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Brian Neil Burg, Esq.
Fullerton, California

(714) 525-1134

BNBurg@BrianNeilBurg.com

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TRUSTS
 
Trust — Definition
  

A trust is a legal entity that is established through a "declaration of trust" document and retitling of assets that serves to manage your person and estate while you are alive and after your death.  It is similar to a will in that it serves a testamentary function (has provisions for the distribution of your property after you die), but it has much greater flexibility than a will and may continue long after you pass away.

Unlike a will, which involves just you and the beneficiaries, a trust involves three entities: you (called a "settlor" or a "trustor"—the person who establishes the trust), a person or institution who oversees the operation of the trust (called a "trustee"), and the people for whose benefit the trust exists (called the "beneficiaries").

Trusts may be revocable or irrevocable.  A revocable trust is one that can be modified or even completely undone at any time by the settlor or settlors, that is, by the people who set up the trust in the first place.  An irrevocable trust cannot be reversed; once property is placed in an irrevocable trust, it is no longer a part of the settlor's estate.  Irrevocable trusts are often used in estate planning to lessen the size of the settlor's estate in order to avoid or minimize estate taxes.

The most common type of trust used in estate planning is the "revocable living trust," which has great flexibility, can be modified or even undone ("revoked") as necessary, but gives individuals and couples a lot more control over their lives and property than does a simple will.

  
Revocable Living Trusts
  
 

A revocable living trust is a lot like a will in that it governs disposition of your estate after you die, but it can also include provisions for incapacity, and it can continue in operation for a long long time.  Suppose you have three children: one an academic scholar, another a spendthrift, and a third with special needs.  Your trust can contain detailed provisions to cover the scholar's college education, prevent the spendthrift from wasting away his inheritance, and care for the third child's special needs (perhaps even for the rest of his or her life).  You have a lot more power with a trust.

In a revocable living trust, all three players—settlor, trustee, and beneficiary—can be the same person or persons: you, or, if married, you and your spouse.  Your life goes on pretty much the same as always, and the trust can be modified or revoked at any time.  Because the trust is revocable, it does not need a special tax ID number from the IRS, and any income from trust property is reported just like any other income you receive—on your Form 1040 and under your Social Security number.  While you are alive, the main difference between having a trust and not having a trust is that titled assets (such as your house and bank accounts) need to be retitled in the name of the trust, and new purchases need to be purchased through the trust and kept in the name of the trust.  The process of changing titles and making sure that your property moves into the trust is called "funding the trust."  Without funding, a trust is largely a worthless piece of paper.

 
Comparison of Revocable Living Trusts and Standalone WillsRevocable living trusts have the following major advantages over wills alone:
  
 
  1. Control Over Assets — A trust permits substantially more control over the disposition of your assets at your death, including ongoing control for decades or even generations.
  2. Avoidance of Probate — A trust generally does not require going through the probate process, which is a court proceeding that may be time-consuming, lengthy, and expensive.  If there is no trust, probate is required so long as the total probate estate is over $100,000 (in California), whether or not there is a will.
  3. Privacy — A trust is handled privately when you die.  The successor trustee takes over, and, in general, handles everything without court intervention.  A probate, however, is public record, and any person can access court records, read the will (if any), and find out who got what.
  4. Tax Advantages — For high net worth individuals and families, a properly drafted trust may eliminate some federal and state taxes.  (Note: this area of the law is currently in great flux and needs to be properly addressed in any new trust created; currently existing trusts should also be reviewed with an estate planning attorney.)
  5. Simplification or Elimination of Other Legal Operations — A properly-drafted trust may avoid a conservatorship proceeding and, in many cases, the need to invoke a durable power of attorney for asset management, by providing for your personal financial care and the management of your assets during any period of incapacity.  Whereas a will only goes into effect when you die, a trust goes into effect immediately upon signing (but remember: the trust can only manage assets that are in the trust's name—so funding is critical).
  6. Cost — Although it costs more to draft a trust than a standalone will, when compared to the cost of probate and loss of control that comes at the time of incapacity or death, it is often far cheaper in the long run.
Other Types of Trusts
Not every trust is a revocable living trust.  Here are some others:
  
Testamentary Trust
 Sometimes people do not create a trust while they are alive, but rather designate in their will that a trust is to be established after they die.  Such a trust is a testamentary trust.  It can have the same provisions as a revocable living trust with respect to disposition of your property at your death, except it is not revocable and will not avoid probate.
  
Irrevocable Life Insurance Trust (ILIT)
 This is a trust typically used to avoid inclusion of life insurance proceeds in the insured's and his/her spouse's estates in order to minimize estate taxes.
  
Special Needs Trust
 This is a trust to provide for a child or adult requiring special care due to physical disability or mental illness.  It is typically designed to go above and beyond applicable government benefits, but without jeopardizing those benefits.
  
Pet Trust
 This is a trust set up to arrange for the care of a beloved pet after the owner's death and for the remainder of the pet's life.
  
 Some trusts, like the Special Needs Trust or the Pet Trust, can be either totally independent trusts or trusts set up as subtrusts of a larger more encompassing trust, such as a revocable living trust.
  
The information presented on this website is not intended to be a source of legal advice or a comprehensive explanation of the law. You should not act upon or rely on information at this or any other website without the advice of a competent California estate planning attorney, especially if you reside outside the State of California, where we are not licensed to practice law and do not give legal advice. This website is intended for educational and informational purposes only.