What is a Living Trust?
by Brenda Geiger, Esq.

One of the first things I’m typically asked when a client steps into my office is “what is a living trust”?

Although it certainly is not a new notion in the world of estate planning, many people still struggle with the concept of a living trust.
            
Basically, a living trust is like a Will in the respect that they both are legal documents that will distribute your property at your death to the heirs you have designated in the document.  However, a trust is different than a Will in many ways.  The first and probably most important difference is that a Will must go through the probate process at your death and a living trust does not.  As I will explain in more detail below, probate is undesirable for a number of reasons. Probate is costly, time-consuming, and is also open to public inspection.  

First, let’s talk in more detail about probate. What is probate?  Essentially, probate is a legal process before the Probate Court that ensures that all of your debts are paid and the title to your property is transferred to your heirs upon your death.  With or without a Will, the property you own at death will be probated unless in trust title.  One exception to this general rule is the small estate.  Estates with a fair market value of less than $100,000 do not need to go through a formal probate process in California. Title to the decedent’s property can be changed by way of an Affidavit.

As mentioned above, one major drawback to probate is that it is expensive.  Probate fees are statutorily set in the Probate Code and are typically 5-8% of the fair market value of the total estate (half to the executor and half to the probate attorney).  The fees are calculated on the “gross” estate value without regard to any indebtedness, liens, or mortgages on the property.  For example, if you own a home worth $800,000 and you have a mortgage of $600,000 on the home, the probate fees would be calculated on $800,000 not the $200,000 in equity that you have in the home. This can be problematic because some families can not satisfy the fees without selling the property. Another reason probate is so troublesome is because of its time-consuming nature. The process is so slow in large part due to the many specific rules that must be followed and the back-up that exists on a typical Probate Court docket.

A probate case usually remains open from 9 to 18 months or even longer for more complicated estates.  Trust administration on the other hand can usually be handled privately by your designated trustee in a matter of a few months for uncomplicated estates.  This in the end gets the assets in to the hands of the intended beneficiaries much faster.
 
Probate is also a public process. The documents filed with the Probate Court including the Will are open for public inspection. Unfortunately, there are some unscrupulous solicitors out there who sometimes prey on the executors of probate estates. 

They promise them get rich quick schemes to entice them to invest the estate.  Many people also don’t want to make public to whom they have left their property or to whom they owned money.
 
A trust avoids the probate process and all of these drawbacks.  It also allows for incapacity planning.  Without a trust, at incapacity, a family member or friend would have to file a conservatorship action on your behalf at with the Probate Court.  This often involves attorney’s fees and filing fees to the Court.  It can also take some time to move through the legal process.  With a trust however, the conservatorship is avoided.  This is because there is usually a provision in the living trust allowing a named successor trustee to step into the shoes of the incapacitated creator of the trust upon the determination of incapacity by a medical doctor.

Finally, a living trust allows its creator to plan to eliminate or minimize the Federal Estate Tax. Currently, each U.S. citizen has a Federal Estate Tax exemption of $2,000,000.  Living trusts such as a Survivor’s Trust with Optional Disclaimer and the Survivor’s Trust with Bypass Trust (also known as an A/B Trust) are two common ways to take advantage of the decedent’s Federal Estate Tax exemption upon the death of the first spouse.  Normally, if the decedent leaves his or her half of the estate to their spouse, that surviving spouse is entitled to an unlimited marital deduction.  In other words, the surviving spouse doesn’t pay an estate tax on the property left to him or her at the time their spouse dies. However, this could swell the value of the surviving spouse’s estate and without further planning; their heirs could be left with a huge Federal Estate Tax consequence.  The Federal Estate Tax rate is currently 45% on estate values above the exemption amount.
 
Ultimately, in most circumstances, the added value a living trust brings to the table far outweighs the use of a Will alone.  A living trust avoids the cost, delay and publicity involved with probate and it allows for incapacity and tax planning. 

They promise them get rich quick schemes to entice them to invest the estate.  Many people also don’t want to make public to whom they have left their property or to whom they owned money.
 
A trust avoids the probate process and all of these drawbacks.  It also allows for incapacity planning.  Without a trust, at incapacity, a family member or friend would have to file a conservatorship action on your behalf at with the Probate Court.  This often involves attorney’s fees and filing fees to the Court.  It can also take some time to move through the legal process.  With a trust however, the conservatorship is avoided.  This is because there is usually a provision in the living trust allowing a named successor trustee to step into the shoes of the incapacitated creator of the trust upon the determination of incapacity by a medical doctor.