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Your Guide to Setting Up a Trust
Setting up a trust is one of the most effective ways to protect your assets. For residents of California, where estate laws and taxes can be intricate, setting up a trust can also offer significant financial advantages and peace of mind.
Our estate lawyer at The Farano Law Group APC can walk you through the essential steps and considerations involved if you live in Orange County, Riverside County, or Los Angeles County.
What Is a Trust?
A trust is a legal arrangement in which one party, known as the trustor or grantor, transfers assets to another party, the trustee, to hold, manage, and eventually distribute those assets to designated beneficiaries.
Trusts are commonly used for estate planning to avoid the probate process, minimize taxes, and provide privacy. There are various types of trusts that serve different purposes, which we’ll explore in more detail later.
In California, the laws governing trusts are outlined in the California Probate Code, which provides the guidelines for establishing, managing, and enforcing trust agreements. Whether you're creating a simple revocable trust or a more detailed irrevocable trust, it's crucial to understand these laws and how they apply to your estate planning goals.
Why Set Up a Trust?
Before diving into the details of how to set up a trust, let’s first explore why you might want to create one. The benefits of setting up a trust in California include:
Avoiding Probate: California’s probate process can be lengthy and expensive. A properly set up trust allows your assets to bypass probate, saving your beneficiaries time and money.
Privacy: Unlike wills, which are public documents, trusts remain private. This means that your estate’s details, including the identity of your beneficiaries and the value of your assets, aren’t made public.
Asset Management: Trusts can provide long-term management of your assets, especially for beneficiaries who may not be able to manage the assets themselves, such as minor children or individuals with special needs.
Tax Benefits: Some types of trusts offer tax advantages, including reducing estate and gift taxes. In California, trusts can also help manage high state income taxes.
Control: With a trust, you have more control over how and when your assets are distributed. For example, you can specify that certain beneficiaries only receive distributions at specific ages or life milestones.
Protection from Creditors: Certain types of trusts, particularly irrevocable trusts, can protect your assets from creditors or legal judgments, preserving your wealth for your beneficiaries.
Now that we’ve covered why setting up a trust is beneficial, let’s go over the steps involved in creating one.
Steps to Set Up a Trust in California
1. Determine Your Trust Goals
Before setting up a trust, it’s essential to clearly define your goals. Are you looking to avoid probate? Minimize estate taxes? Provide for a spouse or children after your passing? Each type of trust offers different advantages, so identifying your objectives will help you choose the right trust structure.
For example, if your primary goal is to avoid probate while maintaining control over your assets during your lifetime, a revocable living trust might be the best option.
On the other hand, if you want to protect your assets from creditors or give your beneficiaries assets in a specific manner, you may need to consider an irrevocable trust or a special needs trust.
2. Choose the Type of Trust
Once you've identified your goals, you’ll need to choose the type of trust that best aligns with them. The most common types of trusts in California include:
Revocable Living Trust: This is the most common type of trust, allowing you to retain control over your assets during your lifetime. You can modify or revoke the trust at any time. After your death, the assets in the trust will be distributed according to your instructions, avoiding probate.
Irrevocable Trust: Unlike a revocable trust, an irrevocable trust can’t be changed or revoked once it’s established. It provides greater asset protection and tax benefits, but you lose control over the assets placed in the trust.
Testamentary Trust: This trust is created through your will and takes effect after your death. It’s subject to probate but can be useful for managing assets for minor children or other beneficiaries.
Special Needs Trust: This type of trust is designed to provide for a beneficiary with disabilities without affecting their eligibility for government benefits.
Charitable Trust: If you want to leave assets to a charitable organization, a charitable trust allows you to support your chosen cause while receiving tax benefits.
Spendthrift Trust: This trust protects the assets from being accessed by beneficiaries' creditors. It also limits the beneficiary's ability to sell or misuse the assets in the trust.
Each type of trust has its own rules and advantages, so consulting with an estate planning attorney is crucial in selecting the right one for your needs.
3. Select a Trustee
The trustee is the person or institution responsible for managing the trust assets according to the terms set forth in the trust agreement. You can serve as the trustee during your lifetime if you create a revocable trust. After your death, a successor trustee, whom you designate, will take over.
It’s important to choose a trustee carefully, as they’ll have significant responsibilities, including managing investments, filing tax returns, and making distributions to beneficiaries.
Many people choose a trusted family member or friend, but you can also appoint a professional trustee, such as a bank or trust company, or if the trust’s assets are substantial.
4. Draft the Trust Agreement
The trust agreement is the legal document that outlines the terms of the trust, including the trustee’s duties, how assets should be managed, and when and to whom the assets will be distributed. This is the most important step in setting up a trust, and it’s vital that the document is thorough and complies with California law.
Because the trust agreement is a legally binding document, it’s crucial to have it drafted or reviewed by a California estate planning attorney to make sure that it’s legally sound and in line with your goals.
5. Fund the Trust
After the trust agreement is signed, you must transfer ownership of your assets into the trust. This process is known as "funding the trust." Assets that aren’t placed in the trust won’t be governed by its terms and may still be subject to probate.
It’s important to work with your estate planning attorney so that all assets are properly transferred into the trust, as any oversight could result in those assets being subject to probate.
6. Update Beneficiaries and Documents
Once your trust is funded, it’s essential to update your beneficiary designations on any accounts or policies that you have outside the trust. This includes life insurance policies, retirement accounts (such as IRAs and 401(k)s), and annuities. Additionally, it’s a good idea to review and update your will, as well as any powers of attorney or healthcare directives, to make sure they align with your trust and overall estate plan.
7. Maintain and Update the Trust
Your trust isn’t a “set it and forget it” arrangement. Life events such as the birth of a child, marriage, divorce, or the acquisition of new assets may require you to update your trust.
It’s recommended that you review your trust at least every three to five years, or sooner if you experience significant changes in your personal or financial situation.
For revocable trusts, making updates is relatively simple, as you retain control over the trust and can modify the terms at any time. For irrevocable trusts, changes are much more difficult (and sometimes impossible) to make, so it’s important to carefully consider the initial setup.
Talk to an Estate Planning Attorney
Setting up a trust in California is an essential step in comprehensive estate planning. By following the steps outlined in this guide and consulting with our estate planning attorney at The Farano Law Group APC in Orange County, you can create a trust that meets your unique needs and secures your legacy for future generations. Reach out today.