A Trust is an entity created by you designed to hold your property and income for the benefit of yourself and/or others as you determine and outline in the trust instrument. Certain terms key to trusts are:

  • Settlor – The owner of the property who establishes the trust.
  • Trustee – The person designated in the trust instrument to hold the trust property and is subject to fiduciary duties to manage it for the benefit of one or more others. Whenever a trust is said to hold property or own property in fact it is the trustee who holds actual title to the property.
  • Primary Beneficiary – The first person or persons designated by you in the trust instrument to receive the benefits of the trust and who are said to have a “present interest” in the trust benefits.
  • Successor Beneficiary – The next person or persons designated to receive the benefits after the primary beneficiary and holds a “future interest” in the trust benefits.
  • Contingent Beneficiary – A person or persons who may receive benefits at a later date depending on conditions set forth in the instrument which is termed a “contingent interest.”
  • Trust Instrument – The document used by the Settlor to create the trust. Among other things it provide for:
    • Naming of beneficiaries
    • Appointment of Trustee(s)
    • Distribution of income
    • Powers of the Trustee
    • Addition and removal of property in the trust
    • Termination of the trust

Trusts can be either a:

  • Revocable Trust – A trust which pursuant to the terms in the trust instrument allows the Settlor to revoke or terminate the trust during the Settlor’s life.
  • Irrevocable Trust – A trust that may not be revoked or terminated by the Settlor but terminates on its own based upon provisions of the instrument.

Trusts can be created during your life which is known as an intervivos trust or designed to take effect at your death in a will which is known as a testamentary trust. Some of the advantages of creating a trust include:

  • Avoidance of Probate– If property is transferred to your trust prior to your death then that property is not owned by you at death and thus is not part of your estate. Rather the ownership of the property is transferred to successor beneficiaries under the terms of the trust. Because California has very regimented and formal probate process using the trust can save thousands of dollars in administrative costs, attorneys fees and court costs. Furthermore, due to the regimented nature of probate a trust can be settled much sooner than probate as there is no requirement for court hearings or approvals prior to distribution of your property.
  • Confidentiality- Because in most cases there is no need for court proceedings or supervision, a trust is an effective tool for maintaining confidentiality of the nature, scope and distribution of your property, subject however to limited notification requirements based on California law.
  • Simplicity and Continuity of Property Management- The trust property is managed by the trustee pursuant to terms set forth by you in the trust instrument. If you are the original trustee and become unable to manage your property the trust can provide for continuation of the management without the need for seeking a formal conservatorship in the courts.
  • Preservation of Property- Many property owners will use a trust to hold property for their loved ones as opposed to an outright gift allowing the property to be distributed under defined rules in order to protect the property from the children’s creditors using spendthrift provisions and in cases when the children might not exercise the best judgment upon receipt of the property or if the child is a minor.
  • Taxes- A carefully drafted revocable trust can be prepared to reduce or eliminate estate taxes upon your death. Irrevocable trusts can be be used during the your life to reduce or eliminate estate taxes, gift taxes andgeneration skipping taxes.


Revocable Trusts

The Revocable Trust also known as the Revocable Living Trust is the workhorse of contemporary estate planning. Used in conjunction with a will, power of attorney and an advance health care directive it provides the estate planning attorney and you a powerful tool to design an effective system for the transfer of your property based on your expectations and objectives. Furthermore, with attention to detail flexibility can be built into the plan so that the plan can be modified or revoked to provide for changes in family circumstances, objectives and constantly evolving tax laws.

In most estate planning situations you will transfer your property to a revocable trust appointing yourself as trustee. This allows you to use the property for your own benefit as you desire and upon your death the property will pass based on your wishes as set forth in the trust instrument.

