Most US homeowners and business owners understand the importance of an estate plan; they just never seem to get around to completing the task. What do you need to know about a trust? Why are trusts a central component of any estate or business succession plan?
A trust is a designated legal entity or arrangement that holds property and assets for the benefit of another party. A trust is considered to be a separate and unique entity in the eyes of the law, with its own distinctly defined rights (much like a separate “person”). There are three primary roles within the trust entity: the “trustor,” the “trustee” and the “beneficiary.” The trustor gives the trustee (within the context of the trust itself) the right to hold title to and control or manage the property and assets within the trust. The “beneficiary” of the trust receives the benefit of the property and assets within the trust itself.
Trusts may be described by the timing associated with their creation. For example, a “living trust” is created for and used during the grantor’s lifetime. The living trust may also be referred to as an “Inter Vivos Trust.” A testamentary trust is usually established after the passing of the grantor. It contains specific instructions on the assets to be transferred into the testamentary trust as well as how they are to be managed and ultimately disbursed.
Trusts are also often described by the ability of the grantor to “revoke” or remove assets from the trust itself. In a revocable trust, property and assets can be placed into the trust or removed (revoked) from the trust at any point in time. In an irrevocable trust, property and assets placed within the trust cannot be revoked by the grantor once the legal entity of the trust is established and the assets are placed within it. Irrevocable trusts provide specific types of protection for the assets within the trust as well as potential tax advantages for the grantor.
In essence, a trust is utilized to reduce liabilities associated with the ownership of real property and significant assets. The trust entity provides an additional layer of protection for the assets it contains while, in some cases, also limiting a creditor’s access to those assets to settle debts or legal judgments.
Another important reason you need to know about a trust is the preservation of all you have worked so hard to build throughout your lifetime. A trust is an important estate planning and/or business succession tool that helps homeowners and business owners avoid the time delays, costs and taxes associated with probate.
In the absence of a trust, when a person passes away there is a legal process to ensure the proper protection and distribution of their assets (and debts) including real property, bank accounts, investments and personal property. Probate administrates the Last Will and Testament of the deceased or manages the estate of the deceased who passes without a will.
A properly structured and funded trust eliminates the cost, time and hassle associated with the probate. Assets are passed directly to the beneficiaries by the trustee according to the instructions of the grantor.
Here in California and across many parts of the US, the cost of taking a single property, such as the family home, through the process of probate will far exceed the cost of creating an estate plan and trust by tens of thousands of dollars.
Trusts can be established to provide for loved ones, special needs children, causes that are near and dear to your heart, as well as beloved pets. Trusts are often deployed to protect those who may face challenges such as addiction or spendthrift behaviors. A properly structured trust can also reduce the taxable burden to the parties who benefit from the trust proceeds (beneficiaries) and make it easier for the assets to pass from one generation to another. A trust is often an essential ingredient in the process of helping senior citizens to qualify for important Medicaid benefits.
Hopefully this article has helped you learn more about what you need to know about a trust and why a trust should be a part of any homeowner’s or business owner’s estate plan or business succession plan. A trust is a valuable legal vehicle that saves grantors and their beneficiaries tens of thousands of dollars while allowing important assets such as the family home or business ownership to pass quickly and efficiently from one generation to the next. A trust can protect your assets from creditors and ensure your wishes are carried out to the letter after your passing.
If you would like to learn more about how a trust can help California homeowners or if you should review and update your trust we invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
