LIVING TRUST OUTLINE

copyright © 1996-2008 Peter Bassing

Attorney at Law (Member, California Bar--State Bar No. 63315) Note: The following discussion is in some instances specific to California law.

Prepared by Peter J. Bassing

WHAT IS A LIVING TRUST? "LIVING TRUST" is the popular term applied to a Revocable Inter Vivos Trust. This is a way by which property (the trust estate) is held by one person (the trustee) for the benefit of another person (the beneficiary). The person who creates the trust and contributes the trust estate is known as the settlor or the trustor. One person, or a couple, might occupy more than one, or all, of these roles, as settlor, trustee and beneficiary. Usually, the settlor or settlors are in fact the initial trustees. The trust is created by a written Declaration of Trust which spells out all of the terms of the trust and the distribution of the trust estate and its income, both during the lifetime(s) of the settlor(s)/beneficiaries(s) and after death. The living trust is revocable. This means that the person or couple who created it can change or undo it. Many trust declarations provide, however, that upon the death of the first spouse, portions of the trust become irrevocable. A Living Trust may provide some or all of the following advantages: 1. Avoidance of Probate 2. Flexibility in the distribution of an estate (Compare to Joint Tenancy) 3. Avoidance of a Conservatorship 4. Avoidance of some post-death income taxes 5. Estate tax savings for married couples 6. Privacy PROBATE Probate is the legal proceeding by which a person's assets are distributed after death. Assets which have been held in a Living Trust do not have to go through Probate since the decedent transferred them to the trust while alive and, upon his or her death, has no estate to probate. Much has been written about the disadvantages of Probate, including the following: a. Delay: It is almost impossible to complete the probate of an estate in less than 6 months, and it may take years.

c. for a total of $6.150. Joint tenancy is not very flexible: the interests of all joint tenants must be equal and they are distributed immediately and automatically upon the death of a joint tenant. . the executor and the attorney are each entitled to a fee set by law and calculated from the size of the estate (without reduction for mortgages or other debts). For example. Even without a trust. if the estate tax savings device of a bypass trust is used (see below). If claims appear likely. In a few situations there are advantages of probate.150. some sales of real estate require court approval and an auction. Expense: Unless they agree to take less.300. no matter what the decedent's Will says. a probate proceeding (with its own local attorney) may be required in each state. for a $100. Joint tenancy has some advantages: a." When property is in Joint Tenancy. b. The probate proceeding requires creditors to file their claims within a period of months.000 estate.b. a Living Trust can be put through probate to gain this advantage. and a description of all property in the estate and its disposition. probate of a will would usually be necessary. Joint tenancy is not very flexible: the interests of all joint tenants must be equal and they are distributed immediately and automatically upon the death of a joint tenant. on the death of the first spouse a simpler court proceeding (a spousal property petition) may be available if that spouse's property passes outright to the survivor. Possible Duplication: If the decedent owned real estate in more than one state. This means that on the death of one joint tenant. In the case of a married couple.000 estate. Loss of Privacy: Anyone may view the Court's probate file. which will normally contain the name. JOINT TENANCY Joint Tenancy should not be confused with "tenancy in common" or "community property. For example. his or her interest automatically goes to the other joint tenant or tenants. "Red Tape": Court approval and extensive notice requirements are still required in many situations. address (and sometimes age) of each relative and heir. for a total of $42. they would each be $21. there is a right of survivorship. the executor's and attorney's fee would each be $3. For a $1. However.300.000. But there are serious disadvantages: a. e. d. rather than simply within the longer statute of limitations. a probate is not always required. It might not give the advantage of stepped-up basis (see below) which the community property form of ownership gives a married couple.

