The Advantages of a Living Trust for a Single California Resident
Even without children or a spouse, there are still reasons for a single person who lives in California to establish a living trust. While their trusts don't enjoy the same tax benefits of one established by a couple, their estate can still avoid probate. If a single person has a living trust and becomes incapacitated, the trust helps avoid a conservatorship of the estate.
The federal government has established the United States Estate Tax, often referred to as a "death tax," which is based on the assets someone owns at the time of his or her death. While married couples may pass any amount of assets to a surviving spouse who is a US citizen, all assets passed to a qualified charity by anyone are also exempt. Amounts exceeding the exemption are subject to the estate tax at a rate of up to 55%.
Unlike a living trust established by a couple, the federal government taxes all of the assets in a trust created by a single person. A living trust that was established by a single person has no affect on the estate tax, and neither eliminates or reduces those taxes. While all assets owned by a single person, both inside and outside the trust, are subject to federal taxes, the State of California has abolished the California Inheritance Tax.
The legal proceeding where a will is validated and where the person or persons who are to receive the assets are designated is known as probate. No one welcomes this process, which can take nine to eighteen months to resolve. In probate, the court will appoint an executor to administer the estate and handle its assets. Both this executor and the attorney will receive a fee based on a percentage of the assets. The fees are set by law and typically run 5-6% of the estate's assets.
Probate can be avoided by holding the assets in joint tenancy, which allows the assets to pass to the survivor without any legal procedures. While this is effective for husband and wife, difficulties can arise when assets are put into joint tenancy with other people, including with children. Any assets held in joint tenancy are available to creditors if any member of the joint tenancy defaults on his or her debts, files bankruptcy, or becomes the defendant in a lawsuit. Assets, however, may be added as a gift to existing joint tenancy accounts.
Probate can also be avoided by establishing a living trust, even if the trust is created by a single person. The trust specifies in a written agreement a trustee who will receive the assets, so there's no need for the probate process. The assets will be controlled by the trustee in accordance with the written trust document until the trust terminates. The trust may continue even after the person who established it dies, and a new trustee is named if the trustee dies. When the creator of a living trust dies, probate and its associated problems are entirely avoided.
Another legal proceeding, a conservatorship, frequently occurs when someone becomes incapacitated and when all of that person's assets are held in his or her name. Conservatorship is much like probate with the appointment of a trustee and associated court and attorney costs, but isn't triggered by death.
Conservatorship is eliminated by a living trust, just like probate. In the event of incapacity, the court does not get involved since the trust's assets are managed by a trustee. A new trustee, named in the trust, takes over if the trustee becomes incapacitated.