How Assets Get Into a Trust
How Assets Get Into a Trust
What is a living trust?
A living trust can be a useful tool when planning your estate. It is a legal document of an arrangement that lets you specifically grant ownership of your assets to a beneficiary. The person, called a trustee, holds legal title to properties to manage assets on behalf of beneficiaries.
The trustee is also responsible for making sure the assets in the trust are distributed to your beneficiaries according to the trust’s directives. You can name yourself as a trustee or you can grant someone else that power. Trusts may be structured in a variety of ways and can prescribe how and when beneficiaries may access trust assets.
Types of trusts: an irrevocable living trust and a revocable living trust
Revocable trusts are often used in California for estate planning. These types of trusts are commonly referred to as living trusts or family trusts. The settlor of a revocable trust has the ability to control the assets held within the trust during their lifetime. They also have the ability to change or cancel the trust at any time.
As California is a community property state, revocable trusts can become a point of contention in divorce proceedings. For this reason, many trust agreements contain specific provisions regarding what will happen to the trust and its assets in the event of divorce.
If a trust does not contain these provisions, California law prohibits spouses in divorce proceedings from changing or revoking trusts. A California court will make the final determination on whether or not a revocable trust can be changed or revoked during divorce.
An irrevocable trust is permanent, and any asset that’s placed inside of it cannot be taken out without express permission from everyone named in the trust. The settlor of the trust gives up control and ownership of the property held within the trust.
As a result, creditors of the settlor generally cannot reach the assets held within the trust. California law does, however, include exemptions to this rule. These exemptions include child support claims, alimony claims, federal tax claims, and state tax claims.
Steps in Creating a Living Trust in California
1. Should you make an individual or shared trust?
If you’re married, you’ll first need to decide whether you want a single or joint trust. A joint trust will allow you to include property that each spouse owns separately as well as joint property.
2. Deciding what property to include in the trust.
Gather the corresponding paperwork for your property, including certificates of stock ownership, titles to automobiles and other vehicles, and records of home ownership.
3. Choosing a trustee.
This could be you or another person. The trustee manages the assets in the trust. If you name yourself as trustee, make sure to name a successor trustee to take over after you die or in the event you become incapacitated and can no longer oversee your own affairs.
You should also choose beneficiaries, who are the people or organizations who will inherit the property in the trust. The trustee or successor trustee is responsible for ensuring that assets go to the beneficiaries as the trust directs.
4. Deciding on beneficiaries.
Who will get the trust property? That is who will get the individual assets in the trust.
5. Drawing up the trust document.
Get the help of either a lawyer or a financial advisor.
6. Signing the trust.
You must complete this step in the presence of a notary public.
7. Transferring your property to the trust.
This is known as “funding the trust” and is crucial to do — otherwise the trust will be empty when it’s passed on to your successor trustee.
You’ll need to change the titles of your assets from your name or joint names, if you’re married, to the name of your trust. You will also change most beneficiary designations to your trust. If your goal in having a living trust is to avoid probate at death and court intervention at incapacity, then you must fund it now, while you are able to do so.
Funding A Trust
The ultimate goal of funding a revocable living trust is to ensure that the trustmaker’s property is governed by the terms of the trust agreement. It will allow the trustmaker's selected disability trustee to manage accounts held in the name of the trustmaker's trust in the event they become mentally incapacitated.
Also, after the trustmaker dies, their selected death trustee will be able to manage and then transfer accounts held in the name of the trustmaker's trust to the ultimate beneficiaries named in the trust agreement.
Why should you fund your trust?
The trustee of a revocable living trust has no power whatsoever over the trustmaker’s property that has not been retitled in the name of the trustmaker's trust. Thus, if the trustmaker becomes mentally incapacitated, then the trustmaker's loved ones may need to establish a court-supervised guardianship or conservatorship to manage the trustmaker's assets that are not held in the name of the trust.
The trustmaker's property that has not been retitled in the name of the trustmaker's revocable living trust may have to go through probate after the trustmaker’s death.
A property that is held outside of the trustmaker's revocable living trust cannot be disposed of as provided in the trust agreement. Assets held outside of the trust may pass by rights of survivorship to other joint owners or beneficiaries.
It is important to take the time to retitle your assets in the name of your trust after you have taken the time to work with your estate planning attorney to create a revocable living trust that fits your particular family situation and financial needs. You will need to update the beneficiary designations for your assets that require a beneficiary designation.
Perhaps you’ve acquired new assets in the years after establishing your living trust and neglected to transfer them, or you left some assets out of the trust when it was originally set up.
Failing to fund your trust with all of your assets can result in a costly probate process which means more court time and fees to come out of your estate. It will also take a longer time before your estate can then be transferred into the name of your beneficiaries.
Therefore, it’s very important to take the necessary steps to ensure that your trust is completely funded with all of your assets before your death.
Nevertheless, along with your trust, your attorney will prepare a “pour over will” that acts like a safety net. When you die, the will “catches” any forgotten asset and sends them to your trust.
Unfortunately, there are some limits to using a pour-over. The property that passes through a pour-over must go through probate before it can be transferred to your trust. The result is that it may take months after your death to distribute the assets in the trust to your beneficiaries.
That’s why estate planning professionals recommend that you do an annual review of your trust documents to ensure that any new property acquired within the last 12 months goes into the trust. You are ultimately responsible for making sure all of your appropriate assets are transferred to your trust.
How Difficult is the Funding Process?
For some assets, a short assignment document will be used. Others will require written instructions from you.
Your attorney will prepare what is often called a certificate of trust. This is a shortened version of your trust that verifies your trust’s existence, explains the powers given to the trustee and identifies the trustees, but it does not reveal any information about your assets, your beneficiaries and their inheritances.
Make a list of your assets, their values and locations, then start with the most valuable ones and work your way down.
Which Assets Should I Put in My Trust?
Generally, assets you want in your trust include real estate, bank/saving accounts, investments, business interests and notes payable to you. You will also want to change most beneficiary designations to your trust so those assets will flow into your trust and be part of your overall plan. IRAs, retirement plans and other exceptions are addressed later.
Getting a Trust in California
Why get a living trust in California?
There are a number of reasons to get a living trust. The main advantage of making a living trust is to spare your family the expense and delay of probate court proceedings after your death.
Probate court is a potentially time-consuming process. When properly prepared, a living trust can avoid the public, costly and time-consuming court processes at death (probate) and incapacity (conservatorship or guardianship).
Who should get a living trust in California?
The amount of property and assets that a person has is an important part of determining if you should get a living trust. A living trust may be especially beneficial for larger estates as they tend to be more complex. And, if you own a home (versus renting) you probably want a trust.
Creating a living trust in California is not a terribly difficult process, but it does take some planning. You might find it helpful to work with an estate planning attorney who has trust knowledge and California law knowledge drafting your living trust. Additionally, a living trust does not replace a will, but it can supplement it to make life easier for your heirs after you die.
An Experienced Trust and Estate Lawyer Can Help
Whether you’re creating a trust or a financial plan, it may make sense to hire an estate planning attorney. A common misconception is that estate planning is only for rich and old people.
In reality, you should come up with a plan for your estate regardless of your financial situation. Even if you hope to have years to live, it’s important to establish an estate plan in case something unfortunate happens.
Andrea Aston, an experienced trust and estate lawyer, is here to help you with all your questions and concerns on help with creating living trusts, pour-over wills, powers of attorney, and other legal services.
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