A legal concept referred to as the “rule against perpetuities” prevents a trust from remaining active indefinitely. California law requires a trust to terminate within 90 years or no later than 21 years after the death of an individual alive at the time the trust was created.
Once assets are placed in an irrevocable trust, you no longer have control over them, and they won't be included in your Medicaid eligibility determination after five years. It's important to plan well in advance, as the 5-year look-back rule still applies.
Parents and other family members who want to pass on assets during their lifetimes may be tempted to gift the assets. Although setting up an irrevocable trust lacks the simplicity of giving a gift, it may be a better way to preserve assets for the future.
One of the biggest mistakes parents make when setting up a trust fund is choosing the wrong trustee to oversee and manage the trust. This crucial decision can open the door to potential theft, mismanagement of assets, and family conflict that derails your child's financial future.
There is no Ideal Time to Consider a Living Trust
Unfortunately, there is no real answer to the “right time” to create a living trust because it is not solely based on your age. Instead, wealthier people with expensive assets, regardless of age, should consider one of these documents.
A trust can remain open for up to 21 years after the death of anyone living at the time of the trust's creation, but that is not common procedure. Most trusts are settled when the grantor dies, and the successor trustee distributes the assets as quickly as possible.
At the end of the payment term, the remainder of the trust passes to 1 or more qualified U.S. charitable organizations. The remainder donated to charity must be at least 10% of the initial net fair market value of all property placed in the trust.
And so the trustee of a trust, whether it's revocable or irrevocable, can use trust funds to pay for nursing home care for a senior. Now, that doesn't mean that the nursing home itself can access the funds that are held in an irrevocable trust. It's always the responsibility of the trustee to manage those assets.
Rich people frequently place their homes and other financial assets in trusts to reduce taxes and give their wealth to their beneficiaries. They may also do this to protect their property from divorce proceedings and frivolous lawsuits.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
That may not always happen, but that's the way it's supposed to work under California Trust law. The bottom line: Beneficiaries enjoy the Trust assets at some point but, until then, they do not control or manage those assets.
Conclusion. Selling a home held within a trust in California requires careful planning, documentation, and adherence to legal requirements.
For all legal purposes, the assets in a revocable trust remain yours even after you put them in the trust. This type of trust has few benefits aside from allowing your family quick access to the money after your death and eliminating the need for probate.
The Bottom Line. You may owe taxes any time you sell a home, regardless of whether it's in a trust. The type of trust, the timing of the sale, and applicable laws all determine who pays the taxes.
This rule generally prohibits the IRS from levying any assets that you placed into an irrevocable trust because you have relinquished control of them. It is critical to your financial health that you consider the tax and legal obligations associated with trusts before committing your assets to a trust.
Suze Orman, the popular financial guru, goes so far as to say that “everyone” needs a revocable living trust.
That said, there is no enforced limit to the amount of money that can be placed in a trust. Yet you must remain mindful of exactly how much you use to fund it if you wish to benefit from the annual gift tax exemption.
A trust can say anything you want and is effective as soon as it is signed/agreed. So if the trust says the house is yours for life or so long as you live there, and then your tenant's, the trust is effective immediately but his right to own it takes effect when the trustee determines that the conditioned happened.
After a trust settlor's death, creditors may have a limited time to make claims against the estate. This period varies by state law but typically ranges from a few months to a year. It's crucial for trustees to be aware of these timelines.
A trustee typically has the most control in running their trust. They are granted authority by their grantor to oversee and distribute assets according to terms set out in their trust document, while beneficiaries merely reap its benefits without overseeing its operations themselves.
Once your home is in the trust, it's no longer considered part of your personal assets, thereby protecting it from being used to pay for nursing home care. However, this must be done in compliance with Medicaid's look-back period, typically 5 years before applying for Medicaid benefits.
Many advisors and attorneys recommend a $100K minimum net worth for a living trust. However, there are other factors to consider depending on your personal situation. What is your age, marital status, and earning potential?
Despite the estate planning benefits of buying a home in trust, there are some disadvantages to be aware of—the first of which is that it can be an expensive, time-consuming process. Another drawback is that putting your home in a trust can make refinancing your mortgage more complex.