CASWELL BELL & HILLISON LLP
FRESNO, CALIFORNIA

ESTATE PLANNING 101: WHAT IS A TRUST?
A trust is a legal instrument that transfers title to designated property from the owner, called the trustor or grantor, to a trustee, who holds the property for the beneficiaries of the trust.  A trust is a “relationship” concerning the beneficial use and ownership of property.  There are three “jobs” in every trust:  the trustor, the trustee, and the beneficiary.  The same person can, and often does, hold the more than one “job” at one time.

Testamentary Trust
A testamentary trust, created in a will, takes effect when the grantor dies.  With a testamentary trust, the assets are subject to probate administration.  The probate court follows the instructions in the Will and establishes the trust, which trust is funded by property of the estate. 

Estate Planning Trust
The second and far more common category of trusts is the inter vivos trust, which is best described as an estate planning trust.  An estate planning trust is used to distribute assets after the death of the trustor(s).  It can also provide for property management in the event of the incapacity of the trustor.

For example, this writer represented a husband and wife in advanced years.  The wife handled all of the finances for the couple; the husband was starting to shows signs of dementia.  The wife developed terminal cancer.  Because we established an estate planning trust, the couple’s children could assist with financial affairs after the mother passed, without the need for a court-supervised conservatorship.

Funding the Trust
When an estate planning trust is formed, the trustor’s assets (house, brokerage account, et cetera) are retitled in the name of the trust.  As the name suggests, a revocable trust may be dissolved entirely by the grantor.  But short of that, the grantor may also change beneficiaries, replace the trustee, or change the composition of the assets in the trust.

Revocable trusts do not remove assets from the trustor’s estate.  The trustor pays taxes on his or her income, and if assets remain in the trust at the death of the trustor, they are part of his or her estate and at least potentially taxable as such. 

In contrast, an irrevocable trust permanently takes assets out of the grantor’s estate and puts them into the trust.  While tax savings can be realized with an irrevocable trust, this type of trust is not to be entered into lightly, as it will take action by a court to alter it later.  For tax purposes, the irrevocable trust becomes a separate entity.  After three years, assets in an irrevocable trust generally are not subject to estate taxes on the death of the grantor, but the transfer of assets into the trust may be subject to gift taxes.

Transfer at Death
Upon the death of the trustor, the trust assets pass directly to the named beneficiaries.  This is considered to be an advantage to a court-administered probate, which can add time and cost to the administration of an estate.  (Never forget the value of the “sunshine principle,” in which court supervision of a probate eliminates or exposes potential irregularities.)

Yet, the cost savings can illusory, if the beneficiaries have disputes regarding administration of the trust.  It is not unusual for trust beneficiaries to spend more in attorneys’ fees than they would have paid for a standard probate.

Is Probate Always Required?
As a practical matter, most estates, especially for married couples, are not subject to any probate at the first death.  Which is to say, the couple’s motor vehicles are transferred by DMV registration; transfer of the house is controlled by the deed; bank deposits are transferred by the account agreement, and payments under life insurance policies and retirement accounts are handled by way of beneficiary designations.  Thus, the concern expressed by some regarding the “evils of probate” and the need for an estate planning trust is sometimes overstated.

© Caswell Bell & Hillison LLP          Attorneys and Lawyers, Fresno, California