As a leading Southern California estate law firm, the Law Offices of Michael K. Elson specializes in estate planning, probate, and trust administration. These are the questions we hear most often.
A trust is an instrument under which a person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the exclusive trustee of your own living trust during your lifetime, keeping full control over all property held in trust. Your appointed successor trustee(s) will take charge only after your death, or if you become mentally incapacitated.
A "living trust" (also called an "inter vivos" trust) is simply a trust you create while you are alive, rather than one created at your death under the terms of your will. A revocable living trust can be amended or revoked during your lifetime.
Different kinds of living trusts can enable your estate to avoid probate, reduce or eliminate estate taxes, preserve the inheritance of your heirs, and/or set up long-term asset management. In many cases, you can accomplish most of these goals with just one carefully drafted trust.
One of the primary advantages to creating a living trust is that property left through the trust does not have to be administered through probate court before it reaches your desired beneficiaries. A will, on the other hand, must be probated. In a nutshell, probate is the court-supervised process of paying your debts, giving notice to potential claimants, and distributing your property to your desired beneficiaries.
The average probate drags on for at least a year or two before inheritors receive anything — and by that time, 5–10% of the property has often been consumed by lawyer and court fees. Assets going through probate are also generally subject to Medi-Cal liens, whereas assets held by a living trust are not.
Still, not everyone needs a living trust. If, however, you own real estate, then a living trust is a must to avoid probate.
Property you transfer into a living trust before your death does not go through probate. The successor trustee — the person you appoint to handle the trust after your death — simply transfers ownership to the beneficiaries you named. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all property has been transferred, the living trust ceases to exist. Unlike a trust, a will must go through probate.
No, however making a living trust operate effectively does require some crucial paperwork at its inception. For example, if you want to leave your house through the trust, you must execute a new transfer deed (prepared by your attorney) so that you own the house as trustee of your living trust. In California, you will need to use special language in your trust document and in the transfer deeds to avoid the unfavorable and unnecessary tax consequence of a property tax reassessment. This paperwork can be complex, but hiring an experienced trust attorney will ensure it is done correctly.
No. A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate. When a will is probated, there must be a newspaper publication giving the world notice of the probate. The living trust and its terms, however, are completely private and do not need to be made public.
It depends on how the trust is set up. The subtrusts created from a bypass/credit shelter trust (A-B trust) or more complex QTIP trust (C trust) after the death of a spouse can provide a significant degree of asset protection. Holding assets in a simple revocable trust does not shelter assets from creditors, but it can still afford significant privacy, which may discourage a lawsuit. With a simple trust, a creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name — however if the potential creditor does not know you own the property, they may be discouraged from pursuing a lawsuit in the first place.
After your death, property in a living trust can be quickly and quietly distributed to the beneficiaries. By the time creditors find out about your death, your property may already be dispersed, and it may not be worth the creditor's time to track down the property and demand the new owners pay your debts.
Yes. A pour-over will is an essential back-up device for property or other assets that you do not transfer to yourself as trustee. For example, if you acquire property shortly before you die, you may not think to transfer ownership to your trust — which means it would not pass under the terms of the trust document. In your back-up will, you can include a clause that names someone to receive any property you have not left to a particular person or entity. A pour-over will may also assist with a Heggstad petition.
If you do not have a will, any property not transferred by your living trust or other probate-avoidance device will go to your closest relatives in an order determined by state law — which may not distribute property as you would have chosen.
A very simple probate-avoidance living trust has no effect on taxes. More sophisticated attorney-drafted living trusts, however, can greatly reduce or even eliminate federal estate tax for people who would otherwise be subject to these taxes.
An A-B living trust is designed primarily for married couples with children. The A-B trust goes by many other names, including "credit shelter trust," "exemption trust," and "bypass trust." Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save hundreds of thousands or even millions of dollars in estate taxes. It is important, however, to include flexible trust terms to ensure unnecessary capital gains taxes are avoided by achieving maximum step-up in cost basis on appreciated assets. Most traditional A-B trusts with mandatory credit shelter trust funding have become obsolete for most families due to the 2018 tax law changes.
A Limited Liability Company is a type of legal entity which affords its owners the same limited liability benefits of a corporation, with the simplicity and favorable taxation of a partnership. An LLC may have one or more owners, which are called members. As a separate legal entity, the LLC must have its own bank account, and all income and expenses must flow through this account. The LLC conducts all business in its name, and its members act as authorized agents. Much the same as shareholders of a corporation are insulated from liabilities of the corporation, LLC members are protected from liabilities of the company.
The question which you have to ask yourself is whether there is foreseeable liability in conducting the business. In other words, is it possible a substantial liability could arise? Even with insurance, there are many policy exclusions. Without an LLC, a substantial judgment could far exceed the policy limit, leaving an unprotected business owner personally liable for the balance.
No. However, you are taking great risk by not allowing your LLC to be prepared by an experienced legal professional. It is critical that the company be formed properly or it will be worthless if there is a lawsuit. And there have been significant changes in the California LLC law since January 1, 2014. Online software and document filing services owe no duty to their customers to make sure the proper documents are executed, or to ensure that the company is formed or operated correctly, or to notify you in the future of critical legal developments or changes in the law.
With few exceptions, a multi-member LLC is taxed as a partnership and requires the annual filing of a Federal Form 1065 partnership return and a California Form 568 return. If the LLC is owned by only one member, a husband and wife, or a living trust, then usually no separate federal return is required and only the state 568 form is necessary. The annual $800 state LLC/corporation tax is due with the tax return on April 15. In limited circumstances, it may be favorable to elect S-Corporation treatment for the LLC — particularly to avoid the gross receipts tax imposed on LLCs earning over $250,000 in gross annual receipts.
No. However, it is critical that the proper paperwork be prepared correctly. Failure to properly execute the correct paperwork and carefully utilize the narrow exemptions will result in your property being reassessed, which can be extremely difficult and expensive to reverse. This risk alone should discourage the use of an online service or paralegal.
A living trust can hold ownership interest of an LLC, so that the LLC and its assets will avoid probate. The LLC and living trust work together to simultaneously protect your assets from lawsuit liability and preserve your assets from probate, estate taxes, and court control. They can be created at the same time or independently, and both can be modified or dissolved at any time by the owner.
In California, an LLC can be formed to conduct nearly all types of business, except those requiring a professional license. For example, a real estate broker, medical doctor, and general contractor may not utilize an LLC according to California law, but may operate as a corporation. Update: The Contractors State License Board has finally given approval for the licensing of LLCs, as well as Corporations, to act as general contractors.
The principal drawback of a typical C-corporation is double taxation — first on the corporation's profits, and then on the shareholder's profits. The owners of an S-Corporation, on the other hand, are taxed only once, like a partnership, while being afforded the same liability protections of the traditional corporate status. S-Corps are ideal for General Contractors, Real Estate Brokers, and other licensed professions where an LLC may not be utilized. In many instances, the LLC is preferable to both the C-Corp and the S-Corp. The LLC is particularly attractive for real estate investments. Unlike a C-Corporation, the LLC's profits are taxed only once. LLCs do not require annual meetings or corporate minutes.
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