Should I Establish a Trust?

If you’ve reached a juncture in your life that you want to begin estate planning or revise an existing estate plan, you undoubtedly find yourself weighing and balancing an array of different options. As you go about this process, you will find yourself asking an array of different questions:

  • Should I write a will?
  • Should I hire a lawyer?
  • Should I establish a trust?

In this article we take on the question of whether or not you should establish a trust. The answer to that question impacts whether and how you should write a will as well as whether you should hire a lawyer.

Types of Trusts in California

Trust laws are established on a state-by-state basis. With that said, there tends to be a considerable degree of similarity in the different trust laws on the books in jurisdictions across the United States. In addressing the matter of whether or no you should create a trust, California trust law is used to illustrate this issue.

There are a number of different trust options available to you in California. These include:

  • Living trusts
  • Revocable trusts
  • Irrevocable trusts
  • Testamentary trusts
  • Married A-B trusts
  • Qualified terminable interest property (Q-TIP) trusts
  • Special needs trusts for disabled beneficiaries
  • Generation-skipping trusts
  • Qualified personal residence trusts (QPRT)
  • Pet trusts

Four Primary Objectives Associated With Creating a Trust

You may have some unique thoughts and ideas pertaining to why you want to create a trust. Understanding this reality, there tend to be four primary reasons why a person typically desires to create a trust:

  • Avoid probate with a trust
  • Avoid estate taxes with a trust
  • Protect assets from creditors and judgments
  • Control ownership of assets after death

Each of these potential goals of establishing a trust are discussed in turn.

Avoid Probate With a Trust

A primary objective in establishing a trust is to avoid the probate process when you pass on. The formal probate process can prove to be time consuming and expensive. Although there is a cost associated with establishing a trust (when you retain an attorney to do so), attorney fees and time associated with a formal estate process following your death will be more significant.

Avoid Estate Taxes With a Trust

Creating a trust is also a solid way of legally avoiding paying estate taxes following your death. Depending on the value of your assets, if that amount outstrips the available estate tax exemption, the amount of money paid out in the way of this type of tax can prove to be significant.

Protect Assets From Creditors and Judgments

Another objective of creating a trust in some instances is to set up a mechanism to protect assets from judgments and creditors. An irrevocable trust is the instrument used to accomplish this objective.

Control Ownership of Assets After Death

The creation of a trust also permits the individual that establishes it the ability to control ownership of his or her assets for at least some period of time following death. You are able to name beneficiaries in your trust that will benefit from it when you die. You can also designate what are known as successor beneficiaries, individuals that will benefit from your trust when the initial beneficiaries pass away.

In California, and elsewhere in the United States, there is a law known as the “rule against perpetuities.” This is a concept that restricts the length of time into the future you can go when it comes to conveying your property to people at a later juncture in time. What this rule means is that anyone who you designate to benefit from your trust in the future must have that benefit within the course of a life in being plus 75 years. For example, if you initially name your child as a beneficiary of your trust and he or she lives 40 years, a successor beneficiary would need to enjoy the benefits of the trust within 40 years of the date of your child’s passing. Typically, this permits a person like you the ability to name grandchildren and perhaps even great-grandchildren as successor beneficiaries of your trust.

The Need for Legal Assistance

Trust law is complex. Drafting a valid trust instrument is complicated. One significant mistake in the drafting process can render the entire trust invalid. For these (and other) reasons you are wise to retain the assistance of legal counsel if you desire to create a trust. In addition, an attorney with a background in this area of the law will be able to assist you in determining what type of trust you should establish in the first instance. An estate planning attorney typically schedules an initial consultation with a prospective client to go over all options, including what type of trust makes the most sense in a particular situation. As a matter of practice, there usually is no fee charged for this preliminary appointment.