Estate planning and administration post-mortem ensure our assets efficiently move to our heirs in the manner we directed.
In a previous post, we discussed the estate planning checklist necessary when reviewing your assets and directives (https://boyerfs.com/blog/estate-planning-checklist-in-california/). Today, I would like to review in more detail the necessity and types of Trusts available. This will not be an all-inclusive list or a one-size-fits-all approach, but an informative blog to hopefully bring some questions into your mind and provoke some kind of reaction that serves you and your family moving forward.
Trusts are vehicles where people can put/title their assets and avoid probate. For those who aren’t aware of what probate is, probate is the process completed when a decedent leaves assets to distribute, such as bank accounts, real estate, and financial investments. Probate is the general administration of a deceased person’s will or the estate of a deceased person without a will.
An executor is commonly named in the will or an administrator, if there is no will, to complete the probate process. This involves collecting the deceased’s assets to pay any remaining liabilities on their estate and distributing the assets to beneficiaries.
So which assets are subject to probate? I like to remember the abbreviation COMESTIC:
- COM = Community Property (assets owned by you and a spouse/partner). Some states, like California, are considered community property states, meaning each person has an undivided interest in a given asset if purchased during the marriage. Half of the asset would be included in the probate estate.
- E = Estate. If you have assets whose beneficiary is the estate. Those assets will be subject to probate.
- S = Singly owned assets. The asset would be subject to probate court if an individual does not have a trust or beneficiary listed.
- TIC = Tenancy in common. If two or more individuals share an asset (tenants in common), and one individual pre-deceases the other owners, the deceased portion would flow through to their estate and into probate.
The importance of the trust/trusts vary and are vast depending on estate value, among other specific situations.
A trust created during life when the grantor transfers the trust property to the trustee but reserves the right to revoke, alter, or terminate the arrangement and reclaim the property. Usually, the grantor is the trustee, but not in all cases. A revocable trust usually becomes irrevocable at the death of the grantor. Property in this type of trust IS included in the grantor’s gross estate.
This trust cannot be altered or amended without the court’s approval. Property in these trusts is rarely included in the grantor’s estate because they CANNOT terminate or reclaim the property in the trust.
This is a type of irrevocable trust (or provision in the trust) that has demand rights. The demand right can be granted to a minor through his/her guardian. When a contribution is made to the trust, the beneficiary has a temporary right to demand a withdrawal (typically 30 days). The withdrawal amount allowable is the LESSER of the annual exclusion amount or the value of the current year’s contribution.
This trust is not created until the person passes away and the will goes through probate. The testamentary trust, while not initially providing estate or income tax benefits, may ultimately do so as successive beneficiaries receive money or property.
Bypass “B” Trust
The first spouse to die controls the property of the trust. “B Trusts” can go by multiple names, such as a non-marital, family, or applicable credit amount trust. Assets would be placed into the trust and passed to the beneficiaries (children, relatives, etc.) when the grantor passes away. The surviving spouse may have income provisions but NO access to the principal in any way. The spouse can also decide to split income with other individuals. The beauty of the bypass trust is that it helps couples with substantial wealth and are looking for ways to reduce their estate tax burden by funding the full estate tax exemption amount ($12,920,000 in 2023 per individual). The Bypass Trust property is not included in decedent’s estate.
Marital “A” Trust
The second spouse controls the property of the trust. The assets flow via the unlimited estate exemption amount for married couples to the “2nd person” after their spouse passes. AKA… No estate taxes are due or paid. The surviving spouse has a right to all principal and income and may do as they please with the remaining assets. At their passing, the remaining amount is included in their gross estate and could be subject to estate taxes.
While this is not an exclusive list, and a lot varies depending on each person or family’s situation, this is meant to be a starting point to ask appropriate questions about if your assets are protected. Please reach out with any questions or to discuss your situation further.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.