Top 3 Reasons to have a Living Trust

by Matthew Grech | Sep 10, 2015 | Article |

The modern day estate plan, particularly in the State of California, is usually centered on a living trust. A trust is a legal relationship, whereby one person, called the "settlor," transfers property to another person, the "trustee," who holds the property for the benefit of third person, called the "beneficiary." The same person may occupy more than one position at a time. For example, in the typical living trust, as long as the settlor is alive, he or she is also the trustee and beneficiary.

While there are a number of different reasons that may motivate one to create a living trust, it is the purpose of this article to focus on the three that our experience has taught us are the most popular.

First, a living trust helps one avoid probate. Probate is the court-supervised procedure for collecting a deceased person's assets, paying their debts and taxes, and distributing their property to their beneficiaries. Currently, a probate is required if a deceased person's non-trust assets are worth more than $150,000.00 at the time of death.

The primary reasons people choose to avoid probate are that, when compared to a trust administration, probate generally takes longer and is more expensive. For example, in California, attorney's and executor's fees connected to a probate are dictated by statute and are based upon the value of the estate. For instance, a probate estate that only consists of a single piece of real property, which has a fair market value of $900,000.00, will result in fees of about $21,000.00, payable each to the attorney and executor handling the estate. Compare this to a trust administration that consists of the same piece of real property, where the typical attorney retainer is approximately $2,500.00, and successor trustees generally receive compensation based upon the reasonable value of their services.

If there is a lesson to be learned from this example it is the following: if you work hard, and you care about your family, particularly your children, then it is important to do the necessary estate planning now in order to preserve as much of your estate as possible for them, rather than have your estate diminished by unnecessary attorney's and executor's fees.

The next reason to have a living trust is that, unlike probate, a trust administration is private. Probate is a public process wherein, theoretically, anyone can go into probate court and look at the file to find out what the estate assets consist of, who the beneficiaries are and where they live. For example, disgruntled heirs or even nosey neighbors can poke around the probate file to see what there is. Further, with the advent of the internet, access to probate court files has become easier than ever, as people do not even have to leave the comfort of their own home to look through the file. For instance, click here to find out how easy it is to begin the process of researching probate court cases in San Mateo County.

A living trust can prevent all of this. Unlike a will, a trust is private and is normally not filed with the probate court, and thus the general public is prohibited from accessing its contents and learning about what the estate consists of and who the beneficiaries are, amongst other things. Some people place a high value on privacy, while others do not, and for those who do, a living trust is certainly the way to protect one's privacy in the context of estate planning and administration.

Finally, and perhaps most importantly, a living trust enables the settlor to protect property for certain beneficiaries. Some people do not possess, or have yet to acquire, the skill set to handle money responsibly and thus would likely squander any inheritance received. Let us illustrate this point using two different examples.

First, a living trust can be set up in a way to stagger the disbursement of an inheritance. For example, most would agree that the average 20-year-old college student is not ready to receive a lump sum inheritance of $900,000.00. A living trust, unlike a will, can prevent this from happening by including a set of instructions wherein distributions can only be made in certain amounts at certain times. For instance, the beneficiary would only be entitled to disbursements that are necessary to maintain her health, education, maintenance and support while she remains in college, and thereafter, perhaps she receives a partial distribution upon completing college, another partial distribution at the age of 30, and then a final distribution at the age of 35.

The second example can be illustrated with someone who is a spendthrift, or a person who spends money in an irresponsible way. Most would probably agree that a spendthrift should not receive a substantial lump sum inheritance at any time in his life. A living trust can be set up not only to prevent a spendthrift beneficiary from wasting away an inheritance, but also to prevent that beneficiary's creditors from using the trust funds to satisfy any debts. Further, a spendthrift trust can also be used to protect beneficiaries who may suffer from addiction and/or are easily deceived or defrauded by others. Whatever the concern may be, a spendthrift trust's primary purpose is to protect property for the intended beneficiary.

If you have further questions about estate planning or administration, please contact Grech Legal at (650) 743-2548 or [email protected] for a free consultation.