What is a Living Trust?

Definition of a Living Trust

A Living Trust (commonly referred to as a Revocable Living Trust) is a document that holds legal title to assets you have placed into the name of the Trust. The purpose of the Trust is to have one document that holds and dictates asset distribution upon the Trust creators passing.

As odd as it may sound, a Living Trust a document that creates a legal agreement between you and yourself (or a married couple and themselves). A Trust typically consists of the following parties:

1. Trustor: (Commonly called Settlor or Grantor), is the person who created the Trust. In the case of a married couple, there are two Trustors, the two spouses.

2. Trustee: For a Living Trust, the Trustee is the person who has legal control over assets held in the name of the Trust. In a typical Trust, upon creation, the Trustee is the same person as the Trustor. For a married couple, the two spouses are the Co-Trustees.

3. Successor Trustee: Individual named to take over legal control of Trust assets upon the demise or incapacity of the initial Trustee. (Necessary because upon the demise or incapacity of the initial Trustee, the Trust cannot exist or function without someone to control assets held in the Trust)

4. Beneficiaries: Parties who will ultimately receive assets held in the name of the Trust once the Trustor of the Trust passes away. Usually the Trustors (and Trustees) children.

Thus what I mean as a legal agreement between “you and yourself” refers to an agreement between you in your capacity as Trustor and you in your capacity as Trustee. The basic idea is that if you do this legal dance to create this fictional relationship between you and yourself, assets held by this Trust can avoid the costly and timely pitfalls of Probate and pass to your intended beneficiaries with relative ease.

Even though upon creation of the Trust the Trustor and Trustee are usually the same person, an artificial distinction must be made because upon the passing of the Trustor, there will be a new Successor Trustee. This will be the person who will have legal control over assets held in the name of the Trust. The Successor Trustee is responsible for all Estate Administration matters including collecting Trust assets and ultimately distributing them to Beneficiaries. Thus a distinction must be made between Trustor and Trustee because while the Trustor will never change, the Trustee inevitably will when he/she passes away – leading way to a Successor Trustee.


What is the Purpose of a Living Trust

A Living Trust has many purposes. The main purpose of a Trust is to have one document that controls all assets of an estate (of an individual) and one document that states who gets what once the owner of the estate passes away. A Living Trust is the most effective Will Substitute one can create.

Creating a Trust also has several Estate and Income Tax benefits, including utilizing Unified Tax Credits, Gift Tax Exclusions, and Step Up in Basis mechanisms. These large fancy terms simply mean that a well drafted Living Trust can and will alleviate tax consequences for both the creator and the beneficiaries of the Trust.

Having a Trust also insures that after the passing of the Trust creator, the estate will avoid Probate. This will save the estate, surviving spouse, and beneficiaries three very important things:

1. Time.

2. Money.

3. Privacy.

Since a Trust is not a public document, it neither has to be recorded with the County or deposited into a court when an Estate Administration is conducted. Conversely, a Will is considered a public document that must be deposited with the Probate Court and can be viewed by anyone.


What is the Difference between a Trust and a Will?

A Living Trust is legal agreement that holds your assets and controls how they will distributed upon your passing. Think of it as a Will that can own property.

In reality, a Will cannot own assets. It can only dictate how assets with be distributed upon the Will creator’s ultimate passing. Additionally a Will must go through Probate, which is costly, time consuming, and open to the public. A Living Trust avoid Probate, is private, and makes the process of passing assets held in the Trust to beneficiaries very easy.

Additionally, a Living Trust has many Estate and Income Tax benefits that do not exist with a simple Will.

In the end, any attorney or law firm who would simply draft an individual a Will without or in lieu of a Trust would be akin to malpractice. Think of a Will as a telegram, whereas a Trust is the Internet.


Do I Need a Living Trust in California?

The answer to me depends on two questions:

1. Do you own real property (a house) in California worth more than $20,000?

If you do, then a Living Trust (instead of a Will) is necessary in my opinion as real property is difficult to transfer to beneficiaries outside of a formal probate. Click here for a Real Property of Small Value Procedure.

2. Do you own real and/or personal property totaling more than $100,000?

If you do, then a Trust is also necessary in my opinion as a Small Estate Affidavit cannot be used and there are multiple potential tax savings associated with the creation of a Trust.

Why does it depend on these two questions?

My answer is based on the available procedures available in California that can be used to avoid a full probate procedure. In short, when someone dies owning assets in California WITHOUT a Trust, a Probate procedure must be commenced to legally pass assets to beneficiaries. However, there are a handful of situations where probate is not necessary – Click here for a list of these situations. Based on available outside of probate procedures, answering the two questions above will determine if you need a Living Trust or not.

Please Note – This answer is strictly for those in California, although the answer is accurate in several other states as many states have similar outside of probate procedures similar to California.