To keep it simple – a trust is a legal/financial instrument that allows a 3rd party (trustee), to manage cash or invested assets; real property; securities; retirement accounts; art or collectibles and other valuables; life insurance or other annuities; as well as any number of different assets, held in trust… usually to be inherited by a trust beneficiary, or several beneficiaries – and set up by a valid “trustor” who is a parent or some other family member.
In California trusts are often used by wealthy families, or by an individual, to avoid probate; to use as a trust loan & Prop 19 parent-child exclusion to keep inherited property at a low tax base; to avoid property tax reassessment; to defer taxes, or avoid taxes altogether.
Or, when it comes to irrevocable trusts (trusts that can’t be altered), California homeowners and beneficiaries frequently make use of a trust loan & Prop 19 parent-child exclusion (formerly a Prop 58 exclusion) when inheriting a home in California & looking for trust loan property tax savings, and possibly buying out siblings that are inheriting the same property, that are looking to to sell their property shares for a higher price than an outside buyer would offer them.
Many people believe that beneficiaries get access to inherited assets more rapidly with a trust than they would through an estate with a Will… However, that is often not the case. Inherited assets held in a trust fund are frequently received from any number of different “final distribution” or inheritance payout schedules – i.e., for example cash distribution every five or ten years; or when a beneficiary turns 21, or 30, or 50, or on some other birthday.
A Spendthrift Clause (written into many California trusts) will make a trust even more inflexible, and insufferable for the beneficiary.
Trusts can be arranged in all sorts of ways, to specify exactly how and when inherited assets pass on to beneficiaries. Often stemming from the view the person leaving the trust had of the beneficiary… whether he is responsible handling money, or if she is a spendthrift with liquid assets… and so forth.
Different Types of Trusts
A Marital or “A” Trust is designed to provide benefits to a surviving spouse; generally included in the taxable estate of the surviving spouse
A Bypass or “B” Trust (also referred to as a “credit shelter trust”) is established to bypass a surviving spouse’s estate in order to make full use of any federal estate tax exemption for each spouse
A Testamentary Trust is created through a Will after a someone passes away, with funds subject to probate and transfer taxes; and often continues to be under probate court supervision.
An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust designed to exclude life insurance proceeds from the deceased’s taxable estate while providing liquidity to the estate and/or the trusts’ beneficiaries.
A Charitable Lead Trust makes specific assets available to a charity; with the balance of the decedent’s assets going to his or her beneficiaries.
A Charitable Remainder Trust enables a beneficiary to receive an income stream for a defined period of time and stipulate that any remainder go to a charity.
A Generation-Skipping Trust takes advantage of the “generation-skipping tax exemption”, distributing trust assets to grandchildren or even generations coming of age after grandchildren; without a generation-skipping tax or estate taxes being imposed on the subsequent death of ones’ children.
A Qualified Terminable Interest Property (QTIP) Trust distributes cash flow to a surviving spouse. When the spouse passes, those assets will then be distributed to other additional beneficiaries listed in the trust document. Often used in second marriage situations, or to maximize estate and generation-skipping tax or estate tax planning.
A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust funded by gifts by its grantor; designed to shift future appreciation on quickly appreciating assets to the next generation during the grantor’s lifetime.