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Southern California Living Trust

The creation of a California Living Trust is one of the most important steps you can take for your family. It prepares your legal affairs for you during your lifetime, and it provides for the easiest way of transferring your assets after you’re gone. The benefits of a California Living Trust are that you can (#1) avoid the California Probate Court process, (#2) provide protection for your family, (#3) manage your assets if you become incapacitated or have a long-term illness, (#4) you can control the distribution of your assets, (#5) save income and estate taxes, and (#6) have some privacy which you would not otherwise have.

#1 Avoid Probate

A California Living Trust can avoid the Probate process. One of the issues involved with Probate is the time that it takes for assets to pass on to the beneficiaries. Most attorneys in California would say that probate takes a minimum of 9 months to a year. But often, the average runs 20-22 months, so there’s a long delay before assets are distributed to the beneficiaries. Part of the problem that develops during this time-delay is that the beneficiaries expect distribution immediately, and when they don’t receive their inheritance right away, they think the Executor is dragging out the process for some personal gain. So, there can be conflict between the Executor & the beneficiaries. With a California Living Trust, you name a Successor Trustee. When you pass away, the Successor Trustee takes charge of the assets, pays the bills and can literally start distributing the assets within weeks instead of many months. So, you avoid the time delay that’s involved with California Probate and hopefully, you can avoid potential conflict between the person left in charge of the estate and the beneficiaries.

Also, a Living Trust can avoid California Probate fees. Take a minute and add up everything in your estate. Total it altogether, and perhaps your estate is worth $1,000,000. If it were to go through Probate, the fees would be $46,000. If your assets totaled $500,000, the fees would be around $25,000. You need to be aware that Probate fees are based on the GROSS value, not the net value of your assets. For instance, if you own property worth $700,000, and have a $600,000 mortgage, there’s only equity of $100,000. Probate fees are not based on your $100,000 of equity, but on the gross, current market value of your property. So, having a large mortgage, does not reduce the cost of probate.

Also, a California Living Trust can help avoid a will contest. If a beneficiary wants to contest a will, they can easily find an Attorney to file a will contest, since the Attorney knows the assets are locked in that Probate process and can’t be distributed until the Court orders distribution. Since the beneficiaries are anxious for distribution of their inheritance, they will often compromise their rights to get a portion of those assets. Whereas, with a California Living Trust, the Successor Trustee can distribute the assets right away to the beneficiaries. Should someone want to contest the Trust, typically, they would file a civil law suit, and pay an attorney up front to initiate the law suit. So, there’s less likelihood of a contest with a Trust than there is with a will. So, avoidance of the Probate process is the first advantage of the California Living Trust and, by itself, enough reason to create a Living Trust.

Now, let’s talk about “what is” a California Living Trust. A California Living Trust is a new legal entity, similar to incorporating a business. When incorporating a business, the process involves going to an attorney who drafts Articles of Incorporation, you sign those Articles, they’re filed with the Secretary of State, and you’ve created a new legal entity. You can transfer assets into that Corporation, you can transfer a business into that Corporation, but if you pass away, does that corporation end? No, because it’s a separate legal entity. If the President of General Motors dies, does GM end? Of course not, because it’s a separate legal entity.

A California Living Trust is very similar. What happens is, you go to an attorney who drafts the Living Trust, you sign the Living Trust, you transfer assets into the Living Trust. You’ve now created a new legal entity. In fact, you can transfer all of your assets into that Trust, regardless of what they are… your personal belongings, your bank accounts, your investments, stocks and bonds, your real estate… everything goes into that Trust. The Trust is a Revocable Trust, meaning you can revoke it or change it. You’re in full control over your assets. You can do everything with the assets in the Trust, as you do right now with them in your name alone. You can sell property, buy new property, give away your assets, trade your assets, sell your home, buy a new home, sell your stock everyday on the stock market, you can do everything with your assets in the Trust, just like you do right now.

You are the Trustor, the person who creates the Trust. You are also the Trustee, the person who manages the Trust. You’re in full control over the assets. A single person is Trustee of their own living trust. A husband and wife typically are both Trustees together of their Trust. If something happens to one spouse, the other serves as sole Trustee. Whether single, or married, you need to have a Successor Trustee. A Successor Trustee can be a beneficiary – someone who’s going to receive something from your estate. If you have children, you can name your children as Successor Trustee(s). We suggest you have at least two people, in case one person cannot serve. Often clients will want Co-Trustees, having two people serving together at the same time.

Also, in the Trust, you control the division or distribution of the estate. If you have four children, you might say want to have everything divided equally between the four, so they’d each get 25%. Or, you might say you want 10% go to your favorite charity; 90% then is divided equally between your children. You decide how and when your assets are distributed, and we build those provisions into your Trust.

Now, we’ve created the Trust. How do we go about transferring assets into the Trust? Let’s address that by addressing how to change title on your assets into your name as Trustee of your Trust.

