Legal Trusts for Californians

A Trust may enable you to preserve your assets for future generations.

A legal Trust may be your best way to preserve all that you’ve worked for and earned, enabling you to pass it to your children and other loved ones — for the next generation or even for the benefit of generations to come.

A legal Trust also enables you to make charitable donations, and more.

LA Elder Law handles all types of Trusts that fall within the needs of our clients.

What is a Trust — and Trust Fund?

Each time you have told a friend or associate, “I trust you with this item to give it to so-and-so when….” you have created a Trust. A legal Trust is basically that — but with all “what-if” bases covered.

Generally, the person who owns the assets creates the Trust. The assets may be either money whether cash, stocks or bonds, or property such as real estate or physical objects. At LA Elder Law and within California, we refer to this owner creating the trust as the Trustor, but he/she can also be called the Grantor, Donor, Settlor.

The property or money that is the reason the Trust exists is called the Principal. The Principal, also sometimes called the corpus, is the asset or assets being held for the Beneficiary by the Trustee at the request of the Trustor.

The person who holds the assets for their owner is called the Trustee. The Trustee may be a person including the Trustor, a lawyer, bank, or another legal entity. If the Trustee is also the Trustor, then at least one successor Trustee is typically named to cover the day when the Trustee can no longer make decisions for himself or passes away. (Often Trustees come to us to help them with these very important responsibilities. You can learn about this on our Trust Administration page.)

The person the assets are held for is the Beneficiary. There may be several people, referred to as Beneficiaries. This is the person or people who benefit from the trust. Oftentimes, the Beneficiary is actually the Trustor or Trustors. Again, if this is the case, then other Beneficiaries are named to cover the event of the Trustor’s passing.

Trust vs Will

The key difference between a Trust and a Will is that a Will enables you to assign your assets to beneficiaries but that takes effect only after you pass away. A Will does not establish any asset management during your lifetime.

So where does the phrase Trust Fund come in?

The Trust Fund is the total of the assets being held. Money in a Trust will either be in a bank account accruing interest or in some sort of market fund so its total value is ever-changing as it is being held. If the asset is real estate, its value is also appreciating or depreciating. The Trustee may also be paid for his services or otherwise spending money.

How do you know if you need a Trust?

You know which of your assets you want to pass to someone. Together, we’ll look at those assets and the situation around them and offer our best advice as to how to handle them within you Estate Plan. Here’s an idea of how you can benefit from a Trust.

• Do you own Real Estate?
• Do you have children?
• Do you have grandchildren?
• Do you have a loved one of any age with special needs?
• Do you want to avoid the costs, delay and lack of privacy of a Probate Administration? Or do you value your privacy and don’t want your belongings to be a matter of public record as they will be upon Probate.
• Do you want to avoid the costs of a “Living Probate” — a Conservatorship?
• Do you want to motivate one of your loved ones to use his or her bequest wisely?

Did you know that if you own a Life Insurance policy, it will be taxed before any of your loved ones get a portion of that policy? For this reason, depending on the value of your estate, you may not want to be the owner of that policy. Instead, it may be better to place it into an Irrevocable Trust, called a Life Insurance Trust, for the Beneficiaries.

Rest easy with your Trust in place.

What are the benefits of having a Trust if you reside in California?

• Many people opt to place their assets into a Trust because assets within a Trust do not have to go through the Probate process. Anything in a Probate becomes a matter of public record. Items within a Trust are quietly transferred. (The alternative is to designate your belongings and the people who will inherit each in a Will, but the Will must go to Probate causing each belonging to be on the public record.)
• By properly setting up a Trust, you and your beneficiaries may find savings under the federal gift and estate taxes. However, this may cost your Beneficiary later on if he lives in California as California collects high income taxes on Trusts. As we review your assets we’ll be able to advise you on whether this is a wise action for you and your potential beneficiaries.
• Another reason some people may want a Trust is to protect assists from malicious, opportunistic or frivolous lawsuits. Sadly, there are people in the world who only want to gain the easy way, by suing rather than by earning. Rather than fall prey to these people, you might put some of your earnings or property into a Protective Trust (aka Asset Protection Trust) to ensure that it gets to be used well by the people you are working hard to provide for.
• You may want a Protective Trust to protect property from all future creditors including Medi-Cal claims for recovery after a loved one’s death. (This often becomes a 6-figure claim, sometimes a 7-figure claim.)
• You may also want to set up a Trust to ensure that your minor children will receive the assets you want them to have in order to have a secure home and financial future. When held in a Trust, the Principal is managed by the Trustee, taken care of until the Beneficiary is old enough to handle the responsibility. (You can read more about that under Planning for Children.) We don’t handle divorces, but you’ll find that Trusts for children are often a part of a divorce settlement as well.
• If you wish to donate a property upon your death an Irrevocable Trust may be the way to go.
• A Special Needs Trust can protect and take care of loved ones with special needs.  We discuss Special Needs Trusts here.

