Click here to view a Living Trust schematic.

A single person (hereafter called "client") establishes a Living Trust by executing a Trust Declaration or Trust Agreement. The Trust is dubbed "Living" because it is created while the client is alive. The terms of the Trust typically provide that the client would act as the Trustee and the sole present beneficiary of the Trust. Occasionally the Trust provides that another individual or Trust institution would act as Trustee. The Trust is revocable or amendable at the sole discretion of the client. The bulk of the client's estate is funded into the Trust, which makes the Trustee (not the client as an individual) the owner of the Trust assets.

Upon the death of the client, the Trust becomes irrevocable, which, of course, means that no one can change the terms of the Trust at this time. The Trust sets forth how the Trust assets are to be distributed after the client's death by the individual or institution that is named the Successor Trustee of the Living Trust in the Trust. The Trust also provides that the Successor Trustee is to take over Trustee duties in the event the client becomes legally incapacitated during the client's lifetime. The powers and administrative duties of the Trustee, as determined by the Trustor, are explicitly set forth in the Trust.

Important companion legal instruments to the Living Trust are the Durable Power of Attorney (for non-medical personal and financial matters) and the "Pour-over" Will. The Durable Power of Attorney is a valuable instrument for giving a chosen individual the authority to deal with third parties with respect to non-Trust assets and to fund (but not amend or revoke) the Living Trust in case the client becomes legally incapacitated. With respect to non-Trust assets of the client, the Will incorporates by reference the distribution terms of the Living Trust. These assets "pour over" into the Living Trust and are distributed with the Trust assets.

The Living Trust results in no change to a client's income tax reporting requirements, and transfer of real estate into the Trust is not deemed a "change of ownership" for property tax reassessment purposes.

These above-described mechanics apply as well to a joint Living Trust executed by a married couple. Upon the death of the first spouse, the surviving spouse continues to act as Trustee and to administer the Trust upon the same terms as before the death of the first spouse. The Trust can be drafted to allow for distribution of some of the first spouse's estate upon his or her death. The Trust can also be drafted to make irrevocable the dispositive terms regarding the first spouse's share of the marital estate upon that spouse's death. In larger estates (over $2,000,000), the Trust typically provides for the creation of estate-tax sensitive sub-Trusts (Bypass and Marital) upon the death of the first spouse. Community property or separate property of the spouses will retain their ownership characterization after being funded into the Living Trust.

Probate administration is required in California for any decedent's estate which is greater in value than $100,000. In computing this $100,000 threshold, assets held in joint tenancy form, with bank "payable on death" designations, in community property form or owned by the Trustee of a Trust do not have to go through probate. For this reason, the assets held in a Living Trust, if the Trust has been properly funded, will not be subject to probate administration. While there would be attorney's fees incurred both at the creation of the Trust and upon the termination and distribution of the Trust, they will typically be less than probate fees and costs. In large estates over $400,000, the fees and costs savings can be substantial.

The post-death administration (termination and distribution) of a Trust estate is not a matter of public record, unlike probate. Privacy in the area of family and estate matters is important to many clients. Bing Crosby had a Living Trust and the details of his estate administration have never been revealed to the public.

For estates smaller than $2,000,000, the post-death administration of a Living Trust typically can be completed in a several months. A probate administration requires at least six months to complete.

A court-administered conservatorship of the client will usually be avoided with a Living Trust, because the Trust instrument provides that a client-nominated successor Trustee shall act on behalf of the client in the event of his or her legal incapacity.

If the client wishes another person or institution to act as Trustee from the start, the client will have the opportunity to see how that Trustee discharges his duties. If the client is unhappy with the Trustee, the client simply removes the Trustee and appoints another.

The Living Trust should never be used if the client has any fear that the chosen successor Trustee would not do the job required of that individual or institution. The successor Trustee owes a fiduciary duty to see that the client's wishes (after the client's death or legal incapacity) are fulfilled in a timely and professional manner. The successor Trustee owes duties of full disclosure and fairness to the beneficiaries of the Trust. If the successor Trustee is also one of the beneficiaries, he or she must not favor his or her own beneficial interest over that of another beneficiary. If the successor Trustee is a related party to any of the beneficiaries, the client should make sure that any personal differences these parties may have will not interfere the post-death Trust administration.

The privacy of Trust administration can be a two-edged sword if the successor Trustee fails to communicate with the Trust beneficiaries.

Probate administration has one outstanding characteristic, which is the careful monitoring by the Superior Court of how the estate fiduciary (called an Executor or Administrator) is handling his or her duties of administering the probate estate. Essentially, the successor Trustee must do the same job as the probate Executor. Both fiduciaries must marshall and inventory the decedents' assets, pay legitimate final expenses and taxes of the decedent, and evaluate and pay valid claims against the decedent's estate.

A lazy, procrastinating, dishonest and/or incompetent Executor will be identified and ordered removed by the court in a fairly short time. Conversely, a successor Trustee having any of these same negative characteristics probably will continue to operate in this manner for a fairly long time before the proverbial dung hits the fan, which is usually after an unhappy beneficiary finally hires an attorney.

During the client's lifetime, the client must take care that his or her Living Trust remains sufficiently funded. Although this is not a particularly burdensome task, it can cause some anxiety for a few individuals.

Funding the Living Trust may cause a "due on sale" problem for investment real estate, depending on the lender involved.

A client's contractual assets, such as life insurance, pension plans, IRAs and other retirement plans, and annuities are not funded into the Living Trust because these assets pass to the designated beneficiary outside of probate administration. However, in some cases for a variety of reasons, the primary or contingent beneficiary of these assets should be the successor Trustee of the Living Trust or, depending upon the situation, the Trustee of a particular sub-Trust, such as a Child's Trust or a Bypass Trust

Certain individuals require more sophisticated estate planning than the average client. This planning typically may involve the creation of death-tax saving Trusts for married couples (Bypass Trusts), Trusts for children, other minors and disabled individuals, Charitable Remainder (or Lead) Trusts, Irrevocable Life Insurance Trusts, Qualified Personal Residence Trusts, Grantor Retained Income Trusts, Dynasty Trusts, Family Limited Partnerships, and more. A Special Needs Trust may be appropriate for the parent who has a child who is mentally or physically disabled and receives governmental assistance benefits. It is important to note that these sophisticated planning devices either can be incorporated into a Living Trust as a sub-Trust or can be coordinated with the Living Trust in an over-all estate planning structure.

Generally, clients with larger estates who wish to reduce federal estate tax value and clients who have particular planning needs (disabled beneficiaries, young or immature children as beneficiaries, etc.) are the ones who should consider employing one or more of these sophisticated planning devices.