Living (Inter Vivos) Trusts; Revocable and Irrevocable Trusts

A trust is essentially a contract whereby you transfer ownership of assets to a trustee (essentially the manager of the trust), who then manages the assets received for those named in the trust (the beneficiaries).  With most living (inter vivos) trusts the party creating the trust (known as the “settlor”) also serves as the trustee for as long as they are able to do so.  Similarly, the party creating the trust is generally the sole beneficiary during his or her lifetime.  An inter vivos trust is an effective way to provide lifetime and after-death property management and estate planning.

Trusts can be revocable or irrevocable. The revocable trust can be amended or discontinued at any time. An irrevocable trust, on the other hand, cannot be modified or discontinued except to the limited extent provided in the trust instrument, by the unanimous consent of the settlor and all beneficiaries, or by court order.  Irrevocable trusts are much less common than revocable trusts, and are typically used to pass a particular asset (such as a life insurance policy or residence) to the settlor’s intended beneficiaries in a tax favorable manner.

In addition to eliminating the need for probate proceedings for all assets that have been properly transferred to the trust, the creation of a trust also can avoid the need for a conservatorship.  A conservatorship is often needed when an individual can no longer manage his or her financial affairs.  A conservator is appointed by a court and given the power to manage the incapacitated individual’s financial affairs.  A conservator can also make decisions concerning an impaired individual’s living arrangements.  In that an inter vivos trust designates a successor trustee who is to manage the trust for the benefit of the settlor upon the settlor’s becoming incapacitated, and a durable power of attorney for health care decisions (commonly known as an Advance Health Care Directive) nominates a person to make medical decisions for an incapacitated individual, conservatorships are rarely necessary where the individual in need previously had a comprehensive estate plan prepared.

For married couples with estates subject to the federal estate tax, a living trust can reduce or eliminate federal estate taxes by setting up Credit Shelter (Bypass) Trusts, Disclaimer Trusts, and/or Marital (QTIP) Trusts at the time of the first death.  The goal is to be able to utilize both spouses’ ability to pass the maximum amount that they can without the imposition of federal estate tax. California does not impose a separate estate or inheritance tax, so California residents need only concern themselves with the federal estate tax.