Why Have a Living Trust?

Good company in a journey makes the way seem shorter. — Izaak Walton

Living trusts are becoming increasingly popular in estate planning. The question all of us should be asking ourselves is: Should I have a living trust?

        First of all, what is a living trust? A living trust is a legal document that allows you to transfer ownership of your property from your individual name to a trust. As with owning your own company, you don’t personally own your property anymore — the trust does — yet, you maintain complete control.

        Secondly, why is a living trust better than a will? The main reason to have a living trust is to avoid the need for probate. Probate is required when an estate is over $150,000 in gross value and there are assets in the name of the decedent that need to be transferred to beneficiaries. This is the case whether or not the decedent had a will. If you own a home in Orange County or San Diego County, your estate will definitely be above this value. What is probate? Probate is a court process wherein a person becomes executor or administrator of the decedent’s estate and seeks approval from the Court to transfer assets to the decedent’s beneficiaries as named in the will or to the decedent’s heirs as determined under Probate Code Sections 6400-6414. The process is time consuming, generally taking 9-18 months and the fees are substantial. The following schedule shows the amount of the fees for the attorney and executor in a probate matter, based on the gross value of the estate (value before debts are considered). An attorney and executor can also request extraordinary fees when unusual  circumstances arise and extra work is required.


             ASSETS                                       FEES

            $100,000                                      $8,000

            $500,000                                    $26,000

         $1,000,000                                    $46,000

         $3,000,000                                    $86,000

        Saving your heirs time and money are two big advantages to a trust. Additionally, a living trust names a person called the Successor Trustee, to manage your financial affairs in the event you become mentally or physically impaired. This will avoid the need for a conservatorship, also known as a “living probate.” Also, when beneficiaries are minors, a trust will avoid the need for a guardianship of the estate because the Successor Trustee will keep control over assets until the minors reach the age of distribution as set forth in the Trust.

        You can also maintain the confidentiality of your estate plan with a living trust since there is no public record as with probate court files. For this reason, a living trust is harder to contest than a will. Your assets will be distributed in the way you determine best.

        A married couple using a living trust can minimize the tax impact on their estates. Currently, a married couple with a properly drafted trust can pass up to $10,860,000 estate tax free to their children, saving approximately $2,172,000 in estate taxes, which would otherwise go to the government rather than your heirs.

        Some people simply hold title to their assets in joint tenancy, thereby avoiding probate because the surviving joint tenant automatically becomes the sole owner upon the death of the other joint tenant. However, a living trust is wiser as there are a number of problems with this approach: (1) The incapacity of a joint tenant may still require a conservatorship; (2) Control is lost over the asset once it is placed in joint tenancy; (3) Estate planning options are limited because the asset is still includable in the estate of the deceased joint tenant; and (4) A probate is likely to be needed if both joint tenants die simultaneously.

        Other people simply give assets away while still living in order to avoid probate, but this approach also has its pitfalls: (1) Control is lost; (2) Gift tax may have to be paid; (3) The recipient may lose a right to a step-up in cost basis for capital gains taxes; and (4) Eligibility for Medi-Cal and SSI may be affected.

        The different approaches to estate planning have various legal and tax consequences which should be carefully analyzed by a qualified professional. As the proverb says, “Plans fail for lack of counsel, but with many advisers they succeed.”

    *    To get started, complete this form: ESTATE PLANNING QUESTIONNAIRE, and call to schedule an appointment with Mr. Hartmann.

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