Most California homeowners at least have heard about a living trust. It’s a big binder full of documents, right? Not everyone, however, understands what’s inside that binder and what each of these documents do. Many California homeowners do not realize that a living trust contains a list of important legal documents, in addition to a revocable trust itself. Keep reading because in this post we are going to unpack the binder and shine some light on what a complete trust package looks like.
Who Needs a Living Trust?
It may sound harsh, but the only way you don’t need a living trust in California is if you are immortal. If you are a superhuman straight from the Marvel franchise—no need to worry about a trust. For the rest of us mortals, a trust is an essential estate planning and asset protection document.
Life events such as marriage, the birth of a child, purchase of property, create a more urgent need for a living trust. However, even for a young, single, healthy individual without many possessions, a trust can be useful because it includes documents such as Durable Power of Attorney and Advance Healthcare Directive. The above is essential in case you end up incapacitated (say, in the event of a bad car accident). We will cover specific components of a trust later in this blog post.
What Does a California Living Trust Do?
The goal of a trust is rather simple: to leave your assets, including real estate, to the beneficiaries that you, the maker of the trust, choose.
When a California resident passes away and leaves a house behind, their name is still on the grant deed. They are still, legally, the owner of the home. A trust provides the living relatives and/or friends a blueprint and a legal mechanism on who is supposed to step into the decedent’s shoes and become the rightful owner of the property.
If you don’t leave such a blueprint, the government (specifically, the state of California) will declare the decedent “intestate” and will take it over from there. In other words, if you don’t have a plan, the government will have one for you. Unfortunately, it is possible that you won’t like it.
One of the greatest features of a revocable trust (most trusts are revocable) is that the creator of the trust wears several hats while alive, which allows him or her full control of assets and properties inside the trust. Normally, the creator of the trust is:
- settlor (aka trustor, grantor, creator)
- trustee
- beneficiary.
As such, the individual or a family who has created a trust can sell, gift, otherwise transfer, or dispose of their assets as their pleases. However, once the settlor passes away, the baton goes to the successor trustee. If the successor trustee is unavailable for whatever reason (e.g.: also dead or incapacitated), then the second successor trustee takes over, and so on.
So, it is important for the original trustee to carefully select and designate more than one successor trustee (in the desired order).
How does one go about choosing a successor trustee? Say, a husband and wife have four children. Once both the husband and the wife passed away, one of their children becomes a successor trustee.
Selecting just one person in charge makes things easier from a legal standpoint and from a simple standpoint of logistics – you only need one person’s signature on various documents and the distribution of assets can proceed swiftly and without any glitches.
If that child is unavailable, then the trust will specify which of his or her siblings should take over as a successor trustee, and so on.
Planning for Common and Uncommon Life Situations
The biggest benefit of a trust is that it helps plan for common and uncommon life situations. A good estate planning attorney will know which questions to ask when setting up a trust so the original trustee’s interests are protected and things go according to his or her wishes.
For instance, what happens when one of the spouses passes away? Does everything go to the living husband or wife? If not, what happens to certain assets? What if the surviving spouse decides to remarry? Does the new spouse get access to all the assets?
An experienced California estate planning attorney will ensure that money stays in the family (if those were the wishes of the settlor) and the new spouse does not inherit the house in case the settlor passes away. In most cases, people will want the property to go to their children from the prior marriage, not the new spouse.
The same is true with minor children. If both parents pass away, does a 16-year-old needs access to hundreds of thousands (or millions) of dollars immediately? Probably not. A trust can specify which assets and in what increments can be distributed to certain heirs. Perhaps, the children must go to college first and then receive 25% of the assets. Maybe the second round of distributions happens when they turn 30, and so on.
Privacy, Asset Protection, and Other Benefits of a Living Trust
Keep in mind that setting up a trust changes the grant deed. Our law firm always makes sure that your updated grant deed gets recorded properly, so the county assessor won’t see the change as an opportunity to reassess the property and raise your taxes.
However – and this is a common misunderstanding – trusts are private documents and never get recorded. As such, they offer privacy that is not afforded to probate. Probate is a title clearance process in cases with no trust.
By the way, having a will does not avoid probate. Since probate is being adjudicated by the court, all the family financial matters are not really private. Probate also invites litigation since there is no clear blueprint as it is when the decedent has a trust.
Other benefits of a trust worth mentioning are avoiding Medi-Cal recovery and debt management. If the decedent used Medi-Cal and the case goes to probate, the State of California will go after the assets in order to recover the amount the decedent used while being alive. However, by law, Medi-Cal recovery is no longer possible if the decedent had a living trust.
If the decedent had credit card debt, the creditors are limited to only one year to try to recover the debt. They are required to go to court and most credit card companies will think twice before hiring expensive corporate lawyers to go after a debt of $10,000 or $20,000.
Finally, a good living trust will always include a Durable Power of Attorney and Advance Care Directive.
A Durable Power of Attorney avoids unpleasant and costly situations such as conservatorship. Say, a husband has Alzheimer’s. If the family had a trust set up which included a Durable Power of Attorney, once the husband becomes is ill, the wife can take control of the family properties and sell some of them, allowing her to use the money to take care of the husband. If no such document exists, then she would have to go to court to get conservatorship – which is costly and may be embarrassing to families who value privacy.
Advance Health Care Directive allows someone else to speak on your behalf in case you are in a coma or similar debilitating condition and are unable to speak for yourself.
Say, the doctors want to perform a risky procedure that may save your life, but they need your consent. If you are unable to speak, they may decide against the procedure due to high risk and liability issues. However, if you have designated someone who can speak for you via Advance Health Care Directive, they can sign the paperwork so you can get the care you need.
To sum up, a living trust is the best asset protection and estate planning document any Californian could have. It has more benefits than one blog post could reasonably list.
The biggest benefit is that a living trust avoids probate, which is public, attracts litigations, and is expensive. How much does it take to probate home in California? On average, to probate a one-million-dollar home in California may cost at least $46,000, including attorney and court fees.