The most commonly used Revocable Trusts are:

  • The Simple Trust – This trust involves the transfer of your property to the trust and allows you to use the property for your own use and enjoyment and after your death the property will transfer outright to your beneficiaries.
  • The Separate Share Trust – This trust is very similar to the simple trust except for the distribution provisions at death. Upon your death the property continues in separate trusts for each your beneficiaries pursuant to terms drafted along your wishes and desires.
  • The Bypass Trust – This trust which is also known as the Credit Shelter Trust is typically used when the settlors are husband and wife and the goal is to limit or avoid Estate Tax. As in the other trusts, during the settlors life, both spouses will transfer their property to the trust. At the death of the first spouse, that spouses share is placed into another trust that the surviving spouse can use for defined purposes (usually health, education, maintenance and support) and at the death of the survivor this property is passed to successor beneficiaries either outright or in trust. The share that is placed in trust at the first to die is usually equal to or less than the amount any person can pass at death free from Estate Taxand thus preserves the deceased spouses exemption and minimizes taxes on the combined estates of both spouses. As a result of tax law changes in late 2010 the bypass trust will most often appear in the form a disclaimer trust due to the portability of the unified credit. A form of Bypass Trust can be used by single individuals and domestic partners however its use for tax planning is limited. In this case an individual may wish to establish a trust for the benefit of a specific person or persons and at their death the property will pass to the ultimate beneficiary and thus in reality giving the intervening beneficiary only the right to use and enjoyment of the property.
  • The QTIP Trust – The Qualified Terminable Interest Trust (QTIP) is designed to save estate taxes and is used between a husband and wife. As in the other revocable trusts, property owned by the Settlors during life is placed in trust. Upon the death of the first spouse, property owned by the first spouse is set aside in trust for the use of the surviving spouse as in the case of the bypass trust but in this case typically property that exceeds the tax exemption is placed in the trust. This gives the first spouse to die control over the ultimate disposition of the property and the surviving spouse use of the property. Furthermore, the balance remaining in the trust upon the death of the surviving spouse is not subject to probate or the creditors of the surviving spouse.
  • The QDOT Trust – The Qualified Domestic Trust is a QTIP trust used when the surviving spouse is a non citizen. If all of the technical Estate Tax rules issued by the IRS are followed then the Settlor of the trust should be able to obtain all the benefits of a QTIP for the surviving non-citizen spouse.

Irrevocable Trusts

Irrevocable Trusts are primarily used for advanced tax planning and share many similarities with the rules and concepts of revocable trusts in that they both provide for the transfers of property to the trustee who manages and distributes the property pursuant to the guidelines set forth in the trust instrument. However, the most notable difference is that the transfers of property into the trust usually are final and cannot be revoked. Some of the more common types of irrevocable trusts are:

  • The ILIT – The Irrevocable Life Insurance Trust is designed to save onestate taxes. If you die owning insurance, the total amount of the proceeds are added to your estate and if the total estate exceeds allowable exemptions then potentially you would have to pay tax on your insurance proceeds which would result in lower benefits for your loved ones. By transferring your life insurance to an ILIT that specifically complies with all of the rules the potential tax savings can significantly outweigh the expense of establishing the trust.
  • The GRAT – The Grantor Retained Annuity Trust is designed to save taxes by transferring property to the trust but retaining a right by you to receive a fixed amount for each taxable year of the trust and at the end of the trust the property is distributed to the beneficiaries.
  • The GRUT – The Grantor Retained Unitrust is designed to give you a fixed percentage of the trust property calculated on annual basis for a specified term and at the end of the term the trust terminates and the property is distributed to the beneficiaries.
  • The CRAT – The Charitable Remainder Annuity Trust is designed to pay the you or other persons designated by you a fixed amount each year  for the recipients life or a term not to exceed twenty years and pay the balance at termination of the trust to one or more charitable beneficiaries.
  • The CRUT – The Charitable Remainder Unitrust is created to hold property placed by the Settlor for the benefit of the Settlor or others designated by the Settlor. The trust must pay on an annual basis a fixed percentage of the assets and at the termination of the trust the property remaining will be given to one or more charitable beneficiaries.

Trusts are extremely flexible and provide an excellent opportunity to draft a plan tailored to your specific needs and objectives. Using a trust as the foundation for yourestate plan will eliminate many surprises that confront your loved ones after your passing, and lighten the burden as they go through the grieving process.