Do you want to ensure that your assets are protected and distributed according to your wishes after you pass away? One estate planning tool that you may want to consider is a revocable living trust.
A living trust is a legal document that can help you avoid probate, minimize estate taxes, and provide for your loved ones.
In this blog post, we’ll discuss what a living trust is, how it works, and the benefits of creating one.
Whether you’re just starting to think about estate planning or you’re looking to update your existing plan, this post will provide you with the information you need to make informed decisions about your future.
To Begin, What is a Revocable Living Trust?
A California revocable living trust is a legal document that allows you to transfer ownership of your assets (such as property, investments, and bank accounts) into a trust (a legal document) during your lifetime, and you can change or revoke it at any time as long as you are mentally competent.
The trust is managed by a trustee of your choice, which can be yourself or someone else, who will be responsible for managing the assets in the trust for the benefit of the beneficiaries named in the trust document.
It’s important to note that a living trust** does not provide asset protection, meaning that your assets in the trust can still be subject to claims by creditors. However, there are other types of trusts that can provide this protection.
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.
living trust definition:Â A living trust is a legal arrangement established by an individual (the grantor) during their lifetime to protect their assets and direct their distribution after the grantor’s death.
**We use the term revocable living trust and living trust interchangeably throughout this article.
Who Needs a Revocable Living Trust?
Here is a list of 4 people who may benefit from setting up a living trust.
- AÂ Grantor who wishes to avoid the Probate process.
- AÂ Grantor who wants someone else to accept the management responsibility of their property.
- A Â 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.
- A Grantor who owns a business or professional practice.
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What are the Requirements for a Revocable Living Trust in California?
According to California Trust law:Â
- 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 a 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. Keep in mind there are certain beneficiary rights in California to be aware of.
- 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 Grantor’s 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 title of the asset from the grantor’s 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 and should include a schedule with sufficient details to identify the asset such as the address and APN to real estate and a list of bank account with an account number.
- 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 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 grantor’s 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.
What are the Pros and Cons of Revocable Living Trusts?
One of the main benefits of a revocable living trust is that it can help you avoid probate, the legal process of distributing your assets after you die, which can be time-consuming and expensive. Instead, the assets in the trust can be distributed to your beneficiaries without the need for probate.
Another benefit of a revocable living trust is that it can provide privacy for your estate. Since the trust is not part of the public record, the details of your estate and who inherits what can remain confidential.
5 Benefits of Revocable Living Trusts:
- Avoiding Probate:Â One of the primary advantages of a revocable living trust is that it can help to avoid the probate process, which can be lengthy, costly, and public. Assets in the trust can pass to beneficiaries without the need for court intervention. Keep in mind that if you just have a Will in place your estate will likely have to go through some form of Probate.
- Privacy: A living trust can be a private document and is not part of the public record, unlike a will that becomes public after being submitted to probate court. There is no trust lookup California such as a registered directory of trusts.
- Flexibility:Â A revocable living trust is flexible and can be changed or revoked by the grantor at any time while they are alive and have the legal capacity to make decisions. This allows the grantor to adapt the trust to their changing circumstances, such as changes in family or financial situations.
- Control: With a living trust, the grantor can maintain control over the grantor’s estate while alive, appointing themselves or another individual as the trustee to manage the assets according to their wishes. Upon their disability or death they can state what how they would like their successor trustee to manage the trust account
- Disability planning:Â A living trust can also provide for the management of the grantor’s assets in the event of their incapacity or disability.
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4 Disadvantages of Revocable Living Trusts
- Expense:Â The cost to set up a living trust can initially be more expensive than creating a will however the cost of administering a trust is usually much less expensive than the cost of going through the probate process with a will.
- Limited protection:Â A revocable living trust provides limited asset protection. Creditors can still go after the assets in the trust, and it is not effective in protecting assets from a lawsuit.
- No tax advantages:Â A revocable living trust does not provide any tax advantages over a will, and the grantor may still be subject to estate taxes upon their death.
- Not a guarantee of avoiding probate:Â Although a living trust can help avoid probate, it’s not a guarantee. Assets that are not properly transferred into the trust may still have to go through probate, which could defeat the purpose of creating the trust in the first place.
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Revocable Living Trust vs Will
A revocable living trust and a will are both estate planning documents that can be used to ensure that your assets are distributed according to your wishes after you pass away. In fact, most estate plans include both. However, there are some key differences between the two.
