A complete estate plan typically includes a variety of documents, often including some type of trust. The types of trusts used in your estate plan depend on your ultimate goals. These may range from minimizing taxes and fees related to your current estate to taking care of your grandchildren’s college tuition or ensuring favorite charities receive regular financial support for years or even decades after you’re gone.
Consulting with an experienced estate attorney is the best way to determine which type(s) of trust(s) make the most sense for your financial situation and goals. In the meantime, let’s look at the role of trusts in estate planning so you begin to understand more about your trust options.
Trusts In Estate Planning Are Essential
One of the biggest myths about estate planning is that creating wills and trusts is something that only wealthy people do. This is absolutely not true. Yes, estate planning becomes more complex with proportion to your finances and assets, but every adult needs to align their estate plan with where they are in life.
Until you own property, your estate plan may be as simple as ensuring you’ve completed beneficiary designations for all of your financial accounts (this can usually be done online or using a simple form), completing advanced medical directives, establishing end-of-life plans, and creating a simple will so your belongings are distributed as you wish.
Once you own a home, have children, or begin to grow your asset portfolio, it’s time to consider creating a trust or multiple trusts, depending on your goals and how you want to protect your family’s future.
What is a trust?
Unlike wills, which go into effect after you die, trusts are active as soon as they are finalized. The term trust is short for trust fund, a specific fund established by a grantor (you) to protect the interests of the trust’s beneficiaries.
Most of the time, family members are the prime beneficiaries of a trust. Still, your trust can also include other organizations, charities, or people you believe in and want to support.
Trust funds typically include:
- Properties/real estate
- Cash accounts
- Investment accounts
- Assets
The trust fund is overseen or managed by a Trustee. Unless the trust is considered irrevocable (rare and only advised in specific conditions), the Trustee or executor can change over the years. In many cases, you/your spouse will serve as the trustees while you’re alive – with additional or successor trustees named for specific circumstances- like your death or incapacity of any kind (like the diagnosis of Alzheimer’s or another form of dementia)
Examples of the different types of trusts are:
- Living trust
- A-B trust (for tax purposes)
- Marital trust
- Spendthrift trust
- Irrevocable trust
- Charitable trust
- Special needs trust
- Pet trusts (always useful but especially if you have an animal that has a long lifespan, like a parrot or ball python)
- And many more!
Only a qualified estate planning attorney can help you determine which type(s) of trusts would benefit you.
Benefits of Including Trusts in an Estate Plan
Regardless of which ones make the most sense, creating an estate plan that includes a trust has multiple benefits.
Your family avoids probate
If you die without a will (or estate plan) in California, your estate may have to go through probate. Probate is a long, drawn-out process that puts undue responsibility on your loved ones. It can also be costly, both in terms of finance and energy – especially if there is any debate or argument about “who gets what.”
Establishing a legal trust makes your wishes clear and almost incontestable in a court of law. Plus, because trusts go into effect immediately, you may reap real-time tax benefits (more on that below). Trusts allow for a nearly seamless and far less complicated transfer of assets and real estate for your family and other beneficiaries.
Reduce taxes
Trusts help your estate and your heirs/beneficiaries minimize or avoid state and federal taxes, including those related to real estate/property transfers. We can also help you set up trusts allowing annual “gifting” so your loved ones receive financial gifts under the current legal tax limits.
For example, in the 2024 tax year, the gift tax exemption rate is $18,000 for individuals or $36,000 for married couples filing a joint return.
Designate money for your favorite charity or charities
Charitable taxes are a popular option that allows the estate to contribute funds annually to your favorite charities or organizations. Like gift tax exemptions, charitable trusts allow you to gift money now, and – with proper planning – those contributions can continue indefinitely into the future.
Support your loved ones via special needs or college funds
If you have a child or grandchild with special needs, your estate planning lawyer will discuss special needs trusts with you. These provide invaluable peace of mind because you know your loved one will be taken care of regardless of what the future may hold for you.
You can also create trust funds for children, grandchildren, nieces/nephews, etc., specifically for their college tuition or costs. As mentioned above, you can also create trusts specific to pet care.
Trusts in estate planning for step-children or other blended families
Even the most nuclear families can be complicated, but blended families absolutely raise the risk of complicated or potentially contentious dynamics. Estate planning for blended families often includes trusts specific to protecting the assets belonging to a person’s biological children, but it can also be specific to protecting the interests of beloved stepchildren or step-relatives that wouldn’t necessarily be included otherwise.
Separate trusts like these may also be helpful if there is a close family friend, neighbor, etc., who you feel is like family and who you want to receive a portion of your assets after you die. Including them in a trust makes your biological/nuclear family less likely to contest it.
The inevitable unexpected life events
Life is not the straight and narrow path we may hope for, and unforeseen complications can arise anytime. By establishing revocable trusts, you create an estate plan with flexibility that can ebb and flow with whatever comes along.
Let Tseng Law Firm Help You Understand Your Trust Options
Would you like to learn more about trust funds and how they can support your estate planning goals? Schedule a consultation with Tseng Law Firm. We are dedicated to educating and counseling you on your planning options that address all your unique needs and concerns. Our goal is to provide you with peace of mind that you, your loved ones, and your property will be protected during and after your lifetime.