A living trust allows assets to bypass probate, ensuring faster distribution, while a will requires court oversight and becomes effective after death. Unlike a will, a living trust provides asset management during incapacity and maintains privacy by keeping estate details out of public records.
By Brad Nakase, Attorney
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A living trust is a formal agreement made by a person (the grantor) while they are still alive to safeguard their assets and control how they are distributed upon their passing.
It is a tool for estate planning that might be able to assist family members and beneficiaries in avoiding a lengthy, public, complicated, and sometimes expensive process known as probate.
A living trust is formalized through a legal document. The grantor’s assets are described in the document along with the terms of the trust. At some point in the future, the grantor names a person or organization to act as trustee and manage the assets in the name of the beneficiaries.
An important feature of living trusts is the power they give to a trustee to oversee the distribution of trust assets to beneficiaries following the grantor’s death.
They start with the grantor establishing a trust instrument while they are alive. This document establishes the parameters and regulations of the trust and is thus legally binding. Those making arrangements for a living trust frequently consult with seasoned estate planners to guarantee a correct setup, given the significance and possible complexity of these documents.
The grantor chooses which assets to include in the living trust and then transfers ownership of those assets to the trust after its creation.
A trustee often has a fiduciary responsibility to act responsibly and in the beneficiaries’ best interests when managing a living trust. When establishing a living trust, the grantor names certain individuals or entities as beneficiaries.
The grantor’s intentions as expressed in the trust agreement determine the distribution of these assets to the beneficiaries upon the grantor’s death.
It is possible to designate a living trust as the beneficiary of specific assets that would normally go to the designated beneficiary (regardless of any provisions in a will).
A living trust differs from a will in that it is effective during the grantor’s lifetime. When the grantor passes away or becomes disabled, the assets in the trust can go straight to the beneficiaries without going through probate.
In order to be protected by the terms of a living trust, assets must be transferred to the trust. What this means is that the trust has taken ownership by re-titling the property.
Real estate (including houses, lots, and commercial properties), money, art, antiques, and other personal possessions, as well as business interests, are all acceptable assets to assign or fund a trust.
Certain financial accounts and assets may consist of:
Donating 401(k) or IRA funds to a living trust is not a good idea. For example, the Internal Revenue Service will consider a change in the ownership structure of an employer-sponsored retirement plan to be an early withdrawal if you make such a change.
In other words, you’d have to pay taxes on the money that goes into your account the year the assignment happens. Additionally, there is a 10% penalty for early withdrawal if you are younger than 59 1/2.
A revocable trust and an irrevocable trust are the two main categories of living trusts.
1. Revocable
Of all living trusts, revocable living trusts are the most prevalent. The creator, known as the grantor, retains control over the assets held in the trust. The grantor has the option to name themselves as trustee when they establish the trust. They are able to alter the trust regulations whenever they see fit. They have the freedom to remove assets, change trustees, change beneficiaries, or end the trust altogether.
It is common practice to establish a revocable living trust to safeguard a grantor’s assets in the event that the grantor is temporarily or permanently unable to manage them. Decisions will be made by the successor trustee on behalf of the grantor in such a case. Upon the demise of the creator, revocable living trusts frequently become irrevocable.
At the time of grantor’s death, the grantor’s revocable living trust assets are still subject to the grantor’s tax obligations. The mere transfer of assets to a trust does not, however, raise tax rates.
2. Irrevocable
Because the trust, and not the grantor, is the legal owner of the assets in an irrevocable living trust, the grantor is unable to name themselves as trustee. As a result, the grantor gives up some control over the trust. The trustee takes on the role of legal owner in a sense.
The grantor has limited flexibility to change the designated beneficiaries after creating an irrevocable living trust. Trust provisions can, in fact, only be changed under very particular circumstances. The courts may even have to sign off on these modifications. Also, once you transfer assets to an irrevocable living trust, you can never take them back.
An irrevocable living trust has advantages. It shields its contents from creditors and lawsuits, for one thing. That is why they are so helpful for people in the medical and legal fields, who are often the targets of lawsuits.
