Living Trusts FAQ

What is a living trust?

A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. A "trustee", must be in charge of the property. You can be the trustee of your own living trust, keeping full control over all property legally owned by the trust.
There are many kinds of trusts. A "living trust" (also called an "inter vivos" trust by lawyers who can't give up Latin) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will.
All living trusts are designed to avoid probate. Some may help you reduce estate taxes, and others let you set up long-term property management.

Why do I need a living trust?

If you don't take steps to avoid probate, after your death your property will probably have to go through probate court before it reaches the people you want to inherit it. Probate is the court-supervised process of paying your debts and distributing your
property to the people who inherit it.

The average probate drags on for six months to years before the inheritors get anything. By that time, there is less for them to inherit. In most cases, at least 5% of the property has been eaten up by lawyer and court fees.

Not everyone has to worry about probate and some people don't need a living trust, e.g. if you have very little property.

If I make a living trust, do I still need a will?

Yes. A will is an essential back-up for property that you don't transfer to your living trust. For example, if you acquired property shortly before your death and hadn't transferred ownership of it to your trust, it wouldn't pass under the terms of the trust. Your back-up will would include a clause that names someone to get any property you did not leave to a particular person or entity.

If you don't have a will, any property that isn't transferred by your living trust or other probate avoidance device (such as joint tenancy) will go to your closest relatives in an order determined by California state law. These laws may not distribute property in the way you would have chosen.

How does a living trust avoid probate?

Property you transfer into a living trust before your death doesn't go through probate. The successor trustee (the person you appoint to handle the trust after your death) simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay.
When the property has all been transferred to the beneficiaries, the living trust ceases to exist.

Will a Living Trust protect my estate if I have to go to a nursing home?

No, and this is a common misconception. Many people think that putting their assets into a Revocable Living Trust would help them qualify for Medicaid, because the assets would no longer be titled in their name. Because a Living Trust is revocable and under your complete control, you have not "given anything away". An alternative to Medicaid is long-term care insurance, which one would create to pay for the costs of long term care.

Does my tax status change when I create a revocable living trust?

No. As long as you are the trustee of your trust, any income generated by assets owned in your living trust are taxed as if they were still held in your name and reported on your personal 1040 form. No special taxpayer identification number and no special tax forms are required.