TRUSTS: What is a Living Trust?

Revocable, living trusts are nothing new. In medieval times, trusts were used in England to avoid such harsh laws as primogeniture (according to which, the eldest born son held the exclusive right to inherit his father's entire estate). A revocable, living trust funded with all of the grantor's assets can avoid the delay of probate and the involved fees. Probate is the process by which the last debts and taxes of a deceased person are paid, with the remaining assets then distributed to the person's heirs. Probate fees are generally paid to the attorney assisting in the probate of the estate and to the personal representative of the deceased person's estate (Prob. Code, §§ 10800 to 10850 provide for the compensation of attorneys and personal representatives). The personal representative is also known as the executor if the deceased person had a will, or the administrator if the deceased person had no will (i.e., intestate). Probate fees are based upon the gross value of all assets that must pass through probate. For example, if a person's sole asset passing through probate was a $300,000 home in which the person had only $30,000 equity, probate fees would be based upon the full $300,000 value of the home and not on the $30,000 equity. Without allowance for extraordinary fees (which the courts are empowered to award), the probate fees would total $14,400. Revocable, living trusts can also avoid conservatorships. The person who sets up the trust (called a "grantor" or "trustor") can designate a successor trustee to manage trust funds in the event of her or his incapacity. Absent a trust or a durable power of attorney, managing the financial affairs of an incapacitated person generally requires court appointment of a conservator. This can be expensive and time consuming. Privacy is another reason to consider a revocable, living trust. When assets pass through probate, whether by will or intestacy, such details as the nature of assets and the identity of heirs becomes a matter of public record. Since a revocable, living trust avoids probate, these matters remain private. Additionally, a revocable, living trust can be used to avoid or minimize Federal estate taxes. Under current law, the amount of a person's estate over $675,000 is subject to Federal estate taxes upon that person's death. But a married couple can structure the terms of their revocable, living trust so that the surviving spouse never inherits the first deceased spouse's estate outright, yet retains the right to use the deceased spouse's estate assets for certain purposes (Treas. Regs. [20 C.F.R.] allow the surviving spouse to use the assets of the deceased spouse's estate for her or his own health, education, support or maintenance in the standard of living to which she or he is accustomed). Theoretically, a married couple with a combined estate valued at $1,350,000 can avoid Federal estate tax liability altogether through careful planning that utilizes a revocable, living trust. The amount a person may xxx tax free goes up to $2,000,000 in 2008 and becomes unlimited in 2010 pursuant to the Economic Growth and Tax Relief Act of 2001. So why not just hold title to real property, bank accounts and other assets in joint tenancy? Joint tenancy also allows a person (the surviving joint tenant) to acquire title without probate because joint tenants have what is called "a right of survivorship." While nothing per se is wrong with joint tenancy, it only defers probate until the death of the surviving joint tenant. When the surviving joint tenant dies, the asset will still have to pass through probate unless the surviving joint tenant reconveys title to another joint tenancy, establishes a trust or utilizes some other probate avoidance method. Revocable, living trusts are used far too seldom today by the middle class in estate planning. While they may not meet all of the needs of every person planning his or her estate, revocable, living trusts should at least receive some consideration by anyone owning assets that would otherwise result in liability for substantial probate fees (e.g., a house).