Living Trust is a trust created during settlors’ life time. A trust may be set up for the following reasons: maintaining control over their assets; avoiding probate; planning for possible incapacity; and preserving privacy.
Maintain Control. Settlors (creators of the trust, sometimes called grantors) can provide clear direction on how to transfer or disburse their asset or its income to the designated beneficiaries. For example, settlors would, in case they died, appoint the successor trustee to manage their real estate or investment accounts for minor children until they become independent. Settlors might have a desire to transfer their assets to the current (surviving) spouses but want their children to succeed them after the surviving spouses died. Or maybe settlors are worried about their children losing their inheritance by future possible divorce to ex-spouses.
Avoid Probate. As described in “Avoid Probate in California”, settlors can avoid the lengthy and costly probate process by creating trust. Remember that even if you create a will, you still have to go through the probate.
However, people often prepare both trust documents and “pour-over” will because they need a backup. People may forget to transfer title into the trust for the property acquired after the creation of the trust. The pour-over will provide a backup to catch their un-funded property when they died. The pour-over will needs to be probated but they may avoid the court involvement by statutory simplified process, called “Small Estate”, if the value of the assets under the will does not exceed $150,000 according to California Probate Code 13100.
Incapacity Planning. Settlors can specify how they want their assets to be managed after they become incapacitated due to possible injury, stroke, heart attack, etc. Without properly written power of attorney, the court will have to appoint someone to handle the assets on behalf of the incapacitated. This process, like probate, could be lengthy and expensive too. You may designate the successor trustee in advance in the trust document to manage your wealth in case you become incapacitated. All business will be privately succeeded and managed by the successor trustee until your recovery.
Privacy. Probate process is a public process. The probate record is a public record. Many people transfer their assets to their living trust because they prefer to preserving privacy of the wealth even after they died.
Living trust is often revocable. Revocable means the trust terms can be modified or terminated by settlors during lifetime or by will. Why revocable? Some would say revocable trust is more basic tool than irrevocable one. For income tax purpose, for example, the existence of trust is ignored except rare cases, and thus there is no change in your income tax status. You do not need to get new tax identification number. In the meantime, some people want to create the irrevocable trust maybe because they want to provide a protection from creditors. There are also some estate planning tools using the irrevocable trust to minimize the estate tax.
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