LIVING TRUST OUTLINE
copyright © 1996-2009 Peter Bassing
Prepared by Peter J. Bassing
Attorney at Law
(Member, California Bar--State Bar No. 63315)
Note: The following discussion is in some instances specific to
WHAT IS A LIVING TRUST?
"LIVING TRUST" is the popular term applied to a Revocable Inter Vivos
Trust. This is a way by which property (the trust estate) is held by
one person (the trustee) for the benefit of another person (the
beneficiary). The person who creates the trust and contributes
the trust estate is known as the settlor or the trustor. One person, or
a couple, might occupy more than one, or all, of these roles, as
settlor, trustee and beneficiary. Usually, the settlor or settlors are
in fact the initial trustees.
The trust is created by a written Declaration of Trust which
spells out all of the terms of the trust and the distribution of the
trust estate and its income, both during the lifetime(s) of the
settlor(s)/beneficiaries(s) and after death.
The living trust is revocable. This means that the person or
couple who created it can change or undo it. Many trust declarations
provide, however, that upon the death of the first spouse, portions of
the trust become irrevocable.
A Living Trust may provide some or all of the following advantages:
Avoidance of Probate
Flexibility in the distribution of an estate (Compare to
Avoidance of a
Avoidance of some post-death
tax savings for married couples
Probate is the legal proceeding by which a person's assets are
distributed after death. Assets which have been held in a Living Trust
do not have to go through Probate since the decedent transferred them to
the trust while alive and, upon his or her death, has no estate to
probate. Much has been written about the disadvantages of Probate,
including the following:
Delay: It is almost impossible to complete the probate of an estate
in less than 6 months, and it may take years.
Expense: Unless they agree to take less, the executor and the
attorney are each entitled to a fee set by law and calculated from
the size of the estate (without reduction for mortgages or other
debts). For example, for a $100,000 estate, the executor's and
attorney's fee would each be $3,150, for a total of $6,300. For a
$1,000,000 estate, they would each be $21,150, for a total of
"Red Tape": Court approval and extensive notice requirements are
still required in many situations. For example, some sales of real
estate require court approval and an auction.
Possible Duplication: If the decedent owned real estate in more than
one state, a probate proceeding (with its own local attorney) may be
required in each state.
Loss of Privacy: Anyone may view the Court's
probate file, which will normally contain the name, address (and
sometimes age) of each relative and heir, and a description of all
property in the estate and its disposition.
In a few situations there are advantages of probate. The probate
proceeding requires creditors to file their claims within a period of
months, rather than simply within the longer statute of limitations. If
claims appear likely, a Living Trust can be put through probate to gain
Even without a trust, a probate is not always required. In the case of a
married couple, on the death of the first spouse a simpler court
proceeding (a spousal property petition) may be available if that
spouse's property passes outright to the survivor. However, if the
estate tax savings device of a bypass trust is used
below), probate of a will would usually be necessary.
Joint Tenancy should not be confused with "tenancy in common" or
"community property." When property is in Joint Tenancy, there is a
right of survivorship. This means that on the death of one joint tenant,
his or her interest automatically goes to the other joint tenant or
tenants, no matter what the decedent's Will says. Joint tenancy has some
advantages: a. Joint tenancy is not very flexible: the interests of all
joint tenants must be equal and they are distributed immediately and
automatically upon the death of a joint tenant.
But there are serious disadvantages:
Joint tenancy is not very flexible: the interests of all joint
tenants must be equal and they are distributed immediately and
automatically upon the death of a joint tenant.
It might not give the advantage of stepped-up basis
which the community property form of ownership gives a married
Property in joint tenancy can be reached by the creditors of each
joint tenant. For example, if you hold property in joint tenancy
with your children so that they will get the property on your death,
an under-insured automobile accident in which they are involved
could jeopardize the asset during your lifetime.
For married couples it is now possible to hold property as "community
property with right of survivorship", thereby overcoming the problem
regarding stepped up basis on the death of the first spouse, although
not avoiding the inflexibility problems inherent in a right of
POSSIBLE INCOME TAX SAVINGS
As mentioned above, one of the disadvantages to holding property in
joint tenancy is possible inability to take advantage of the "stepped-up
basis" advantage. When a person dies, the income tax basis of his
property is "stepped-up" to its current value. If the property is sold
before further increase in value there will be no income tax payable
because the sales price is equal to its basis.