3 differences between a living trust and a will:
- Probate: One of the biggest differences between a revocable living trust and a will is how they handle probate. A will requires probate, which is the legal process of verifying the will, paying off any debts, and distributing the assets to the beneficiaries. Probate can be a lengthy and costly process, and it can also be a public process that exposes your assets and beneficiaries to public scrutiny. On the other hand, assets held in a revocable living trust can be distributed to the beneficiaries without going through probate, which can save time, money, and provide privacy for your estate.
- Asset Management: Another difference between a revocable living trust and a will is how they manage your assets during your lifetime. A will only takes effect after you die, whereas a revocable living trust can manage your assets during your lifetime if you become incapacitated or unable to manage them yourself. In this way, a revocable living trust can provide added protection and peace of mind for you and your loved ones.
- Cost: Finally, a revocable living trust can be more expensive to set up than a will. However, the cost may be worth it for those who want to avoid probate, ensure privacy, or manage their assets during their lifetime.
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In summary, while a will is a widely used estate planning document, a revocable living trust can provide added benefits for those who want to avoid probate, manage their assets during their lifetime, and have greater flexibility in their estate plan.
How much does a Revocable Living Trust cost?
The cost of a revocable living trust can vary depending on several factors, such as the complexity of the trust, the attorney’s fees, and the location where you live. Generally, the cost of setting up a revocable living trust can range from a few hundred dollars to several thousand dollars.
If you hire an attorney to create the trust for you, the cost may include an initial consultation fee, drafting fees, and ongoing maintenance fees. Some attorneys (like the attorneys at Opelon LLP) charge a flat fee for creating the trust, while others may charge an hourly rate.
In addition to attorney fees, there may be other costs associated with setting up a revocable living trust, such as filing fees with the state, recording fees for transferring assets into the trust, and appraisal fees for valuing assets.
It’s important to note that while a revocable living trust can be more expensive to set up than a will, it may save money in the long run by avoiding probate costs and potential disputes among heirs. It’s best to discuss your specific situation with an estate planning attorney to determine the costs and benefits of a revocable living trust for your individual needs.
Click here to see our flat fees for setting up an estate plan.
What is an A/B Trust?
An A/B Trust is a type of estate planning tool designed to minimize estate taxes and provide for a surviving spouse. It involves dividing a married couple’s assets into two separate trusts upon the first spouse’s death, typically referred to as the A Trust and the B Trust.
The A Trust, also known as the marital trust, is funded with assets that are equal to the maximum amount exempt from estate taxes. The surviving spouse can access the assets in this trust during their lifetime and receive income from it. However, they cannot change the beneficiaries or the terms of the trust.
The B Trust, also known as the bypass trust or credit shelter trust, is funded with assets that exceed the maximum amount exempt from estate taxes. The surviving spouse cannot access the principal in this trust but can receive income from it. The beneficiaries of the B Trust are typically the couple’s children or other designated heirs.
By using an A/B Trust, the couple can effectively double the number of assets that can pass to their heirs free of estate taxes.
This type of trust can be particularly useful for couples with significant assets and those who want to ensure that their children or other beneficiaries receive a portion of their estate.
However, A/B Trusts can be complex and may require the assistance of an experienced estate planning attorney to set up properly.
In Conclusion
Due to the expense and stress that comes along with probate setting up a living trust is advisable for many California residents. It is important to work with a qualified attorney and not just use an online revocable living trust template. The estate planning attorney will counsel you on what should be included in a revocable living trust.
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.
Stay tuned for our next blog post on drafting a “trust-agreement-for-real-estate”.
As the deadline for the estate tax exemption sunset rapidly approaches, those with high-net-worth must be well informed of all implications.
In this post, we’ll discuss how to make use of the current estate tax exemption and present strategies that could help minimize taxes paid by future heirs. Making sure you understand your options now is key to making sound decisions related to your estate planning needs when it comes time!
Short Summary
- It is important to note that the estate tax exemption sunset is not a certainty. Congress could choose to extend the exemption or make other changes to the estate tax law. However, it is important to be prepared for the possibility that the exemption will sunset in 2026.
- The exemption will be cut in half, to $5.49 million. However, it will also be adjusted for inflation. This means that the actual exemption amount in 2026 may be slightly higher than $5.49 million.
- The exemption sunset applies to both the estate tax and the gift tax. This means that individuals who give away more than $5.49 million in gifts during their lifetime will also be subject to the gift tax.
