Different Types of Trusts Used in Estate Planning

Whether your objective is to minimize estate taxes, ensure financial privacy, preserve your family’s wealth, or distribute property more easily to your loved ones, trusts are an integral tool in estate planning. In California, there are a multiple types of trusts that can be used to meet your specific needs. However, before you implement a trust into your estate plan, it’s important to be familiar with what a trust is and how it can help you satisfy your goals.

What is a Trust?

A trust is a vehicle that holds property and organizes assets for future beneficiaries. The person who creates a trust is referred to as the grantor — sometimes also called the trustor or settlor. The grantor selects a trustee who will manage the trust in accordance with the terms that govern it. The grantor also designates beneficiaries who will benefit from the assets held in the trust and the income it generates.

To set up a trust, an instrument must be drafted that lists the assets owned by the trust, identifies the chosen beneficiaries, and provides instructions regarding distribution. Importantly, a trust must also be funded by transferring property into it. This is done by changing the title of your assets from your own name to the name of the trust. Nearly any type of assets and property can be placed in a trust, including real estate, bank accounts, business interests, artwork, collectibles, and investment accounts.

Common Types of Trusts

There are a wide variety of trusts that can be used in an estate plan. Different types of trusts may be created for different purposes or beneficiaries. Since each trust serves a specific purpose, a comprehensive estate plan might even include multiple trusts.

Some of the most common types of trusts used in estate planning include the following:

• Testamentary trusts — A testamentary trust is one that is set up to benefit the heirs of the grantor after their passing. Also referred to as a “will trust,” these types of trusts are irrevocable and do not go into effect until the death of the grantor.
• Living trusts — A living trust can be used during the lifetime of the grantor. At the time of their passing, any assets in the trust would be distributed to the named beneficiaries. These types of trusts can avoid the public probate process and offer the grantor a variety of estate planning options.
• Revocable trusts — A revocable trust is set up while the grantor is still alive. These types of trusts can be terminated, amended, or revoked at any time during the grantor’s lifetime.
• Irrevocable trusts — An irrevocable trust is one that is established during the grantor’s lifetime. These trusts may not be altered, revoked, or amended once assets have been placed in it. While they are not as flexible as revocable trusts, they are extremely useful for tax planning purposes. Critically, many irrevocable trusts can avoid estate taxes. Irrevocable trusts are also often used for asset protection purposes.
• Charitable trusts — Charitable trusts allow you to donate to a non-profit or charitable organization. The assets may be distributed over time, with the remaining assets going to either the charity or an alternate beneficiary. Charitable trusts can significantly reduce estate tax liability.
• Special needs trusts — Special needs trusts can be used to provide financial benefit to a child or other beneficiary with a disability while preserving their eligibility for needs-based government benefits.
• Life insurance trusts — A life insurance trust can be used to hold the proceeds of an individual’s life insurance policy so that it avoids the estate tax.
• Pet trusts — Pet trusts are recognized under California law and can be used to allocate funds for the care of a pet.

The above are just several types of trusts that can be used as part of a California estate plan. Other types of trusts can include credit shelter trusts, blind trusts, and retirement trusts — just to name a few. It’s important to discuss your specific estate planning needs with a qualified trusts and estate attorney who can advise you regarding your options.

Advantages of Using Trusts in Estate Planning

There are many benefits to using trusts in an estate plan. Although a will can distribute property upon your passing, it must first go through the lengthy and costly probate process. The assets in a trust can be distributed immediately. In addition, when set up properly, trusts can also come with many tax benefits and protect the privacy of your family’s financial situation.

When you create a trust, you can continue to ensure your family’s wealth is protected after your passing and distributed to those you choose. Significantly, the entire estate does not need to be distributed upon your death. A trust can allow you to control how the property is distributed. For instance, you may wish to delay distributions until children reach a certain age or a specific event occurs, such as graduation.

Notably, living trusts can also serve another function — they are effective during the lifetime of the grantor. In the event you become incapacitated, a living trust can appoint a successor trustee and prevent your family from undergoing conservatorship proceedings. Instead, the successor trustee would take over the responsibility of managing the assets in the trust.

Contact an Experienced California Trusts and Estates Attorney

If you are planning your estate, it’s important to have a knowledgeable attorney by your side who can advise you regarding the type of trust that would best suit your needs. The attorneys at White & Bright, LLP have extensive experience handling a broad scope of estate planning matters — including assisting clients with creating a wide variety of trusts. Call us to schedule a consultation to learn how we can help.