If a married couple holds property as joint tenants or tenants in
common, it is not certain that the IRS would consider it to be community
property, and only the decedent's half might receive the stepped-up
basis. The survivor's half would keep the old basis and on any
subsequent sale there could be a taxable capital gain. Although the
other advantages of a trust would not be obtained, a married couple
should ordinarily hold community property as "community property with
right of survivorship" (under Civil Code Section 682.1) rather than as
For Example: Husband and wife purchased an apartment building years
ago for $200,000. They took title as joint tenants to avoid probate when
either died. They have taken a total of $50,000 in depreciation. Their
basis is, therefore, $150,000. If they were to sell the building for
$350,000 they would have a taxable gain of $200,000 and might pay about
$55,000 in federal and state income taxes.
If Husband dies before they sell the building, the basis of his
one-half which passes to wife by joint tenancy right of survivorship is
increased to current value, or $175,000. The IRS might take the position
that the wife's half was her separate property, and its basis of would
remain at $75,000. If Wife sells the building for its $350,000 value,
she will have a taxable gain of $100,000 and might pay federal and state
income taxes of about $28,000.
But if the couple had held the property as community property instead
of as joint tenants, the law provides that BOTH halves of the property
receive a stepped up basis on the death of either spouse. The decision
of the couple in the example to avoid probate by use of joint tenancy
rather than with a Living Trust might cost Wife about $28,000 in
avoidable income taxes.
SAVINGS FOR SOME MARRIED COUPLES
In California there is no state death tax. The Federal death tax is
called the estate tax.
The federal estate tax is based on the net value of the estate of the
decedent. In most cases, for persons dying after January 1, 2004, the
first $1,500,000 of the estate was tax free. Under legislation passed in
mid-2001 (the "Tax Relief Reconciliation Act of 2001") this amount,
called the "Unified Credit Equivalent", increased to $3,500,000 in 2009.
Unless there is a change in the law, the Estate Tax will be repealed for
the year 2010. It will be automatically reinstated, in 2011, at 2001
levels. Also, assets passing from one spouse to the other are exempt
from the tax. Non-exempt assets are taxed at rates varying from 37% to
Because of the complete exemption for property left outright to a
spouse, the estate tax may not seem to be an immediate concern for
married couples thinking only about the death of the first of them to
die, no matter how large the estate. However, a transfer of all of the
property of the first spouse to die to the surviving spouse may have the
effect of increasing the estate of the surviving spouse to the point
that on his or her death the estate will exceed the present $3,500,000
Unified Credit Equivalent and estate tax would be due.
A Living Trust declaration may provide that on the death of the first
spouse to die the trust is split into two (or sometimes three) trusts.
One of these trusts (sometimes called the "survivor's trust" or the "A"
trust), remains revocable by the surviving spouse who typically is given
the right to all principal and income on demand. The other trust
(sometimes called the "bypass" trust, the "exemption" trust, or the "B"
trust) usually contains enough property to take maximum advantage of the
Unified Credit Equivalent without producing any estate tax. It becomes
irrevocable on the death of the first spouse to die, but by its typical
terms, the surviving spouse is entitled to receive its income and, to
the extent necessary to maintain his or her standard of living, its
principal. On the surviving spouse's death, the balance of the trust
will be distributed, either immediately or over time, to beneficiaries
the couple have selected.
The bypass trust does not become part of the surviving spouse's estate
and does not increase that estate for tax purposes. On the death of the
surviving spouse, his or her estate is entitled to its own "exemption",
reducing, or possibly avoiding estate tax liability.
While the use of a bypass trust to save estate taxes is common in Living
Trusts, it may also be done by Will. It cannot be accomplished by
holding property in joint tenancy, though. Of course if a Will rather
than a Living Trust is employed, probate will be necessary.
FLEXIBILITY OF DISTRIBUTION
Both Living Trusts and Wills provide substantial flexibility in
disposing of property. If property is held in joint tenancy, upon the
death of any joint tenant his interest in the property immediately
passes to the other joint tenant or tenants. With a Living Trust,
property need not pass immediately. It can be held, for example, to
benefit a number of beneficiaries according to particular written
standards or in the discretion of a trustee. While legally "adults" at
age 18, many children are not mature enough to wisely use a lump sum.
