In essence, a trust transfers your assets while you are still alive to be held in trust (protected) for your beneficiaries. It avoids probate because it is created and takes effect during your lifetime. A trust allows you to control how your assets are managed, often with tax advantages. You retain control because you determine the terms of the trust and you select the “trustee”, the person who manages the trust for you. As the person setting up the trust, you are called the “settler” and often “settlers” choose themselves as the “trustee”. This puts the management of your assets in your control or the control of a “trustee” of your choosing rather than in the control of an administrator appointed by a judge. Moreover, during your lifetime, you retain the benefits of any property you place in the trust.
In California, the most common trust is a “Revocable Living Trust”. It is revocable because you retain the right to terminate the trust at any time. You can then choose to create a new trust, a will, or decide that you are comfortable with your wealth passing to your heirs under intestate laws without a will.
Usually, the creation of a trust is accompanied by “Durable Powers of Attorney”, “Advance Healthcare Directives” and “Pour Over Wills”. With a durable power of attorney, you allow a trusted agent to handle your financial affairs, including management of a trust, should you become incapacitated. Advance healthcare directives allow you to appoint an agent to make important health care decisions for you should you become incapable of making your own decisions. Because the agent makes important decisions for people regarding their health, many choose to limit those powers. Finally, a pour over will ensures that all of your assets not given to the trust are transferred to the trust at your death and provides for the distribution of those assets according to the terms of the trust. Because a pour over will is a will which operates after one’s death, it is subject to probate. However, because those assets not placed in the trust are usually a small percentage of a person’s total wealth, the probate costs are significantly reduced.
In addition, depending on your circumstances, you may also choose from among numerous “Irrevocable Trusts” which can offer significant tax advantages. These are often life insurance trusts or charitable trusts. However, irrevocable trusts are subject to strict statutory guidelines (government imposed conditions) which reduce your control over your wealth. Nonetheless, when considerable wealth is involved, irrevocable trusts can be an important estate planning tool in managing your wealth and reducing your tax burden.