When people think about estate planning, many immediately focus on wills. But what many don’t realize is that trusts offer far more flexibility, control, and tax advantages. Trusts aren’t just for the wealthy—there are several different types of trusts that can serve a wide variety of purposes, from providing for loved ones with special needs to avoiding the probate court process to protecting assets for generations to come. In California, choosing the right type of trust can make all the difference in how your estate is managed and passed on.
In this guide, we’ll break down the key types of trusts, how they work, and how they can benefit you and your family.
1. Revocable Living Trust
A revocable living trust is one of the most common types of trusts that families and individuals use in California. It is called “revocable” or “living” because the owner of the trust can change the assets or terms of the trust throughout their lifetime.
This type of trust is a good option for many, since their needs and the needs of their family will change throughout their lifetime as long as the owner of the trust has the mental and physical capacity to make legal decisions.
If you wish to buy or sell a property, it can be added to or taken out of the trust. If new children or grandchildren are born or adopted into your family – or if your family situation changes in other ways – revisions can be made as needed.
Upon your death, your assets will transfer directly to the beneficiaries you have named without having to go through the probate court and process. This is a huge benefit for many families!
Benefits of a Revocable Living Trust:
- Avoiding Probate: Since assets are in the trust, they don’t go through probate, saving time and money.
- Privacy: Probate is a public process, but trusts remain private.
- Flexibility: You can change or revoke the trust at any time while you’re alive.
- Incapacity Planning: If you become incapacitated, a successor trustee can manage the assets without needing court approval.
2. Special Needs Trusts: First-Party and Third-Party
A special needs trust (SNT) is an excellent way to provide for a family member with disabilities or other special needs. A SNT allows you to provide for your loved one’s special needs without jeopardizing their eligibility for essential public benefits like SSI and Medi-Cal (or reducing the amount of those benefits).
Special needs planning is something that requires expertise and experience – it’s something that most firms don’t offer because it is so specialized. At Cookman Law, we handle a lot of special needs planning matters throughout the state and are committed to creating plans that are tailored to each family’s unique needs.
- First Party Special Needs Trusts are funded with the individual’s own funds. This often happens when the disabled individual inherits a sum of money or a retirement account – it allows the individual to still retain and maintain those assets without endangering their access to public benefits.
- Medi-Cal Payback: When the beneficiary dies, any remaining funds from a First Party SNT must be used to reimburse Medi-Cal for the services provided.
- Third Party Special Needs Trusts are funded someone other than the than the disabled individual, often by a parent, sibling, or grandparent.
- No Payback Requirement: Unlike a first-party SNT, there is no requirement to repay Medi-Cal after the beneficiary passes away.
- Pooled Trusts are a lower-cost type of third-party SNT that are managed by an organization or non-profit, allowing many families to take advantage of trusts that would otherwise require larger funding. (Note: Cookman Law does not advise regarding pooled trusts, but we can refer you to pooled trusts.)
SNTs in California are designed to pay for many things that are essential to a person’s quality of life.
Benefits of a Special Needs Trust:
- Preserves Eligibility for Public Benefits: Assets held in the trust are not considered when determining eligibility for SSI, Medi-Cal, or other needs-based government programs, allowing the beneficiary to continue receiving their benefits.
- Provides Supplemental Support: A Special Needs Trust can be used to pay for items and services that enhance quality of life and improve daily living.
- Asset Protection: The SNT can provide creditor protection as well as sheltering family gifts and inheritances.
- Long-Term Care Planning: A well-funded SNT can provide for an individual throughout their lifetime, providing peace of mind for those who love them.
4. Charitable Trust
A charitable trust allows you to leave a portion of your estate to a charitable organization while potentially receiving an income stream and tax benefits. There are two main types: charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).
Since the assets in a charitable trust can be invested, there is the potential for them to grow over time, which can benefit both the donor and the charitable recipients. In a CRT, for example, the donor can receive income for life while the remainder of the trust grows for future charitable contributions.
Charitable Remainder Trust (CRT):
You transfer assets to the trust, and then you or other individuals receive income from the trust during your lifetime. After you pass, the remainder goes to the charity.
Charitable Lead Trust (CLT):
The charity receives income from the trust for a set period, after which the remaining assets are passed on to your beneficiaries.
Benefits of a Charitable Trust:
- Tax Advantages: Depending on various factors, you may be eligible for an income tax deduction; there may also be estate tax or capital gains tax advantages.
- Philanthropic Impact: By creating a charitable trust, you can support causes that you are passionate about and develop a lasting legacy.
- Flexibility and Control in Your Estate Planning: Charitable trusts are very flexible in how they can be structured, allowing you to make a difference in the way you choose.
5. Dynasty Trust
A dynasty trust is designed to pass wealth down through multiple generations while avoiding estate taxes and protecting the assets from creditors. Unlike other trusts, which may expire after a few decades, dynasty trusts can last for 100 years or more, depending on state law.
This type of trust is specifically designed to allow families to transfer wealth down through multiple generations, ensuring that assets continue to benefit children, grandchildren, and even great-grandchildren. It creates a lasting financial legacy that can support the family for decades or even centuries.
One of the major benefits is that once assets are transferred into a dynasty trust, they are shielded from future estate taxes for as long as the trust remains in effect. Successive generations can benefit from the trust without incurring estate taxes upon each transfer of wealth.
Benefits of a Dynasty Trust:
- Minimizes Estate Taxes: By utilizing estate tax and GST exemptions at the time the trust is funded, the grantor avoids estate taxes on future wealth transfers, allowing assets to grow tax-free for the benefit of future generations.
