Articles

Living Trust Basics

By: Owen Chen

Updated: March 29, 2022

Disclaimer:

I am not a lawyer. This article is general information and not legal advice. Consult a qualified legal professional for your specific situation. No liability is assumed for any consequences resulting from using this information.

Introduction:

Due to cultural reasons, many Chinese people avoid discussing wills, death, and posthumous arrangements. However, trusts, like car insurance and health insurance, serve the same purpose: they are there just in case.

Who should set up a trust?

People who have real estate, investments, businesses, property, or children should set up a trust.

How to set up a trust?

Generally speaking, there are three ways to set up a trust:

• Hiring a lawyer: This can be expensive.

• DIY: Some websites offer steps for "DIY" trusts, such as LegalZoom and LawDepot.

• Company Legal Plan: Hire a lawyer from the company's legal plan network, with little or no cost.

What is a trust?

A trust is a system and legal action of property management. It's a legal contract where the grantor (the person who sets up the trust) places their property into the trust. The property nominally placed into the trust belongs to the trust. The core function of a trust is property management, aiming to ensure a person's assets ultimately belong to a specific beneficiary. 

How can I make a trust legally binding?

To make your revocable living trust a binding legal document, you must sign the revocable living trust document and date it in the presence of a notary.

What is the difference between a trust and a will?

Trusts and wills are both tools for estate (property) planning.

Overall, a trust does not face scrutiny like a will does; a trust is completely confidential. The property placed in a living trust does not need to go through the complicated and lengthy court verification (probate) process after the grantor's death and can directly be transferred to your designated beneficiaries.

Both properties with a will and those without a will have to go through a time-consuming and expensive court verification (probate) process after the grantor's death. The court freezes the property, and the money in the account cannot be accessed to handle affairs. The court must go through the probate process. Moreover, all property details and family situations are made public, without any privacy. The establishment of a will must comply with local legal requirements and procedures, otherwise, the court can declare it invalid. Estate dispute cases are not uncommon. The legality and validity of a will can be challenged by the grantor's relatives, and the execution of a will needs to be confirmed and carried out by the court.

Roles in a Trust:

1. Trust Settlor (Grantor): The settlor establishes the trust and places property into it.

2. Trustee: The trustee manages and distributes the property according to the settlor's wishes. When you are still alive, you are the trustee.

   • When choosing a trustee, it's vital to ensure the person chosen is honest, reliable, trustworthy, and willing to act as your executor. While many people typically choose a friend or close family member, opting for a lawyer, bank, or asset manager can sidestep any potential issues (though it may be more expensive).

3. Beneficiary: The beneficiary is the person who inherits the assets after the testator's death. Your beneficiaries may include your spouse, children, relatives, and friends. Please include the full names of the beneficiaries in your will to confirm their identities.

Types of Trusts:

Trusts are divided into Revocable Trusts and Irrevocable Trusts; based on their effective time, they are further divided into Living Trusts (also known as Inter-Vivos Trust) and Testamentary Trusts.

1. Irrevocable Trust: In an irrevocable trust, once you place assets into the trust and designate beneficiaries, it is permanent. The existing or future assets (such as life insurance) that you put into the trust are no longer legally yours, and you have no control over them, nor any beneficial rights. Unless you're part of a large family with substantial assets, it's not recommended to establish an irrevocable trust. When you own an irrevocable trust, you need an Employer Identification Number (EIN), and you must file taxes. One advantage of an irrevocable trust is that it may reduce your estate taxes.

2. Revocable Trust/Revocable Living Trust: A common type of living trust is a revocable trust. The settlor retains full control and rights. The trust can be revoked or beneficiaries can be changed at any time. Revocable trusts don't offer substantial tax savings, nor do they provide asset protection. For revocable trusts, you can use the Social Security Number of the settlor.

3. Testamentary Trust: After the death of the settlor, the assets in the living trust begin the process of becoming part of the testamentary trust. According to its nature, it's divided into three types, namely A, B, C Trusts, suitable for estate planning.

Pour-Over Will:

A Pour-Over Will is a legal document that ensures a person's remaining assets automatically transfer into a previously established trust upon their death.

Any assets omitted from your Revocable Living Trust will become part of (poured into) your Revocable Living Trust after your death. These assets will first go through a probate process before being transferred into the trust. Then, the assets will be distributed according to the rules in the trust. The will also establishes guardianship for minor children, as well as former marriages and other children.

Durable Power of Attorney:

If you are incapacitated, this document gives someone else full statutory power to sign your name on your behalf and manage your finances for all assets not belonging to your trust. Examples include IRAs, annuities, and pension plans. Since they do not belong to your trust, your beneficiaries (Beneficiary) have no right to deal with them, but a Durable Power of Attorney can. (Your Revocable Living Trust provides financial power of attorney for trust-owned assets to your successor trustee or surviving spouse.)

Advance Health Care Directive:

Your end-of-life medical wishes (Advance Healthcare Directive), such as not wanting to undergo traumatic resuscitation or live in a vegetative state, will guide the final medical decisions made by your family and doctors.

1. Health Care Power Of Attorney: This is applicable for any situation in which you cannot make healthcare decisions for yourself. It becomes effective when you lose consciousness or are unable to make your own healthcare decisions, not only when you are terminally ill. Without it, nobody has been designated as your healthcare agent, and decisions will be made on your behalf by the court.

2. Directive To Physicians: This document, also known as a Living Will, allows you to make decisions about providing, withholding, or withdrawing treatment to sustain life and provide pain relief.

Limitations in Regard to Taxation:

Revocable Trusts offer little tax-saving functionality or asset protection. You can use the settlor's Social Security Number.

One advantage of an Irrevocable Trust is that it might reduce your estate tax. When you own an Irrevocable Trust, you need an Employer Identification Number (EIN). You must file a tax return (Form 1041).

Estate Taxes and Gift Taxes:

In US immigration law, foreigners in the US can be categorized into three statuses: immigrant, non-immigrant, and undocumented immigrant. In tax law, foreigners in the US are only divided into two categories: resident aliens and non-resident aliens. The US estate tax threshold applies to US citizens and permanent residents.

Property inherited between spouses is not subject to any estate tax. If the estate is donated to a government-certified charity, the recipient charity can also be tax-exempt.

• Federal Estate Tax: The federal estate tax applies to estates worth $11.7 million and above in 2021 and will rise to $12.06 million in 2022. Married couples can avoid paying estate tax for up to $24.06 million upon both their deaths. The maximum tax rate for estates exceeding this amount is 40%.

• Federal Gift Tax: In 2021, the federal gift tax exempts $15,000 per recipient per year, which will increase to $16,000 in 2022.

• California Estate Tax: Many US states, such as New York, Connecticut, and Washington D.C., double-tax the estate of their residents. California is one of the 38 states without an estate tax. Beneficiaries and heirs can inherit property tax-free. They also don't need to pay income tax on the property, as inherited property is not considered ordinary income.

• California Gift Tax: California also does not have a gift tax.

• Non-Resident Alien Estate Tax: The estate tax threshold for non-resident aliens who buy property in the US is $60,000. A century later, if they want to leave their US property to their children, their children will face hefty estate taxes.