Estate planning is unfamiliar territory for many people, and the process can be wrought with fear and emotions. However, familiarizing yourself with the common terminology, as well as having an experienced attorney who will tailor the estate planning process to your individual needs, will go a long way toward giving you peace of mind.
If you are embarking on California’s estate planning process, you may already realize that the world of trusts is quite expansive. While there are a wide variety of trust options available, a few types of trusts are more common in the estate planning process. An estate planning attorney can provide information on how various trusts can be beneficial to you and your family. The following is a brief guide to understanding the world of trusts.
What Is a Trust?
A trust is an entity that holds a variety of assets, including property, for use by a person’s heirs. A trust can be created during the grantor’s (the person who sets up the trust) lifetime, or it can be a part of a will, formed after the grantor is deceased. Once the grantor assigns assets to a trust, they no longer belong to the trustee but to the trust itself. All trusts have a trustee, whose job is managing the trust. The trustee holds the title to any properties and other assets in the trust until the distribution occurs, according to instructions in the trust documents. The trust documents include the instructions and specific rules regarding the distribution of assets. Asset distribution from a trust typically occurs outside the scope of probate.
When you are deciding on a trust, keep in mind your overall estate planning goals, as well as the amount of flexibility and control you would like to have over the trust. Most trusts can help your family avoid probate, and many trusts can offer asset protection, minimize taxes on your estate or create income for your surviving family members.
Revocable Trust/Living Trust
Revocable trusts, also known as living trusts, offer more flexibility and control for the grantor. They are created during the grantor’s lifetime, and the grantor retains complete control over the trust. The trust can be modified, amended, revoked, or terminated at any time and for any reason by the grantor. Many revocable trusts will automatically switch to irrevocable trusts upon the death of the grantor.
Revocable trusts provide the benefit of transferring assets such as high-value properties to the trust, thus avoiding probate and making passing on property to surviving family members much easier and faster.
One of the disadvantages of a revocable trust is that it does not provide asset protection for transfers made to the trust during the grantor’s lifetime. This allows assets to count towards Medicaid eligibility determination and allows creditors access to these assets. However, it’s not easy to access, as the creditors must petition the court to access these assets.
Irrevocable Trusts
An irrevocable trust is also created during the life of the grantor, but may not be amended, revoked, or changed except in the narrowest of circumstances. Assets placed in this type of trust may not be removed or changed, but the grantor may retain rights to income generated by the trust, according to the trust document instructions.
Irrevocable trusts offer the benefit of asset protection from Medicaid, creditors, and tax liability reduction. A well-structured irrevocable trust assures that since property and assets do not belong to the grantor any longer, they will not factor into income tax liability or estate value. Most special situation trusts are irrevocable trusts and benefit from the guidance of an experienced estate planning attorney.
Totten Trusts
Totten trusts are revocable trusts specifically set up for monetary assets and not real estate. This type of trust allows the grantor to deposit funds into an account in the grantor’s name, held in the trust for a second party, named as the beneficiary. In this way, bank accounts can be passed on to surviving family members, after the grantor’s death without going through probate court. It is important to include the proper language when setting up the trust account. Language such as “Payable on Death To,” “As Trustee For,” and others ensure that the beneficiary is identifiable.
Special Needs Trust
This type of trust is beneficial for families who have members with special needs. The trust provides asset protection without impacting access to government benefits such as Medicaid or Supplemental Security Income. The special needs trust can provide funds for continuing care and other items necessary to maintain the comfort and well-being of a family member with special needs that existing benefits may not cover. Most special needs trusts contain provisions that terminate the trust in the case that it causes the recipient to become ineligible for benefits.
Special needs trusts allow the beneficiary to stay eligible for government benefits while reaping the additional benefits of the trust. Funds used to create the trust are usually tax-deductible and can come from a number of avenues such as gifts and inheritances. Funds are kept safe from creditors and misuse since they have specific requirements for usage.
There are quite a few other types of trusts that are available and may be best in special circumstances but are less common. These types of trusts include:
- Charitable Trust
- Spendthrift Trust
- Tax By-Pass Trust
- Asset Protection Trust
- Life Insurance Trust
- Family Trust
- Testamentary Trust
Forming a trust can protect your family’s hard-earned assets and provide long-lasting security for your loved ones. The type of trust that is right for you and your family will depend on your unique circumstances as well as your wishes for the future.
Contact Our Firm for Help with Your Estate Planning
If you are unsure of your next steps and need the advice of a professional, contact our firm. Our trust estate planning attorneys can provide all the guidance you need to make the best choice and create the right trust for your estate plan. Give us a call today at 714-432-6494 or contact us online and let our expert staff help you start planning your family’s future.
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