California Living Trust Guide

What Is a Revocable Living Trust?

A revocable living trust is a legal document that creates a separate legal entity (the trust) to hold your assets during your lifetime and distribute them to your beneficiaries after your death. "Revocable" means you can change or revoke the trust at any time during your lifetime. "Living" means it is created while you are alive (as opposed to a testamentary trust, which is created by a will). You are typically the trustee (manager) of your own trust during your lifetime, so you maintain full control of your assets.

How a Living Trust Works

You create the trust document, which names you as the initial trustee and beneficiary, names a successor trustee to take over if you become incapacitated or die, and specifies how assets are to be distributed after your death. You then transfer your assets into the trust by retitling them in the trust's name. During your lifetime, you manage the trust assets just as you did before — the trust is transparent for tax purposes and you report all trust income on your personal return. At your death, the successor trustee distributes assets to beneficiaries according to the trust terms, without probate.

Funding the Trust

The most common mistake in trust planning is creating the trust but failing to fund it. An unfunded trust is useless — assets not titled in the trust will still go through probate. KDA works with clients to ensure all significant assets are properly transferred into the trust: real estate (requires a new deed), bank and investment accounts (requires updating account titling), business interests (requires updating operating agreements or stock certificates), and vehicles (requires DMV retitling). Assets with designated beneficiaries (retirement accounts, life insurance) generally do not go into the trust — they pass directly to named beneficiaries.

Incapacity Planning

A living trust provides seamless management of your assets if you become incapacitated. Your successor trustee takes over management of trust assets immediately, without court involvement. This is a significant advantage over a will, which only takes effect at death. For assets outside the trust, a durable power of attorney is needed to authorize someone to manage those assets during incapacity. KDA recommends a comprehensive incapacity plan that includes the trust, a durable power of attorney, and an advance healthcare directive.

California Living Trust Specifics

California is a community property state. A married couple's living trust must properly characterize assets as community property or separate property to preserve the step-up in basis on both halves of community property at the first spouse's death. California also has specific rules for transferring real estate into a trust — the transfer must be structured correctly to avoid triggering property tax reassessment under Proposition 19. KDA coordinates with estate planning attorneys to ensure California-specific issues are properly addressed.

What a Living Trust Cannot Do

A revocable living trust cannot: reduce estate taxes (the assets are still in your taxable estate), protect assets from creditors (revocable trusts offer no creditor protection), name guardians for minor children (only a will can do this), or hold retirement accounts (IRAs and 401(k)s should generally not be titled in a trust). For these purposes, additional planning tools are needed — irrevocable trusts for asset protection and estate tax reduction, a will for guardian designation, and beneficiary designations for retirement accounts.