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What is a Trust?

A trust is a tool used in estate planning that allows you to manage your property while you are alive and also to ensure that your assets are distributed according to your wishes upon your death. Trusts are often an important part of a person’s estate plan.

Types of Trusts

There are five main types of trusts that you should be aware of while planning your estate. These types of trusts include living trusts, revocable living trusts, irrevocable living trusts, special needs trusts, and spendthrift trusts.

Living Trust

A living trust is created by the grantor during their lifetime; and it goes into effect while they are still alive. One major advantage to creating a living trust is to avoid probate, which can tie up assets and property for a long period of time and can also become quite expensive. Another advantage to having a living trust is that you can have some privacy, as the associated documents do not become public record like they do if it goes through probate.

 

A disadvantage to creating a living trust is that there is a lot of work involved and a lot of paperwork required to maintain the living trust.

Living Trust – Frequently Asked Questions

Once everything is distributed to the beneficiaries of the trust, what happens to the trust?

After the beneficiaries have received their proper distributions of assets from the trust, the trust is then extinguished and no longer exists.

Is it expensive to have a living trust?

There will likely be some additional costs to having a trust created, notary fees associated, and recorder’s fees with the filing of any deeds into the trust, but you do have the benefit of saving a vast amount of money on court costs since you will avoid probate court. However, you should be aware that the trustee that manages the trust should be entitled to compensation for the work that they do to administer the living trust. Their reasonable fees may be paid out of the living trust.

Living trust – Statistics

Over half of adults living in the United States do not have a will or a living trust. Approximately one out of every four Americans live to at least age 90, and many of these individuals suffer from some form of dementia, so it is important to create a will or trust that suits your needs before you suffer any significant mental decline.

California Living Trust

The standards for living trusts vary a bit from state to state. The state of California does not use the Uniform Probate Code, so the probate process in California is a bit more complex than it is in other states. For this reason, creating a living trust in order to avoid the probate process is a popular choice in this state.

Revocable Living Trust

A revocable living trust is generally used as another term for a living trust, and the concept is basically the same. Choosing a revocable living trust to incorporate into your estate plan is beneficial if you wish to avoid the probate process, which can be particularly lengthy in California. Another benefit to choosing a revocable trust is the flexibility. You can make changes to a revocable living trust as needed throughout your lifetime, which is helpful in the event of a divorce or additional child, or some other major life event that may alter your wishes for the distribution of your assets at the time of your passing. The major disadvantage to a revocable living trust is essentially the same as it is for a living trust as they are basically the same thing. This disadvantage is that there may be significant maintenance involved while the trust is in existence and this will involve additional work to be performed by the trustee, resulting in additional trustee fees.

Revocable Living Trust – Frequently Asked Questions

Who Can Be a Beneficiary of My Revocable Living Trust?

You can make anyone a beneficiary of your revocable living trust, such as your spouse, children, or other family members. You are also able to make an organization a beneficiary of your trust, such as an educational institution or charitable organization.

How Do I Know the Trustee of My Revocable Living Trust is Acting in the Best Interest of the Trust?

You can be assured that the trustee responsible for managing your revocable living trust is acting in the best interest of the trust because they owe a fiduciary duty to the trust. This means that they are legally obligated to act in the best interests of the trust, or they can be held liable for their failure to do so.

Revocable Living Trust – Statistics

On average, going through the probate process tends to take a year or more to become final. Due to this statistic, it is beneficial to most people to choose a revocable living trust in order to put their beneficiaries in the best position to avoid probate. A 2017 survey done by Caring.com revealed that only about 36% of Americans with minor children have a living trust or a will in place.

Irrevocable Living Trust

An irrevocable living trust is a trust that cannot be modified or changed in any way after it has been created, except in some extraordinary circumstances. As the name indicates, it also cannot be revoked.

One major advantage to establishing an irrevocable trust is that property in that trust is not included in the valuation of your estate for estate tax purposes. This is a significant benefit if you have a very large estate. Another advantage to creating an irrevocable living trust is that your assets may be protected from creditors in the event you are sued down the road. Since the assets in the trust are owned by the trustee, these assets cannot be taken from the trust to satisfy any judgment against you.

The disadvantage to an irrevocable living trust is clear – you are unable to change or modify it once you have created it. Whether the advantages of an irrevocable living trust outweigh the major disadvantage is entirely dependent on your own individual circumstances. Your attorney will be able to help you decide what type of trust is right for you.

Irrevocable Living Trust – Frequently Asked Questions

Is there any way to modify an irrevocable living trust in California?

