Common Questions About Living Trusts

What is a trust?

A trust is a way to hold the legal title to assets (like real estate, personal property, and so forth). You can think of a trust like a basket or purse: by putting all of your stuff into the “basket” of the trust, the value of your stuff does not count towards triggering a probate after you pass away.

What about my bank accounts / investments / retirement / life insurance?

There are two ways to ensure your money doesn’t end up in probate: naming your trust as a Pay on Death (“POD”) recipient, or re-naming an account into your trust’s name. I recommend taking the easier approach for the given asset. For example, you can’t really “change” the name on a personal bank account, your bank will simply close your existing account and open a new one in the trust’s name. So, for accounts that would cause headaches if you change the name on the account (personal bank accounts and retirement accounts are the primary examples), updating a POD to name the trust is usually the better way to go. For other accounts like non-retirement investment accounts, it’s often easy to re-name an existing account. And for life insurance, it usually makes sense to name a trust as the “contingent” beneficiary, to receive insurance proceeds only if the primary beneficiary (your spouse, for example) is not alive to receive the proceeds.

Somebody told me / I saw on the internet that I can just add my kid(s) to my title or accounts

Adding children to land titles or financial accounts can have many unintended and negative consequences. For example —

Adding anyone to a bank account or land title makes that person a present co-owner of the account or land. That means the child has access to money, and the child must also sign if the parents want to sell or refinance the real estate.

The transfer can trigger tax consequences. For real estate, the child loses the ability to step up the basis of the interest received by the transfer. This means a higher capital gains tax bill when the property is sold.

For a child who is married, if they separate from their spouse, the spouse could claim that the co-owned asset is Community Property.

If a child co-owner gets into an accident, then the co-owned asset can be reachable by the other party.

If your aim is to keep and use your property while you’re here, and leave the property to your kids after you pass away, there’s a much better way than making your kids co-owners of your land or accounts.

What about Joint Tenancy?

Joint Tenancy does include a right of survivorship. However, what happens if the joint owners die at the same time, or close enough that there is no “surviving” Joint Tenant? In such cases, Probate Court is the result.

I don’t want the State to take my money

The good news is that the State will not just “take” your money if you pass away: you have to owe the State money (like back taxes, certain Medi-Cal benefits, or unpaid child support obligations) before the State shows up with a bill. However, probate court can be rather expensive: average fees and costs range from 4% to 8% of the gross value of the estate. If the estate includes land, then add another 7% to 8% of the property’s value for sale-related expenses — the fees really add up. With a living trust, the loved ones you leave behind avoid the probate court expenses.

Will a trust protect my assets from lawsuits?

In a word, no. A living trust is a way to avoid probate, not evade creditors. There are some people who claim their fancy “asset protection” trusts will shield assets from legitimate creditors, but in practice, it usually doesn’t work out that way. In the law, there are concepts like “piercing the corporate veil” and “fraudulent transfers” that allow clever lawyers and creditors to reach assets in so-called asset protection trusts. This isn’t to say that there’s no such thing as limited liability: for example, if you set up an LLC to own a rental property, and someone claims they were injured at the property, then (with some limited exceptions) your personal assets are separate from the LLC asset (the rental property).

The best ways to avoid financial liability that could ruin you are simple and straightforward: act reasonably, and buy good insurance. If you act reasonably, then it’s very unlikely that you would be accused of, let alone be found liable for, an act or omission that leads to financial ruin. If you make an honest mistake, the insurance should cover the damages caused by the mistake, and the insurance company’s employees (including lawyers when appropriate) work out the details.