Revocable Living Trusts
We spend our lifetime building up assets and accumulating possessions. And we want to leave them to our loved ones when we pass away. That is the goal of financial and estate planning.
And several estate planning tools can help. You can leave your possessions by using a will, which takes effect upon your death. Sadly, according to a Gallup poll, only about half the US population has a will.
You can give away many of your assets to your loved ones during your lifetime. Or you can place the assets in an irrevocable trust, with instructions to the trustee on how to distribute the property to loved ones you name as beneficiaries.
But all these tools have weaknesses. A will becomes effective only upon death and can't help your wishes while you are alive. Gifting some items is a good strategy, but do you really want to give away your home and financial assets while you are alive?
And transferring assets to an irrevocable trust means you no longer own or control those assets. "Irrevocable" means that it may not be possible to change the trust, even if you have a severe change in financial circumstances. What if one child has substantial medical needs? Or what if one child marries into wealth while the other has financial setbacks and might lose their house. Even a well-drafted irrevocable trust cannot foresee all circumstances.
That is why a Revocable Living Trust is one of the most popular estate planning tools. A qualified California estate attorney can use this type of trust with wills, irrevocable trusts, or gifting to develop a powerful estate planning strategy for you.
What is a Revocable Living Trust?
A trust is a legal entity that holds assets on behalf of a beneficiary. You can transfer your assets, like real estate, cars, gold, personal items, and almost any assets, into a trust you establish. The person establishing the trust is called the grantor, settlor, or trustor. The trustee administers the trust and will distribute the assets to the beneficiaries you named according to the terms of the trust.
An irrevocable trust is designed as a separate entity that cannot be easily changed. There are some rare exceptions, which usually mean the parties must go to court. Once you transfer property into an irrevocable trust, you no longer legally own the property. The IRS recognizes that the irrevocable trust is separate from you, and the trust is responsible for filing and paying its own taxes.
But suppose you establish a revocable living trust. In that case, you can change it whenever you want to as long as you are not legally incapacitated. While the revocable living trust will help avoid probate proceedings, during your lifetime the IRS recognizes all the assets within the trust belong to you as the grantor. And the IRS will tax you on those assets as if they were yours and not in the trust at all.
Why Use a Revocable Living Trust?
Flexibility and Control
Of the many reasons to use a living revocable trust, flexibility and control are two of the most powerful. Many parents are not ready to give up control of their assets. You may feel more comfortable maintaining your assets, investments, real estate, or family businesses. Or you don't think your children are ready to run the family empire yet. With a revocable living trust, you maintain control of all the assets.
And if you or your family have unexpected life circumstances, you can change the trust anytime. You can leave additional funds to your children with more significant needs. Or you can add protective language to keep some of them from spending their inheritance too quickly. You can even exclude family members from receiving any income or assets from the trust.
You remain in control of the trust and the assets until the day you pass away.
A significant benefit of this type of trust is avoiding probate. Probate is the legal process by which a court oversees the distribution of a deceased person's assets. It can be time-consuming and costly. Many people seek to avoid it if possible. By transferring assets into a revocable living trust, you can bypass probate and ensure that your wishes are carried out more efficiently.
You can use a revocable living trust to manage assets during periods of incapacity. Suppose you have an accident or illness that incapacitates you and you become unable to make financial or healthcare decisions. In that case, the trust can provide a mechanism for managing your assets and making decisions on your behalf. This can be particularly useful for those with minor children or special needs individuals who may need ongoing financial support.
A revocable living trust can also be an effective way to plan for end-of-life decisions. The grantor can specify their wishes for healthcare, funeral arrangements, and the distribution of assets in the trust document. This can provide peace of mind for the grantor and their loved ones, as it ensures that their wishes will be fulfilled in the event of their death or incapacitation.
Protect Your Privacy
Trusts are designed to be private documents. Avoiding probate can keep private and confidential matters away from prying eyes.
A revocable living trust does not become part of the public record. No one in the future can search public records to learn more about your estate distribution.
But a will is a public record, and all information in the will about assets, distributions, amounts, and other private information becomes publicly available to anyone.
Peace of Mind
A properly drafted revocable living trust sets out a strategy and clear plan to deal with all of your assets. This gives you peace of mind now, knowing that your wishes will be carried out. And a revocable living trust gives your loved ones certainty and comfort, realizing they won't have to make these difficult decisions later during a time of great family stress.
What About Taxes?
During the grantor's life, they are in control of the assets and are responsible for all taxes on those assets and incomes as if the trust did not exist. That income is included in the grantor's personal tax filings.
However, when the grantor dies, the revocable trust becomes irrevocable for legal and tax purposes. But generally, since the grantor was in control of the trust assets before he passed away, the IRS will include the value of those assets in the grantor's estate for tax purposes. The assets avoid probate, but the value of the assets is used by the IRS in their estate tax calculations.
The strategic use of trusts can help minimize income and estate taxes. But the law and IRS codes can be complex. This is an area where you want to get expert advice from a qualified California tax and estate attorney.
What Happens Upon the Grantor’s Death?
Upon the grantor's death, the trust becomes irrevocable, meaning the trust can no longer be altered or revoked. The trustee will then be responsible for distributing the assets in the trust according to the terms of the trust document. A qualified California estate attorney will design your trust specific to your family's needs. This may include distributing assets to beneficiaries or using the assets to provide for the needs of minor children or special needs individuals.
Considering a Revocable Living Trust? Schedule a Consultation Today.
A revocable living trust is a powerful estate planning tool that gives you control, flexibility, and privacy and allows you to avoid the time and cost of probate proceedings.
If you're considering establishing a revocable living trust, it's essential to work with an experienced California estate attorney to ensure that the trust is properly drafted and meets all legal requirements. Whether you're looking to provide for minor children, plan for end-of-life decisions, or manage your assets more effectively, a revocable living trust can be an effective solution.
At San Diego Legacy Law, our trust attorneys work closely with clients to evaluate their personal goals and available assets before incorporating trusts into their estate plans. Our founder, attorney Nicole D'Ambrogi, holds an LLM in International Taxation with concentrations in Financial Services and Wealth Management, which allows her to strategically analyze the many variables that can affect your ability to meet your estate planning goals instead of focusing on simple document preparation.
San Diego Legacy Law serves clients throughout San Diego and those in La Jolla, Del Mar, Rancho Santa Fe, El Cajon, Poway, Spring Valley, Chula Vista, Santa Rosa, Petaluma, Novato, and Healdsburg.
Contact us today to schedule a consultation to discuss your estate planning and asset protection needs.