A Living Trust can be made the beneficiary of life insurance policies so
that the death benefits can be similarly invested, managed and
distributed, rather than paid out in a lump sum which may or may not be
used for the purposes the decedent had in mind.
A Living Trust, particularly when coupled with a general durable power
of attorney for financial management and personal affairs, can provide
property management for a person who might someday be unable to manage
his or her own assets due to advanced age or illness.
A Conservatorship proceeding in court will involve added expense and,
often, embarrassment and psychological debilitation to both the
Conservatee and the person petitioning for the Conservatorship. Also,
many transactions undertaken by a Conservator, including most sales of
property, require Court approval. An alternate trustee, or co-trustee
under a Living Trust, can manage financial matters without the necessity
of a Conservatorship. Since the trust is revocable, a settlor who
disputes his or her incapacity will not have given up any control.
As is discussed in the sections about Probate and the avoidance of
Conservatorships, both involve court proceedings. The court's file is
available for inspection and copying by anyone visiting the county
clerk's office. Names and addresses (and sometimes ages) of
beneficiaries will be made known.
In contrast, the provisions of a Living Trust are not normally matters
of public record. Neither the extent and disposition of assets nor the
names and addresses of beneficiaries need become generally known.
DISADVANTAGES OF A LIVING
TRUST, or "NO FREE LUNCH"
While for many people they will be outweighed by the benefits, a Living
Trust has disadvantages and limitations:
Initial Paperwork: A Living Trust often involves somewhat more
paperwork than some of the alternatives discussed in this outline,
and much more than others. Because of this, attorney's fees in
preparing the estate planning documents are typically higher.
Need to Transfer Assets: As to many of the things a Living Trust is
designed to do, it simply "won't work" unless assets are transferred
to it. For example, real property deeds must be signed, acknowledged
("notarized") and recorded with the County Recorder. This is usually
quite simple, but not as simple as doing nothing. As assets are
acquired or transferred, title must be taken and given by you as
Borrowing Against Property: While a Living Trust is a perfectly
legal way to hold property, some commercial lenders use pre-printed
forms and train personnel to deal only with typical situations. When
you want to refinance property held in the trust, it is sometimes
easier to "switch than fight"; to transfer the property out of the
trust, borrow the money, and transfer the property back into the
trust. The transfer back into the trust cannot, by law, be
considered by the lender a sale on which it can "call" the loan.
No Protection Against Creditors: It should be understood that
putting your property into a Living Trust will not put it out of
reach of the claims of your creditors. Neither will a Will or joint
tenancy. The law provides certain exemptions from the claims of
creditors --the "homestead" exemption, for example. Putting your
property into a living trust does not deprive you of any of those
Extra Accounting: If a married couple have "A-B trust" provisions in
their Living Trust declaration (see
Possible Estate Tax
Savings), after the death of the first spouse to die, the
surviving spouse must keep separate records for the "B" trust, and
have a separate tax return filed for it. For simple estates, this is
likely to mean additional expense of a few hundred dollars per year.
Of course, if the same estate tax saving devices were accomplished
by a will, the same record keeping and tax requirements would arise.
COMMON QUESTIONS ABOUT LIVING TRUSTS, AND
Question: How will a living trust affect our income tax
liability while we are alive?
Answer: If, as is usual, you are the beneficiaries of the trust
you create, there will be no income tax effect at all. You will continue
to file your form 1040; all income, deductions, etc. of the trust will,
properly, be shown as yours.
Question. What happens to the income tax basis of property
when it is transferred to the Living Trust?
Answer: Nothing. On transfer to the trust the basis is
Question: Does it make sense for an unmarried person to set up
a living trust?
Answer: While one benefit of a Living Trust,
possible estate tax
savings by use of an "A-B" trust arrangement, is not available
to a single person--through a trust or otherwise--other benefits of a
Living Trust, like the ability to avoid
conservatorship , might
be even more important to a single person. Since the relatively simple
procedure of a spousal property
petition, discussed above is unavailable on the death of an
unmarried person, probate avoidance may be an equal or greater
consideration for him or her.
