Planning your estate can feel overwhelming, especially when trying to understand the different types of trusts available in California. Trusts serve various purposes, such as avoiding probate, minimizing estate taxes, protecting assets, and ensuring your loved ones are taken care of. This guide provides a comprehensive breakdown of the most common types of trusts in California and how they work.
Revocable Trusts
Living Trusts
A revocable living trust allows you to manage your assets during your lifetime while ensuring a smooth transfer to your beneficiaries upon your passing. One of the main advantages is that it helps avoid probate, which can be a lengthy and expensive process in California.
- Flexibility: You can amend or revoke the trust at any time.
- Privacy: Unlike wills, trusts are not public records.
- Incapacity Protection: If you become incapacitated, a designated successor trustee can manage your assets without court intervention.
Learn more about revocable living trusts.
A/B Trusts for Couples
An A/B trust, also known as a bypass trust, is designed for married couples to maximize estate tax exemptions. When one spouse passes away, the trust splits into two parts:
- Trust A (Survivor’s Trust): The surviving spouse retains control.
- Trust B (Bypass Trust): The deceased spouse’s share is protected from estate taxes.
This setup ensures that assets are preserved for future generations while minimizing tax liability.
Irrevocable Trusts
Unlike revocable trusts, irrevocable trusts cannot be modified after they are created. These trusts offer strong asset protection and estate tax benefits.
Life Insurance Trusts
A Life Insurance Trust (ILIT) keeps life insurance proceeds out of your taxable estate, ensuring that your beneficiaries receive the full payout without estate tax deductions.
More on life insurance trusts.
Qualified Personal Residence Trusts (QPRTs)
A Qualified Personal Residence Trust (QPRT) allows you to transfer your home into a trust while still living in it for a set period. This can significantly reduce estate taxes by locking in the home’s value at the time of transfer.
Spendthrift Trusts
A Spendthrift Trust protects beneficiaries who may be financially irresponsible. The trustee controls distributions, preventing reckless spending and shielding assets from creditors.
Testamentary Trusts
A Testamentary Trust is created through a will and only takes effect after the grantor’s death. This type of trust is commonly used to manage assets for minors or dependents who need structured financial support.
- Requires Probate: Unlike revocable trusts, these trusts must go through probate before becoming active.
- Beneficiary Protection: Helps ensure that assets are distributed responsibly.
Specialized Trusts
Special Needs Trusts
A Special Needs Trust (SNT) provides financial support to individuals with disabilities without affecting their eligibility for government benefits. These trusts cover expenses beyond what public assistance provides, such as medical care, education, and recreation.
Charitable Trusts
Charitable trusts allow you to support causes you care about while gaining tax benefits.
- Charitable Remainder Trust (CRT): Provides income to you or beneficiaries first, with the remainder going to charity.
- Charitable Lead Trust (CLT): Supports a charity first, then transfers assets to your beneficiaries.
Learn about setting up a charitable trust.
Generation-Skipping Trusts
A Generation-Skipping Trust (GST) allows assets to be passed directly to grandchildren or younger generations, skipping their parents to minimize estate taxes.
- Tax Savings: Avoids double taxation that would occur if assets passed through the middle generation first.
- Controlled Distributions: The grantor can set specific terms for how and when beneficiaries receive funds.
Credit Shelter Trusts
Also known as a bypass trust, this allows married couples to use both spouses’ estate tax exemptions, ensuring more wealth is passed on to heirs.
- Reduces Estate Taxes: Assets in the trust are not counted in the surviving spouse’s taxable estate.
- Preserves Wealth: Allows assets to grow tax-free over time.
Blind Trusts
A Blind Trust is used when beneficiaries should not have knowledge of or control over trust assets. This is commonly used by politicians or business executives to avoid conflicts of interest.
- Trustee Independence: A trustee manages assets without input from the grantor.
- Confidentiality: Beneficiaries do not have access to financial details.
Choosing the Right Trust
Selecting the right trust depends on your goals:
- Avoiding probate? Choose a revocable living trust.
- Protecting assets from creditors? An irrevocable trust or spendthrift trust works best.
- Providing for a loved one with disabilities? A special needs trust is the right choice.
- Minimizing estate taxes? Consider a QPRT, ILIT, or credit shelter trust.
Work With A California Estate Planning Attorney
Frequently Asked Questions
What is a California trust, and what are the main types?
A trust is a legal entity that holds assets for beneficiaries. The main types in California are revocable trusts, irrevocable trusts, testamentary trusts, and specialized trusts (such as special needs or charitable trusts).
What are the advantages of a living trust over a will?
A living trust helps avoid probate, offers greater privacy, and provides a smoother transition of assets compared to a will.
How does a testamentary trust work?
A testamentary trust is established through a will and only becomes effective after the grantor’s death. It’s commonly used to manage inheritances for minors or dependents.
What’s the difference between a revocable and irrevocable trust?
A revocable trust can be modified or revoked by the grantor, while an irrevocable trust cannot be changed once it’s created. Irrevocable trusts offer stronger asset protection and tax benefits.
How does a special needs trust protect government benefits?
A special needs trust ensures that a disabled individual can receive financial support without losing eligibility for public assistance programs such as Medicaid or Supplemental Security Income (SSI).