California Revocable Living Trust “Ultimate Guide”

Revocable California Living Trust

A revocable living trust can be an important component of an estate plan for California residents. Also known as a revocable trust or inter vivos trust, a revocable living trust allows you to transfer ownership of your assets to the trust during your lifetime, retain control over those assets as the trustee, and ensure your assets avoid probate upon your death.

Unlike an irrevocable trust, a revocable living trust can be changed or terminated at any time, giving you flexibility. However, upon your death or incapacity, the terms become irrevocable.

A revocable living trust is often used in conjunction with a last will and testament which controls assets not included in the trust.

Do I need a living trust in California?

Whether you need a living trust depends on your individual circumstances and estate planning goals. Here are some reasons why a California revocable living trust may be appropriate:

• Avoid probate. Assets transferred to a revocable living trust do not pass through probate, which can save time, money, and privacy compared to a will. In California, probate fees can range from 4% to 7% of the value of the estate.
• Avoid conservatorship. If you become incapacitated, a living trust allows your successor trustee to manage your financial affairs and assets outside of court supervision. This avoids the need for a court-appointed conservator.
• Control of assets after death. The trust contains instructions for distributing your assets upon death. This avoids disputes among beneficiaries.
• Privacy. Unlike probate, a living trust allows you to transfer assets privately upon death. The terms of your trust remain private.
• Out-of-state real estate. If you own real estate outside California, a living trust can avoid multiple probate proceedings in different states.

On the other hand, a living trust may not be necessary if your estate is under California’s $166,250 probate threshold or if your assets are only non-probate assets like life insurance and retirement accounts with properly named beneficiaries.

An experienced estate planning attorney can advise you on whether a living trust is appropriate.

Choose a trustee

Choosing a competent trustee is one of the most important decisions when creating a living trust.

Here are some tips for selecting a trustee:

• Name yourself as the initial trustee so you maintain control during your lifetime.
• Choose a responsible successor trustee to manage the trust when you can no longer serve due to death, illness, or incapacity. This could be a spouse, adult child, relative, friend, trust company, or bank trust department.
• Consider naming co-trustees to serve together. This provides checks and balances.
• The trustee should be financially responsible and understand trust administration, tax rules, and estate settlement. An institutional trustee has professional expertise.
• Choose a successor trustee who lives in or near California, where your real estate is located. Out-of-state trustees may need to hire professionals to help administer your California assets.
• Discuss the position with the chosen trustee to ensure they are willing and able to serve. The role involves time, responsibility, record-keeping, and filing tax returns.
• Build in trustee succession throughout the life of the trust. Name backup successor trustees in case your first choice is unable to serve.

Selecting the right trustee is critical to ensure proper management and distribution of your trust assets. Consult with an experienced estate planning attorney for guidance.

The Role of Successor Trustees in a Living Trust

Naming one or more successor trustees is an important part of creating a revocable living trust. Here is an overview of the successor trustee’s role:

• Step into the settlor’s shoes. When the settlor (the person who creates the trust) can no longer serve as trustee due to incapacity or death, the successor trustee steps in to manage the trust. They assume all responsibilities of the settlor/original trustee.
• Follow the trust instructions. Successor trustees must follow the directions for trust administration and asset distribution contained in the trust document. This includes discretionary instructions and mandatory instructions.
• Manage assets. Successor trustees take legal ownership of trust assets and manage investment decisions, distributions, payment of bills and taxes, real estate, record keeping, accounting, and filing tax returns.
• Make distributions. They determine when to distribute income and principal to beneficiaries according to the trust terms. This requires exercising discretion at times.
• Wrap up trust affairs. When the trust terminates, the successor trustee distributes the remaining assets to beneficiaries under the terms of the trust.
• Impartiality. Successor trustees must remain impartial when dealing with multiple beneficiaries. They should not favor one beneficiary over another.

Proper administration by a successor trustee is crucial to executing the settlor’s wishes and avoiding disputes. Thoughtful selection and preparation can lead to a smoother transition.

Living trusts and estate taxes in California

Revocable living trusts do not provide any special income or estate tax benefits on their own. However, they can play an important role in an integrated estate plan designed to minimize taxes.