Additionally, the grantor can lower their taxable estate by transferring ownership of assets to the trust rather than themselves. Also, when it comes to government programs like Medicare and Medicaid, the assets aren’t considered for cost or eligibility purposes.
Keep in mind
Having a living trust in addition to a will can be beneficial for individuals because, generally speaking, they serve different purposes. And while the testator is still alive, the assets held by a living trust begin to accrue protection. When a person dies, their will becomes legally binding.
An effective estate planning tool, a living trust lets you keep control of your assets while you’re alive and makes it easier for your family to divide your estate after you pass away. It has some benefits, but it also has some drawbacks, like most things.
Advantages
Drawbacks
1. The Living Trust
By establishing a living trust, you can designate a person or people to receive your assets after your death and designate another to act as trustee. This means that your loved ones won’t have to deal with the probate process when it comes to the distribution of trust assets and other issues concerning your estate.
To avoid probate altogether, some people set up living trusts. On the other hand, their creation can be more time-consuming and expensive than a will. In addition, a notary public is necessary.
No one can name a guardian for a minor child or appoint an executor to a will in a living trust. Because of this, people who have living trusts usually also write a will.
When you establish and sign a living trust, it goes into force right away and gives you the power to manage, direct, and safeguard your assets as you go through life. Furthermore, this control, as expressed in the living trust document, will continue to govern the distribution of assets to beneficiaries even after your death.
2. The Will
When you make a will, you appoint an executor to carry out your final instructions. It specifies the manner in which your executor is to divide up your assets. It defines who will be responsible for paying taxes and debts, who will be named guardians for minor children, and how to handle matters such as making funeral arrangements and paying off debts.
Probate is the court-supervised procedure for dealing with a will and distributing assets. Everyone knows that probate can be a costly and time-consuming ordeal. The involvement of a probate court also makes matters pertaining to a will public.
Compared to a living trust, the cost of creating a will is lower because it is not as complex. A notary public is not necessary, but a witness is. When you die or become incapacitated, it becomes effective.
Wills provide a number of clear advantages:
But there are some disadvantages as well:
When it comes to estate planning, living trusts and wills are two separate tools. In order to make educated decisions regarding the distribution and management of assets, it is critical to understand their differences.
1. Cost
Compared to a will, the initial costs of setting up a living trust tend to be higher. In California, the average cost to have a will drawn up is between $200 and $1,000, while the average cost to draft a living trust is $2,000 to $4,000. The complexity and continual management needs of a living trust also mean that it may end up costing more in the long run to maintain and update.
2. Privacy
The privacy benefits of living trusts outweigh those of wills. The assets held in a living trust pass directly to the designated beneficiaries upon the decedent’s death, shielded from public view. In contrast, the public has access to information about an estate and its distribution when a will goes through probate. People who value secrecy often choose living trusts because of this privacy feature.
3. Probate Procedure
To avoid probate altogether, a living trust is a good option. This eliminates the need for a judge to oversee the distribution of assets to beneficiaries, which speeds up the process and saves money (probate fees can be 4–7 percent of the estate’s value). The duration of the court-supervised probate process, which is necessary for wills, can range from a few months to a few years, contingent upon the complexity of the estate and any potential disputes.
4. Administration of Property
In the event of incapacity, a living trust allows for superior administration of assets. If the person establishing the trust becomes unable to do so, the successor trustee can take over management of the trust assets without the need for a court order. There are no provisions for the management of assets during the lifetime of a person in a will; it only becomes effective after death. Because of this difference, living trusts are beneficial for people who are worried about becoming incapacitated in the future.
In California, your individual situation and estate planning objectives should guide your decision between a living trust and a will. Picking the right choice requires looking at a number of things.
Establishing a living trust is more complicated and expensive than drafting a will, both in the outset and in the long run. The process of making and updating a will is less complicated and costly.
