Living Trusts

S0-called living trusts are in vogue as will substitutes these days. In legal speak, they are known as inter vivos trusts, but they are also known as grantor trusts and revocable trusts. Since the purpose of this blog is to discuss estate planning issues in plain language, we'll just call them living trusts.

So just what is a living trust?

A trust is a set of instructions among three parties related to the use of property for a period of time. The person who places the property into (or "funds") the trust is known as the grantor, or trustor. The person who administers the trust, i.e., who carries out the instructions of the trust, is the trustee. The person who gets the benefit of the trust is the beneficiary.

In a living trust, these three roles are usually played by the same person. By doing this, you could place your assets into the living trust, carry out the instructions of the trust (including selling the assets in the trust or adding new assets, or revoking the trust entirely) and enjoy the use of the assets. In other words, after funding the trust with your assets, life pretty much goes on as it did before.

So why would anyone want a living trust?

What happens to the living trust during your lifetime is only the first half of story. The second half is related to what happens when you die. The living trust document contains instructions for what to do with the property in the trust when you die. This includes naming someone to carry out the instructions (known as the successor trustee) of the living trust, and a new beneficiary (or beneficiaries) who get to use the trust property (known as successor beneficiaries).

If that sounds a little like what a will does, it is. The big difference between a living trust and a will is that a living trust does not go through probate. Probate is a court-supervised proceeding where your estate is gathered and distributed among your heirs. Since it is a court proceeding, it is public, and all documents, including your will, become public record. A living trust, on the other hand, does not go through probate. It is administered by the successor trustee, and the assets in the trust are distributed per your instructions. Since a trust doesn't go through the probate process, it does not incur the fees involved in a probate. Probate fees and attorney's fees are set by statute, and depend on the amount of your estate. In California, probate fees are four percent of the first $100,000; then three percent of the next $100,000; two percent of the next $800,000; one percent of the next $9,000,000; one-half of one percent of the next $15,000,000; and a reasonable amount determined by the court for amounts above $25,000,000. Attorney's fees are based on the same schedule and are in addition to the probate fees.

If you have a large estate, your probate fees could be pretty high. For example, if you had a $400,000 estate, the probate and attorney's fees would be $22,000. In contrast, a relatively simple living trust would still incur costs to administer after your death, but they should be much less than $22,000.

Another issue is time. Probate is subject to the timing of the court, which can take six months to a year or longer depending on the court's backlog and the complexity of administering the estate. The relatively simple $400,000 trust should be administered in six months or less.

So Why Would Anyone Not Want a Living Trust?

If you have a small estate, say less than $100,000, then a living trust may not be advantageous. California law allows for summary procedures for estates valued at less than $100,000, and in some cases, probate can be avoided altogether. So if your estate is less than $100,000, the only potential disadvantage to going to through probate is its public nature. If you are OK with that, then there really is no need for a living trust.

Living Trusts are something everyone should consider, particularly if you have a large estate that would result in an expensive, lengthy probate proceeding. If, on the other hand, your estate is $100,000 or less, and you're not concerned about it becoming public record, a living trust is probably unnecessary.

In my next post, I will talk about wills, and why you need one in your estate plan even if you do have a living trust.