Revocable Living Trust

This post is for knowledge sharing only. It is not intended to be tax or legal advice.

I used to believe that trusts were only for the wealthy. But recently, I learned that there is at least one trust that ordinary families, especially those living in California, should establish for seamless family wealth inheritance: a revocable living trust.

One may need to find a lawyer on the estate planning to discuss and set up a revocable living trust. But it is still good to learn some background knowledge before talking to a lawyer.  

Why revocable living trust

A revocable living trust, as implied by its name, allows the grantor (who created the trust) to make changes or completely revoke the trust while they are still alive. This means the grantor maintains full control over the assets placed within the trust. As a result, assets held in a revocable living trust are NOT protected from creditors.

Avoid Probate

The primary reason to establish a revocable living trust is to avoid probate. Probate is a court-supervised procedure validating a will and administering an estate, which has the following drawbacks:

  • The probate process often takes months or even years, preventing beneficiaries from timely access to their inheritances.
  • Total probate costs range from 4-7% of estate assets on average. See this article for the details of probate fees in California.
  • Probate is a public process and thus the details of the estate become part of the public record.
Note: In California, a will does NOT prevent from probate.

Protect privacy

By bypassing the probate process, the details of the trust, including assets, beneficiaries and distribution instructions, remain confidential. 

Also note that when buying real estate through a trust, the property is titled in the name of the trust, which keeps the ownership details private.

Avoid Conservatorship

If the grantor becomes incapacitated, the successor trustee can seamlessly take over the management of trust assets.

In the absence of a trust, if someone becomes incapacitated, a court may appoint a conservator to manage their financial and personal affairs. Note that a will does NOT prevent from a conservatorship since it only takes effective after testator death.

Avoid California Medi-Cal recovery 

California Medi-Cal Estate Recovery Program states that "For Medi-Cal members who died on or after January 1, 2017, repayment will be limited only to estate assets subject to probate that were owned by the deceased beneficiary at the time of death". This means assets in a revocable living trust is shielded from Medi-Cal recovery.

Fund a Revocable Living Trust

After working with a lawyer for the paperwork, remember to transfer the assets into the trust. Missing this step is one of the biggest mistakes that people make when setting up a trust. Simply listing the assets in the paperwork is far from enough.

Real Estate

The steps to transfer a house into a revocable living trust:
  1. Have a talk with the lender before transferring a mortgaged house into the trust.
  2. Make, sign and record a deed for the transfer.
  3. Fill and record the county forms (Preliminary Change of Ownership Report in California) along with the deed. This is important for exclusion from reassessment.
  4. Add the trust as "additional insured" to the homeowner insurance as well as umbrella insurance.
Remarks:
  • To refinance a house in a revocable living trust, one need to first take the house out of the trust, and then put it back after closing (important). Be careful not to trigger reassessment.
  • There should also be cashes in the trust besides the real estate reserved for the beneficiary to pay the mortgage.

Non-Retirement Accounts

For each non-retirement financial accounts including bank accounts, CD and taxable investment accounts, work with the provider:
  • Transfer the account ownership to the trust. 
  • Or open new trust accounts and transfer assets from individual accounts to trust accounts.

401K, IRA and HSA

Unlike non-retirement accounts, it is NOT a good idea to put retirement accounts and HSA into a revocable living trust:
  • Changing the owner of 401K, IRA and HSA is considered as a 100% withdrawal, which has tax consequences.
  • 401K, IRA and HSA do not go through probate if designating "correct" beneficiaries.

So instead, it is better to directly designate the contingent beneficiaries of 401K, IRA and HSA to be the same beneficiaries of the trust. (The spouse is the primary beneficiary.) 

If the beneficiaries are minors, one may designate the contingent beneficiaries of 401K, IRA and HSA to be a trust. I am still learning the consequences when designating a trust as the contingent beneficiary.

More Tips

There are some more tips I find online on setting up a revocable living trust:

  • Name the revocable living trust:
    • It is better not to put the word "revocable" in the title of the trust, in case someday in future one may want to make the trust to irrevocable.
    • It is better not to put your names in the title of the trust for privacy protection.
  • Name the trustee:
    • You and your spouse should be trustee.
    • Name someone else as the successor trustee.
  • Do not forget other documents including a pour-over will and a power of attorney.

Location: 美国加利福尼亚帕罗奥图

Comments

Post a Comment

Popular posts from this blog

529 Plan

This post is for knowledge sharing only. It is not intended to be investment or tax advice. 529 Plans are tax-advantaged accounts specific for education saving: Contribution are made with after-tax dollars. Growth within the account is tax-free. Withdraw for qualified education expenses is also tax free. Roth IRA First 529 Plans are very similar to Roth IRA . But Roth IRA withdraw under  the 5-year rule  is tax free for any purpose. Therefore, unless for the state tax deduction in some states, it is always better to max out Roth IRA first (through backdoor and mega backdoor  for high income earners) before funding a 529 plan. Note: there is NO California state tax deduction for any 529 plan. 529 or Not? Here are some considerations in reality before funding a 529 plan: What if no qualified education expenses In the worst case that there will be no qualified education expenses, you can still take money out for non-qualified expenses, but you have to pay: federal income tax + 10% federa
Read more

How to offset W2 tax

This post is for knowledge sharing only. It is not intended to be tax or investment advice. 1. Contribute to pre-tax 401K and HSA As well known, pre-tax 401K and health saving account (HSA) are the only a few tax shelters for W2 workers.  2. Tax-loss harvesting If your total capital losses exceed your capital gains in a tax year, you can deduct up to \$3,000 (married filing jointly) from your ordinary income. If your losses are more than $3,000, you can carry over the remaining amount to future years, continuing to offset your income until all the losses are used up. A popular method to generate these deductible losses is  tax-loss harvesting . This involves selling a security at a loss to offset gains or reduce ordinary income, and optionally purchasing a similar, but not "substantially identical", security to avoid missing out on the market. However, be aware of the  wash-sale rule , which disallows claiming a loss if you buy the same or a substantially identical security
Read more

Health Saving Account (HSA)

This post is for knowledge sharing only. It is not intended to be investment or tax advice. Health saving account (HSA) is another tax-free investment account that is even better than Roth IRA . HSA offers three tax advantages: The contribution is tax deductible. Investment grows tax-free. Finally, withdrawals for qualified medical expenses are also tax-free. To fully utilizes the advantages, it is better to let the money stay and grow in HSA as long as possible. To achieve this, Do NOT use HSA money to cover the current medical expenses. Instead, save the receipts and ask for reimbursement in future year of withdrawal. Remarks: HSA does NOT have any CA state tax benefits. Both HSA enrollees and their spouse are NOT eligible to contribute to the general   flexible spending account (FSA) . One can have a HSA and  limited purpose FSA (LPFSA) at the same time. Unlike the general FSA, LPFSA can only cover vision and dental expenses. High Deduction v.s. HSA Saving To be eligible for HSA,
Read more