We recommend that individuals and married couples who own a home set up a living trust to avoid probate. California probate is very expensive and typically takes a year to complete. If your living trust is the owner of your home, rather than you directly, your home will avoid probate when you pass away.
However, living trusts do more than help your family avoid probate. A thoughtfully designed and well-written living trust estate plan will ensure that someone you choose can manage your assets and make health care decisions for you if you become incapacitated. A living trust estate plan will also allow for an efficient and smooth transfer of your assets to your loved ones.
Our single clients create separate living trusts.
Usually, our married clients choose to set up joint living trusts. The exception is when it is a second or third marriage, often a prenup, and they intend to separate their assets. A joint living trust makes sense for most married couples because most, if not all, of the assets are joint and community property assets.
An unmarried couple is two individuals who have chosen to be together but are not legally married.
Should unmarried couples set up individual living trusts or joint living trusts? The simple answer is unmarried couples should set up individual living trusts.
Why?
First, some background.
Community property is a legal construct for married couples, and California is a community property state. Unmarried couples do not have community property.
Anything purchased during marriage is presumed to be community property, meaning each spouse owns half of each asset. Also, unless the married couple had a prenup, all income earned by either spouse is community property. Assets purchased by either spouse, even if purchased from one spouse’s bank account, are community property unless the bank account was funded with separate property.
However, once married, nothing is separate property unless it is defined in a prenup, brought into the marriage by one spouse and kept separate, or inherited by a spouse and kept separate. Also, certain damage awards in a personal injury lawsuit can be separate property. But for most California married couples, everything is community property.
Community property assets are considered to be owned half by each spouse. When one spouse dies, half remains with the surviving spouse, and the deceased spouse’s half will be distributed according to his will or living trust or, if none, according to California intestacy law.
Since community property is a legal construct for married couples, unmarried couples do not have community property. Consequently, the community property rules do not apply. If you are not married, your income is yours, not half your partner's. Your assets are yours, not half your partner's.
In California, like most of the nine community property states, married couples use joint living trusts. Joint living trusts work well with community property assets because community property assets are jointly owned. Joint living trusts are written to recognize and administer joint assets.
In separate property states, married couples often use separate living trusts. Separate living trusts are written to recognize and administer separate assets.
Married couples receive tax benefits that unmarried couples do not, which makes it more beneficial for married couples to use joint living trusts.
Living trusts are grantor trusts. The person creating the trust is the grantor. A grantor trust's tax identification number is the grantor's social security number. With a joint trust for a married couple, both spouses are the grantors; therefore, either or both spouses’ SSNs can be used for the living trust assets. As a result, income generated from joint trust assets can be reported on the joint tax return.
Non-married couples must separately report income from their separate assets on their separate tax return. If a non-married couple used a joint living trust, which partner’s social security number would they use for the living trust assets? This can get complicated.
If a spouse has received a substantial inheritance, we often recommend that she set up a separate property living trust to own the inherited asset or investment account. This clearly distinguishes the separate property inheritance from the couple’s community property assets in their joint living trust.
Married couples can transfer title of their home to their joint living trust so the home will escape probate.
If unmarried couples own a home together, they must consider what happens when one dies. They can own their home jointly with the right of survivorship, as tenants in common with each owning their share in a separate living trust.
Joint tenancy with right of survivorship means when the first partner dies, the other will receive 100% of the property. Joint tenancy could eliminate probate if the partners don’t die at the same time.
Tenancy in common means each owns half, and each partner's half will be distributed according to their separate estate plan.
If each partner has a living trust and transfers the title of the home to their living trusts, they will avoid probate, and they can name each other as beneficiaries of their share of the home.
Estate planning is more challenging for unmarried couples, but with thoughtful planning and execution, an unmarried couple's estate plan can protect against probate, provide for asset and health care management if a partner becomes incapacitated, and ensure an efficient transfer of their assets.