Revocable Living Trust

By Frank Minuti, CPA

I frequently have discussions with clients related to revocable living trusts. A revocable living trust is a legal document that an individual or married couple referred to as grantor(s) sign that establishes a separate legal entity to hold their assets and designate the distribution of those assets upon death.

The grantor(s) retain the right to change the terms of the trust, take all or any of the assets out of the trust at any time and terminate the trust during their lifetime. In the case of a married couple the trust generally provides that on the passing of the first spouse, that spouses one-half interest in the community property of the married couple is transferred to an irrevocable trust with the surviving spouse getting the income from and use of the assets but the final distribution of those assets follows the instructions set in the living trust prior to the passing of the first spouse. The surviving spouse retains control of his/her one-half of the community assets and can make any changes as to the final distribution of those assets.

Assets transferred to the irrevocable trust are not subject to gift taxes and real property is not reassessed for property taxes. Generally the grantor(s) are the trustees. The trust document does name successor trustee(s) that step-in in the event of the grantor(s) death or inability to perform the trustee duties. The successor trustee can be a one or more children, a trusted friend, a trusted advisor, a bank trust department or a private trustee.

There are many benefits of establishing a revocable living trust. Estate planning attorney Michelle Anderson of Bosso Williams APC (831-426-8484) and I discussed this area and agreed that the primary benefits include the avoidance of probate fees and a simpler transfer of the assets on death.

Probate – Assets held inside a revocable living trust are not subject to probate. If the decedent’s assets held personally and not in the living trust exceed $100,000 those assets may be subject to probate fees which in California start at 4% and decrease to 1/2%. In arriving at the probate estate assets are counted at their current value without reduction for debt.

Asset Transfer - Property that goes through probate cannot be distributed to heirs without court approval which can be time consuming and costly. Property that is held in a living trust can be distributed to the heirs by the trustee without obtaining court permission. The fact that the assets are in the irrevocable living trust does not reduce the estate taxes of the donor(s). The assets in the irrevocable trust are not included in the estate of the surviving grantor upon his or her death.

A will is still necessary as it covers any assets that are not titled in the name of the trust at death. The will typically contains a pour over provision that states that all assets not in the trust at the time of death should be transferred to the trustee of the trust. These assets are subject to probate as they are not in the trust at the time of death so it is imperative that the total value of the assets not held in the name of the trust be less than $100,000.

In addition, all taxpayers should consider having a health care directive which specifies whether you would like to be kept on artificial life support if you become permanently unconscious or are otherwise dying and unable to speak for yourself.