A trust is an arrangement between you as trustor and your appointed trustee where property is transferred to the trustee for the benefit of your beneficiaries. You can change or revoke it while you're still alive, hence the name living trust. It is also known as a revocable inter vivos trust.
Why would I want a trust as part of my estate plan?
A trust can hold property for a spouse, partner, dependent child, friend or family member for a specified period of time. Property in a trust does not go through probate, hence minimizing costs and delays of probate. You also avoid unwanted publicity because it's a private document.
How does trust administration differ from the probate process?
Trust administration offers privacy and simplicity. Unlike your will, a trust is a private record, so information about your assets is protected. Probate is court supervised administration of your will. But even though living trusts don't have to be supervised by a court, a trustee may be required to seek court instructions to resolve disputes with beneficiaries over administration of the trust, which can be costly at times.
How popular are living trusts?
In California, living trusts are popular because they help avoid probate, which can be costly. Living trusts are also used for asset management or in anticipation of illness.
Can I escape taxation through a revocable trust?
Yes, but not always. For instance, a trust's income is subject to income tax. But trusts can be used to minimize estate and gift tax by taking advantage of estate and gift tax exemptions and the unlimited marital deduction for transfers between spouses.
What's the difference between an irrevocable and revocable trust?
A revocable trust can be changed or revoked by you while you're still alive. It's usually used to plan for disability and to avoid your will from being contested by others.
Irrevocable trusts are unchangeable. Irrevocable life insurance trusts can be used to remove a life insurance policy from a person's estate, avoiding estate taxes on the insurance proceeds.
How would I set up a trust for my child?
During your lifetime, you may set aside assets in your living trust to provide funds for your child's education, or to begin creating a wealth base for your child. Another way is to set up a trust by your will to delay distribution of assets to your children until they reach a suitable age or attain certain goals in life that are important to you, such as obtaining a college degree etc.
How do I choose my trustee?
Pick a trustee who will know how to implement your wishes in the trust document. Trustees interact with your beneficiaries and make decisions about the assets you put in your trust. The trustee will be tasked with gathering your assets, investing them, reporting their value to the government and paying taxes. He or she will also pay your creditors, report to your beneficiaries and a court and distribute your assets.
In California, you can be your own trustee of a living trust. A spouse, partner or close family member could serve as a trustee in coordination with a professional trustee, hired through a bank or trust company.
How can I defer estate tax through a trust?
Almost any transfer of assets, whether by gift during your lifetime or bequest upon your death, can have both state and federal tax consequences.
The most significant of the various transfer taxes is the unified federal estate and gift tax. During 2005, for example, the gross value of an estate that did not exceed $1.5 million was excluded from federal income tax filing requirements. For 2006, 2007, 2008, that amount increased to $2 million. In 2009, the estate tax exemption amount increased to $3.5 million. In 2010, there is no federal estate tax. After 2010, the exemption amount may revert to $1 million, pending any legislative changes. In California, it's not uncommon to have an estate that exceeds $1 million if you own a home, business, retirement account and/or a life insurance policy.
Deferring payment of the estate tax is one major goal of estate planning. The primary means of deferring estate taxes is to transfer an estate to a spouse, since transfers between sp