Q1: WILL I NEED TO FILE AN EXTRA TAX RETURN IF I SET UP A LIVING TRUST?
A: No. Your revocable living trust (“RLT”) is ignored by the Internal Revenue Service (“IRS”) and the Franchise Tax Board (“FTB”) for tax purposes. If you are asked for the taxpayer identification number (“EIN/TIN”) of your trust, you would supply your social security number. All income tax items will be reported under your social security number(s), which means you’ll file the same tax returns you usually file.
Q2: WILL TRANSFERRING REAL ESTATE TO MY LIVING TRUST INCREASE MY PROPERTY TAXES?
A: No. As described above, for all intents and purposes, you and your living trust are the same person. That means, from a property tax perspective, your local County Assessor will not reassess your property. Thus, you can freely transfer property into and out of your trust without causing any changes (“reassessments”) to your property taxes for that property.
Q3: WHO IS THE “GRANTOR” OF MY TRUST?
A: You are. Remember that a living trust is a contract between the person creating the trust (the “grantor”) and the person who will manage the trust (the “trustee”), for the benefit of others (the “beneficiaries”). Since you’re the creator of your living trust, you will always be the grantor of that trust. Other names for grantor are “trustor” or “settlor.” The names may vary by firm. Note, if you’re married, your spouse will typically also be a grantor of your trust. But, as discussed below, you will also be the trustee and beneficiary of your trust.
Q4: WHO IS THE “TRUSTEE” OF MY TRUST?
A: Typically, you are. Remember that a living trust is a contract between the person creating the trust (the “grantor”) and the person who will manage the trust (the “trustee”), for the benefit of others (the “beneficiaries”). Typically you fill all roles, but if you are unable to do so when setting up your trust (e.g. elderly and/or infirmed), you would nominate someone else (e.g. person or entity) to assume this role. Note, if you’re married, your spouse will typically also be a manager of your trust. If you or your spouse can no longer manage the trust, then someone that you selected will take over as manager, also known as a “successor trustee.”
Q5: CAN I CHANGE ANYTHING AFTER I SIGN MY LIVING TRUST?
A: As long as you’re “well,” you can change anything you want to change. Remember that you are setting up a revocable living trust. Nothing is set in stone. You can place assets into the trust, take assets out of the trust, add beneficiaries to the trust, delete them from the trust, and change your successor trustees. You can even get rid of the trust altogether. However, should you become incapacitated, the terms of your trust freeze, because only you can change them. Once you regain capacity, you can start making changes again.
Q6: DO I NEED TO DO ANYTHING WITH MY PROPERTY AFTER I SIGN MY LIVING TRUST?
A: Yes. Signing your trust is only the beginning. You need to make sure all your property that you want in your trust is transferred into the trust. This process is called “funding” or “aligning assets.” We’ll either do this for you for a fee, or we’ll give you detailed instructions on how to do so. Part of the reason you set up a trust is to avoid court involvement with your assets, but your trust is only effective in accomplishing this if you actually transfer your assets to the trust.
Q7: WHO SHOULD I NAME TO MANAGE THE TRUST IF I CAN’T DO IT?
A: This is one of the most important issues in estate planning. The simple answer is that you should name someone you trust. Typically people name family members because they believe family members will always watch out for them. But watching out for you isn’t the job; carrying out your instructions in your trust is – even if they disagree with the instructions. Your best choice as trustee would be someone, or some entity, who/that can do that.
Q8: WHO SHOULD I NAME AS GUARDIAN FOR MY CHILDREN?
A: Remember that with your living trust, two types of people will be involved with your children. First, the trustee of your trust will use your assets to support your children until the time they can support themselves. This means making financial decisions based on short-term needs (e.g. buying a car for your 16-year-old) and long-term needs (e.g. education tuition). Second, a guardian will make day-to-day decisions about your children: where your children should live; where your children go to school; and what healthcare your children should receive. Sometimes, it makes sense to have the same person in both roles; sometimes it doesn’t. For example, you may trust your sister with financial issues, but prefer your brother’s parenting style.
Q9: WHAT INSTRUCTIONS CAN I GIVE MY GUARDIANS?
