From the Desk of San Diego Will and Trust Attorney, Kristina Hess:
Sometimes, when I talk with people in San Diego, Del Mar, Encinitas, Solana Beach, Rancho Santa Fe, and La Jolla about estate planning, they are confused about the difference between a will and a trust and want to know the basics of trusts and revocable living trusts. So, here is a very basic primer.
Trusts are entities that exist just as individual people exist. Trusts, therefore, are capable of doing most things that people are capable of doing with respect to operating in business and life. They can enter contracts, buy real estate, make investments, open bank accounts, start businesses, and even inherent property.
Like business entities, trusts operate at the direction of people. In California, the people who create trusts and put assets into them are called settlors. The people who operate trusts are called trustees. Trustees make the decisions, and they direct trust assets. Of course, there are constraints. For one, trust documents typically spell out the guidelines that trustees must follow. In addition, the law imposes a very high level of fiduciary responsibilities on trustees in order to ensure that they are managing assets properly and not engaging in improper conflicts of interest.
Finally, the people who receive trust income and those who are entitled to receive trust principal are called beneficiaries. In other words, trustees manage trust assets for the beneficiaries. Under certain circumstances, this structure—management of assets by the trustee for the benefit of the beneficiaries, who have no control over the assets—creates a shield between the creditors of beneficiaries and assets held in trust.
A Grantor trust is a trust where the settlor is also the beneficiary. Revocable living trusts (RLT) are an example of a grantor trust. In an RLT, the same person or people are the settlors, beneficiaries, and the trustees. In this type of setting, trust assets aren’t protected from creditors. The purpose of a revocable living trust is simply to avoid probate after death. Another purpose is to control who gets what, when, and how, to provide for oneself in the event of an incapacity and to structure distribution of assets upon death.
By putting assets into the name of a trust, you can retain control of those assets and beneficial use of those assets and, at the same time, avoid ever giving the judicial system control over the disposition of your assets when you die (and avoid being subject to unnecessary taxes).
Revocable living trusts are the ultimate in “pass through” type entities. The settlor retains all the benefits of ownership (and runs the risk of exposing assets in the trust to creditors), including the ability to sell, lease or mortgage certain property, and has a built-in last will and testament-type feature.
Trusts: Not One Size Fits All
In California, especially in San Diego county where we have (even now) relatively high real estate values, anyone who dies with even a small net worth needs to have a revocable living trust and a “pour over” will. The “pour over” will typically leaves everything to the revocable living trust and serves as a safety net if an asset was not properly “funded” to the RLT (ownership change made to the trust). The trust then controls the distribution of assets. Again, this is all designed to avoid an expensive and unpredictable probate process and provides a means of estate tax avoidance.
But some people need trusts that are more protective in nature—trusts that truly protect against the claims of creditors or those who might file frivolous lawsuits. Others need trusts to protect against estate taxes. Whatever your ultimate needs may be, you need to start with a revocable living trust and a will. All planning for anyone with assets will require those two tools on some level.
Revocable Living Trusts are the backbone of most estate plans.
If you have any additional questions, please contact our office at www.krhess.com or by calling (858) 461-6844.
Create Legacies that Last!
San Diego Trust Attorney