Understanding Different Types of Trusts in California
More Californians than ever are using trusts in their estate plans. A trust is a legal entity created by the trustor. The trustor transfers his or her assets and property into the trust and appoints trustees to manage the trust for the benefit of the beneficiaries. In essence, a trust holds assets for a single beneficiary or beneficiaries. Californians can utilize many different types of trusts, and each different type of trust serves a unique purpose.
The Parties Involved in a California Trust
There are three different parties involved in a California trust – the trustor, the trustee, and the beneficiary or beneficiaries. The trustor is the person who grants the trustee control over the estate, property, or assets, of the trust. The trustee creates the trust agreement that sets the rules for the management of the trust.
The trustee or trustees are responsible for managing the trust. The trustor chooses his or her own trustee or trustees. Finally, the beneficiary or beneficiaries are the people who will benefit from the assets of the trust agreement. The following trusts are commonly used by California estate planners.
Our Trust Lawyers can Help You Create a Unique Trust
If you are interested in using a trust in your estate plan, the lawyers at the Law Office of Daniel Hunt can help. We create unique estate plans based on the individual needs and goals of our clients. Contact our law firm today to schedule your initial consultation and learn how our lawyers can help you create a trust that best suits your needs. We listen to the goals of each client and create a strategy for an effective estate plan.
A Testamentary Trust
A testamentary trust is often called a will trust. Testamentary trusts include an agreement made to benefit the beneficiary after the trustor has passed away. In other words, testamentary trusts do not go into effect until the person who created the trust dies. Many times, executors of an estate will create a testamentary trust after creating a last will and testament.
Typically, a testamentary trust will be created in a person’s will. While a carefully executed will goes into effect immediately after it is signed and witnessed, the trust fund in the will does not go into effect until the testator’s death. Testamentary trusts cannot be changed or altered because they are irrevocable.
A Living Trust
A living trust, also known as an inter-vivos trust, is made during the lifetime of the trustor. The trustor can use the assets in the trust during his or her lifetime. Once the trustor dies, the assets transfer to the designated beneficiaries. One of the key benefits of a living trust is that these trusts avoid probate court as long as the grantor funded the trust.
Trustors create revocable trusts during the lifetime of the trustor. The key benefit of a revocable trust is that the trustor can amend, terminate, or revoke the trust during the lifetime of the trustor. In many revocable trusts, the trustor, trustee, and beneficiary are the same individual. Once the individual passes away, other beneficiaries will receive the assets of the trust.
An Irrevocable Trust
In an irrevocable trust, the trustor creates a trust that he or she cannot alter or change during his or her lifetime. As the name implies, trustors cannot revoke an irrevocable trust. In this type of trust, the trustor cannot take assets back once they transfer them into the irrevocable trust. While irrevocable trusts are more inflexible than revocable trusts, they do come with unique benefits. Irrevocable trusts are more tax efficient.
In some cases, the trust pays no estate taxes at all on the assets owned by the irrevocable trust. Irrevocable trusts are also used for long-term care and retirement planning. When the trustor transfers his or her assets into an irrevocable trust, the assets will not count against the trustor as income or assets when qualifying for Medicaid.
Life Insurance Trusts
Life insurance trusts allow the trustor to transfer their life insurance account into a trust. The benefit of transferring ownership of a life insurance policy to trust is to keep the life insurance proceeds free from taxation and to allow the beneficiary to access the proceeds of the life insurance immediately after the trustor’s death. Life insurance trusts are irrevocable. Also, the trustor cannot borrow against the life insurance policy or change the trust.
Charitable trusts are also extremely popular. In a charitable trust, the trustor names a non-profit organization or a charity as the beneficiary. This type of trust is often created during the lifetime of the trustor. Upon the death of the trustor, the assets will be distributed to the charity or nonprofit of the trustor’s choice. Estate planners often use charitable trusts to reduce the amount of gift taxes or estate taxes. In some charitable trusts, the children or inheritors receive part of the trust when the trustor passes away and the remainder goes to a charity.
In a blind trust, the trustor creates the trust and appointees trustees without the knowledge of the beneficiaries. These types of trusts are beneficial when the creator of the trust does not want the trustees or beneficiaries to know about the trust because they anticipate conflict. Sometimes, they may worry that two or more beneficiaries will engage in conflict if they know the terms of the trust.
Credit Shelter Trusts
A credit shelter trust is also known as a bypass trust. In a credit shelter trust, the trustor can grant the recipients a certain amount of assets up to the estate-tax exemption amount. The trustor can give a family member or spouse the remainder of an estate tax-free. These types of trusts are popular because the estate will remain tax-free even when it grows due to investments.
Daniel Hunt is lead attorney and owner at Law Offices of Daniel Hunt. He is also a California State Bar Certified Legal Specialist in Estate Planning, Trusts & Probate Law.