WHAT IS A LIVING TRUST?

A living trust is a legal document that replaces what you think of as your will. The living trust makes sure your assets go to the people you choose. It also avoids probate upon death or a conservatorship proceeding if you become incapacitated. Moreover, it allows couples to eliminate or reduce taxes. In addition, setting up a trust gives you a complete picture of your assets and compels you to get your "financial house in order" to transfer the assets into the trust.

SHOULD I HAVE A LIVING TRUST?

You should seriously consider a living trust if you either:
  • Own your own home or any other real property, or
  • Own over $100,000 in investments and other personal property.

DO I LOSE ANY CONTROL OVER MY ASSETS?

Absolutely not. You name yourself as trustee of your trust. You report to no one. You continue to control all your assets as before - to buy, sell, borrow against, give away, or do anything else you want to with your assets. In addition, you may change the trust any time.

WHAT HAPPENS IF I CANNOT ACT AS TRUSTEE?

In the trust you will name someone, typically a family member or close friend, to take over if something happens to you. We call this person the "successor trustee." This person, however, has nothing to do with your trust or assets until you become incapacitated or pass away.

WHAT IS PROBATE?

Probate is a court supervised transfer of your property to your heirs. Many people mistakenly think that having a will avoids probate. The opposite is generally true. Having only a will almost guarantees that your assets will have to be probated.

WHY ARE SO MANY PEOPLE SETTING UP LIVING TRUSTS TO AVOID PROBATE?

  1. A Probate Is Expensive. In general, attorneys love probates because we are entitled to charge large fees on a probate. However, what is good for attorneys is not what is best for your heirs. In California, statutory probate fees range from 4-8% of the gross value of your estate. Court costs and appraisal fees are added to that. On the other hand, a properly created and maintained living trust avoids probate. When you are gone, your successor trustee simply pays your last bills, reads your trust to see who gets your property, and then distributes the property. This all occurs without reporting to the probate court.
  2. A Probate Means Delay. A probate takes at least six months to get your assets to your heirs. We feel this delay is actually worse than the expense of a probate because of the potential hardship and emotional drain. On the other hand, property in a living trust generally can be distributed in a few short weeks.
  3. A Probate Invades Your Privacy. A probate is open to the public. In a probate, anyone can go to the court clerk's office and find out a surprising amount of information about the deceased and his or her family. A living trust, on the other hand, avoids such an invasion of privacy. No probate is needed if the living trust is set up and maintained properly. With a living trust, only your heirs and your attorney will know about your affairs.

WHAT IF I OWN REAL ESTATE IN ANOTHER STATE?

If you do not have a living trust, your heirs will likely have to go through two probates, one in California and another in the other state where you own real estate. A living trust will allow you to avoid probates in both states.

DOES A LIVING TRUST AVOID PROBATE?

A living trust enables you to avoid probate if you set it up correctly and make sure pretty much all your assets are in the trust.

CAN'T I JUST AVOID PROBATE WITH JOINT TENANCY?

For a married couple, holding their assets as joint tenants together does avoid probate upon the death of the first of them. However, as is explained below, joint tenancy may very well have a high income tax cost to the surviving spouse. Furthermore, a major problem will arise when the second spouse dies, or if both spouses die together - a probate will be required at that point. In addition, many problems are caused by owning property in joint tenancy with a child. For example, your child's creditors might try to seize your property. Furthermore, at your death, your property could end up going to only one of your children at the expense of your other children or grandchildren. A living trust can avoid all these problems.

WHY DOES JOINT TENANCY CAUSE INCOME TAX PROBLEMS FOR A COUPLE?

In short, if a couple holds appreciated property, such as real estate, as joint tenants and one of them passes away, the surviving spouse will have income taxes to pay if the property is sold. This occurs because only half of capital gains are eliminated at death under joint tenancy. The cost may be tens of thousands of dollars or even more. On the other hand, if the same couple were to set up a living trust and transfer the appreciated asset to the trust as community property, on the death of the first spouse the survivor could sell the asset and have no income tax to pay.

WHY SHOULD I WANT TO AVOID A CONSERVATORSHIP?

