Trust FAQ

1. What is a Trust?
2. Are There Other Documents That Come With a Trust?
3. What Kinds of Trusts are there?

What is a Trust?

There are several types of trusts, but for most people the revocable living trust provides the protection and flexibility sufficient for their estate needs.

A revocable living trust agreement is a contract between the Trustors and the Trustees. The Trustors are the persons who create the Trust and who deliver their property to the Trustees of the Trust. The Trustees are the individuals who manage the Trust Property for the benefit of the Beneficiaries of the Trust. The Beneficiaries are whomever the Trustors choose to receive benefits from the Trust.

For married couples, Husband and Wife are the Trustors, usually are the initial Trustees and are the primary Beneficiaries of the Trust. If the Trustors become incapacitated, or upon their deaths, successor Trustees will then manage the Trust under the terms of the Trust Agreement. Upon the death of both the Trustors, new Beneficiaries (previously selected by the Trustors) will receive the benefits of the Trust (typically a distribution of the trust assets to those beneficiaries as individuals).

The Trust Agreement sets forth how the Trust property will be used during the lifetime of the Trustors, and upon their deaths. The Agreement will state that the property of the Trust will benefit the Trustors during their lifetimes, using the income and principal, if necessary, to pay bills or buy additional property. (Actually, the Trustors use their property as they always have, for whatever purpose they choose. The only difference the Trustors will notice is how title is held. Title to property will now read in their names as Trustees of their Trust. Example: John Smith and Mary Smith, Trustees of the Smith Trust dated January 1, 2017.) If the Trustors become incapacitated, the successor Trustees use the Trust property for the benefit of the Trustors. All property titled in the Trust avoids conservatorship administration.

Upon the death of the Trustors, the Trust will act like a Will, distributing Trust property to those individuals as written in the Agreement. Property may be maintained in the Trust for the benefit of some individual, such as a minor or incompetent, using income or principal for whatever purposes described, with eventual distribution to that individual or some other person or entity. All property titled in the Trust avoids probate administration.

The Trust Agreement is revocable and amendable during the lifetimes of the Trustors. The Trustors, at any time, may amend the Trust Agreement to reflect changes in their lives (births, deaths, divorces, etc.). Beneficiaries can be changed or added. Upon the death of a spouse, certain Trust Agreements allow for the amendment of the Agreement only to the extent that it affects the surviving spouse’s property interests. Otherwise the entire Trust can be amended during the lifetime of the surviving spouse. When both spouses have died, the Trust Agreement becomes irrevocable and unamendable.

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Are There Other Documents That Come With a Trust?

Other estate planning documents that are generally created at the same time as the Trust Agreement are:

  1. Trust Certification-An abridged version of the Trust Agreement that assists the trustor with the transfer of bank accounts, security accounts, stocks and bonds to the trust (while keeping your personal information private).
  2. Declaration of Trust Ownership of Personal Property-Used to transfer title of tangible personal property (such as furniture and furnishings, jewelry and automobiles) to the trust.
  3. Grant Deed-Deed to transfer title of real property to the trust.
  4. Preliminary Change of Ownership Report-Delivered with the Grant Deed to the County Recorder to ensure no property reassessment due to the transfer of real property title to the trust.
  5. Pour-over Will-Will used to transfer any non-trust property to the trust upon the death of the trustor, and to nominate a guardian for minor children.
  6. Advanced Health Care Directive-Sets forth the directions and desires for medical care of an individual who has become incapacitated, and appoints an agent to make health care decisions for that individual.
  7. Durable Power of Attorney for Management of Property and Personal Affairs-Appoints an individual to make certain decisions in regards to non-trust property interests and personal affairs if the principal becomes incapacitated.

At the time that the Trust Agreement is signed the Trustors begin the transfer their property to the Trust by changing title of that property to the names of the Trustees. A grant deed is prepared, signed and recorded. Bank accounts (except your everyday checking account) are transferred. Same for stock or securities accounts. Tangible personal property is transferred. IRAs, retirement accounts and life insurance have beneficiary designations which can be changed (upon specific advice from your attorney or CPA) to allow for the Trust to receive the proceeds.

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What Kinds of Trusts are there?

There are numerous types of trusts available for many purposes. The most popular type of trust is the revocable living trust, discussed above. Listed here are just a few other select trusts with explanations of their purposes:

A Special Needs Trust is established to preserve governmental benefits for disabled or elderly beneficiaries. These are benefits (such as Supplemental Security Income (SSI) or Medi-Cal) that are available to a person if his or her income and/or assets are below a certain minimum level. The trust assets and income can then be used to supplement the beneficiary’s governmental benefits without interfering with the ability to receive those benefits. A third party (such as a parent, grandparent or sibling of a disabled child) generally establishes and funds the trust with his or her assets. The trustee will then use those assets and/or income to pay for extras or emergencies not anticipated or covered by the governmental benefits. The trustee is strictly guided as to the trust’s uses, with the idea of maintaining those benefits foremost.

A Life Insurance Trust is an irrevocable trust funded with life insurance. Its primary objective is to avoid inclusion of life insurance proceeds in the insured’s taxable estate. Must be carefully drafted to ensure that there are no “incidents of ownership” by the insured. Meaning, the proceeds cannot be used by the trustee to pay the insured’s estate taxes, debts or costs of estate administration, nor can the insured be the trustee or have the power to remove or replace the trustee; otherwise the proceeds will be included in the insured’s gross estate for estate tax purposes.

A Minor’s Trust is also an irrevocable trust. It is generally funded by a parent whose goal is to reduce his or her estate for estate tax purposes by gifting property or cash to the minor. Transfers to the trust are treated as transfers of a present interest to the minor and will qualify for the annual gift tax exclusion. The trust can be established or continue for a beneficiary who has attained age 18 but who has not yet attained age 21 (even though this person is no longer a minor under California law).

A Qualified Personal Residence Trust is a very specialized irrevocable trust wherein the owner will transfer his or her personal residence to the trust with the expectation that at a certain determined future date the property will be transferred to family members (usually children). The goal is to remove the property from the original owner’s estate for estate tax purposes.

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