Here is how living trusts interact with California and federal estate taxes:

• No California estate tax. California does not impose a state estate tax. However, estates exceeding $12.06 million in 2022 are subject to federal estate tax.
• Unlimited marital deduction. Assets transferred to a surviving spouse are not subject to estate tax under the unlimited marital deduction. Trusts can be drafted to take advantage of this deduction.
• Property tax benefits. Placing a primary residence in a living trust may provide property tax savings under California’s parent-child and grandparent-grandchild exclusion.
• Flexibility. Revocable trusts can be altered to take advantage of changing tax laws. formula clauses can be included to maximize estate tax exemptions.
• Estate tax credit shelter trusts. Married couples can establish A-B credit shelter trusts under their living trusts to utilize both spouses’ estate tax exemptions. This can effectively double the amount exempt from federal estate tax.
• Lifetime gifts. Making gifts up to the $16,000 annual exclusion during life removes assets from the taxable estate. A living trust facilitates this gifting.
• Portability. A living trust alone does not make use of the portable estate tax exemption. Portability is elected under the deceased spouse’s estate tax return.

Consult an experienced estate planning and tax attorney to craft a customized strategy that incorporates living trusts and other tools to minimize your estate taxes.

When does a Revocable Living Trust become irrevocable?

A revocable living trust only becomes irrevocable upon the occurrence of certain events, including:

• The settlor’s death. Upon the death of the settlor (creator of the trust), the trust terms become irrevocable. The named successor trustee takes over management, and assets are distributed.
• The settlor’s incapacity. If the settlor becomes incapacitated or incompetent, the successor trustee assumes control and the trust usually becomes irrevocable. However, the trust may allow the settlor to revoke it even under incapacity in certain cases.
• Resignation by the settlor. The settlor can resign as trustee, causing the trust to become irrevocable. However, the settlor usually retains the power to remove and replace trustees after resignation.
• Divorce. If spouses divorce, the trust usually directs that it be divided into two separate trusts, one for each spouse. The trusts become irrevocable as to the ex-spouse’s share.
• Delivery to beneficiaries. Once the settlor delivers property to named beneficiaries of the trust, that portion of the trust becomes irrevocable.
• Written statement. The settlor can sign a statement declaring the trust irrevocable. But this rarely occurs with a revocable living trust.
• Court order. A court can order that the trust become irrevocable under certain circumstances, such as the settlor’s incapacity. This is rare without the settlor’s consent.

Barring changes in life circumstances like these, the settlor generally retains the power to revoke or amend a revocable living trust.

Only upon the settlor’s incompetence or death does the trust become truly irrevocable.

What are the Requirements for a Revocable Living Trust in California?

Here are the key requirements for creating and funding a legally valid revocable living trust in California:

• The settlor must have capacity. The settlor (creator) must be of sound mind and have adequate capacity to execute the trust document.
• Trust terms must be legal. The trust provisions cannot violate any laws, including laws against perpetuities that limit trust duration.
• Trustee duties. The document should clearly define the trustee’s duties and powers over trust administration and asset management.
• Successor trustees. At least one successor trustee should be named in case the initial trustee is unable to continue serving.
• Residual beneficiaries. The document should identify who will receive trust assets after the settlor’s death and termination of the trust.
• Written document. All trust terms should be in writing, dated, and signed by the settlor and witnessed according to California law.
• Notarization. While not required, it is best practice to notarize the settlor’s signature on the trust document.
• Funding the trust. The settlor must formally transfer ownership of assets to the trustee by retitling them in the name of the trust. Without funding, the trust remains empty.

An experienced California estate planning attorney can help prepare a customized revocable living trust that satisfies all legal requirements.

Proper creation and administration are key to avoiding future complications.

How to create a living trust in California

Here is an overview of the steps required to create and implement an effective revocable living trust in California:

1. Consult with an attorney. Have an estate planning lawyer prepare your customized trust document, tailoring it to your goals and assets.
2. Name trustees. Designate yourself as an initial trustee, as well as one or more successor trustees to serve when you can no longer manage the trust.
3. Execute the document. Formally create the trust by signing the document in the presence of a notary public or two adult witnesses.
4. Assign assets. Transfer ownership of assets you want in the trust from your name to the name of the trust, including real estate, accounts, investments, etc.
5. File a pour-over will. Prepare and sign a will that acts as a safety net to catch any assets not transferred to the trust before death.
6. Apply for new tax IDs. Obtain a federal EIN and state tax ID number for the trust for tax and accounting purposes.
7. Administer the trust. Manage the trust assets according to the document terms while you serve as trustee. Keep thorough records.
8. Review it periodically. Update the document as needed to reflect changes in trustees, beneficiaries, assets, and tax laws.

