The Living Trust as an Estate Planning Tool

1.  General concept.  A "living trust" (sometimes referred to as a revocable inter vivos grantor trust) is a document (a "trust") established during your lifetime.  It is called "revocable" because you may revoke the trust and change the beneficiaries or any other provisions during your lifetime.  It is created "inter vivos" (that is, "during lifetime") as opposed to a "testamentary trust" which is established only at your death following a formal probate proceeding.

2.  Will substitute.  A living trust is partly a "Will substitute" because it controls how trust assets are distributed at your death. It also avoids probate because assets transferred to the trust are not subject to court supervised probate administration at death.

3.  Parties. There are three parties to a living trust. 

            a.  Trustor. The “trustor’ or  “settler”) is the creator of the trust.  This is the person who transfers assets into the trust and states how the assets are to be managed and distributed during the Trustor's lifetime and after the Trustor's death.  This is also the person who may revoke the trust and change the beneficiaries.

            b.  Trustee. The "trustee" is the person designated by the trustor to manage the trust assets and to follow the trustor's instructions as set forth in the trust instrument.  The trustor can remove any trustee and the trustor may even serve as Trustee. 

            c.  Beneficiaries. The "beneficiaries" are the persons who "benefit" by receiving payments or distributions from the trust.

4.  Typical provisions.  A typical trust might provide that the Trustor changes title to assets into his or her own name "as Trustee of the trust"; that the Trustee is to distribute to the Trustor (as "beneficiary") all of the net income from the trust during lifetime; that the principal (or corpus) of the trust might be invaded if necessary for health, support and maintenance; and that the Trustor retains the right to designate from time to time who will receive the assets which remain in the trust at the Trustor's death.  The Trustor may even provide that the assets are to continue to be held in trust following the Trustor's death, perhaps by providing that the Trustor's spouse will receive all of the net income (and so much principal as is necessary for health, support and maintenance), with the balance passing at the spouse's death in equal shares among the Trustor's children or other named beneficiaries.

5.  Death tax planning.  Under normal circumstances, a living trust does not become irrevocable (that is, unchangeable) until the Trustor's death.  If there are two Trustors (for example, a husband and a wife), then only part of the trust usually becomes irrevocable at the death of the first spouse. The irrevocable portion typically is designed to reduce or eliminate death taxes at the surviving spouses’ death, and is often called a "By‑Pass Trust" because it "by‑passes" or escapes death taxation at the deaths of both the first spouse to die and the surviving spouse.  Reduction of death taxes may be accomplished in either a living trust or a trust created by a Will.

6.  Advantages.  There are five primary advantages of a living trust:

a.  Avoids probate.  A living trust avoids probate.  It usually (i) reduces estate settlement costs (primarily attorney's fees and Executor's compensation), (ii) eliminates the need for detailed court accountings, (iii) allows assets to be sold without court supervision and delays, and (iv) speeds up the process of distributing income and assets to beneficiaries.  It also gives the deceased trustor's affairs some degree of privacy.  Wills and probate proceedings are open to public inspection, but living trusts do not normally require court disclosure or court supervision.

b.  May eliminate need for a conservatorship.  A living trust may provide management of your assets during your lifetime, and may permit you to designate a successor trustee to step in and manage your affairs if you desire to travel or if you become incapacitated.  A living trust may make it possible to avoid formal court supervised conservatorship proceedings (and the legal costs associated with them) if you become incapacitated.

c.  Retains flexibility and management assistance.  A living trust is flexible.  The trustor may gradually give investment powers to a successor trustee (including a professional trustee, if desired); may revoke the trust; may change the trustee; and may amend the trust at any time as changing circumstances dictate.

d.  Permits continuity of management.  The living trust provides continuity of management. The same trustee may continue to manage your financial affairs even after your incapacity or death.

e.  Avoids California real property tax reassessment.   There will not be any increase in real property taxes when real property is transferred into a revocable trust.  The first spouse's death will not cause reassessment if the surviving spouse may continue to use the property during lifetime.  The trustor's children may receive the trustor's principal residence, plus as much as one million dollars of value (under Proposition 13) of other real property in California without reassessment.

7.  Disadvantages.  There may be four primary disadvantages to a living trust:

a.  Higher initial expense.  It is more expensive to create a living trust than a Will, especially because title to your assets should be changed into the living trust.  If you designate a professional trustee (for example, a bank or a trust company) to act immediately, the trustee will typically charge an annual fee for managing the trust.  An annual "full management" fee is typically 1⅓% or more of the fair market of the assets in the trust.