A: Your estate documents are meant to address a lot of legal issues, and it’s hard, if not impossible, to incorporate parenting ideas into those documents, so we don’t. But, of course, those ideas will be very helpful for your guardians, and they can become very important for your children as they grow up. As a result, we sit down with you to conduct an interview to determine the issues you think are important. We also encourage you to write a letter to the guardians if you choose. Your letters and your interview can be updated as your children grow and you learn more about the people they’re likely to be. Also, since a court must formally appoint your guardians, these instructions give the judge specific issues to consider in deciding which person is best suited to take care of your children.
Q10: CAN I NAME CO-GUARDIANS?
A: You can, but it’s sometimes a bad idea. Guardians must be appointed by a court, so you double the court’s work if you name two guardians. Worse, what happens if the co-guardians disagree about something? Either one of them can pull the situation right back into court, which means your children will end up living with decisions made by a judge. This is what we’re trying to avoid. Also, what happens if the co-guardians have a falling out? For example, it’s fairly common to designate “my sister and her husband” because you want your kids to live with that family if that time ever comes. But if your sister and her husband fall apart and get divorced, then your children end up in their custody dispute. If you really want your sister to take care of your kids, just name her and make it easy for her by reducing the number of ways the situation could sour.
Q11: RETIREMENT PLANS AND LIFE INSURANCE PROCEEDS ARE CONTROLLED BY MY BENEFICIARY DESIGNATIONS, SO WHY DO YOU TALK ABOUT THEM AS PART OF MY ESTATE PLAN?
A: Your retirement plan administrator and your life insurance company will make payments to the people you designate as beneficiaries. But if the administrator or insurer decides there was some problem with your designation (and that’s a problem that usually doesn’t surface until after your death), then they will insist on making payment to the executor of your probate estate, which means a court has to get involved. Also, if you designate young children as beneficiaries, then a court guardianship proceeding will be necessary because payments cannot be made to minor children. Beyond that, if your retirement assets or life insurance proceeds are a big part of your estate, then you probably want to protect those assets by coordinating them with your living trust. Naming your living trust (“conduit trust”) as a contingent beneficiary of these assets serves a multitude of purposes.
Q12: WHY DOES ZAPF ESTATE PLANNERS ENCOURAGE LIFETIME TRUSTS FOR BENEFICIARIES?
A: An example will help with this answer. Say I have two sons and they are equal beneficiaries of my estate. After my death, my trust says to create equal shares for them (so each gets 50% of my estate), but instead of ending the trust and giving each son his share (a pretty typical approach), I say to keep the trust going. I also say that each son automatically gets all the income from his share and can use more than the income (up to 100% of the assets – the principal) if he needs more for something like living expenses. I then specifically say that I do not want any of these assets to be paid to creditors. By giving this instruction, I’ve created protection of assets which should always be available to my sons (and, perhaps, their descendants) but that creditors cannot touch. If my child runs some attorney, doctor, or other professional off of the road, or makes bad business decisions, or marries the wrong person who gets a decree to split his assets, my trust should protect his inheritance (note – my son would probably no longer want to be manager (“trustee”) of his trust at this point). However, if I make my son the manager (“trustee”) of his trust, then he can invest and control the assets as he sees fit, which means he can buy a house through his trust or start a business. This should give him maximum flexibility as well as maximum protection.
Q13: I’M MARRIED. WHAT CAN MY SPOUSE DO WITH PROPERTY IN OUR TRUST AFTER MY DEATH?
A: The goal of estate planning for married couples is making it as easy as possible for the survivor. After the first spouse dies, the survivor may have complete control over the assets in the trust. This choice is entirely up to you, as a couple, to decide. Doing this, however, means the survivor will only need to do a minimal amount of paperwork after the first death.
Q14: WILL A LIVING TRUST CHANGE MY CONTROL OVER MY PROPERTY?
A: No. You’ll manage your property just like you do now. You can invest anyway you want to. You can make gifts. You can change your plans. You can sell assets and buy new ones. As long as you’re managing the trust, a living trust does not put any restrictions on your rights.