Living Trust vs Testamentary Trust

As we’ve said, when you hear the word Trust used, it is most likely a Living Trust. This is a trust that becomes effective while the Trustor, the asset holder, is still alive. A Living Trust doesn’t come into Probate — if it is properly set up and funded — so it is a private, simpler affair. Upon the death of the Trustor, all assets within the Trustor’s Living Trust are transferred to the Beneficiaries without even a single document needing to be filed in court assuming the Trust was properly funded at death. A Living Trust can be either revocable or irrevocable even after it has been put into effect.

Alternatively, you can have a Trust that becomes effective only after you pass away and your Will comes into effect. This is called Testamentary, as in “Last Will and Testament.” It is part of your Will and becomes part of the Probate process. As with the rest of a Will, you can change it as long as you are alive.

Revocable Trust vs Irrevocable Trust

When you place an asset into a Revocable Trust you retain full control of the assets (properties) that you’ve placed into it. You can change anything within the Trust, such as the Trustees and Beneficiary, and even terminate the Trust. Only upon your incapacity or death does the appointed Trustee take over this management/administration.

When you transfer an asset to an Irrevocable Trust you give up all control over that asset and you can no longer revoke that control. You must relinquish all control to the Trustee; he or she must be entirely independent. However, at LA Elder Law, we give the Trustor certain controls over the Trustees and Beneficiaries that takes the sting out of the word “Irrevocable.” Our clients can have their cake and eat it, too.

With a Revocable Trust you count as the owner when it comes to taxes. Generally, with most Irrevocable Trusts, you no longer own or control the assists so you are no longer responsible for taxes on these assets.

Most Irrevocable Trusts are ironclad property transfers. It is common to ensure that minor children will receive their settlement and in Elder Law and asset protection as well. If you wish to donate a property upon your death, this is a good way to do so as the property is no longer taxable under federal estate taxes. There are intricacies to all of this so count this only as an intro to the topic. As we go over your estate, we’ll recommend an Irrevocable Trust if we see that it benefits you.

What can you expect when you set up a Revocable Living Trust or Revocable Trust (RLT)?

You create the Revocable Living Trust (RLT) and give it a name, then transfer your assets from your own name to the name of the Trust. This must be done while you, the creator of the Trust, are alive. Because it is Revocable, you can control it — be your own Trustee, as long as you are deemed able. Only when you are incapacitated does your appointed Trustee (successor trustee) take over. (You can also have more than one successor trustee.)

In fact, you can not only be your own Trustee, but also your own Beneficiary. Yes, you still get to benefit from the assets in that Revocable Living Trust.

While you are able, you have full control of the items in this Revocable Living Trust and you pay tax on them exactly the same as before the assets were in the Trust. Even if you transfer your own home residence to the RLT, things such as your mortgage won’t change. You can sell any items within the Revocable Living Trust. You can remove any items that are within it. You can change the Beneficiaries, or change allotments to each Beneficiary. You can even dissolve the Trust completely.

What goes into a Trust — and what doesn’t?

As we discussed on the Wills page, there are some things you don’t need to put into a Will. These items also don’t need to be in a Testamentary Trust — or a Living Trust.

• any asset named in your Will
• your IRA if it has a named beneficiary
• your 401(k) if it has a named beneficiary
• your Keogh if it has a named beneficiary
• any other retirement account if it has a named beneficiary
• your life insurance policy, if it has a named beneficiary
  (Otherwise, the proceeds will be payable to the estate which then necessitates a probate proceeding.)
• bank accounts or stock market accounts that cite a joint tenant or have a named beneficiary
• cars not held in trust or joint tenancy
• real estate properties that have another person on the title with right of survivorship
• any annuity if it is being paid directly to a named beneficiary

What if you have a Living Trust and a Will that contradict one another?

If you have a Revocable Living Trust, it sets up the distribution of your assets. However, a Will does the same. So what happens if you leave both a Revocable Living Trust and a Will — and what happens if the two documents contradict one another? This can be a big problem and cost your estate a lot of money in legal fees, federal taxes, and perhaps family relationships. This is just one reason why people have us properly draft or to review their entire Estate Plan.

Wondering about a Qualified Personal Residence Trust?

You might have heard about a Qualified Personal Residence Trust. We use something more tailored to California and Medi-Cal. If we feel such a thing benefits you, we’ll be sure to recommend it to you.