- The estate tax exemption sunset only applies to federal estate taxes. However, some states may have their own estate taxes, which could still apply even if the federal exemption has sunset.
Understanding the Estate Tax Exemption Sunset
The estate tax exemption plays an important role in safeguarding the transfer of wealth between generations without incurring any taxation. Consequently, the Tax Cuts and Jobs Act of 2017 amplified it to $11.18 million for 2018-2025 as a relief to many high-net-worth people, but due consideration must be paid towards its expiry date in 2026 when reverting back to $5 million (with inflation). Thus, accurate estate tax calculation taking into account the precise rate is necessary for proper utilization and careful planning should also take into account current or future changes that may occur with regard to taxes laws/regulations while leveraging from this allowance period effectively.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act raised the estate and gift tax exemption from $5 million to a staggering $12.06 million per individual or an impressive $24.12 for couples, which is adjusted annually due to inflationary pressures. This increased allowance will be short-lived. Come 2026, it’s anticipated that the lifetime estate and gift tax limitation will decrease back down to around $6.8 million for each person with any extra amount defined as being subject to taxation, however, keep in mind it is not yet known for sure what the exact amount will be.
Timeline for the Sunset
Individuals should remain aware of the looming 2026 sunset date on the estate tax exclusion and proactively adjust their planning strategies to protect inherited wealth.
This could include utilizing annual gift tax exclusions, irrevocable trusts, as well as charitable giving options.
Professional advice is important for navigating this uncertainty effectively and ensuring security for future generations.Â
Maximizing the Current Estate Tax Exemption
To take full advantage of the present estate tax exemption, one should consider using up the annual gift tax exclusion and moving assets into irrevocable trusts.
Doing this can help secure today’s estate duty exception and bring down taxes on an individual’s taxable wealth. Offering resources to family members earlier in life gives them access to those funds right away, which could potentially rise in value over time too, thus bringing forth wealth. Decrease in chargeable estates. To make judicious decisions regarding financial planning, it is crucial for one to understand gift as well as other kinds of inheritance taxation relevant rules including federal ones that apply when a couple ties the knot together. If your possessions exceed these exceptions once they become due, you ought to be consulting with a competent fiscal consultant or attorney about putting aside money through a credit shelter trust setting so both couples are able to utilize their exemptions while safeguarding their fortunes for future generations likewise reducing rates applying upon belongings inherited from now deceased partners.
Annual Gift Tax Exclusion
The annual gift tax exclusion enables individuals to transfer wealth of up to $17,000 in 2023 without incurring taxes on it. Utilizing this and the estate exemption limit can help diminish taxable estates and provide one with effective protection against their current estate tax liabilities.
It is vital that you stay mindful of the yearly allowance as anything exceeding has to be noted down on a gift tax return form.
Making use of these exemptions optimally allows taxpayers to benefit from reduced burdensome taxation fees for their assets while planning ahead by transferring them securely into heirs’ names.
Irrevocable Trusts
An irrevocable trust is a valuable tool in estate planning that can provide family members with benefits due to the lifetime estate and gift tax exemption being transferred into it.
Creating such trusts must be done under guidance from an attorney or competent tax professional who will ensure all assets are safeguarded against taxes while still distributing according to one’s wishes.
With this expertise on hand, you’ll benefit from it. By taking advantage of any increased exemption provided by using these trust funds for your designated beneficiaries.
Minimizing Taxes for Heirs
To reduce the amount of taxes that your heirs will have to pay, you should look into transferring assets with high appreciation as part of your estate and presenting them with cash or properties which are low on value.
Planning strategically about how these possessions are transferred can help in reducing the taxable total wealth when it comes time for passing down inheritance after death.
Utilizing options like utilizing annual gift tax exclusion laws, giving away lifetime gifts, and making donations towards irrevocable trusts provides an effective way to preserve inherited funds while at the same time not forcing descendants to be accountable for paying hefty amounts due to taxation on those very belongings.
Highly Appreciated Assets
Highly valued assets such as real estate, stocks, and other securities have grown in value over time.
When selling or transferring these kinds of possessions, capital gains taxes may apply. To reduce the amount of tax on highly appreciated assets, there are methods you can employ such as giving away certain items to family members utilizing trusts.
Make use of the annual gift tax exclusion for extra protection when it comes to safeguarding your wealth while lessening any taxation that would befall heirs upon inheritance.