With the help of an experienced attorney, a revocable living trust can give you control, avoid probate, and reduce taxes as part of an integrated estate plan.

Having a living trust creates peace of mind

Creating and implementing a revocable living trust offers several benefits that can provide peace of mind:

• Probate avoidance. Assets in the trust transfer privately to beneficiaries and avoid the delays and costs of probate.
• Control. As a trustee, you retain control over the assets during your lifetime. You can amend or revoke the trust terms as needed.
• No guardianship. If incapacity occurs, your successor trustee can manage assets on your behalf, avoiding the need for court-supervised guardianship.
• Protection from incapacity. The trust provides instructions for asset management if you cannot make financial decisions due to incapacity.
• Seamless transition. The trust helps assets pass smoothly to beneficiaries upon death, ensuring your inheritance wishes are followed.
• Privacy. Trusts are not public documents like wills going through probate. Your assets and distributions remain private.
• Professional trustees. Naming a bank, trust company, or financial advisor as a trustee provides professional asset management.
• Tax planning. Trusts can help reduce estate taxes when drafted as part of an integrated estate plan.

Taking the time to plan for life events and implement a living trust provides comfort knowing your affairs are in place.

Consult with an estate planning attorney to create your revocable trust.

What Can a Successor Trustee Do?

A successor trustee serves a vital role in managing a revocable living trust after the initial trustee’s resignation or death. Here are some of the main powers and duties successor trustees can exercise:

• Make investment decisions to grow, manage, and safeguard trust assets
• Pay bills, expenses, and taxes relating to the trust
• Make and oversee real estate transactions if the trust owns real property
• Manage any business interests or assets owned by the trust
• Collect income generated from trust assets and distribute it to beneficiaries
• Sell trust property and reinvest the proceeds according to the trust terms
• Pay debts, loans, claims, and creditors of the settlor’s estate
• Distribute assets to beneficiaries as directed in the trust
• File income tax returns and pay taxes owed by the trust
• Open and manage bank, investment, and retirement accounts in the name of the trust
• Keep thorough records and provide accountings to trust beneficiaries
• Defend the trust against any claims or litigation
• Terminate the trust upon conditions outlined in the trust document

A successor trustee has broad powers and discretion when administering a living trust.

However, they must always follow the settlor’s instructions in the trust document.

Consider signing your trust document in front of a notary public

While California law does not require a living trust to be notarized, having your signature notarized offers key benefits:

• Verifies identity. Notarization verifies the identity of the person signing the trust document (settlor). This prevents fraudulent creation.
• Avoids challenges. A notarized trust is much less likely to be challenged on claims you did not actually sign it or lacked proper capacity.
• Establishes date. The notary certifies the date the document was signed. This can be crucial for legal questions later.
• Substitute for witnesses. In some states, notarization can take the place of witnesses. Even if witnesses sign in California, a notary provides additional security.
• Peace of mind. Notarization provides you and your successor trustees with confidence in the validity of the trust and your wishes.
• Easier trust administration. Successor trustees typically have an easier time administering a notarized trust with fewer hassles.
• Higher level of care. Requiring notarization means you took an extra step to execute the document carefully and formally.

While not mandatory in California, taking the extra step to have your signature notarized when you sign your revocable living trust provides significant legal protections and peace of mind.

How Much Does It Cost to Create a Living Trust in California?

The cost to create a revocable living trust in California can range from $1,200-$5,000 or more depending on your unique circumstances and options chosen. Factors that affect the cost include:

• Location within California (attorney rates vary regionally)
• Complexity of your assets
• Customized options selected and trust types utilized
• Attorney’s experience and reputation
• Whether you use an estate planning lawyer or an online legal service
• Amount of time spent consulting with the attorney
• Whether your pour-over will is included
• Additional documents drafted, like powers of attorney for finances and healthcare

On average, California residents can expect to spend around $2,500 to work with an experienced estate planning attorney to create a customized living trust package.

This includes the time discussing your specific situation and wishes with your lawyer.

Additional costs are incurred to formally transfer assets into the trust.

