A revocable living trust is an invaluable estate planning tool for both spelling out who will receive your property while also avoiding the scourge of the probate process. However, if a revocable living trust is not properly funded, it may end up being essentially useless. This begs the question, “What does proper funding of a revocable trust entail and how do I know if this was done for my trust?”
Funding a revocable trust means transferring legal title of the asset into the name of the trust. Depending on the character of the asset this will take a variety of different forms. I will discuss a few different common asset types and how to ensure that they are properly transferred into your living trust.
This month I am going to talk a little more about the office of trustee. While some people are familiar with the concept of a trust, many do not understand the role of a trustee or the duties that accompany the position.
Becoming a trustee
First, some background about becoming a trustee. Although named as a trustee or co-trustee, a person does not automatically become a trustee by law. A person may either accept or reject the position of trustee. A named trustee or successor trustee accepts the position by either signing the trust document, signing a separate written acceptance, or by knowingly exercising powers or performing duties under the trust instrument. Once a person accepts the position of trustee, they owe certain duties to the current beneficiaries of the trust.
A trust is used to keep your home and other assets safe from probate and distribute your non-tax-deferred assets. Your 401(k) distribution on the other hand is governed by the beneficiary form you probably filled out years ago when setting up your retirement plan.
In California, even if you have a will and/or a trust, the beneficiary designation form still controls who receives your 401(k) when you die. While your most recent estate planning documents may distribute your assets in one way, an outdated 401(k) beneficiary form could send a substantial amount of your assets to someone whom you no longer wish to leave property.
One area of the California estate planning world that does not get much attention these days is Estate Taxation. Although currently estate taxation does not affect a large portion of the population it is still good to know the basics.
California State Estate Tax
As many of my clients are, you may be surprised to learn that California does not have a state level estate tax like many other states. New York, for example has a top state estate tax of sixteen percent for any assets over a certain exclusion amount. I do not want to jinx the current situation so I will stop talking about it now.
Holding Title to Real Estate in California as a Married Couple
When it comes to holding title to real estate in California as a married couple, there are a couple of primary considerations. The two most important of these for most people are taxes and probate. Below is a cursory coverage of these two issues.
The way in which you hold title as a married couple has serious capital gains tax consequences upon the death of the first spouse. Taking title as joint-tenants can result in a substantial taxable capital gain that would not exist if the property was held as community property or in a trust. With title as community property or in a trust, when the first spouse passes away, the capital gains “basis” is stepped up to current market value when the property passes to the surviving spouse. If the surviving spouse sells the next day, their capital gain is zero.