000. if you hold property in joint tenancy with your children so that they will get the property on your death.1) rather than as joint tenants. $150. They took title as joint tenants to avoid probate when either died. or $175. If a married couple holds property as joint tenants or tenants in common. one of the disadvantages to holding property in joint tenancy is possible inability to take advantage of the "stepped-up basis" advantage. For married couples it is now possible to hold property as "community property with right of survivorship". Property in joint tenancy can be reached by the creditors of each joint tenant. Although the other advantages of a trust would not be obtained. When a person dies. Their basis is. The Federal death tax is called the estate tax. and its basis of would remain at $75.000. . it is not certain that the IRS would consider it to be community property. The survivor's half would keep the old basis and on any subsequent sale there could be a taxable capital gain. If the property is sold before further increase in value there will be no income tax payable because the sales price is equal to its basis.000 value. If Husband dies before they sell the building. a married couple should ordinarily hold community property as "community property with right of survivorship" (under Civil Code Section 682. the law provides that BOTH halves of the property receive a stepped up basis on the death of either spouse. The decision of the couple in the example to avoid probate by use of joint tenancy rather than with a Living Trust might cost Wife about $28.000 in depreciation. ESTATE TAX SAVINGS FOR SOME MARRIED COUPLES In California there is no state death tax.000 and might pay about $55. and only the decedent's half might receive the stepped-up basis. The IRS might take the position that the wife's half was her separate property. If Wife sells the building for its $350.000 they would have a taxable gain of $200.000 in federal and state income taxes. the basis of his one-half which passes to wife by joint tenancy right of survivorship is increased to current value.000. For example. she will have a taxable gain of $100. They have taken a total of $50.c. although not avoiding the inflexibility problems inherent in a right of survivorship. For Example: Husband and wife purchased an apartment building years ago for $200.000.000 and might pay federal and state income taxes of about $28. an under-insured automobile accident in which they are involved could jeopardize the asset during your lifetime. But if the couple had held the property as community property instead of as joint tenants. thereby overcoming the problem regarding stepped up basis on the death of the first spouse.000.000 in avoidable income taxes. therefore. POSSIBLE INCOME TAX SAVINGS As mentioned above. If they were to sell the building for $350. the income tax basis of his property is "stepped-up" to its current value.

The bypass trust does not become part of the surviving spouse's estate and does not increase that estate for tax purposes. the Estate Tax will be repealed for the year 2010.500. On the death of the surviving spouse. However. the balance of the trust will be distributed. Nonexempt assets are taxed at rates varying from 37% to 45%. If property is held in joint tenancy. FLEXIBILITY OF DISTRIBUTION Both Living Trusts and Wills provide substantial flexibility in disposing of property. Because of the complete exemption for property left outright to a spouse. to the extent necessary to maintain his or her standard of living. upon the death of any joint tenant his interest in the property immediately passes to the other joint tenant or tenants. his or her estate is entitled to its own "exemption". A Living Trust declaration may provide that on the death of the first spouse to die the trust is split into two (or sometimes three) trusts. an estate of someone dying in 2008 with a net value of $2. its principal. the estate tax may not seem to be an immediate concern for married couples thinking only about the death of the first of them to die. or the "B" trust) usually contains enough property to take maximum advantage of the Unified Credit Equivalent without producing any estate tax. and will increase to $3. It will be automatically reinstated. 2004.000 Unified Credit Equivalent and estate tax would be due. reducing. to beneficiaries the couple have selected. Of course if a Will rather than a Living Trust is employed. at 2001 levels.500. .000 in 2006. it may also be done by Will.000.For example. but by its typical terms. or possibly avoiding estate tax liability. In most cases. for persons dying after January 1.800. increased to $2. With a Living Trust. One of these trusts (sometimes called the "survivor's trust" or the "A" trust).000 in 2009. no matter how large the estate. the surviving spouse is entitled to receive its income and. a transfer of all of the property of the first spouse to die to the surviving spouse may have the effect of increasing the estate of the surviving spouse to the point that on his or her death the estate will exceed the present $2. The other trust (sometimes called the "bypass" trust. called the "Unified Credit Equivalent". the first $1.000.The federal estate tax is based on the net value of the estate of the decedent. in 2011.000. Unless there is a change in the law. It becomes irrevocable on the death of the first spouse to die.000 of the estate was tax free.000 and not passing to the spouse would be liable for estate tax of about $350. remains revocable by the surviving spouse who typically is given the right to all principal and income on demand. Also. On the surviving spouse's death. either immediately or over time. It cannot be accomplished by holding property in joint tenancy. Under legislation passed in mid-2001 (the "Tax Relief Reconciliation Act of 2001") this amount. though. the "exemption" trust. While the use of a bypass trust to save estate taxes is common in Living Trusts. assets passing from one spouse to the other are exempt from the tax. probate will be necessary.