To transfer your personal property, typically, after signing your Trust, the next page is called an “Assignment”, and by signing this Assignment, you are assigning, or transferring, your personal belongings into your Trust. And this is done by categories: furniture, furnishings, personal belongings, jewelry, tools – all of your personal assets are transferred into your trust by category, so that you don’t have to list every pot and pan. Now, you can be as specific as you want in dividing these personal assets, but transferring them into the trust is a very simple process.

What about your stocks and bonds? If you have a brokerage account, just tell your broker to change the name on your account to the name of your Trust. If you have individual stock certificates, just write to the transfer agent and ask them to re-issue your stock shares into your name as Trustee of your Trust.

Now, bank accounts, credit union accounts, savings accounts can be transferred the same day you create your Trust. You simply walk into your bank or credit union and say, “I’ve created a Trust and want to transfer my accounts into my Trust.” The attorney who created your Trust should have typed out the exact wording of how to take title, so that when you arrive at your bank, they’ll have what they need to transfer your account(s) into your Trust.

Your real estate is probably one of your largest valued assets, and we want to make sure it gets transferred without complication, through a California Trust Transfer Deed, moreover, we will have typed on your deed, “excluded from reappraisal under Proposition 13”, so that the County Assessor cannot increase your property taxes, and so that you keep your Prop. 13 tax basis. In fact on this California Deed, we include the California Constitution Section that says they cannot increase your property taxes when you transfer your real estate into a revocable California Living Trust.

Now, there are certain assets that, rather than changing ownership, we recommend that you change the name of the beneficiary to be the Trust. You contact these companies and ask them to name the Trust as your beneficiary. There’s an important exception to this, and that is, if you’re married and you have a tax-deferred entity, such as an IRA, 401k, 403b, or TSA, we recommend that you name your spouse as your first beneficiary, and the Trust as your second beneficiary. And, the reason is that your spouse can roll that tax-deferred account over into their own IRA, and have tax advantages that no one else has. Now, we’ve created the Trust and we’ve transferred assets into the Trust. How is it that we avoid the probate procedure? The answer is very simple… by having created this new legal entity, and having transferred assets into that entity, when you pass away, the Trust does not end - it continues in legal existence. Your Successor Trustee takes charge of the assets, pays the bills and distributes the assets to your beneficiaries. As a result, there is no public process, there are no probate fees or delays, we’ve avoided probate altogether by having created a California Living Trust and transferred assets into that Trust. So, with a very simple legal step, you’re able to avoid the California Probate procedure.

#2 Protect Your Family

A California Living Trust can help provide protection for your family. Now, if you have minor children or grandchildren, the problem is that, under California Law, the State of California says that once a young person reaches age 18, they can receive their inheritance.

But, you might say, “I don’t want them to get it until they’re mature enough!” Well, California Law says that unless you’ve created some form of Trust, your beneficiaries receive their inheritance at age 18. And, probably, you don’t want them to get it until they’re 21, or 25. You make that decision – it’s your money– you pick what age your assets are distributed. Now, what if you don’t want your beneficiaries to receive their inheritance until they’re 25, but you’re concerned they might need money for their college education. Well, you’ve named a Successor Trustee to take charge of your assets when you’re gone, and has the authority to pay for their college education, and distribute the balance at age 25.

What if you have an adult child or another beneficiary that’s on Medi-Cal? If you were to leave them any money, what would happen? They’d have to go off Medi-Cal, spend everything down to about $2,000, and then reapply for Medi-Cal. So, the inheritance you left them is now gone. You could use what’s call a Special Needs Trust, which allows for their inheritance to be held in trust for them. Medi-Cal pays for normal expenses, and your Trust can pay for extra things they’d otherwise never receive.

Also, you might want to provide for your parents in a way that you feel is important.

What if you have a spouse with a terminal illness? Historically, you’d have to spend down your assets to $2,000 to $3,000 before applying for Medi-Cal. Then, when the ill spouse passed away, the “well” spouse was left with nothing. Now, we can build protection for part of your assets into your Trust for the “well” spouse, so that you’re able to receive the maximum advantage allowed under Medi-Cal Law for the “well” spouse.

#3 Manage Your Assets During Incapacity

Also, a California Living Trust provides management during incapacity. If you become incapacitated, unable to handle your own affairs, who’s going to handle them for you? Well, if you haven’t planned ahead of time, your family has to go to a Court-supervised procedure called a Conservatorship, which, in California, is time-consuming and expensive. An attorney or Conservator has to file annual and bi-annual accountings with the Court, and often there are legal battles over who’s going to manage your affairs. And, sometimes the person who fights the hardest to manage your money, is the person you’d least want to be in control of your financial destiny. You need to make the decision and say, “If I no longer can handle my affairs, this is the person I want to be in charge.” And you do this when you create your California Living Trust. You name a Successor Trustee who takes charge and makes decisions for you, should you become incompetent.

We do need to create two additional documents along with your California Living Trust. One is a Durable Power of Attorney for Finances and one is a Durable Power of Attorney for Healthcare which, if you want, can have the provision that if you’re in a terminal condition where there’s no reasonable expectation of your survival, you request no life support. A lot of people feel strongly about this issue.

