California trust laws allow for a variety of different types of trusts. Trusts are legal tools for financial planning, transferring ownership of property to a trustee for the benefit of the named beneficiaries. Some types of trusts are intended to reduce estate taxes or shield assets from creditors, while others serve as alternatives to lengthy and expensive probate proceedings.
California Trust Laws
Many California residents create estate plans, allowing them to have a say in how their assets will pass to others when they die. Setting up a trust is one legal tool that can help accomplish this end.
A trust is an asset-holding arrangement that gives one party the legal right to manage property on behalf of another. Every trust in California involves three different roles, which include:
- The trustor, or grantor, who funds the trust.
- The beneficiary, who benefits from the trust.
- The trustee, who handles the trust property for the beneficiary.
While it's easy enough to find do-it-yourself trust forms on the internet, it is wise for an individual considering a trust to get an overview of California trust options first. Many different types of trusts are referenced in the California codes but there are really two primary distinctions: testamentary vs. living trusts and revocable vs. irrevocable trusts. Each type of trust suits the needs of a particular financial situation.
Testamentary, or Probate, Trusts
In California, testamentary trusts are also called probate trusts. These are trusts that only become effective upon the death of the grantor, the person who makes and funds the trust. Frequently, testamentary trusts are created within the grantor's will, and often the grantor's intent in including a probate trust is to provide a managed fund for the benefit of minor children.
Although a will is effective the minute the person signs it, a probate trust within a will is not effective until after the death of the grantor. A person making a will can change it at any time and for any reason during her lifetime. That means that she can change the beneficiaries of a testamentary trust or any other aspect of the trust as long as she remains alive and of sound mind.
Read More: What Is a Non Testamentary Trust?
Living, or Intervivos, Trusts
A trust that a grantor creates during his lifetime is called a living trust. Unlike probate trusts, a California living trust is effective the moment the grantor signs, notarizes and funds it. Since the grantor remains alive, he can name himself as the trustee.
All testamentary trusts can be altered during the lifetime of the grantor, since they do not come into effect until his death. That means they are all revocable. However, living trusts in California can be revocable or irrevocable.
Revocable Living Trusts
Many people making California living trusts opt to make them revocable. This means that the grantor can modify the trust assets, add or remove beneficiaries or change any of the trust's terms up until the moment she dies or becomes mentally incompetent. This gives the grantor continued ownership and control over the assets she transfers to the trust.
A revocable trust is not a good tool to reduce estate taxes in most cases. Instead, people use California revocable living trusts to avoid the state's often complex probate procedures. However, it's important to note that for smaller estates, simplified procedures are available. An estate planning specialist can provide essential information regarding trusts and probate.
Irrevocable Living Trusts
Irrevocable living trusts are immediately effective, like revocable living trusts, but the transfer of the assets is irrevocable. That means that once a grantor creates an irrevocable trust, he cannot take back his assets or modify the trust terms.
Because of this, irrevocable living trusts can be used as a vehicle to gift property and reduce taxes. Still, it is wise for anyone considering this type of trust to consult an attorney or accountant to determine its effect on his estate.
Teo Spengler earned a JD from U.C. Berkeley Law School. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an MA and an MFA in English/writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.