How Do I Know If I Should Set Up a Trust?

It’s not easy to think about what will happen after you pass. When you start to make arrangements for your finances and your loved ones —at any time or age—somehow, it seems to make death seem more certain, even though we all know that eventually, we will die.

That’s why it’s critical that we prepare now, while we are healthy and able, for how we want things to play out if we were to pass away, especially with regardings to our assets.

The last thing you want is for your loved ones to be dragged through probate—a long, stressful, and public court process examining someone’s last will and testament—to settle your affairs.  But unfortunately, that’s exactly what happens when you fail to prepare in advance.

If you’re wondering what the estate planning process is all about and how to best prepare for the “what-ifs” in life, you’re not alone. Educating yourself on the estate planning process is key.

Should I Set Up a Trust?

Establishing a trust is the most effective way to avoid your family having to go through a long and expensive court process known as probate and ensure your wishes regarding your assets would be known and followed.  You should strongly consider setting up a trust if:

You have dependents like a spouse and children
You own more than $160,000 in assets
You own a home that’s worth at least $50,000

Talk to a Newport Beach estate planning lawyer to ensure your property and assets are handled the way you want them to be when you’re gone.

What is a Trust?

A trust is a legal document that specifies who should receive your assets when you pass away, including any restrictions or protections, and who is in charge of wrapping up your affairs.

Trusts involve three separate parties:

  • Trustor, or “grantor”: The person creating the trust and transferring assets to it
  • Beneficiary: The person who will eventually receive the trust assets.
  • Trustee: Third-party responsible for finally distributing the trust assets to the beneficiaries.

When someone creates a trust, they’re essentially transferring property and money from their individual name to the name of the trust itself.

Types of Trusts

While there are many types of trusts, the most common trusts are known as revocable trusts and irrevocable trusts.

The trust you choose should be based on your purpose for the trust, both now and in the future.

Irrevocable Trust

An irrevocable trust is simply one that cannot be revoked or changed by the trustor alone. The trustor will no longer have any control over the transferred assets, and they won’t be able to remove them from the trust. They also won’t be able to make changes to the trust agreement without the beneficiaries’ consent.

So, why would someone want to create an irrevocable trust?

There are a couple of reasons:

  • Irrevocable trusts have associated tax benefits since they are typically not part of your taxable estate. This allows you to minimize estate taxes. Irrevocable trusts are usually protected from the hands of any creditors or ill-intentioned third parties since the assets no longer belong to the trustor at all.

When an irrevocable trust is created, the trustor will transfer assets to the name of the trust entirely and forever. They can only be amended with very few exceptions and typically would require court intervention and approval.

Revocable Trust

If you want to retain control over the assets you place into the trust you’re creating, chances are a revocable living trust is the way to go. When a trust is revocable, the trustor, trustee, and beneficiary are all the same person. This gives the trustor total control over the trust assets. If this is the case, typically, the trustor must name a successor trustee and a successor beneficiary to take over the trust when the trustor becomes incapacitated or dies. A revocable trust can be changed or even dissolved at any time while the trustor is still alive and has the mental capacity to do so. When the trustor passes away, it becomes an irrevocable trust.

With a revocable trust, you’ll be able to amend the terms of the trust as life changes happen, which could be any of the following modifications:

  • Adding or removing assets from the trust
  • Adding or removing beneficiaries
  • Altering the terms and guidelines of the trust’s language
  • Dissolving the trust completely

In the case of revocable living trusts, though, tax planning through a tax advisor is essential. It’s important to understand what taxes your estate will be subject to and understand strategies that can help you reduce or eliminate tax liability when you pass away.

Furthermore, assets held inside a revocable living trust are not protected from ill-intentioned third parties, like creditors, predators, lawsuits, and ex-spouses.

Who Needs a Trust Instead of a Will?

Many people have wills and believe this is all they need to ensure their loved ones are cared for when they pass on. However, even when a deceased person has a Last Will and Testament in place, their estate often still goes through the California Probate Court process.

Probate is a long and expensive court process that your heirs at law must go through if you failed to pass your assets through other means like a revocable living trust, joint ownership, or beneficiary designation. As part of that process, the court will identify who your beneficiaries are according to California’s default laws, that all outstanding creditors of yours are notified, that all liabilities you have are settled, and that any remaining funds after the enormous court fee are distributed to your next of kin/heirs at law. The probate process is open and public so anyone can see what you owned at the time of your death.

So, what are the advantages of setting up a trust?

The most significant benefit of having a trust instead of a will is that the assets set aside in a trust fund do not go through the probate process. This means your loved ones can settle your financial affairs quickly, easily, and privately. Unfortunately, a Will does not avoid the probate court process itself but simply directs who you want the judge to put in charge of your estate and who you want to inherit from you.

How Much Money Should You Have for a Trust?

California estate law stipulates that estates valued at more than $166,250 and real property valued at more than $55,425 go through a formal probate process. For this reason, if your real estate holdings and overall estate value fall above those thresholds—or are close to the thresholds—you should create a revocable trust to protect your assets from probate.

If You Have Dependents, You Should Have a Trust

If you have a dependent spouse or minor children, a trust ensures that your wishes for taking care of your family are fulfilled. After all, they’ll rely on your assets for educational expenses and other heavy living costs when you pass away.

With an estate plan that includes funds for your loved ones’ health, maintenance, education, and support, you can ensure your loved ones will be taken care of and avoid them having to go through a lengthy probate process.

Protect Your Wishes… and Your Loved Ones’ Futures

Ensuring your loved ones are cared for after you’re gone can be complex. You shouldn’t have to worry about whether your financial wishes are carried out when there are options that will protect your assets for the future.

Is setting up a trust worth it? Well, that’s a complicated question.

Speak with an estate planning attorney about whether a trust is the best option for your estate so you can finally have some peace of mind.