What are the Differnet Types of Trusts: Choosing the Right one for your needs.

Contrary to popular belief, executing a last will and testament is not the only essential part of an estate plan. In many cases, establishing a trust is even more important than writing a will. Certain trusts can serve the same essential function of a will while also providing additional benefits. Many people find other types of trusts may be useful, and even vital, depending upon your financial and familial circumstances. This article is an overview of the different types of trusts in California. If you need assistance with a California estate planning matter, call a seasoned San Francisco Estate planning attorney at Bassin Law for advice and representation.

Key take-aways

• The two basic trust structures are revocable and irrevocable.
• Revocable trusts can be changed after they’re created; transferring your assets to a revocable trust can help you avoid the probate process.
• Irrevocable trusts typically can’t be changed or amended after they’re created. Several types of irrevocable trusts are available to choose from, depending on your reason for setting one up.

The world of trusts is not one-size-fits-all. The type of trust you choose should reflect your unique wishes for how your assets are handled now and in the future. A trust can help you navigate specific tax concerns or creditor protection, ensure your wealth supports your family, or leave a legacy for a charitable cause you believe in

Revocable trusts

As stated above, a Revocable Trust, also referred to as a living trust, is one that can be changed after it’s created. “A revocable trust can accomplish many of the same things as a will. However, there’s one key difference. By creating and transferring your assets to a revocable trust, you can avoid the probate process that’s required for a will. Probate can be both lengthy and public, and a revocable trust usually kept private.

A living trust is created and given effect while the trustor is still alive. Typically, upon the death of the trustor, the assets are passed to named beneficiaries. Passing assets via a living trust as opposed to a will can often be used to avoid probate.

Because you can make changes to your revocable trust at any time, for certain purposes you are still viewed as the owner of the assets.

For example, you’ll be responsible for making tax payments and reporting on the trust’s investment returns, and revocable trust assets are includable in your estate and are available to creditors.

You can set up your revocable trust to end in a variety of ways. You can have your revocable trust end upon your death, and have all assets distributed to your beneficiaries at that time. You can also set it up so that when you pass away, that revocable trust automatically creates irrevocable trusts that continue to hold property for different people or institutions.

Irrevocable trusts

You typically cannot change or amend an irrevocable trust

after it’s created. The assets are transferred out of your estate at the time the trust is created, and the trust pays its own income tax and files a separate return. This can give you greater protection from creditors and estate taxes. 

As stated above, you can set up your will or revocable trust to automatically create irrevocable trusts at the time of your death. When you use your will to create irrevocable trusts, it’s called a testamentary trust. But you can also set up irrevocable trusts during your lifetime.

 A testamentary trust,  is created to benefit the trustor’s heirs after the trustor passes away. Testamentary trusts are typically created in conjunction with a will and do not go into effect until the trustor dies.

There are a variety of irrevocable trust types to choose from, depending on your unique circumstances. “Your reason for setting up an irrevocable trust is critical in helping you select one that fits your needs,”. Are you setting up a trust to:

• Transfer wealth to the next generation?
• Keep a family business in the family?
• Leave a legacy with a charity you support?
• Minimize estate taxes for you or your beneficiaries?
• Shield your assets from creditors?

The following are scenarios where these concerns can be addressed through a type of irrevocable trust.

Irrevocable life insurance trusts

This type of trust (also called an ILIT) is often used to set aside funds for estate taxes. An ILIT might be particularly useful if you own a family business that’s set to remain in your estate when you pass away. You can create an ILIT ahead of time to ensure the business stays in your family, despite estate bills, by gifting the premium on your life insurance into the ILIT each year.

Your trustee will own the policy, and when you pass away, the trustee collects the policy proceeds. Those proceeds can be distributed to the trust’s beneficiaries, who can use them to pay estate taxes, ensuring they won’t have to sell the family business. The Beneficaries may also use it to fund a buy/sell agreement where they buy out the remaining owners once you pass away so they can control the company.

Grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs)

There are certain irrevocable trusts that are intended to last for only a specific number of years. Two examples are grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs).

“grantor retained annuity trusts, GRATs are a common way for people to minimize taxes on financial gifts to their beneficiaries, With this type of trust, you contribute assets to the trust and receive an annuity payment on a regular basis, usually a set percentage of the original amount of assets. The assets in the trust will inevitably rise and fall in value.

When the terms of the trust end, any remaining funds, including appreciation on the funds, transfer to your beneficiaries’ gift-tax free. If you’re no longer alive when the terms end, the assets will be part of the estate and subject to estate tax. This strategy is best used for owners who are in good health.

qualified personal residence trusts.QPRTs are another way to transfer assets to beneficiaries  more specifically, real estate. For example, if you want to give your home to your child but have no plans to move out. You could set up a QPRT for 10 years. If you’re alive at the time the trust terminates, the property passes outside of your estate and on to your child.

The Major Risk with a QPRT is that the homeowner dies between the time the QPRT expires and the next QPRT is enacted.

These are strategies to leverage both time and appreciation to get assets out of your estate with the goal of saving money on estate taxes.

Charitable remainder annuity trusts

Certain irrevocable trusts, such as a charitable remainder annuity trust, can help you leave a lasting charitable legacy. In this instance, you can set up the trust so that your children or other “Primary Beneficiaries” receive income to start, and then a charity or Charities you choose receives any remaining assets.

You can also set up the Charitible Remainder Trust to work the opposite way, meaning the charity receives income from the trust and then, after a certain period of time, the trust terminates and the remaining assets go to your children. This strategy may allow the owner to take advantage of  an income tax deduction up front for setting up this type of trust for a charitable donation. SEE IRC SEC 170.

Special needs trusts

If you have a child or family member with a disability, you might consider setting up a special needs trust. Special needs trusts are typically created for individuals who are eligible for government benefits due to disability.

Be aware, Gifting money to a child with special needs outside of a special needs trust may disqualify them from receiving Supplemental Security Income (SSI). With a special needs trust, you can provide for your child while ensuring they’re still qualified for government benefits.

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Domestic asset protection trust

A domestic asset protection trust (DAPT), also called a self-settled trust, can used to protect assets from future creditors, though it’s not every state recognizes this kind of trust. Where this kind of trust is allowed, it can be used to ensure the children retain family assets in the event of a divorce.

Generation skipping trusts

A generation skipping trust (GST) is a trust people often choose for tax reasons. This type of trust allows you to designate assets to your grandchildren, skipping over your children, thus bypassing estate taxes that would occur if they directly inherited your assets.

The Tax Code accounts for this Practice with the Generation Skipping Transfer Tax. Which would still tax these kinds of the transfers.

However, each individual has a generation has an allotted skipping tax exemption, just as you have an estate tax exemption..

These are just some of the many types of trusts available. When you know what you want out of your trust and how you want it to affect future generations, you can work with your tax and legal advisors to narrow down which trust makes the most sense for you.

Updates and Changes to Trusts

An irrevocable trust can be amended, or terminated only with explicit consent of the beneficiaries or by court order. Testamentary trusts are subject to similar restrictions because the grantor becomes unable to approve modifications after they pass away. Therefore, testamentary trusts behave much like irrevocable trusts after the Grantors passes away.

 According to the California Legislature, in most cases, an irrevocable trust may only be modified or terminated if all beneficiaries give their consent. Once the ownership of all assets has been transferred to the trust, the grantor, in a legal sense, relinquishes every right of ownership tied to the assets and the trust.

These are only a small sampling of the different kinds of trusts you might benefit from utilizing. Call a knowledgeable California trust & estates attorney at Bassin Law for assistance drafting a will, executing a trust, establishing a guardian, or otherwise for help planning your California estate. The diligent and thorough San Francisco estate planning legal team at Bassin Law is ready to assist clients with any trust & estate matters in the San Francisco Bay Area and Across northern California. Contact our estate planning office at 415-753-6200.