California Living Trusts vs. Will In California

Living trusts and wills are common estate planning tools used to transfer assets upon death, but they have some key differences:

• Probate. Assets transferred by a living trust avoid probate, while assets passing under a will must go through probate.
• Privacy. Trusts are private documents while the terms of a will become public in probate court.
• Contestability. It is easier to challenge a will than a properly funded living trust.
• Control. A trust allows ongoing control of assets while alive, unlike a will which takes effect at death.
• Disability planning. A living trust outlines succession if disability occurs, while a will only works at death.
• Tax planning. Trusts allow for more customized estate tax planning than wills.
• simpler. Wills tend to cost less and can be simpler if the estate is small and straightforward.
• Maintenance. Trusts require more lifetime monitoring and asset transfers compared to the one-time signing of a will.

Both can be useful tools and often they are used together as part of a complete estate plan.

Understanding the tradeoffs helps determine if a living trust is appropriate.

Contact a Revocable Living Trust Contest Lawyer in California

What are the Pros and Cons of Revocable Living Trusts?

Revocable living trusts have advantages and disadvantages to consider when creating an estate plan:

Pros

• Avoid probate for most assets, saving time and money
• Preserve privacy since trusts are not public records like wills in probate
• Allow continued control over assets as trustee during your lifetime
• Spell out wishes for asset distribution upon death outside of probate court
• Avoid or minimize estate taxes if properly structured
• Provide instructions for property management if you become incapacitated
• Difficult to contest with built-in settlement provisions
• Can manage real estate and business interests held in trust
• Professional trustees like banks can provide asset management

Cons

• Higher upfront costs to create compared to a basic will
• Additional work is required to transfer assets into the trust
• Complexity requires a lawyer, while wills can be DIY
• Must be monitored and kept updated if changes occur
• Lose control if you become incapacitated and successor trustees act
• Lack of customization with online templates
• Difficult to change tax planning after assets are transferred to irrevocable trust
• Disputes can still arise over successor trustee selection or distributions

An estate planning attorney can help weigh the pros and cons of your situation to decide if a living trust suits your needs.

The Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) doubled the federal estate, gift, and generation-skipping transfer (GST) tax exemption amounts from about $5.5 million to about $11.4 million per person, indexed for inflation. This change provides high-net-worth individuals with significant tax planning opportunities before the increased exemption sunsets in 2026.

Take stock of your assets

One of the first steps in estate planning following the TCJA is to take stock of your assets and determine if your estate will exceed the doubled exemption amount before it reverts back to pre-2018 levels. High net worth individuals with assets over $11.4 million per person or $22.8 million per married couple are wise to explore planning strategies like spousal lifetime access trusts (SLATs) to lock in the higher exemption.

Timeline for the Sunset

Under current law, the doubled federal estate, gift, and GST tax exemption is scheduled to sunset after 2025. That means as of January 1, 2026, the exemptions will return to their pre-TCJA amounts of about $5.5 million per person indexed for inflation. Any benefits from the increased exemptions could evaporate if Congress takes no further action. Advance planning before 2026 is critical.

Revisiting Estate Plans Regularly

In the wake of the TCJA, it is important for high-net-worth individuals to revisit their current estate plans to see if any changes are warranted in light of the increased exemptions before 2026. Consulting with an experienced estate planning attorney and tax advisor can help analyze whether techniques like SLATs, spousal access trusts, gifting, or switches to grantor trusts could now be beneficial given the TCJA provisions. Estate plans crafted before 2018 may need updating to maximize the new tax rules.

Irrevocable Trusts

For high-net-worth individuals, maximizing lifetime gifts up to the doubled gift tax exemption can allow assets to appreciate outside of the taxable estate. Gifting to an irrevocable trust can freeze asset values and effectively leverage the increased exemption amounts even after the sunset occurs if properly structured. Consulting with an estate planning lawyer is key before taking any action given the irrevocable nature of these trusts.

Understanding the Estate Tax Exemption Sunset

The Tax Cuts and Jobs Act doubled the federal estate tax exemption to about $11.7 million per person in 2021, indexed for inflation. However, this increased exemption is currently set to sunset on January 1, 2026. At that time, the exemption is scheduled to revert to pre-2018 levels of about $5.5 million per person, indexed for inflation.

This means the window for leveraging the higher exemption will close at the end of 2025. Once the sunset takes effect, any portion of an estate over the reduced exemption can face a 40% federal estate tax. Advance planning before the reversion is key for high-net-worth individuals.