It can be held. the provisions of a Living Trust are not normally matters of public record. Names and addresses (and sometimes ages) of beneficiaries will be made known. it simply "won't work" unless assets are transferred to it. many transactions undertaken by a Conservator. Also. While legally "adults" at age 18. Neither the extent and disposition of assets nor the names and addresses of beneficiaries need become generally known. For . a Living Trust has disadvantages and limitations: 1. Initial Paperwork: A Living Trust often involves somewhat more paperwork than some of the alternatives discussed in this outline. can manage financial matters without the necessity of a Conservatorship. managed and distributed. to benefit a number of beneficiaries according to particular written standards or in the discretion of a trustee. The court's file is available for inspection and copying by anyone visiting the county clerk's office. attorney's fees in preparing the estate planning documents are typically higher. rather than paid out in a lump sum which may or may not be used for the purposes the decedent had in mind. AVOIDING CONSERVATORSHIP A Living Trust.property need not pass immediately. including most sales of property. both involve court proceedings. for example. particularly when coupled with a general durable power of attorney for financial management and personal affairs. A Conservatorship proceeding in court will involve added expense and. embarrassment and psychological debilitation to both the Conservatee and the person petitioning for the Conservatorship. An alternate trustee. 2. and much more than others. In contrast. Need to Transfer Assets: As to many of the things a Living Trust is designed to do. A Living Trust can be made the beneficiary of life insurance policies so that the death benefits can be similarly invested. Since the trust is revocable. can provide property management for a person who might someday be unable to manage his or her own assets due to advanced age or illness. ENHANCING PRIVACY As is discussed in the sections about Probate and the avoidance of Conservatorships. or "NO FREE LUNCH" While for many people they will be outweighed by the benefits. Because of this. or co-trustee under a Living Trust. often. a settlor who disputes his or her incapacity will not have given up any control. many children are not mature enough to wisely use a lump sum. require Court approval. DISADVANTAGES OF A LIVING TRUST.

This is usually quite simple. No Protection Against Creditors: It should be understood that putting your property into a Living Trust will not put it out of reach of the claims of your creditors. and have a separate tax return filed for it. AND THEIR ANSWERS Question: How will a living trust affect our income tax liability while we are alive? Answer: If. this is likely to mean additional expense of a few hundred dollars per year. Borrowing Against Property: While a Living Trust is a perfectly legal way to hold property.example. is not available to a single person--through a trust or otherwise-other benefits of a Living Trust. Question: Does it make sense for an unmarried person to set up a living trust? Answer: While one benefit of a Living Trust. Extra Accounting: If a married couple have "A-B trust" provisions in their Living Trust declaration (see Possible Estate Tax Savings). COMMON QUESTIONS ABOUT LIVING TRUSTS. As assets are acquired or transferred. etc. properly. acknowledged ("notarized") and recorded with the County Recorder. real property deeds must be signed. the surviving spouse must keep separate records for the "B" trust. title must be taken and given by you as trustee(s). it is sometimes easier to "switch than fight". You will continue to file your form 1040. all income. you are the beneficiaries of the trust you create. probate avoidance may be an equal or greater consideration for him or her. but not as simple as doing nothing. For simple estates. if the same estate tax saving devices were accomplished by a will. to transfer the property out of the trust. 3. the same record keeping and tax requirements would arise. On transfer to the trust the basis is unaffected. be considered by the lender a sale on which it can "call" the loan. borrow the money. deductions. like the ability to avoid conservatorship . The law provides certain exemptions from the claims of creditors --the "homestead" exemption. What happens to the income tax basis of property when it is transferred to the Living Trust? Answer: Nothing. there will be no income tax effect at all. might be even more important to a single person. The transfer back into the trust cannot. Neither will a Will or joint tenancy. Putting your property into a living trust does not deprive you of any of those exemptions. discussed above is unavailable on the death of an unmarried person. and transfer the property back into the trust. of the trust will. as is usual. . 4. When you want to refinance property held in the trust. for example. after the death of the first spouse to die. Of course. 5. by law. be shown as yours. Question. possible estate tax savings by use of an "AB" trust arrangement. some commercial lenders use pre-printed forms and train personnel to deal only with typical situations. Since the relatively simple procedure of a spousal property petition.

