Estate planning is an important part of your overall financial plan. Each year, more Californians see the benefits of adding a trust to their estate plan. Knowing which type of trust would most benefit your situation depends on your current financial situation.
Will a Trust Work for You?
Before you can add a trust to your estate plan, you may need to know what a trust is and how it could benefit you, your heirs, and your goals for your finances. A trust is a legal document used by a trustor to organize their assets for future beneficiaries. A trustor’s assets are placed within a trust, which a selected trustee manages.
There are three named entities within a trust document:
- Trustor: The person who creates or grants a trustee access to the trust's assets. The trustor chooses the trustee.
- Trustee: The trustee manages the trust by creating the terms that govern it.
- Beneficiary: A beneficiary is an heir or persons who benefit from the assets within the trust.
The role of the trustee is to act as guardian of a trust. They are appointed to manage the interests of a single named beneficiary or multiple ones named in trust documents. The trustor can also manage the assets within a trust depending on the type of trust being drafted.
Popular Trusts Used in California
There are many different types of trusts available to Californians, and each serves a specific purpose.
- Testamentary Trust: A will trust, or a testamentary trust, is created to benefit the heirs of a trustor after he or she has passed away. It’s considered a will trust because it can’t go into action until the trustor dies. A testamentary trust is typically created in conjunction with a will, and it cannot be altered or changed as it’s irrevocable.
- A Living Trust: A living trust is created during the lifetime of the trustor and can be used during their lifetime. Upon the death of the trustor, the assets will be passed along to the named beneficiaries. One of the biggest benefits of a living trust is that it avoids probate court if funded by the grantor. Living trusts are among the most popular estate planning instruments because they allow for a wide range of options for trustors.
- Revocable Trust: A revocable trust is created while the trustor is still alive and can terminate, revoke, or amend the instrument as he or she sees fit. Like most other trusts, upon the death of the trustor, the beneficiaries receive the assets as named in the trust.
- Irrevocable Trust: An irrevocable trust is created during the lifetime of the trustor, but these trusts may not be altered, revoked, and assets cannot be removed once they are placed in trust. Irrevocable trusts are more rigid than revocable trusts, but they have more tax benefits. Assets placed in an irrevocable trust can avoid most estate taxes, and they can be used to provide valuable tax planning and retirement funding for trustors. The assets can be used by the trustor and not count as income. Once the trustor dies, assets will be passed on to the beneficiaries named in the trust.
- Charitable Trusts: A charitable trust exists to give assets to a non-profit organization or charity upon the death of the trustor. Charitable trusts are typically used to protect the assets earmarked for a charity from gift and estate taxes. These types of trusts are flexible, and the assets can be divided between heirs and a charity at a percentage determined by the trustor.
Other Types of Trusts Available in California
There are a few other types of trusts available to estate planners, and an attorney can help you determine if any of these other types may work for your situation.
- Life Insurance Trusts: A life insurance trust is created to hold the proceeds from a life insurance policy on a trustor so it can be used by named beneficiaries.
- Blind Trusts: A blind trust is created by a trustor to prevent the beneficiaries from knowing the identity of the trustees.
- Credit Shelter Trusts: Credit shelter trusts allow beneficiaries the ability to pull assets from the trust up to the limited dictated by estate tax laws.
At Samra Dhillon & Associates, we have family law attorneys on staff who can help you develop a strategy for your unique situation. If you need help understanding different types of trusts in California or figuring out which one is right for you, feel free to contact our law firm. Call us today at (916) 571-1550 to schedule a consultation.