The main vehicle that people use in California is a revocable living trust. You also hear the term family trusts or inter vivos trust, it is all the same thing. It is basically a revocable trust so that while you are alive, you can change it anytime you want, that is what revocable means.If you pick your friend Joe to be the Successor Trustee of the trust in case something happens to you and you donot like Joe anymore, you can do an amendment and change it so your friend Suziecan be the Successor Trustee of the trust in case something happens to you.
When you die, the trust then becomes an irrevocable trust which means nobody can change it and it says exactly who receives your assets and when they receive them. That is how that trust avoids probate. The revocable living trust is the trust that most people in California use.
A testamentary trust is set up in a will. Testamentary trusts work well when you have smaller estates and you want to hold the money in trust for the children until they reach a sufficient age of maturity, then they receive the money. The problem with testamentary trusts is that they are set up through the probate court, so your estate is stuck in the court system which is what you really are trying to avoid in California.
Irrevocable trusts are exactly what they sound like, you can never change them. For the most part, irrevocable trusts are used for tax purposes, such as avoiding estate tax purposes for very wealthy individuals. They also are used when you have a charitable intent such that you want to leave specific money for the benefit of a charity but you want to be able to use the assets while you are alive to support yourself.
When Can I Amend An Irrevocable Trust?
Generally speaking, absent a court order for a really good reason, irrevocable trusts cannot be changed, that is exactly what irrevocable means, you’re stuck with it!That is why I really caution people to avoid creating irrevocable trusts unless there is a really good reason such as you need to do estate tax planning if your estate is really large, or if you have a charitable intent.
The other reason that people create irrevocable trusts is when there is a situation where public benefits are involved, such as under the Medicaid and Medi-Cal system to where you need to protect assets such that the state doesnot take them when somebody dies because they are on government assistance for a nursing home or home care and things of that nature.
Who Should the Trustee of the Irrevocable Trust Be?
It depends on what kind of trust you are dealing with. When you are dealing with an irrevocable life insurance trust, it just has to be somebody other than the creator and the owner of the trust. When you are dealing with something like a charitable remainder trust, the grantor of the trust can be the trustee, that is not a problem.So again it all depends on what kind of trust you are doing in terms of who isgoing to be the trustee.
What is a Charitable Remainder Trust?
The charitable remainder trust is a very popular vehicle. The idea on the charitable remainder trust is that you are sitting on an asset such as a piece of real estate that you have owned for a long time and you purchased it for very little money and it is now worth a lot of money.So much so that if you turned around and sold it right now, you would pay a lot of money to the government in capital gains taxes.
The idea of the charitable remainder trust is that you give it to the charitable remainder trust and in turn the charitable trust then turns around and sells the piece of real estate. Since the trust is a charity, it doesn’t have to pay any capital gains taxes on the sale. Therefore you have the full value of the asset sitting in this charitable remainder trust that you just converted from an investment of some kind, whether it’s real estate or stocks or whatever into a big pile of cash.
What you then do is that you invest the money and every year for the rest of your life you take outeither a percentage payment out of it or the income that the trust generates. Then when you die, whatever is left over then goes to the charity that youset up when you created the trust. The idea is to be able to live off of a bigger pile of money while you are alive and give a bigger gift to a charity when you die.
People might say, “Well, wait a minute. My kids don’t get that money?”. Yes but there are ways to handle that. For instance, the trust can then buy a life insurance policy on you that is then payable to your children. So the insurance policy pays the kids the death benefit free of both income and estate taxes so everybody wins. So it is basically a lot of creative work in order to be able to not give the government hardly any money in taxes and maximize income and death gifts for everyone involved.
For more information on Different Kinds of Trusts, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (858) 278-2800 today.