in 2011. FEES AND SERVICES Note: These fees and services are offered for the great majority of "typical" estates. a Federal Estate Tax return must be filed within 9 months after the death. such transfer might be considered a premature distribution on which not only income tax but a 10% penalty might have to be paid.000. following the first to die of a married couple. Of course. Unless there is a change in the law. for particularly complicated matters. can the trustees or beneficiaries be changed? Answer: Yes. Question: Will transfer of real estate to a Living Trust increase property taxes? Answer: No. at 2001 levels ($1.000 in the year 2008 and increasing in uneven increments to $3.150 for a single person and $1. (Note: if the estate (including anticipated life insurance benefits) is equal to or greater than the "Unified Credit Equivalent -. If the estate of the deceased exceeds the "Unified Credit Equivalent". In some cases.Question: What happens on the death of a person who has set up a Living trust? Answer: The successor trustee should take steps to remove the decedent's name from accounts. there is no guaranty that lawyers (and accountants) can be completely avoided following the death.000 in 2009 -. The law implementing Proposition 13 specifically exempts from the definition of "change of ownership" transfers to a trust of which the transferors of the property are the beneficiaries. It will be automatically reinstated. as Trustee.500.). These fees include an initial consultation with Peter Bassing and the preparation . 401's or Keogh plans be transferred into a Living Trust? Answer: No." Question: If I/we once set up a Living Trust.000.500. Question: Should IRAs.these fees are somewhat higher. Under Federal law. During your lifetime (or the joint lifetimes of married couples).000 Unifed Credit Equivalent).$2. While any given estate will almost always require less "lawyering" if a trust has been properly employed than if a will has to be probated. the Estate Tax will be repealed for the year 2010. you will be advised BEFORE you incur any commitment to pay fees at all. the surviving spouse must make a decision whether or not to "disclaim" all or a portion of the decedent's estate.000 in 2009.000. the trust can be freely amended in that or any other respect. such plans are already held in a specialized form of "living trust. Under legislation passed in mid-2001 (the "Tax Relief Reconciliation Act of 2001") the "Unified Credit Equivalent" for the years 2007 and 2008 is $2. a decision which should be made before property is "re-arranged" and within a few months following the death. Click on the link below for detail on fees.550 for a married couple. fees may be higher but if a fee different from those shown here would be charged. etc. This is usually not very complicated and typically involves about as much paperwork as if the property had been held in joint tenancy. It increases to $3. and substitute his or hers. The basic fees charged for "packages" containing the documents listed below range from $1. Conceptually.

or all clients in the same way. • Certification of Trust. It is a "backup" measure. A "summary" of certain trust provisions you can conveniently provide to third parties. to transfer assets to the trust which you neglected to. the consultation is free. for an appointment. and as a practical matter it would be difficult or impossible for Peter Bassing to undertake to keep all clients updated about changes in the law. We will take care of recording. Should it come to your attention through the news media or other sources that there has been a change in the tax (or other) law relating to estate planning. If these laws change. mentally or physically. Peter Bassing does NOT undertake the responsibility of advising you of future changes. Changes in the law may not affect all clients. Documents Provided: • Declaration of Revocable Inter-Vivos Trust • "Pour Over" Will. whichever is earlier. A power of attorney that give another person (often the alternate trustee) the power.of papers listed below. among others. you are urged to contact Peter Bassing. or another professional advisor. You will be charged $60 each for additional deeds. • Advance Health Care Directive (formerly generally known as a Durable Power of Attorney for Health Care). The balance is payable when the documents are completed or 60 days after drafts are provided. PLEASE NOTE: LIMITATION ON FUTURE REPRESENTATION. • Quitclaim Deed. . in case you are incapacitated. For this reason. This is a Will which provides that any property which is not held in joint tenancy and which has not been transferred into the trust during your life will be transferred to it. • Durable Power of Attorney for Financial Management and Personal Affairs. This will transfer one piece of real property (often your residence) to the trust. Of these amounts. $500 must be paid at the end of the consultation if you want to proceed. if you choose not to proceed. The advice Peter Bassing will furnish is based on present applicable laws. it is imperative that the estate plan be reviewed and (if necessary) changed. This allows another person to make decisions about medical treatment in case you are not in a condition to make them yourself.

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