Wills are standard tools for asset distribution, but trusts offer several advantages in California. When you are thinking about creating a trust, you may be wondering, “How do trusts work in California?” Orange County trust lawyers can answer all your questions about the process.
Understanding Trusts: The Basics
A trust allows someone to transfer ownership of their assets to a recipient. The recipient then manages the assets and distributes them according to the trust creator’s instructions. There are three main parties involved in a trust:
Grantor or Trustor
This individual creates the trust and then transfers ownership of their assets to the trust. Typically, the grantor does this to hold their assets in the trust until they can be delivered to their beneficiary.
The grantor sets terms for how the trustee should manage the trust.
Trustee
The trustee is the individual or institution appointed to manage the trust assets and distribute them according to the grantor’s wishes. The trustee has a fiduciary duty to act in the interest of beneficiaries and follow the grantor’s outlined instructions responsibly.
The two main types of trustees are:
- Individual Trustee: This should be someone the grantor appoints because they trust them. This person could be a friend, family member, or professional, like an attorney. This individual will manage all the trust’s assets after the trust terms are met, such as the grantor’s death.
- Corporate Trustee: A bank or trust company can also act as a trustee. These organizations offer professional management and trusted service.
Beneficiary
The beneficiary or beneficiaries are the parties that receive benefits from the trust. The grantor will designate when the beneficiaries receive their inheritance and how much they will get.
The Types of Trusts
Although high-worth asset individuals typically use many types of trusts, three trust types are primarily used in California. These are:
Revocable Living Trust
This trust is popular for people who seek to retain control over their trust assets while they are still alive. In a revocable trust, you can name yourself the trustee and have that designation switch upon your death or if you become incapacitated. With your title of trustee, you can manage the assets however you wish while alive.
Upon death or incapacity, your designated successor takes control of the assets and distributes them according to your instructions. This distribution process by your successor trustee avoids probate. Probate uses the court to manage and distribute assets in an estate, typically as instructed through a will.
Revocable living trusts can ensure that your wishes are clearly understood and enable an efficient distribution of your assets.
Irrevocable Trust
Generally, assets held in an irrevocable trust are no longer a part of your estate after they are placed into your trust. There are many irrevocable trusts, each with benefits and limitations. Some of the most common are:
- Grantor Retained Annuity Trust (GRAT): This trust allows you to transfer assets to it but continue receiving income from those assets for a set period of time.
- Charitable Remainder Trust (CRT): This trust lets you benefit a charitable organization after a predetermined number of years.
- Irrevocable Life Insurance Trust (ILIT): This trust owns a life insurance policy for you. The death benefit of this trust can pay estate taxes or benefit heirs without being included in your estate.
Testamentary Trust
A testamentary trust differs from a revocable or irrevocable one because it is created through your will after you pass away. This can be beneficial for people with minor beneficiaries who will receive their inheritance at a later age. A drawback of testamentary trusts is that the assets allotted to a testamentary trust must go through probate, which is usually time-consuming and costly.
Choosing Between a Will and a Trust
When choosing between a will and trust, it is essential to make an educated decision. Consider these factors when you are deciding which estate plan to use:
- Estate Size and Complexity: If you have a large or complex estate that will vastly diminish or be difficult to understand during probate proceedings, a trust may be better for you. If you have an uncomplex estate, a will may be more advantageous and simple to create.
- Privacy: Trusts offer more privacy than wills. They do not go through probate, and your assets will not be reflected in the public record.
- Asset Distribution: A trust will be more beneficial if you have specific needs, timelines, or complex instructions that need to be followed.
- Incapacity Planning: Only a trust can help when you want someone to manage your assets in case you become incapacitated.
A general rule of thumb is that if you have a simple estate, a will should be sufficient. For anything more complex, you should create a trust.
Disadvantages of Trusts in California
There are many benefits of trusts in California, but if you do not have a complex estate, creating a trust may not be necessary. When debating whether you should make a trust or a will, you should know the disadvantages of holding your assets in a trust.
- Cost: Creating a trust can be costly. The process typically requires legal fees. There will also be ongoing costs to keep the trust current.
- Upkeep: Trusts must stay funded and their records updated. These upkeep costs are a considerable drawback to some people creating a trust.
- Complexity: Trusts can be complex legal documents. They require an estate planning attorney to draft, create, review, and decipher.
- Loss of Control: You relinquish all control of the transferred assets with irrevocable trusts. Also, no one can change the trust document.
FAQs
Q: What Are the Rules for Trusts in California?
A: You must follow California law to set up a proper trust. The law states that an individual can create a trust if:
- The grantor intends to create the trust.
- Property exists in the trust.
- There is a beneficiary unless it is a charitable trust.
Additionally, a trust cannot be created against public policy or for illegal purposes, such as holding illegal assets.
Q: How Does a Trust Work When Someone Dies in California?
A: When someone dies in California, ownership of a trust’s assets is transferred. With ownership of the assets, it is the successor’s fiduciary duty to abide by the instructions outlined in the trust document. They also have the responsibility to manage and distribute the assets to benefit the beneficiaries.
Suppose a successor trustee violates their fiduciary duty. In this case, the beneficiaries can bring a case against the trustee and have them removed if the case is successful.
Q: What Are the Disadvantages of a Living Trust in California?
A: The main disadvantages of a living trust in California are the costs associated with its creation and upkeep and the time it takes to create one since they are such complex documents. You cannot place many retirement, health, medical savings, and active financial accounts into a living trust.
Q: What Are the Benefits of a Trust in California?
A: A trust has many benefits in California. One of the main benefits is that trust assets bypass probate. Probate can be costly and time-consuming for grieving families, and the complex process can sometimes cause disputes between beneficiaries. Other benefits of trusts include flexibility in how to set up asset distribution or account for incapacity situations in estate planning.
Orange County Trust Lawyers
Consult an experienced Orange County trust attorney when creating a trust in California. At the Law Office of Christopher P. Walker, our team can guide you through the process, help confirm that the trust is properly drafted and funded, and address any of your concerns.