Charitable Giving and Estate Taxes

The increased federal estate tax exemption provides an opportunity for high-net-worth individuals to engage in tax-efficient charitable giving as part of their estate plan. Here are some strategies to consider before the exemption reverts to pre-2018 levels:

• Make large charitable donations up to the higher gift tax exemption amount to remove assets from your taxable estate.
• Donate appreciated assets like stocks and real estate to receive an income tax deduction for the full fair market value while avoiding capital gains tax.
• Use charitable trusts like charitable remainder trusts (CRTs) to generate fixed income streams and future charitable donations.
• Name charities as beneficiaries on retirement accounts and life insurance policies to avoid income taxes at death.
• Create a donor-advised fund for ongoing charitable giving and name the fund as a beneficiary in your will or trust.

Consultation with experienced estate planning, tax, and philanthropic advisors is important before implementing charitable giving strategies.

Donor-Advised Funds

Donor-advised funds can provide an estate planning tool to engage in significant charitable giving before the increased estate tax exemption sunsets. Here is how they can be utilized:

• Make a large donation to a donor-advised fund up to the higher gift tax exemption amount. This removes assets from your taxable estate.
• Recommend grants and distributions from your fund over time to support your favorite charities and causes.
• Name your donor-advised fund as a beneficiary in your will or living trust to receive part of your estate upon death.
• Make ongoing contributions to your fund during life to maximize the use of the higher exemptions before 2026.
• Potential income tax deduction when contributions are made to the fund during life depending on legal structure.

Consult with financial and legal advisors to implement donor-advised fund planning properly. Thoughtful planning and the creation of a timeline for advising grants from your fund assets is key.

Will the annual gift tax exclusion change in 2026?

The scheduled sunset of the increased estate tax exemption under the Tax Cuts and Jobs Act does not impact the annual gift tax exclusion. The annual exclusion amount, which allows you to make gifts up to a certain dollar limit per year without eating into your lifetime exemption, remains unaffected.

For 2023, the annual exclusion amount is $17,000 per donor, per recipient. That means a married couple can gift up to $34,000 to each donee this year without filing a gift tax return. The annual exclusion is indexed for inflation in $1,000 increments and is expected to continue rising each year.

Unless Congress makes further changes, the annual gift tax exclusion policy will remain the same before and after 2026. This provides an ongoing opportunity for annual gifting as part of estate tax planning.

What is the generation-skipping tax exemption for 2026?

The generation-skipping transfer (GST) tax exemption is scheduled to revert back to pre-tax Cuts and Jobs Act levels of around $5.5 million (indexed for inflation) in 2026 when the increased estate tax exemption expires.

Any irrevocable dynasty trusts funded between 2018 and 2025 with amounts greater than the lowered GST exemption may lose their exempt status in 2026 and beyond. This could subject trust distributions to grandchildren and lower generations to the GST tax.

Strategies like using the higher GST exemption amounts for estate equalization among children rather than long-term dynasty trusts can avoid loss of exempt status after sunset. Consultation with an experienced estate planning attorney is important when crafting plans to utilize the increased GST exemption before 2026.

What will the federal estate tax exemption be in 2025?

Under current law, the federal estate tax exemption for 2025 is projected to be around $12.92 million per person, indexed for inflation from 2022. The exemption has been temporarily doubled from 2018 through 2025 under the Tax Cuts and Jobs Act.

However, the increased exemption is scheduled to sunset on January 1, 2026, reverting the exemption back to around $6.8 million per person in 2026, indexed for inflation.

As a result, the federal estate tax exemption is projected to be significantly higher in 2025 compared to 2026 – nearly double. Advance estate planning before the sunset is important for high-net-worth individuals who could be impacted. An experienced estate planning attorney can advise on strategies to implement ahead of the 2026 reversion.

What is the federal estate exemption for 2023?

For 2023, the federal estate tax exemption is $12.92 million per individual, indexed for inflation from the 2022 exemption amount. The exemption doubled to over $11 million per person under the Tax Cuts and Jobs Act starting in 2018. However, this increased exemption is currently scheduled to sunset on January 1, 2026.

At that point, the exemption is slated to revert to pre-2018 levels of around $6.8 million per individual in 2026, indexed for inflation. This means the window to take advantage of the historically high $12.92 million exemption will close at the end of 2025.

Estates over the lowered exemption in 2026 could face a 40% federal estate tax. Consulting with an experienced estate planning attorney to implement wealth transfer and tax planning strategies before sunset is advisable for high-net-worth individuals.

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