#4 Control the Distribution of Assets

Also a California Living Trust allows you to control the division of your assets. If you don’t make the decision of how your assets will be distributed, who’s going to make it for you? The State of California, through the court Probate process. And, unfortunately, if you want to include a charity in your distribution, the State of California thinks your favorite charity is the State of California. You might disagree with that! And you might want to include a real charity in your Distribution.

#5 Ways of Holding Title to Property

  1. Separate Property title is held in your name alone. When you die, this property has to go through the Probate procedure, and eventually to your beneficiaries. You could have your separate property in your Living Trust, have it bypass Probate, and go on to your beneficiaries without that delay.
  2. Tenants in Common, is when you hold title “in common” with other people. When one person on title passes away, their share does not go to the remaining people on title, it goes through Probate and eventually onto their beneficiaries. You can have investments with other people, and hold your “tenants in common” portion in your Living Trust and avoid probate you’re your beneficiaries.
  3. Joint Tenancy has a special characteristic called “right of survivorship”. This means that, if there are three people on title as Joint Tenants, they each own 1/3. When one person passes, the two who are left now own 50% each, and the last person living, owns 100%. Perhaps that’s not what you want. For example, a client came into the office, said she had 5 children and that she wanted everything equally divided between her 5 children. One of her daughters had visited her after her husband died, and suggested that they add the Daughter to the deed of her home and onto all of her bank accounts. Now, if Mom dies, that one daughter would receive 100% of everything, and the other 4 children would get nothing, which was not what the Mother wanted. And, what if the daughter gets into an auto accident? If she’s sued, they’ll find out that she’s on title to Mom’s house, and Mom could lose her home because she put her Daughter on title as a Joint Tenant. Joint Tenancy has serious dangers.
  4. Community Property is any property acquired during the marriage, as a result of the earnings of either Husband or Wife. It does not include property received by gift or inheritance during the marriage, or brought into the marriage (that’s Separate Property). There’s a significant income tax advantage that married couples can receive by holding property as Community Property.

Let’s say you have rental real estate that’s worth $700,000, which you purchased for $100,000. If you sold the property, there would be a profit of $600,000, and long term capital gains (state and federal) tax would be $145,000. Now, if you held the property in Joint Tenancy, and sold the property after the death of your spouse, you’d receive a step-up in basis as to ½ of the increase in value ($300,000). So, $300,000 would be subject to tax, and the tax would be $72,000. You can avoid this tax completely by holding title as Community Property. Then, on the death of your spouse, you’d receive a step-up to the full increase in value ($600,000), and there would be no tax due. When title is held in Community Property, on the death of a spouse, you can sell everything you own… real estate, stocks and bonds, and pay no income tax.

What if you want to transfer title to your home during your life time, to your beneficiary? If you put them on title, you transfer your tax basis to them. So they will have to pay tax on the difference between what you paid for the property, and what its worth whenever they sell it. It’s better to put your property in your Living Trust, and have them receive the property when you pass away. That way, they’ll get a new tax basis to the current market value when you die, and they’ll pay no tax. Also, you won’t have to worry if they get into an accident, file for bankruptcy, or have an IRS audit, since they won’t be on title to your property.

#6 Estate Tax

Estate tax is the federal tax that is imposed when someone dies. The tax is on everything you own: personal property, bank accounts, investments, IRA’s, real estate, life insurance. If the total value of your assets exceeds the exemption, a 40-50% tax is due within 9 months of death. A married couple can combine their federal tax exemptions by creating an A-B Living Trust, so that they receive two deductions against the tax. Without the A-B Trust, when the first spouse dies, everything passes to the surviving spouse, and when the surviving spouse passes, there’s only one deduction against the tax. A side benefit of the A-B Trust is that, if you are the first to die, the surviving spouse cannot change your beneficiaries on your half of the estate.

Summary of the financial benefits for a married couple with assets worth $1,350,000: $53,000 saved in probate fees and $145,500 saved in state taxes, a total of $198,500.

Summary for the financial benefits for a single person with assets worth $500,000: $26,000 saved in probate fees.

In Closing:

When creating a Living Trust, several other documents are prepared for you. A Pourover Will, in case you fail to transfer all of your assets into your Trust, a Durable Power of Attorney for financial matters, in case you become incompetent and have not transferred an account into your Trust, and a Durable Power of Attorney for Healthcare, so that if you’re unable to make your own medical decisions, your loved one(s) can step in for you.

We need to meet and talk with you regarding your unique situation. For instance, how do you hold title on your assets? How do you want them divided? Will your assets be subject to the federal estate tax? How old do you want your beneficiaries to be before they receive their inheritance? Who will take care of your minor children? Do you have property outside California? Then, we’ll design your Trust to suit your situation and determine if there are other legal strategies we need to use to reduce your estate tax liability, or protect your assets from liability.

If you’d like more information, please contact us at (626) 445-1212. We welcome the opportunity to discuss your unique needs and how we may best meet them.

Other Links of Interest:

Attend a Living Trust Seminar

Southern California Living Trust Online Seminar

A-B California Living Trusts

California Living Trusts

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255 E. Santa Clara St., Suite 300  |  Arcadia, CA 91006  |  Phone: 626-445-1212  |  Map & Directions
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