The Complete Guide to Revocable Living Trusts in California

If the past few years taught us anything, unforeseen circumstances drastically impact our lives. Global health events, personal illness, car accidents, and even the stark realities of aging reduce our mental and physical capacity, so we need to plan for as many contingencies as possible.

Most adults have a will to express their needs and desires after death, but fewer plan for asset management in the event of incapacitation. Luckily, living trusts exist to cover that gap.

A living trust sets forth conditions for you (the trustor) to assign asset management responsibility to a third party (the trustee) in the event of your incapacitation or death. However, it isn’t a substitute for a will.

When a living trust activates, and the trustee takes control of your assets, the trustee has a fiduciary responsibility towards the trust.

This means the trustee is legally obliged to act according to the trust’s terms to the greatest extent possible and operate in your best interest.

The primary benefit to establishing a living trust is that property management concerns may not have to go through court probate in case of incapacitation or death. Instead, the trustee takes over assets and either maintains or distributes them according to the terms.

Since the living trust can be activated while you’re still alive, it also provides peace of mind for covering care expenses if you’re incapacitated for a long time. The trustee can liquidate assets to pay for healthcare, so you ensure that your needs are met during this period while still alive.

Aside from revocable and irrevocable trusts, which we’ll cover in a minute, there are two primary types of trusts in California:

1. Basic living trust. This is the most flexible trust and designates three roles:

• The trustor or grantor owns the property and defines a third party to manage it in certain circumstances.
• The trustee manages the property according to the trustor’s wishes.
• Assets are distributed to beneficiaries by the trustee.

2. Testamentary trusts. These trusts are built into a will and are only activated in the event of the trustor’s death, leaving a gap in asset management if the trustor is incapacitated.

Many special living trusts cover specific trustor circumstances within the basic living trust framework. These include charitable trusts to leave assets to a charity and pet trusts to choose care for your animal friends.

A living trust can contain and manage:

• Cash and retirement accounts
• Non-retirement personal investment accounts, including stocks and bonds
• Personal property and real estate

Take note, though - if you correctly name beneficiaries for non-probate assets like life insurance and retirement accounts, these assets go directly to the recipient without needing a trust or probate.

A living trust is an absolute necessity. By defining asset management conditions in the event of incapacitation while you’re still alive, a living trust covers contingencies that a will cannot. This does not mean you should forego a will. Instead, a living trust is used alongside a will for estate planning.

This is especially important in California because the state has high probate fees when assets are only designated through a will – up to 4% of total assets. Probate court is also a long and slow process, so a living trust quickly takes care of your assets and loved ones.

Creating a living trust in California is simple – all you need is a declaration of trust. Since there is no standardized format for the declaration, you can go it alone, but this isn’t recommended. Instead, consider using an online estate planning service like ClearEstate, or find a reliable attorney. Attorneys tend to be more expensive, though, so it may not be worth the cost if you don’t have many assets.

There are a few steps to ensure you maximize the benefits of a living trust in California:

1. First, you’ll need to go through all the assets you want to manage and create a comprehensive listing that includes type, location, and value.
2. Next, designate a trustee. Many set themselves as the primary trustee but ensure you assign a trusted secondary trustee if you cannot manage assets yourself.
3. Designate beneficiaries by assigning your inventoried asset to each person or organization. Make sure to be as explicit as possible to avoid legal disagreements between beneficiaries. The last thing you want in times of crisis is family bickering over your possessions.
4. Complete the declaration of trust through an attorney or online estate planning service. Again, we don’t recommend going it alone because this can create unforeseen loopholes or room for loose interpretation, leading to a lengthy probate process.
5. In California, you only need to sign the declaration to make it legally binding. It’s always a good idea to sign in front of a notary to prevent any questions of legitimacy.
6. Since the trust is a legal entity, you’ll need to transfer property to the trustee named in the document. If you’re the primary trustee, you’ll still need to redesignate yourself as the owner in that trustee capacity. This is called funding the trust.

Remember to fund the trust as soon as the declaration is completed. If you don’t, it’s effectively useless and serves as an empty vessel. If the living trust isn’t funded, then assets will not be managed by your designated trustee and will likely go through probate. If you establish yourself as the primary trustee, you’ll still retain ownership and control of the assets while you’re capable.

While you maintain ownership of the assets as the primary trustee, there are effectively no changes in taxation. You’re still taxed on capital gains and income, and no separate tax return is required.

If you’re incapacitated, the trustee may assign a unique tax ID to the trust itself. This prevents the trustee from being personally responsible for paying taxes on income from the trust’s assets. Instead, the trust pays taxes as a separate entity and files an individual return.

After death, the trustee files a tax return for every year the trust is whole and generating income. If assets are distributed to beneficiaries, they may have to pay taxes on the distribution, but many extra considerations affect estate taxation.

A revocable trust gives the flexibility to change terms or revoke the entire trust for the duration of the grantor’s life, assuming they aren’t incapacitated.

An irrevocable trust does not have this flexibility. Instead, once the declaration is signed, and the trust is funded, the terms are set in stone. To change an irrevocable trust, the trustee and all beneficiaries must agree on the new terms, or a judge must approve changes outside of group consensus.

Barring the grantor’s decision to change a revocable trust to an irrevocable trust, the trust only becomes irrevocable after the grantor’s death. This means that the terms can no longer be modified without consensus or judge approval.

To wrap things up

A living trust grants peace of mind that a simple will does not. By accounting for contingencies in the grantor’s life before death, a living trust ensures loved ones get the assets they’re entitled to without a lengthy and expensive probate process. Most people would enjoy a living trust's material and psychological benefits, so getting further professional guidance is highly recommended.