Estate planning is the process of preparing your hard-earned wealth and assets for your demise, and revocable living trusts are some of the most effective and efficient tools for doing so. This article explains:
- What trusts are and their role in estate planning in California.
- The benefits of creating a revocable living trust.
- The types of assets you can place in a revocable living trust in California.
What Is A Revocable Living Trust And How Does It Work?
A trust is created when you assign your assets or property to a third-party entity created to hold on to them for a specific purpose. A revocable living trust is the most basic and frequently used estate planning trust.
As the name suggests, you have the ability to revoke it, amend it, change it, update it, add to it, and move assets in and out of it freely during your lifetime. The revocable trust is a fantastic tool for estate planning. This is because it gives you the flexibility to determine (or change) who is going to be in charge, what their powers are, how the assets are going to be distributed, and more.
What Are The Benefits Of Creating A Revocable Living Trust?
With a revocable living trust, you have the flexibility to tailor the choice of assets and beneficiaries, as well as set up the rules for distribution in any way you see fit. For example, you can:
- Give someone the right of occupancy in a property that belongs to the trust.
- Maintain a right of first refusal on the sale of assets.
- Outline a precise and long-term schedule of distribution to beneficiaries.
- Establish age restrictions or other restrictions on the beneficiaries.
For example, imagine if a beneficiary is known to have a gambling addiction or a drug addiction. There are certain safeguards that your estate planning attorney can help you put in place when creating the trust in order for them to receive distributions.
Revocable living trusts offer maximum flexibility while also maintaining maximum control over the trust during your lifetime. But perhaps most importantly, living trusts can also ensure your estate and family bypass the California probate process because it becomes irrevocable on your passing.
When you die, the trust becomes irrevocable, meaning it can no longer be changed by anyone and your decisions and wishes are locked in place and will be respected.
Finally, all beneficiaries have the ability to request an accounting and a copy of the trust to make sure the current trustee is doing their job. This means there are extensive legal checks and balances in place to ensure your wishes will always be carefully followed.
Why Are Revocable Living Trusts So Effective For Estate Planning When Dealing With Real Estate?
Everything discussed up until now should make it obvious that revocable living trusts are exceptional tools for planning your estate. Compared to, for example, they offer considerably more flexibility. When you are still young, life often brings significant changes, and you might need to move assets in and out, so flexibility is essential. But the advantages do not stop there.
Another benefit of putting assets into a revocable trust, especially real estate property, is that on your passing, the trust “steps up” the value of that property to data death value. In other words, when it is bequeathed to a beneficiary, it will be considered as what it is worth at the time of your death, not the time you paid for it.
For example, if you bought a property at a hundred thousand dollars 40 years ago, it could easily be worth a million now. If you were to sell that house yourself, you would have to pay capital gains on the difference. At least $900,000, which would all be subject to the tax. However, if the house is sold after you pass it on to beneficiaries through a trust, that is not the case.
Because the trust steps up the property to the value at death, that is the new cost basis. If your beneficiaries immediately go sell it at a million, there would be no difference between that stepped-up value and the sale price. As a result, no capital gains taxes are associated with that sale.
That is a considerable advantage over an irrevocable trust because the value of assets in those is determined at the moment of transfer, not death. In other words, when you put an asset in an irrevocable living trust, you run the risk of it increasing in value before you die and beneficiaries having to pay taxes on it.
Real estate is only one of many types of assets you can place in a trust.
What Types Of Assets Can Be Included In A Revocable Living Trust?
Technically, any and all types of assets can be included in a revocable living trust. However, there are certain types of assets or circumstances in which you might want to be cautious or think twice before doing so.
Assets that can be titled into the name of the trust include:
- Bank accounts
- Real property
- Personal property
- And more…
Personal property could be tangible items or nearly anything in the house that is moveable, such as jewelry, furniture, or family heirlooms. You can also place cars, boats, and other recreational vehicles into the name of the trust, as well as any non-tax deferred investments.
The only concern really comes in when talking about retirement-type accounts or tax-deferred accounts. The IRS takes the position that if you retitle a tax-deferred account into a trust, they are going to tax it on the full amount just because of the retitling.
Instead, it is often wiser to have those accounts passed directly to named beneficiaries at the time of your death. The same is also true for life insurance policies. For example, a full-term, full-life, or universal life insurance policy is often more like an investment vehicle. You will want to pass those policies, like the tax-deferred accounts, directly to a named beneficiary on those individual policies.
If this is starting to sound confusing, that is because it is. The interactions of tax laws, insurance and investment options, and estate planning laws are complex. This is why you need exceptional and experienced estate planning attorneys at your side to help you identify the perfect plan for your estate, which may very well end up including at least one revocable living trust!
For more information on Revocable Living Trusts In An Estate Plan, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (951) 262-8811 today.
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