Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and More FAQ (Part 2)

This is part 2 of the blog series entitled “Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and More FAQ” discussing frequently asked questions about living trusts, probate, taxes and more.

Doesn’t joint ownership avoid probate?
Not really. Using joint ownership usually just postpones probate. With most jointly owned assets, when one owner dies, full ownership does transfer to the surviving owner without probate. But if that owner dies without adding a new joint owner, or if both owners die at the same time, the asset must be probated before it can go to the heirs.

Watch out for other problems. When you add a co-owner, you lose control. Your chances of being named in a lawsuit and of losing the asset to a creditor are increased. There could be gift and/or income tax problems. And since a will does not control most jointly owned assets, you could disinherit your family.

With some assets, especially real estate, all owners must sign to sell or refinance. So if a co-owner becomes incapacitated, you could find yourself with a new “co-owner” — the court–even if the incapacitated owner is your spouse.

Why would the court get involved at incapacity?
If you can’t conduct business due to mental or physical incapacity (Alzheimer’s, stroke, heart attack, etc.), only a court appointee can sign for you – even if you have a will. (Remember, a will only goes into effect after you die.)

Once the court gets involved, it usually stays involved until you recover or die. The court, not your family, controls how your assets are used to care for you. This public process can be expensive, embarrassing, time consuming and difficult to end if you recover. And it does not replace probate at death – your family could have to go through the court system twice!

Does a durable power of attorney prevent the court’s involvement at incapacity?
A durable power of attorney lets you name someone to manage your financial affairs if you are unable to do so. However, many financial institutions will not honor one unless it is on their form. And, if accepted, it may work too well — giving someone a “blank check” to do whatever he/she wants with your assets. It can be very effective when used with a living trust, but risky when used alone.
What is a living trust?
A living trust is a legal document that, just like a will, contains your instructions for what you want to happen to your assets when you die. But, unlike a will, a living trust avoids probate at death, can control all of your assets, and prevents the court from controlling your assets if you become incapacitated.
How does a living trust avoid probate and prevent court control of assets at incapacity?
When you set up a living trust, you transfer assets from your name to the name of your trust, which you control — such as from “Bob and Sue Smith, husband and wife” to “Bob and Sue Smith, trustees under trust dated (date of trust).”

Legally you no longer own anything (don’t panic: everything now belongs to your trust), so there is nothing for the courts to control when you die or become incapacitated. The concept is very simple, but this is what keeps you and your family out of the courts.

For additional questions about trust law, speak with our experienced Estate Planning Lawyer in Los Angeles today.

Continue to: Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and More FAQ (Part 3)

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