Understanding the California Revocable Living Trust in 2023 (Updated)

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.

**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.

1. A Grantor who wishes to avoid the Probate process.
2. A Grantor who wants someone else to accept the management responsibility of their property.
3. 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.
4. 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?

1. In order for a trust to exist there must be trust property.
2. 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.
3. 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.
4. 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.
5. The Grantor and Trustee must both be legally competent.
6.   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 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 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.

1. 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.)
2. 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))
3. 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:

1. Avoiding Probate: 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.
2. 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.
3. Flexibility: 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.
4. Control: With a living trust, the grantor can maintain control over the assets in the trust while alive, appointing themselves or another individual as the trustee to manage the assets according to their wishes.
5. Disability planning: A living trust can also provide for the management of the grantor’s assets in the event of their incapacity or disability.

4 Disadvantages of Revocable Living Trusts

1. Expense: 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.
2. Limited protection: 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.
3. No tax advantages: 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.
4. Not a guarantee of avoiding probate: 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.

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.

4 differences between a living trust and a will:

1. 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.
2. 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.
3. 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.

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 to 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.