Trusts and estates are two of the primary legal structures used to transfer assets over to heirs and beneficiaries after someone dies. Estates and trusts work in distinctively different ways and serve different functions. Estates function as a one-time transfer of assets that are distributed after death. Trusts, in contrast, allow the trust creator (the trustor) to establish an ongoing transfer of assets to beneficiaries before and after death.
What Is an Estate?
Simply put, an estate is everything you own. This can include your home (or other real estate properties), cars, bank accounts, portfolio investments, life insurance policy, jewelry, furniture, and other possessions. When you establish an estate plan, you are protecting these assets from being distributed against your wishes upon your death or incapacitation.
Estate planning covers the primary aspects of how your personal and financial affairs will be conducted. Estate planning also includes medical directives that can help you prepare for life events that may leave you unable to make healthcare decisions for yourself.
What Is a Trust?
A trust is a document that serves legal and financial purposes in an estate plan. With a trust, you select a trustee who will be responsible for distributing your assets to your beneficiaries. Since a trust document is just one component of a comprehensive estate plan, you should consider using it to complement other planning measures that honor your final wishes.
There are many different types of trusts operable in the state of California. Each of these trusts serves a unique and specific purpose. The following types of trusts are most commonly used in California:
- Revocable Trust – This type of trust allows the creator (trustor) to make changes to the document or cancel the trust altogether. As the trustor, you should be sure you always have recently updated documents of your trust.
- Irrevocable Trust – These trusts work in the opposite manner of the revocable trust. In an irrevocable trust, once created, the trustor nor anyone else is allowed to change the document.
- Asset Protection Trust – When a trustor has a lot of debt, an asset protection trust can protect the trustor’s assets from being subjected to creditor claims.
- Spendthrift Trust – This trust serves as a protection measure that operates similarly to an asset protection trust, but it works to protect the inheritance from the recipient’s creditors.
- Special Needs Trust – This trust is unique because it allows persons with special needs to be awarded their inheritance without impacting their Social Security benefits.
- Charitable Trust – These trusts prioritize the philanthropic interests of a trustor, often used by the wealthy to reduce tax liability.
- Constructive Trust – This type of trust may be deemed “in place” by a court. A decedent does not typically create a constructive trust.
Creating A Trust Requires A Few Simple Steps
Creating a trust document is a proactive way to take protective measures over your assets. While the process of creating a trust involves financial planning and legal red tape, it can be broken down into three (3) major components:
- First, as the trustor, you should take inventory of your assets. Asset inventory helps give you a clear idea of which types of property you possess to begin the process of selecting beneficiaries to receive said property according to the terms you select.
- Second, you will appoint your assets to a third party (a trustee) to manage and oversee. Your trustee will be responsible for upholding the terms set in your trust document. Examples of things a trustee can be required to do on your behalf include making funeral arrangements, overseeing property tax settlements, and distributing assets of your estate to your heirs and beneficiaries.
- Third, you decide which people or charitable organizations will receive the assets in your trust. This part of the process requires you to think deeply about the future to make decisions about how your beneficiaries will benefit from the item(s) you bequest.
Creating a trust document involves sophisticated planning, but it does not have to be an overwhelming endeavor. An attorney who is skilled in estate planning can help make the process easier to navigate.
What Differentiates an Estate and a Trust?
Trusts and estates are similar in the sense that both exist to distribute assets. However, they differ in terms of how asset distribution occurs. Trusts can be created while the trustor is alive. Furthermore, a trustor can make arrangements to distribute assets while they are alive.
Estates, however, only become operative at the moment of the trustor’s death. It is important to reiterate that trusts are documents that can serve as part of a more comprehensive estate plan. Creating a trust document can preserve assets in the estate and keep the estate itself out of probate.
A trust is intended to serve as a semi-permanent legal and fiduciary entity that can extend into some time in the future. In other words, trusts can distribute a decedent’s assets over time. An estate is a legal entity that is enacted on a one-time basis, though the assets acquired may be substantial enough to last for generations.
Now that you have a better understanding of the key differences between estates and trusts, the next step is acquiring legal assistance from an attorney with estate and trust experience to get you started.
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