A Study of the Living Trust

Over the last twenty-five years, I have been asked thousands of questions regarding the Living Trust by clients and readers of my legal articles. I find that the questions and responses allow for a unique learning experience in understanding the Living Trust.

Some of the questions reveal real life issues and some are rather amusing. The last names of the inquirers and dates of the inquiries have been deleted to protect the identities of the persons involved in the questions.


Client Queries

Q: I have read that Living Trusts have one purpose under California Law — to avoid probate. Is this statement correct? Charles, Solana Beach

A: Charles: For many attorneys, this is the only purpose for which they create Living Trusts. However, we utilize the Living Trust and other Estate Planning documents to accomplish the following including Probate avoidance:

  1. Protect childrens’ inheritance from divorce, lawsuits and creditors;
  2. Negate/reduce taxes;
  3. Stretch IRA distributions with asset protection;
  4. Protect the home and other assets from Medi-Cal claims;
  5. Protect inheritances of minor children from the Guardianship laws;
  6. Protect the financial security of the well-spouse, should the ill-spouse need nursing home care;
  7. Provide for a step-up in basis on 100% of the marital assets on the death of each spouse;
  8. Blended family provisions to insure the children of each spouse is not disinherited;
  9. Control distributions to children so as to avoid depletion by the child due to dependencies (drug, alcohol, gambling);
  10. Include Trust Protector provisions to avoid Court proceedings because of sibling or in-law rivalry and contests;
  11. No Contest and Spendthrift provisions to prevent intervention by creditors of beneficiaries;
  12. Provisions to insure the Court system has no authority over your Living Trust;
  13. Provisions for your pets should you become incapacitated or deceased.
  14. Provisions to insure a surviving spouse has absolute control and ownership of all Community Property after the death of a spouse;
  15. Provisions to amend the Trust to address changes in the law once a parent or spouse is declared incompetent.

Q: Mr. Stephens, can’t I get a Living Trust form over the Internet? Alice, San Diego

A: Alice: Yes, if you want a generic form which does not include cited California law nor include the provisions indicated in the answer to the first question above. Basically, it comes down to this. Do you want to rely on a generic form off the Internet to protect your home and all of your assets and investments that you have worked to accumulate and protect your family? Is that worth $249.00 bucks?

Q: Jack, we have a Living Trust we signed in 2012. Do we need to have it reviewed annually?
Hal, Del Mar

A: Hal: No, not that often unless there are personal reasons for an amendment. However, if your Living Trust is encased in cobwebs and has not been reviewed in a number of years, there have been numerous changes in the law over the past few years. Your Living Trust is a working viable document that needs attention from time to time. For example, the exemption from Federal Estate Tax (FET) has been increased to $11.5 Million per person.

Many Living Trust owners possess A-B Trusts to protect from FET which may no longer be appropriate. Restating the Living Trust from an A-B to a Simple Married Trust can alleviate expenses and costs of filing two income tax returns and annual accountings of the A-B Trust. That would be an excellent reason to have your Living Trust reviewed unless wasting moolah is your thing.

Q: Mr. Stephens, we moved to California from out of state and my spouse and I have inheritance assets that we own individually. Must we create two separate Living Trusts? Robert, Carmel Valley

A: Robert: You may or, you may not. If all is going well in the marriage you can create one Marital Trust and transfer your individual inheritances in the Trust as Separate Property. Or, if you are treading somewhat of a rocky road in the marriage you may each wish to create a Sole and Separate Property Trust to transfer your individual inheritance. The latter Estate Plan reveals to the world that each of you firmly intend to keep these assets under your control and title in your name

Q: Mr. Stephens, my spouse has been declared incapacitated and I want to change our Living Trust which we created together several years ago. I want to disinherit my spouse’s children since we no longer get along. Is this a problem?      Ann, La Jolla

A: Ann: It sounds like it could be a problem for your spouse’s children. Disinheritance is not a happy thought for potential beneficiaries. I would need to review your Trust and Estate Plan to check for restrictions and/or limitations to amend for disinheritance purposes.

If I represented you in the preparation of the Trust, I would be unable to draft such an amendment based on a conflict of interest.

For an amendment such as this to be valid, the Living Trust must not include any restrictive provisions to amend in this regard; the Living Trust must allow for an amendment via a Power of Attorney; and the Power of Attorney must provide for the authority to amend the Trust.