- Asset Protection: A well-structured dynasty trust can protect assets from the creditors of the beneficiaries. It also can offer protection from division in the event of a divorce.
- Long Term Growth of Assets: By keeping assets in the trust and allowing them to grow over time, a dynasty trust takes full advantage of the power of compounding. Over multiple generations, the assets can grow substantially, providing long-term financial security for the family.
6. Qualified Personal Residence Trust (QPRT)
A qualified personal residence trust (QPRT) allows you to transfer your primary or vacation home into the trust, removing it from your taxable estate. You continue to live in the home for a specified period, and at the end of the term, the house is transferred to your beneficiaries.
This trust is designed to reduce estate taxes while allowing the grantor (the person creating the trust) to continue living in the home for a predetermined period. After that period, the home is transferred to the beneficiaries, typically family members.
Benefits of a QPRT Trust:
- Reduces Estate Taxes: Because the QPRT reduces the size of the estate, substantial savings are possible. In addition, the current value of the home is locked in for gift and estate tax purposes.
- Continued Use of the Home: The grantor retains the right to live in the home rent-free for the term of the QPRT (which can be a set number of years).
- Helps Preserve Family Wealth: QPRTs are often used to ensure that family residences, vacation homes, or other sentimental properties stay in the family.
7. QTIP Trust
A Qualified Terminable Interest Property (QTIP) trust is a special type of irrevocable trust that allows an individual (the grantor) to provide an income stream for their surviving spouse while maintaining control over the ultimate distribution of the trust’s assets after the spouse’s death.
This type of trust offers significant tax advantages, protects assets from remarriage or mismanagement, and ensures that the grantor’s wishes are carried out after the spouse’s death. For individuals in blended families or second marriages, a QTIP trust is an excellent way to balance the needs of the surviving spouse and other beneficiaries, ensuring that wealth is passed on according to the grantor’s wishes.
8. QDOT Trust
A Qualified Domestic Trust (QDOT) is an estate planning tool specifically designed for U.S. citizens who want to leave assets to a non-U.S. citizen spouse while deferring estate taxes. Since non-citizen spouses are not eligible for the unlimited marital deduction that U.S. citizen spouses receive, a QDOT allows the surviving spouse to delay estate taxes on the transferred assets until their death.
A QDOT is an essential estate planning tool for individuals with non-citizen spouses who want to take advantage of the marital deduction and defer estate taxes. It provides financial security for the surviving spouse, protects assets from immediate taxation, and ensures compliance with U.S. estate tax laws. For families navigating complex international estate planning issues, a QDOT offers flexibility, long-term asset protection, and control over how wealth is ultimately distributed to future generations.
9. A/B Split Trusts
An A/B split trust is a type of trust used in estate planning that “splits” into two separate trusts upon the death of the first spouse: the “A” trust (Survivor’s Trust) and the “B” trust (Bypass Trust). This structure helps maximize estate tax exemptions and protect the deceased spouse’s assets for future generations.
The Bypass Trust is often used to shield assets from estate taxes when one spouse passes away. The trust “bypasses” the surviving spouse’s estate by holding the assets of the deceased spouse, ensuring that their estate tax exemption is fully utilized.
How It Works:
- Upon the death of the first spouse, the trust divides into two parts: the A Trust holds the surviving spouse’s assets, while the B Trust holds the deceased spouse’s assets.
- The B Trust (Bypass Trust) provides income or benefit to the surviving spouse but keeps the principal out of their estate, preserving the estate tax exemption for the deceased spouse.
Benefits of an A/B Split Trust:
- Maximizes Estate Tax Exemptions: Helps preserve both spouses’ estate tax exemptions.
- Asset Protection: The B Trust’s assets are protected from future creditors or remarriage of the surviving spouse.
- Control Over Inheritance: Ensures that assets in the B Trust are passed to the children or other beneficiaries according to the deceased spouse’s wishes.
10. Irrevocable Life Insurance Trust (ILIT)
An irrevocable life insurance trust (ILIT) is used to own and manage life insurance policies, keeping the death benefit out of the insured’s taxable estate. Once the trust is created and the life insurance policy is transferred into it, the trust becomes the owner of the policy, and the death benefit is paid out to the trust’s beneficiaries upon the insured’s death.
Benefits of an ILIT:
- Estate Tax Reduction: Keeps life insurance proceeds out of your taxable estate, which can significantly reduce estate taxes.
- Control Over Life Insurance Proceeds: You can dictate how the death benefit is managed and distributed to beneficiaries.
- Creditor Protection: Because the ILIT owns the policy, the death benefit is generally protected from creditors.
This trust is ideal for individuals with significant life insurance policies who want to protect their estate from taxes and ensure that the proceeds are used in a way that aligns with their wishes.
Choosing the Right Trust for Your Needs
Trusts are incredibly flexible tools for estate planning, offering benefits ranging from avoiding probate to protecting assets for future generations. Understanding the different types of trusts available in California is the first step in creating a comprehensive estate plan that meets your specific needs. Whether you’re looking to protect a loved one with special needs, reduce estate taxes, or create a charitable legacy, there’s a trust that can help.
Cookman Law helps clients with revocable trusts, special needs trusts, dynasty trusts, QTIPs and QDOTs, and A/B trusts. While we do not help with charitable remainder trusts, ILITs, or QPRTs, we can refer you to people who do.
If you’re not sure which trust is right for you, we’re here to help. Our team specializes in crafting customized estate plans that ensure your assets are protected and distributed according to your wishes.
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