Creating a trust or multiple trusts is an indispensable part of the estate planning process for many people. Trusts offer many advantages. They can reduce taxes, simplify the probate process, and give the grantor (the person who creates the trust) some amount of control over how their assets are used and managed even after they pass away. There are many different types of trusts in California. There is no one-size-fits-all approach because each has its advantages and disadvantages. Understanding some of the most common trusts will give you a sense of the tools available to you.
The grantor’s will creates a testamentary trust after their death. A person might want this type of trust if they don’t wish to fully transfer their property to an heir (in the case of minor children, for example).
Because it doesn’t come into existence until the grantor’s death, the grantor may annul or make changes to the terms of a testamentary trust while they are still alive. However, the assets of the trust must go through the probate process.
As the name implies, a living trust is created while the grantor is still alive. The tax implications of a living trust and the degree of control the grantor may keep over the assets depend on whether it is a revocable or irrevocable trust.
With a revocable trust, the grantor may move assets in and out or annul the trust. However, any income is taxable to the grantor.
An irrevocable trust cannot be changed once created, so the trust itself must pay the taxes.
Special Needs Trust
A special needs trust provides for the needs of a person who is chronically disabled. The major advantage of a special needs trust is that the disabled person may still receive government benefits such as SSI or Medi-Cal. That’s even when the value of the assets in the trust would otherwise disqualify them.
A special needs trust can either be first-party (funded by the assets of the disabled person) or third party (funded by someone else).
Life Insurance Trust
With a life insurance trust, the trust owns and pays for an insurance policy on the grantor’s life. When the grantor dies, the proceeds of the policy are paid to the trust and distributed accordingly. Because the assets are not part of the estate, this arrangement can reduce or avoid estate taxes.
There are two main types of charitable trust: the charitable remainder trust and the charitable leads trust.
With a charitable remainder trust, the grantor may receive income from the trust assets for a certain period of time or the rest of their life. The assets are distributed to designated charities after the set period.
A charitable lead trust works oppositely. Income is paid to charity for the duration of the trust, and afterward, the assets may be distributed to family or others. The two types offer different income and estate tax benefits.
For Expert Advice on Different Types of Trusts
The list of California trust types could go on: bypass trusts, spendthrift trusts, blind trusts, etc. You have many options available to meet your unique needs, but it’s crucial to speak with an experienced estate planning attorney to find the best fit. Contact our office today to schedule a consultation.