Along with creating a roadmap for the distribution of your assets after you are gone, a comprehensive estate plan should protect your property during your lifetime, prepare for the possibility of incapacity, simplify the administration of your estate, and provide clear instructions for your loved ones. While a Last Will and Testament remains an important estate planning document, people often choose to incorporate a revocable living trust into their overall plan as well because of the flexibility and the numerous advantages it provides. A properly drafted and funded living trust can help you maintain control of your assets while you are alive, streamline the transfer of those assets after your death, and reduce many of the challenges your family might otherwise encounter. To help you decide if one is right for your plan, the Los Angeles at Schomer Estate & Wealth Advisors discuss several important reasons to incorporate a living trust into your California estate plan.
What Is a Living Trust?
A living trust is a legal entity that holds assets intended for the benefit of the named beneficiaries. As the person creating the trust, you are known as the Trustor or Settlor. You also appoint a Trustee who will manage the trust assets and administer the trust terms. If you create a revocable living trust, you may also serve as the initial Trustee, allowing you to maintain complete control over the trust assets while you remain alive and competent. With a revocable living, you may amend the terms, add or remove assets, change beneficiaries, replace your Successor Trustee, or revoke the trust entirely whenever you choose, provided you remain legally competent. If the trust is irrevocable, you cannot amend or revoke the trust after the trust has been established.
How Does a Living Trust Work?
Once you have drafted and executed a trust agreement, you must “fund” the trust by transferring ownership of appropriate assets into the trust’s name. Some assets, such as retirement accounts and certain life insurance policies, generally are not retitled into a revocable living trust, although beneficiary designations may still coordinate with your overall estate plan. If you serve as the Trustee, very little changes from a practical standpoint during your lifetime as long as you remain competent. If you become incapacitated, your Successor Trustee can assume management responsibilities according to the terms of the trust. If you appointed someone else as the Trustee, that person takes over the administration of the trust as soon as the trust is funded.
Common Reasons to Established a Living Trust
One reason that living trusts are so commonly found in a comprehensive estate plan is that they are extremely flexible and can help you achieve a wide range of estate planning goals and objectives, such as:
- Avoiding Probate: Probate proceedings are often more time-consuming, expensive, and procedurally complex than many people expect. Assets properly titled in the name of a living trust generally bypass probate because the trust, rather than the individual, owns those assets. Instead of requiring the probate court to authorize transfers, the Successor Trustee administers and distributes trust property according to the trust agreement. Avoiding probate often allows beneficiaries to receive assets sooner while reducing administrative burdens placed upon surviving family members.
- Maintaining Your Privacy: Once a Will is submitted to the probate court, information concerning your estate may become accessible to the public. Depending on the circumstances, court records may reveal the nature of your assets, their approximate value, the identities of your beneficiaries, and other financial information. A living trust, however, provides a much greater degree of privacy because trust administration ordinarily occurs outside the probate process. Consequently, financial information is shared only with the individuals who have a legitimate interest in the administration of the trust.
- Preparing for Incapacity: A well-thought-out estate plan should prepare for the possibility that you may become unable to manage your financial affairs during your lifetime. An unexpected accident, serious illness, stroke, or progressive cognitive disorder can leave you temporarily or permanently unable to handle your finances. If your assets are owned by a revocable living trust, your designated Successor Trustee can generally step in and continue managing trust property without interrupting day-to-day financial operations.
- Protecting Beneficiaries: Instead of requiring all beneficiaries to receive their inheritance immediately, a living trust lets you establish customized distribution provisions that reflect each beneficiary’s individual circumstances. For example, if one of your beneficiaries is financially responsible and experienced managing investments, an outright distribution may be appropriate. Another beneficiary, however, may benefit from receiving distributions over time rather than inheriting a substantial sum all at once. A trust can also provide additional protection for beneficiaries who live with disabilities, struggle with substance abuse, or face mental health challenges. You can authorize your Successor Trustee to make distributions for education, healthcare, housing, business opportunities, or other purposes while delaying unrestricted access until specified ages or milestones are reached.
- Asset Protection: Assets transferred into an irrevocable living trust generally are no longer owned by you, making them more difficult for future creditors to reach. This added protection can be particularly valuable if you are a business owner, physician, landlord, investor, or anyone with increased liability exposure. Many irrevocable trusts also include spendthrift provisions that help protect a beneficiary’s inheritance from creditors and poor financial decisions.
- Tax Planning: Properly structured irrevocable living trusts can remove certain assets from your taxable estate, potentially reducing estate taxes. Specialized trusts, such as an Irrevocable Life Insurance Trust (ILIT), may keep life insurance proceeds outside of your taxable estate while preserving those assets for your beneficiaries.
- Long-Term Care (Medicaid) Planning: Irrevocable living trusts are frequently incorporated into long-term care planning because they can help preserve assets while preparing for future Medicaid eligibility, provided planning occurs well before long-term care is needed. Because Medicaid imposes a look-back period on asset transfers, early planning is essential.
- Charitable Gifting: If charitable giving is part of your legacy, an irrevocable trust can also support philanthropic goals. Trusts such as charitable remainder trusts and charitable lead trusts allow you to benefit charitable organizations while integrating those gifts into your overall estate plan.
Do You Have Questions about How a Living Trust Fits into Your California Estate Plan?
For more information, please join us for an upcoming FREE seminar. If you have additional questions about how a living fits into your California estate plan, contact the experiencedLos Angeles trust attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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