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Tuesday, November 16, 2010

The Purpose of the Living Trust

There is always a lot of discussion regarding the need or desire to have a living trust. It should be noted that there are many different types of trusts, the principal differences being revocable versus irrevocable. 

In a revocable trust, the person who creates it, the settlor or grantor, has the ability to receive all assets during their lifetime, and there is normally no tax benefit during lifetime nor any protection from long term care expenses. 

In an irrevocable trust, the grantor gives up control or ownership of some or all of the assets, and therefore; there is going to be an intended benefit to the creator of the trust for tax as well as asset protection purposes. 

The trade off is that giving up control and ownership of the asset may permit benefits for purposes mentioned, whereas the revocable trust will provide for no protection of assets. Also, it should be noted that in some states, the creation of an irrevocable trust for yourself does not reduce creditor protection in the event that you are sued, as long as the you are the primary beneficiary of the trust. 

One of the benefits of both a revocable and irrevocable trust is that the assets are placed in the trust during lifetime, and this produces a net benefit of avoiding probate. Probate avoidance is important, as it will expedite the administration and settlement of your estate, keep all assets and terms of the trust private, as well as minimize fees and court costs in the process of settling the estate. 

The terms of the trust are normally similar to that of a will. There will be distribution made to or for the benefit of your spouse, children, and grandchildren. If desired, distribution may be held by the trustee for the benefit of your children and grandchildren, with specific amounts or percentages of the assets being distributed at various ages or dates subsequent to the your death. Also, in the event that any beneficiary may be disabled, the fund may be held in a special needs trust, or supplemental needs trust, so that the benefits that the person is receiving from any governmental source will not be reduced or eliminated, but the funds in the trust may be available to or for the benefit of the beneficiary. 

The living trust becomes effective the day it is signed, as opposed to a Will which becomes “alive” only upon the death of the creator. Funding the trust is important, as the assets in the trust at the date of death or date of disability will avoid any probate process, but if not, then the assets in the person’s name alone need to be transferred into the trust at death, which will require a probate process. 

Therefore, if you have a trust, you should utilize it and fund it during your lifetime. Normally, you are your own initial trustee, so there is no accountability, filing fees, or requirement that any other individual or entity is aware of the investments and trust provisions. The trustee, normally the settlor, will turn over control to a successor trustee upon disability or death. Often, the person who creates a trust no longer wishes to manage the funds themselves or pay their own bills, and they delegate the authority to an individual or corporate trustee, who will then attend to all financial responsibilities so that the creator may enjoy life, travel, and not be restricted in the administration of the trust itself. 

Living trusts are wonderful opportunities to avoid the probate process, but in some instances, it is not necessary, as the only assets that pass through probate are those assets in a person’s name alone. Therefore, there may be alternatives that are simpler and less expensive, such as transfer on death, joint ownership, and beneficiary designations, which will allow your assets to pass directly to other individuals or charities upon death. However, the trust may need to be maintained, in some cases, so that the beneficiaries do not receive funds outright, but rather, they are held, managed, and maintained for the benefit of the beneficiaries, but not necessarily in equal shares. 


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The lawyers at Sowards Law Firm assist clients with Estate Planning, Wills, Living Trusts, Probate, Estate Administration, Medi-Cal Planning, Business Law and LLC Preparation throughout California, including clients located in and around, Oakland, Palo Alto, Petaluma, Pleasanton, Point Reyes, Redwood City, Richmond, Salinas, San Carlos, San Francisco, San Jose, San Leandro, San Rafael, San Ramon, Santa Clara, Santa Cruz, Santa Rosa, South San Francisco, Sunnyvale, Union City and Vallejo.



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