Revocable Living Trusts in California

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What Is a Revocable Living Trust in California?

A California revocable living trust is a legal contract that allows individuals to continue to own and control their property while they are alive, then transfer.

California Revocable Living Trusts Overview

As long as the grantor is alive and has the mental capacity to make decisions, the income earned by the property held by the trust belongs to the grantor. After the grantor dies, then the property will transfer to the beneficiaries.

Put more simply, a revocable living trust is a document that allows individuals to continue to own and control their property while they are alive, then transfer it to whoever they want after they die, all while avoiding probate.

This important estate planning tool is very appealing to many California residents because of its flexibility.

Types of Trusts

There are many types of basic trusts that deal with different scenarios and distributions. However, they all have the same relationships established between three roles: grantor, beneficiary and trustee (which can all be held by the same individual):

  • Grantor – gives property to the trustee to manage for benefit of beneficiary
  • Beneficiary – entitled to the benefit of the property
  • Trustee – receives property from the grantor and manages it for beneficiary

Additionally, there is a testamentary trust which is a type of trust that is made within a will.

More particularly, a revocable living trust is a type of trust that operates when the grantor is still alive. It allows the grantor the choice to change the terms of the trust or even end the trust. Revocable living trusts are used to avoid probate and to protect the privacy of the trust owner and beneficiaries of the trust as well as minimize estate taxes.

How the Trust Is Funded

To fund is to move assets into the trust. This is accomplished by changing the assets title from the grantor’s name into the name of the trust. At that point, the trust is governed by the terms of the trust.

Some things to note:

  • A trust should be fully funded on the creation date;
  • You should review your assets and verify the correct assets are held by the trust;
  • Update any beneficiary designations for assets held outside of the trust;
  • The holder of a durable power of attorney may be authorized to fund the trust if they are granted that power (though in some special circumstances, courts have allowed the holder of a durable power of attorney to transfer assets into a trust even when they are not specifically authorized to).

What Happens After Death

At the time of your death, the person(s) you appointed as co-trustee or successor trustee will assume their role and carry out the instructions set forth in your trust, distributing and managing your assets for the named beneficiaries (which can be people and/or organizations).

Who Needs a Revocable Living Trust?

Typically, a revocable trust is useful and practicable for someone who wants another individual to manage their property.

Alternatively, a grantor who wants to assure that his/her property will continue to be managed in the event that the grantor becomes disabled or deceased;

A grantor who wants privacy in the administration of his/her estate while he/she is alive, and upon his/her death.

California Revocable Living Trust Requirements

In order for a trust to exist there must be (1) trust property, (2) a legally competent grantor (sometimes referred to as settlor or trustor), (3) a legally competent trustee and (4) a beneficiary.

The grantor must sign the trust in front of a certified notary and then fund the trust with the grantor’s property.

How Is a Revocable Living Trust Taxed?

It is a wise idea to consult with a CPA or a trust attorney in Orange County when looking at the tax implications of setting up a living trust as they can be a bit complex.

Nonetheless, some basic things to be aware of are:

  • No gift is generated by establishing or funding a revocable living trust since the gift is not completed until the trust becomes irrevocable. (Burnet v. Guggenheim, 288 U.S. 280 (1933)
  • Since the grantor has not irrevocably disposed of any assets, the entire trust corpus will be included in the grantor’s estate for federal estate tax purposes. (IRC Sec. 2038)
  • All income of a revocable living trust is taxed directly to the grantor at the grantor’s tax rate. This is because the grantor is considered the owner of the trust’s assets.(IRC Sec. 671.)
  • If one of your main concerns is to avoid federal estate taxes, you may want to consider alternative options such as an irrevocable trust.

How Evolution Tax and Legal Can Help With Revocable Trusts in California

If you have questions or concerns about if a revocable trust is right for you, or if there are changes that you would like to make to your trust, Evolution Tax & Legal professionals are available to help you. We have skilled lawyers and CPAs that can answer your questions and provide you with advice that best suits your needs. Contact us today for a free consultation!