One of the most common estate planning documents in California is the Revocable Living Trust. You can think of a Revocable Living Trust kind of like a container to hold your assets while you're alive. This container is governed by a set of specific instructions that you lay out in the document that creates the trust, and tells others how the assets inside the trust are to be used for your benefit while you're alive and how the assets are to be distributed after you pass away. Depending on your marital status, there will be different ways to create a trust.
If you're single, or not married and not in a registered domestic partnership, you will most likely have a revocable living trust that holds all of your own assets. Also, any assets that use a beneficiary designation, such as life insurance policies or retirement accounts will likely have the trust named as its primary beneficiary so that the proceeds from those assets can be distributed in accordance with the revocable living trust provisions.
If you're married, it is likely that you and your spouse will create a single joint revocable living trust that holds both of your assets--whether it is community property or the separate property of both spouses. Occasionally, couples will create 2 or more revocable living trusts--one to hold the couple's community property, one to hold one spouse's separate property, and perhaps one more to hold the other spouse's separate property. The specific combination will depend on factors such as:
- Whether and/or the amount of separate property that each spouse has.
- The value of the assets that the spouses' own overall.
- The similarity or disparity in how each spouse wants to distribute his or her assets.
- Other personal factors such as each spouse's belief in the other's ability to handle financial affairs.
Day-to-Day Life Remains the Same
So long as you (and your spouse, if you have a joint living trust) are alive and fully functioning, there's no practical change to how you handle your financial affairs once the trust is set up. Because revocable trusts can be amended, changed, or revoked by you, they do not provide any immediate benefit for tax or creditor purposes (though this is not necessarily the case after you pass away). If a trust is revocable and amendable, then:
- Transferring assets to the trust does not cause any adverse tax consequences.
- Income taxes as a result of rent, dividends, capital gains or losses are treated the same as it was prior to creating the trust.
- The trust assets will be included as part of your estate.
- There is no reassessment of your real estate for real property taxes (a huge benefit for long-time residents in counties where the property tax bases tend to be much lower than the fair market values of the property, such as in Los Angeles County).
Schedule of Assets
In most trust documents, there's a separate schedule which lists all of the assets that you own and is supposed to be contained within the trust. This is helpful for at least a few purposes.
First, if you die and haven't otherwise kept a good record of the property that you own, this schedule can be useful to your successor Trustee, who can use the list to track down your assets.
Second, if you forgot to re-title those assets in the name of your trust, it could serve as the basis for a "Heggstad" petition, which is a special procedure to transfer those assets to your trust without the need to go through a full probate process.
So there you have it, a few basics of a revocable living trust.