Eliminating the need for probate and the subsequent public record-keeping processes makes living trusts a more private estate planning tool. Conversely, wills are accessible to the public after they pass through probate.
Living trusts can save time and money by avoiding the probate process, which is otherwise necessary to distribute assets. Probate is a necessary but costly and time-consuming process for wills.
Living trusts are a useful tool for incapacity planning because they permit a successor trustee to oversee the trust’s operations without involving the court, which improves asset management in the event of incapacity. Wills aren’t useful for planning for incapacity since they only become effective after death.
While both wills and living trusts give the grantor control over the distribution of their assets, the latter allows for more exact management of those assets both during and after death.
Wills are able to name guardians for minor children, but living trusts are not able to do so.
In everyday life, there are times when a living trust or a will might be better.
Each person’s needs and circumstances are unique, so it’s important to understand all of these factors and potential outcomes before making a decision.
In most cases, it is wise to consult an estate lawyer when creating a living will. But here’s a rough outline of what you need to do to make one.
No. If a person writes out a living will, they are essentially giving a trusted relative or friend the authority to make decisions on their behalf in the event that they are unable to do so themselves due to illness or injury. One way to avoid the probate process when one dies is to set up a living trust, also called an intervivos trust. This kind of trust creates a separate legal entity, the trust, which can hold assets.
Legal representation is typically necessary when establishing a living trust. An individual can expect to pay between $1,100 and $1,500, while a couple can expect to pay between $1,700 and $2,500, all depending on the attorney they choose and the complexity of their living trust.
The main drawbacks of trusts, apart from their expense, are purpose-specific and depend on whether the trust is revocable or irrevocable. One drawback of revocable trusts is that they cannot shield assets from creditors or tax authorities while the owner is alive. There is little leeway in reshaping an irrevocable trust after its establishment, and the beneficiaries give up all claim to the assets held within.
Choosing between a living trust and a will requires familiarity with California law. Different rules apply to these estate planning instruments depending on the state.
1. Legal Framework for Living Trusts in California
Revocable and irrevocable living trusts are the two most common kinds in California. A revocable living trust allows the trustor to make changes or remove them at any time while they are living, according to California law. Because the assets are still considered part of the taxable estate, this type does not offer any tax benefits. On the other hand, there are irrevocable living trusts that, once set up, cannot be changed.
These trusts, however, may provide tax advantages and safeguard assets. To establish a valid living trust in California, one must meet the criteria laid out in Section 15200 of the Probate Code. These include having the trust property identified, having a written document that records the arrangement, and having a clearly named beneficiary. The validity and functionality of the trust depend on its proper execution and funding.
2. Rules Regulating Wills in California
Wills in California must adhere to specific legal requirements. Having the testator’s signature and the witnesses’ signature are the three requirements for a valid will under Section 6110 of the California Probate Code. Section 6111 also recognizes holographic wills, which are handwritten and do not require witnesses, as long as the testator signs and the material provisions are in the testator’s handwriting.
Wills in California must take into account the state’s community property laws, which state that spouses have a right to a portion of the community property. To prevent challenges in probate court, it is crucial to adhere to all statutory requirements.
There are a number of typical mistakes that people make that can ruin a California living trust or will. Not transferring assets into a trust in a timely manner is a big problem that can render its benefits useless. It is essential to update the living trust on a regular basis to reflect current wishes and prevent legal disputes, particularly after major life events.
Wills are vulnerable to challenges to their validity or probate when executed incorrectly, for example, due to a lack of witnesses or ambiguous wording. To avoid these problems and make sure the estate plan is in accordance with California laws, use specific, legally binding language and have a lawyer review it periodically.
When planning for the management and preservation of assets both during and after a person’s lifetime, a living trust can be a crucial legal instrument. In most cases, it gives the people who create and finance them, known as grantors, the ability to live off of their assets while they’re alive and to decide how to distribute them after they die.
In most cases, a living trust can help beneficiaries receive their assets more quickly and with less hassle than going through the expensive and time-consuming probate process.
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