In very limited circumstances, you may be able to modify an irrevocable living trust in California. One way to do this is to have all beneficiaries agree to the modification and petition the court for permission. Another reason this type of trust could be modified is in a scenario where the principle of the trust is not enough money to conform to changed tax law or for the trust to be administered.

 

Who can be the trustee for my irrevocable living trust?

You may choose a trusted friend or family member, or you may opt to have an accountant, professional trustee, or an attorney be the trustee for your trust. Any trustee selected should be trustworthy and able to take on the responsibility.

Irrevocable Living Trust – Statistics

A survey done by Caring.com in 2017 showed that only 42% of Americans have a living trust or a will in place. Additionally, it is estimated that Americans spend about 2 billion dollars each year on probate costs, so this is just another reason why an irrevocable trust is worth considering.

Special Needs Trust

A special needs trust is created specifically for beneficiaries that have special needs, such as physical or mental disabilities that prohibit them from being able to manage their own finances. One advantage of creating a special needs trust for a beneficiary with special needs is that the trust generally will not impact any government benefits they may be receiving for their disability.

Another advantage of this type of trust is that the funds in the trust are protected from any judgments, so if the beneficiary is sued, the funds in the trust cannot be used to satisfy a judgment against the beneficiary. There are no significant disadvantages to creating a special needs trust where the beneficiary truly has special needs.

Special Needs Trust – Frequently Asked Questions

Should I still create a special needs trust if the beneficiary does not use government benefits?

Yes, you should still create a special needs trust even if your beneficiary is not currently using government benefits. The first reason for this is because no one can predict the future. The beneficiary to the special needs trust may not currently be utilizing government benefits, but it does not mean that they may not need them in the future. Additionally, special needs trusts are geared towards the specific needs of the disabled beneficiary, so under these circumstances, a special needs trust is worth considering.

How does the beneficiary get access to the special needs trust?

In order to use the funds in the special needs trust, the beneficiary will need to go through the trustee. The trustee will be able to purchase services, products, and pay for medical expenses and other needs for the beneficiary.

Special Needs Trust – Statistics

According to the National Organization on Disability, there are over 41 million Americans who have some form of a disability. Additionally, over 75% of special needs adults are unemployed. For these reasons, special needs trusts are often necessary and strongly benefit disabled beneficiaries.

Spendthrift Trust

A spendthrift trust is a trust in which the beneficiary has limited access to the trust principal funds. Typically, these types of trusts are created by grantors who have concerns that their chosen beneficiaries will not use the funds or property wisely. By using this type of fund, the grantor can ensure that the funds are not used up all at once by the beneficiary.

The major advantage of creating a spendthrift trust is that you can protect the beneficiary from creditors or the impulse to spend the funds quickly and unwisely. The disadvantage to creating a spendthrift trust is that in the event the beneficiary does need access to the principal funds, there is a lengthy process for them to go through and establish that they need access for a valid and approved reason.

Spendthrift Trust – Frequently Asked Questions

What is the role of the trustee in a spendthrift trust?

The trustee responsible for managing the spendthrift trust you create will have varying degrees of responsibility depending on how much power you wish for them to have. For example, you can choose to have the trustee make payments to the beneficiary, or you can opt to have the trustee in full control of the funds and any access for any reason would then need to go through the trustee.

How do I know if the beneficiary to my trust would require a spendthrift trust?

Whether or not the beneficiary you have chosen needs a spendthrift trust is entirely up to you. Some of the reasons a grantor may choose a spendthrift trust over another option are if they feel the beneficiary may be careless with the money, or if they are concerned about the beneficiary having an addiction that could cause irresponsible use of the money. Another reason for choosing a spendthrift trust would be if the grantor thinks the beneficiary may be easily deceived or may fall into significant debt with creditors.

Spendthrift Trust – Statistics

A study performed by the US Legal Wills revealed that people with higher incomes tended to have a will and trust plan in place; however, these estate plans were often outdated. In addition, spendthrift trusts in California have recently been given a closer look due to case law that developed in the last few years. It is important to have a qualified attorney handle your estate plans, including spendthrift trusts, in order to ensure your wishes are properly carried out.

Who Can Be a Trustee?

If you are considering creating a trust, one of the first considerations is who you will designate as the trustee. This is a very important consideration, not to be taken lightly. A trusted family member or advisor may be a great fit, as well as an accountant, attorney, or professional fiduciary. You should be mindful of your selected trustee’s ability, desire to act, and where they may be physically located, which could create additional costs or constraints for your estate and trustee.

