A California Revocable Living Trust is a trust (a legal contract) where the terms can be changed (or canceled ) the person who created the trust (the grantor) decides.
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 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.
Who Needs a Revocable Living Trust?
Here is a list of 4 people who may benefit from setting up a living trust.
- A Grantor who wishes to avoid the Probate process.
- A Grantor who wants someone else to accept management of their property.
- 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.
What are the Requirements for a Revocable Living Trust in California?
- In order for a trust to exist there must be trust property.
- There must be a Grantor (sometimes referred to as a Settlor or Trustor). A Grantor is the person who transfers the property into the trust and creates the terms of the trust.
- There must be a Trustee. A Trustee is a party whom property is transferred by the grantor, who receives legal title to the property placed in the trust, and who generally manages and distributes income of the trust. The Trustee must follow the terms of the trust, as established by the Grantor.
- There must be a Beneficiary. A beneficiary is the party for whose benefit the trust is created and who will receive the direct or indirect benefit of the use of income from and/or principal of the trust property.
- The Grantor and Trustee must both be legally competent.
- The Grantor must sign the trust in front of a certified notary and then fund the trust with the Grantors property.
When is a Revocable Living Trust Funded?
The term “funding” is used to describe the process of moving assets into the trust. This is usually accomplished by changing the assets title from the grantors name into the name of the trust. Once the assets are moved into the trust, the terms of the trust govern how they are managed.
In short a Revocable Living Trust should be funded:
- The trust should be fully funded on the creation date.
- Every year thereafter it is a good idea to review your assets and verify the the correct assets are held by the trust.
- Be sure to update any beneficiary designations for assets held outside of the trust.
Funding a revocable living trust can occur at the establishment of the trust or at any later date. It is best practice to fund the trust with a token at the creation of the trust (such as $10 or a magic wand provision). The holder of a durable power of attorney may be authorized to fund the trust if the they are granted that power.
In some cases, 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, however it is not wise to count on this. As part of the funding process it is also important to update any applicable beneficiary designations to coordinate with the provisions of the trust.
How is a Revocable Living Trust Taxed?
When looking at the tax implications of setting up a living trust, it is wise to consult with your CPA.
With that said, here are some general considerations.
- For federal income tax purposes, 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.)
- 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)
When does a revocable Living Trust become irrevocable?
A revocable living trust becomes irrevocable either when the grantor gives up their right or upon the grantors death. Generally speaking, a grantor cannot revoke a living trust during incapacity. With that said, it may be possible for a revocable living trust to become irrevocable if the grantor is deemed to be mentally or physically incompetent.
If you are interested in setting up a revocable living trust reach out to us to schedule a time to meet in person or schedule a virtual appointment