Many people are familiar with the concept of drawing up a will to plan for estate succession. But wills aren’t the only type of estate planning tool available. Trusts are another way to plan for the future. In some cases, they act as a replacement for a will, while in other cases, they work together with a will. Each estate is unique. Here’s what to know about trusts in California.
What Is a Trust?
A trust is a financial arrangement in which a third party (known as a trustee) manages assets held for beneficiaries. The estate owner (known as a trustor) transfers the assets to the trust. While this is similar to a will in that the named beneficiaries will ultimately receive the assets, there are some significant differences.
Trusts don’t go through probate, unlike many wills. Probate is a public process, so the terms of the will, how it’s distributed, and to whom becomes part of the public record. Because trusts don’t go through probate, it’s a private matter.
Trusts can often distribute assets more quickly than a will can because of being able to avoid probate.
It’s possible in some cases that using a trust will reduce court fees and other estate costs and potentially reduce estate taxes.
What Types of Trusts Are Available in California?
There are many different types of trusts in California, all with different benefits and nuances. This is not a comprehensive list but includes many of the most commonly used trusts. If you’re unsure which of these might work for you or have needs that don’t appear to be met with any of these, contact an experienced estate planning attorney to learn what other options might be available.
A revocable trust (sometimes referred to as a living trust) is one in which the trustor can continue to manage and change throughout their life. Once the trustor passes, the beneficiaries receive the assets assigned to them without going through probate court. But as long as the trustor is living and competent, they can make changes to the trust.
The beneficiaries will receive none of the assets until the trustor passes away.
When a trustor sets up an irrevocable trust, they lose the ability to revoke the trust if they change their mind later. That can seem like a disadvantage, but there are advantages to irrevocable or revocable. These are often used for long-term care and retirement planning, as once the assets are transferred to the trust, they can’t be included as assets or income when determining whether or not the trustor is eligible for Medicaid.
Life Insurance Trust
This irrevocable trust allows any life insurance assets to be passed to beneficiaries after the trustor’s death without activating any estate taxes.
While a life insurance policy will ask for named beneficiaries, they may have to pay taxes without this type of trust.
Special Needs Trust
This type of trust is used for people with disabilities. It can be an essential part of protecting their future, as when set up correctly, the person with disabilities can receive funds from the trust without it counting against them when determining Medicare or Medicaid (or other government support) eligibility.
When someone would like to leave some or all of their assets to a nonprofit organization, a charitable trust is an excellent mechanism to do so. There are multiple ways to create this type of trust, including the possibility of allowing interest-only disbursements for a period of time before the bulk of the assets are transferred.
As the name implies, this is a trust designed to ensure assets go to grandchildren rather than children. If set up correctly, this type of trust may keep the trust assets to remain untaxed.
Married couples frequently use this. Each spouse sets up a revocable (living) trust, and each specifies that if the assets of one will pass to the other’s trust upon the trustor’s death. This usually makes the assets safe from gift or estate taxes as it’s passed to the surviving spouse.
This is an increasingly popular option that allows pet owners to arrange in advance for their pets to be cared for if something should happen to the original owner. The trust can provide funds for the pet’s needs (food, veterinary care) and often includes a stipend for the person caring for the pet.
Is There Something a Trust Can’t Do?
While there are many things different trusts can do, there’s one crucial thing that none of them are able to handle, and that’s assigning guardianship of a minor child. This is a situation in which having both a trust and a will may be the best solution.
Only a will can legally name a guardian for orphaned minor children. Without a will, the courts will name a guardian, who may or may not be someone the parent would have wanted.
What Should I Do if I Need to Set Up a Trust?
Call Cava & Faulkner at 916-685-1225 for a free consultation. Because there are multiple types of trusts available, each with its own pros and cons, working with experienced, knowledgeable estate planning attorneys can help you through the decision process of what’s best for you and your estate. We understand how important it is for you to ensure your estate is handled precisely as you want it to be.