Benefits to Setting Up Trusts

There are many benefits to setting up a trust. First and foremost, there are many different options available for trusts, so you can choose one that best supports your needs. Depending on the trust that you choose, there are a variety of benefits. These benefits tend to include having more power over the distribution of trust funds (how they are distributed over time), as well as using trusts in order to reduce taxes. You can also use trusts to help ensure that the funds will actually end up in the beneficiary’s hands, rather than going to creditors or used to satisfy debts.

When You Should Set Up A Trust

Your attorney will be able to discuss your individual circumstances with you and go over the best options for your needs. Generally, the best time to set up a trust is now. There are a variety of different trusts that suit different needs, so in order to make sure your wishes are carried out, it is a good idea to set up your trust as soon as possible.

How to Set Up a Trust

Once you have decided to set up a trust, it is important to speak with a knowledgeable attorney who can advise you on what type of trust is best for you. There are several steps involved in setting up a trust, which can vary depending on what type of trust you choose. In general, you will need to provide all documentation of your assets and property and file the proper paperwork to choose your beneficiaries. Then, you will choose the terms of your will and trust in order to best suit your needs.

The Cost of Creating a Trust

The costs involved in creating a trust will vary depending on the type of trust you have chosen, as well as the amount and type of assets and property you own. The best way to determine a ballpark number of what the cost will be to set up a trust is to meet with one of our experienced attorneys who can help you decide what trust is best for you and review your assets and give you a heads up on how much it may cost. Contact our office to schedule a consultation today.

Frequently Asked Questions Regarding Trusts

How do I know which type of trust to choose?

The answer to this question will require an in-depth look at your finances as well as a discussion about what exactly you wish to accomplish through the trust or trusts you want to set up. Your attorney will help guide you to a trust plan that suits your needs.

If I already have a will, why would I need to create a trust?

A trust is just one of the many aspects of estate planning. For some people, a simple will is all they will need to carry out their wishes. For others, creating a trust is a more appropriate means of accomplishing their goals. What is best for you depends on many factors, including your personal goals and assets.

Wills Versus Trusts

While both wills and trusts are a form of estate planning, there are significant differences between the two types of plans. The main distinction is that typically, a will only goes into effect once you pass on, while a trust can go into effect immediately. Another difference is that a will generally covers all assets and property that you own, while creating a trust will only affect the specific assets that you include in the trust. Also, a will generally must pass through probate, while a trust may allow your beneficiaries to avoid the probate process. Wills can be a good estate planning option for someone with simple assets to resolve, while trusts tend to be beneficial for more complex matters and larger estates.

Power of Attorney

The term power of attorney means to have the authority to act on behalf of someone else, generally for legal, medical, or financial matters. It can be limited to a specific area and time period or may be more general.

Medical Power of Attorney

If you give someone medical power of attorney over you, that allows them to make medical and any end-of-life decisions for you in the event you are unable to do so. Of course, choosing someone to fill this role is a serious decision to make, and you will want to be someone you have full trust in to carry out your wishes.

Financial Power of Attorney

Designating someone as having financial power of attorney allows them to make legal and financial decisions on your behalf. You have the ability to grant this person full power over finances, or you can limit their power of attorney. A financial power of attorney can go into effect immediately.

Durable Power of Attorney

The term durable power of attorney refers to the length of time the power of attorney is in effect. If you opt to give someone durable power of attorney, it will automatically end at the time of your death. It allows the person you designate to have the power of attorney to make decisions on your behalf even if you are incapacitated or very ill.

Aside from death, there are also other circumstances in which durable power of attorney may end, which include divorce in some states (if your power of attorney was your spouse), invalidation by a court, or you may also choose to end the power of attorney at any time if you are mentally competent to do so.

Regular Power of Attorney

A regular power of attorney is only effective when the principal (the person who the person with the power of attorney is acting on behalf of) is alive and has the legal capacity to act. The power of attorney can be revoked at any time, and if the principal becomes incapacitated, the regular power of attorney will end. If it is your desire to have the person designated as your power of attorney act on your behalf if you become incapacitated and unable to act on your own, then you need to give that person durable power of attorney rather than regular power of attorney.

Estate Planning Attorney

An estate planning attorney can assist you in developing an estate plan to manage your assets and finances for the future. Your estate planning attorney can help you decide what type of estate plan best suits your needs and can work with you to develop an estate plan that carries out your end-of-life wishes, including medical decisions through a living will, as well as distribution to beneficiaries of any assets of the estate.

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