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By: Cava and Faulkner

How Can Trusts Be Used to Protect Assets for Future Generations?

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What Is a Trust?

A trust is a legal fiduciary arrangement that places assets into a separate ownership usually managed by a third party, known as the trustee. Trusts are organized in numerous ways including how assets eventually make their way to the named beneficiaries. Some trusts provide protection for family members with disabilities by helping them avoid conflicts with government programs such as Medicare or Social Security. Others can provide a steady, controlled income to beneficiaries who may have difficulty managing money prudently.

One advantage of many trusts is that they avoid probate, unlike wills. That has a couple of advantages: First, it usually means the assets will be distributed more quickly when the original estate owner dies. Second, avoiding probate means that the details of the estate are private. Probate is a public function, and wills and estates that go through probate are made available for public review, while trusts remain private. Third, the cost of probate is very high and can drain assets that were meant to improve the lives of loved ones. Fourth, probate deprives a person of choosing when and how a beneficiary receives an asset so an 18 year old could inherit money which may alter the course of their life in a very negative way.

What Types of Trusts Are Available in California, and What Can They Do?

There are many. This is not a complete list, but does include some of the most commonly used trusts. For concerns about your estate’s specific needs, it’s crucial to work with an experienced estate planning attorney.

Revocable or Irrevocable Trust

Trusts are generally either revocable or irrevocable. Which is best for you estate depends on how you feel about the requirements of each.

Revocable trust. The trustor (person who moves their assets into the trust) creates the trust and has the ability to change, end, or revoke the trust at any point in their lifetime, as long as they’re deemed mentally competent. This type is commonly used to avoid probate because the trustor has the ability to make changes in the future (for example, if they come to believe someone listed as a beneficiary is no longer the best choice for certain assets, they can change those assets to go to someone else).

Irrevocable trust. With this type of trust, once the trustor moves the assets into it, they no longer have the right to make any changes, cancel, or revoke the trust. While it might seem logical that the trustor would prefer to retain control, there are circumstances in which an irrevocable trust might be the better choice. One primary reason is that assets in an irrevocable trust can’t be reached by creditors. For people who are more susceptible to being sued (including physicians and lawyers), this is a good way to ensure that a yet-unforeseen lawsuit won’t destroy the estate they’ve built up.

Special Needs Trust

If the trustor wants to ensure one or more beneficiaries who have special needs and will need a steady income for the foreseeable future can receive those without losing their eligibility for various needs-based governmental options such as Medicare/Medicaid. This is especially helpful when there are beneficiaries with disabilities that will make it difficult for them to support themselves as adults.

Life Insurance Trust

This type of trust is arranged to have life insurance payouts go directly into the trust upon the trustor’s death. It can only be an irrevocable trust, and the trustor can’t borrow money against the life insurance policy in their lifetime. But it can protect against excessive taxation at the trustor’s death.

Testamentary Trust

Unlike the other types of trusts mentioned so far which go into effect as soon as the trustor moves assets into them, a testamentary trust doesn’t go into effect until the trustor passes away. These are also irrevocable trusts.

Blind Trust

This is useful when the trustor has reasons not to want the beneficiaries to know about the trust (or the trustees appointed to manage it) because they fear there could be conflict between themselves and the beneficiaries or among the beneficiaries.

If I Have a Trust, Do I Need a Will?

If you have any assets that you don’t want to place in a trust, you should draw up a will to specify how those are to be distributed. A pour over will serves a very important purpose if your trust fails, by ensuring your beneficiaries will receive the assets that should have been distributed through a trust.

There’s also one important thing that a will can do that a trust can’t, and that’s to name a guardian for any orphaned minors. If the parents die with a trust but without a will, it will be up to the courts to determine guardianship for the surviving children. Usually the courts will look at close family members first. But to ensure the parents’ preference for guardians is followed, they must have a will.

Who Should Be Appointed Trustee of My Trust?

There are several considerations, and this topic should be discussed with an attorney. But here are a few basic things to keep in mind.

Trustworthy. The trustee must be someone the trustor can count on to carry out their wishes.

Strong personal financial track record. The trustee should not have a mixed financial background.

Communication skills. The trustee needs to communicate with a variety of people, including family members and beneficiaries.

Detail-oriented. The trustee will have to manage paperwork, accounting, and deadlines, and should be detail-oriented to succeed.

What Should I Do if I Need Help Developing an Estate Plan with Trusts?

Call Cava & Faulkner at 916-685-1225 for a free consultation. As discussed above, trusts are an excellent way to protect assets for future generations. Every estate is unique, and which trusts will most benefit yours depends on the specifics of your estate. We can review your estate and help you determine the best approach for protecting your assets and benefiting your inheritors going forward.