Question: What happens on the death of a person who has set up
a Living trust?
Answer: The successor trustee should take steps to remove the
decedent's name from accounts, etc. and substitute his or hers, as
Trustee. This is usually not very complicated and typically involves
about as much paperwork as if the property had been held in joint
tenancy. In some cases, following the first to die of a married couple,
the surviving spouse must make a decision whether or not to "disclaim"
all or a portion of the decedent's estate, a decision which should be
made before property is "re-arranged" and within a few months following
the death. If the estate of the deceased exceeds the "Unified Credit
Equivalent", a Federal Estate Tax return must be filed within 9 months
after the death. Under legislation passed in mid-2001 (the "Tax Relief
Reconciliation Act of 2001") the "Unified Credit Equivalent" for the
years 2007 and 2008 was $2,000,000 and increased to $3,500,000 in 2009.
Unless there is a change in the law, which is likely, the Estate
Tax will be repealed for the year 2010. It will be automatically
reinstated, in 2011, at 2001 levels ($1,000 Unifed Credit Equivalent).
While any given estate will almost always require less "lawyering" if a
trust has been properly employed than if a will has to be probated,
there is no guaranty that lawyers (and accountants) can be completely
avoided following the death.
Question: Will transfer of real estate to a Living Trust
increase property taxes?
Answer: No. The law implementing Proposition 13 specifically
exempts from the definition of "change of ownership" transfers to a
trust of which the transferors of the property are the beneficiaries.
Question: Should IRAs, 401's or Keogh plans be transferred
into a Living Trust?
Answer: No. Under Federal law, such transfer might be considered
a premature distribution on which not only income tax but a 10% penalty
might have to be paid. Conceptually, such plans are already held in a
specialized form of "living trust."
Question: If I/we once set up a Living Trust, can the trustees
or beneficiaries be changed?
Answer: Yes. During your lifetime (or the joint lifetimes of
married couples), the trust can be freely amended in that or any other
FEES AND SERVICES
Note: These fees and services are offered for the great majority of
"typical" estates. Of course, for particularly complicated matters, fees
may be higher but if a fee different from those shown here would be
charged, you will be advised BEFORE you incur any commitment to pay fees
The basic fees charged for "packages" containing the documents listed
below are. indicated on a separate Estate Planning Fee Schedule.
These fees include an initial consultation with Peter Bassing and the
preparation of papers listed below. Of these amounts, $500 must be paid
at the end of the consultation if you want to proceed; if you choose not
to proceed, the consultation is free. The balance is payable when the
documents are completed or 60 days after drafts are provided, whichever
Click here for more on fees
Declaration of Revocable Inter-Vivos Trust
"Pour Over" Will. This is a Will which provides that any property
which is not held in joint tenancy and which has not been
transferred into the trust during your life will be transferred to
it. It is a "backup" measure.
Durable Power of Attorney for Financial Management and Personal
Affairs. A power of attorney that give another person (often the
alternate trustee) the power, among others, to transfer assets to
the trust which you neglected to, in case you are incapacitated,
mentally or physically.
Advance Health Care Directive (formerly generally known as a Durable
Power of Attorney for Health Care). This allows another person to
make decisions about medical treatment in case you are not in a
condition to make them yourself.
Quitclaim Deed. This will transfer one piece of real property (often
your residence) to the trust. We will take care of recording. You
will be charged $60 each for additional deeds.
Certification of Trust. A "summary" of certain trust provisions you
can conveniently provide to third parties.
PLEASE NOTE: LIMITATION ON FUTURE REPRESENTATION. The advice Peter
Bassing will furnish is based on present applicable laws. If these laws
change, it is imperative that the estate plan be reviewed and (if
necessary) changed. Changes in the law may not affect all clients, or
all clients in the same way, and as a practical matter it would be
difficult or impossible for Peter Bassing to undertake to keep all
clients updated about changes in the law. For this reason, Peter Bassing
does NOT undertake the responsibility of advising you of future changes.
Should it come to your attention through the news media or other sources
that there has been a change in the tax (or other) law relating to
estate planning, you are urged to contact Peter Bassing, or another
professional advisor, for an appointment.
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