Medical science is making great strides, but an unfortunate consequence of longer life spans is many older people cannot manage their own affairs. If you become incapacitated by a stroke or another cause and do not have a trust and durable powers of attorney, your family may have to petition the court to have a conservator appointed for you. As with a probate, the purpose of a conservatorship is actually quite simple - enabling someone to make decisions for you. The problem is that as with a probate, a conservatorship is an expensive and complicated procedure.

WHY SHOULD I HAVE A LIVING TRUST AND POWER OF ATTORNEY?

Having a living trust and durable powers of attorney almost always avoids the need for a conservatorship. If you become incapacitated, whomever you have named in the trust and durable powers takes over for you without having to go to court. In particular, the "Durable Power of Attorney for Health Care," one of our basic estate planning documents, will give your family the power to make health care decisions for you, including the power to "pull the plug."

HOW DOES A LIVING TRUST ELIMINATE DEATH TAXES IN MANY CASES?

A living trust may allow a couple to effectively double the basic estate tax exemption ($1,000,000 in 2002, doubled to $2 million). For estates totaling over $2,000,000 this saves over $435,000 in death taxes. If you have a typical will which leaves everything to your surviving spouse, your children may have to pay over $435,000 in taxes that could have been avoided with a living trust.
Please note that the estate tax exemption is slated to increase as follows:
2002-2003 $1,000,000
2004-2005 $1,500,000
2006-2008 $2,000,000
2009 $3,500,000
2010 Repealed
2011 $1,000,000

IS A LIVING TRUST HARD TO SET UP?

No. We can help you set it up as quickly as you want, even in a couple of day's time if needed.

ARE THERE ANY ONGOING COSTS?

No. A living trust does not cause any ongoing costs of management or administration. There will be no additional attorney's fees once the trust has been set up, unless later you want to amend the terms of the trust. You do not need to let us know or change any special trust list if you buy or sell trust assets in the future. In addition, please note that transferring assets to your living trust does not change your property taxes or how you file your income taxes.

IS A LIVING TRUST HARD TO MAINTAIN?

No. After your living trust has been properly set up, all you have to do is be diligent in generally putting new assets into your name as trustee of your trust.

DO I STILL NEED A WILL IF I HAVE A LIVING TRUST?

Yes. At no additional cost, we will prepare for you, what is called a "pour-over" will. It is so called because it "pours over" into the trust any odds and ends not already in the trust by the time of death. Examples of such assets would be your automobile and checking account.

HOW ABOUT THE CASE OF A SECOND MARRIAGE?

The living trust is especially necessary when a husband and wife have children from prior marriages. Without proper estate planning, it is likely that the children of one of the spouses will end up with all of the couple's property and the children of the other spouse will get nothing. A properly drawn living trust assures that the surviving spouse will be cared for, but then also assures that both sets of children will receive their rightful inheritance. A living trust is the only way to accomplish such goals and still avoid probate.

HOW STABLE ARE LIVING TRUSTS?

They have been around since the end of the Middle Ages in England. They were developed for a familiar reason - to avoid taxes, the king's death taxes. Living Trusts have become increasingly popular over the last few years for the reasons discussed above. We strongly believe nothing will change the clear advantages of using a living trust as the key to effective estate planning.

IRREVOCABLE LIFE INSURANCE TRUSTS (ILITs)

The Irrevocable Life Insurance Trust generally prevents life insurance proceeds from being subject to estate tax. Until you pass away, the trust will own nothing but your life insurance policies. Since the life insurance policy is either owned by or has as its irrevocable beneficiary the Irrevocable Trust, and since you are neither the trustee nor a beneficiary, the proceeds will not be subject to estate taxes when you pass away. Therefore, the full proceeds are available for the beneficiaries, unreduced by estate taxes. The estate tax savings are typically between 41 and 47 percent of the policy proceeds. Please contact us for more information on this fascinating planning vehicle.

WE OFFER A FREE INITIAL CONSULTATION TO ANSWER ANY QUESTIONS YOU MAY HAVE ABOUT LIVING TRUSTS.
PLEASE CALL DANIEL R. MORTENSEN AT (661) 799-8035 TO ARRANGE YOUR PERSONAL CONSULTATION.

Mortensen Law Office
Tax, Trust & Probate Attorneys, P.C.
22807 Lyons Avenue
Newhall, California 91321
(661) 799-9225

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