Cash and Low Appreciation Assets
Transferring cash and assets which do not normally experience major value appreciation to your heirs can offer instant advantages without facing onerous tax obligations.
These low-appreciation items, like cars, furniture, or artwork, may prove beneficial in giving the recipients more financial independence and stability as they are ready to be used right away.
Charitable Giving and Estate Taxes
Donor-advised funds (DAFs) are an advantageous way to be philanthropic over the long haul and control when your contributions will be made.
You can take advantage of a single, tax-deductible investment into a DAF that you then manage in order for donations to charities of your choice at any time.
This opportunity offers beneficial tax advantages while also being an excellent means to pass down values about charity to future generations through estate assets.
Charitable giving is fundamental in minimizing taxable estates as it allows individuals to retain their legacy by allotting resources after passing away.
Donor-Advised Funds
Donor-advised funds (DAFs) are maintained and administered by a 501(c)(3) public charity, providing tax benefits to donors wishing to support charities with their long-term contributions. Establishing such an account is quite easy, most financial institutions offer them.
Charitable giving through DAFs allows for the efficient distribution of donations while supporting the donor’s preferred causes or organizations.
Direct Payments to Institutions
Direct payments to institutions, such as charities or schools, can be employed in order to decrease the value of an estate and reduce one’s obligations for estate tax.
For instance, donating appreciated securities could entitle you to a deduction according to its market value during that year plus an exemption from capital gains taxes. Consequently, reducing both your own taxes and those imposed on future heirs.
By making direct financial contributions to educational establishments or charitable organizations it is possible to minimize overall taxation while effectively managing wealth inheritance arrangements within the family.
Revisiting Estate Plans Regularly
It is important to periodically revisit your estate plan due to life changes or alterations in trustees and executors. Events such as marriage, divorce, the birth of a child or the death of a beneficiary can influence an update necessary for your estate’s current state and assets.
Also, any fluctuations in asset value should prompt this review too. So you can guarantee that it meets those who will inherit it accordingly.
Seek Professional Advice
Navigating the estate tax exemption landscape can be complex, so it’s important to find professional legal or tax advice.
An informed attorney or specialist in taxes is key for understanding how modifications of these regulations may affect your estate planning and minimize any liabilities when it comes to taxation.
By engaging experienced professionals, you can devise solutions that secure legacy wealth for future generations while being mindful of financial obligations such as taxes.
Summary
It is important to take action now and ensure that your estate remains intact for future generations by capitalizing on the current tax exemption, lessening taxes for heirs, and engaging in charitable giving.
Developing an effective estate plan while consulting professional advice will help you navigate any uncertainties regarding the estate tax sunset in 2026. Thus, regularly revisiting your plan should be part of a sound estate strategy.
Frequently Asked Questions
What is the generation-skipping tax exemption for 2026?
For those looking to make long-term gifts, the reduction of generation-skipping tax exemption in 2026 should be taken into account.
This can have an effect on ensuring financial security for beneficiaries as the amount will drop from $5 million per person ($10 million for married couples) plus indexing down to that level.
Planning ahead is crucial when considering this reduced allowance so that future generations are protected financially.
What will the federal estate tax exemption be in 2025?
It is anticipated that, based on the current rules and regulations in place, by 2025 the federal estate tax exemption will reach $5.49 million when adjusted for inflation. This number could be altered depending on what Congress determines to do with regard to making these changes permanent or granting an extension of them.
Will the annual gift tax exclusion change in 2026?
The current annual gift tax exclusion has a limit of $17,000 which will stay in place until December 31st 2025. After this date, the allowed amount for excluding gifts from taxation is projected to adjust back to $5 million as adjusted according to inflation since 2017. It looks like there are plans for a change in regard to the gift tax and associated exclusions in 2026.
What is the federal estate exemption for 2023?
Beginning in 2023, the federal estate exemption has been raised to $12,920,000 – up from its previous level of $12,060,000. Similarly, for gifts, there will be an increase in the annual exclusion limit from 16K to 17K dollars providing more protection and security for both estates and gifted amounts.
What is the estate tax exemption?
The estate tax exemption grants an individual a certain amount of leeway in transferring their wealth without being burdened by the accompanying taxes. Depending on prevailing conditions, this threshold can be altered and have major implications for how much money is subject to taxation under the estate tax.
