Trusts can be a valuable tool for those who set them up, called settlors. When considering how to set up your California estate, it is generally recommended to establish a trust instead of writing a will. This is because trusts, as opposed to wills, are not subject to the probate process.
Another reason for establishing a trust is for tax purposes. Certain types of trusts are not subject to personal tax; the trust will generate revenue but will not be part of the settlor’s income tax.
While most of our clients have more familiarity with wills as opposed to trusts, a will is subject to probate. That is to say, a will, to be validated, must pass through a California Probate Court, pursuant to the California Probate Code. There are costs and time issues involved.
First, the client will be charged the court fees for probating the will. There are estate management fees involved that go to the lawyers. The cost in California is generally around 4% of the estate (note that wills covering estates that are worth less than $150,000 need not go through the probate process provided that the settlor or the settlor’s representative submits proper paperwork to the probate court).
Second, the probate process can be time consuming. When a loved one passes on, there are issues to worry about like grief, family functionality etc. Compelling the beneficiaries to undergo the probate process will just add to the stress. The probate process will take at least four months, and only then will the beneficiaries be able to obtain funds from the estate.
As such, it is generally preferable to avoid the probate process.
Setting up a trust may provide the settlor with tax advantages because, as mentioned, the settlor will be personally taxed on profit generated by the trust. This is usually done with an irrevocable trust, which is a trust that does not allow for changing the terms after it has been established. Legally, the trust, because of its remoteness from the settlor, is considered an entirely different entity and therefore not subject the settlor’s personal tax obligations.
Nonetheless, like everything else, the irrevocable trust must be created properly.
Case law from the 1920s, a time of great American prosperity, provided some considerations when setting up a trust for the purpose of tax remoteness. In the 1927 case of Brainard, Brainard was a highly successful stock investor who set up a trust that held much of his stocks. The trust would generate revenue via the stocks. Brainard was the trustee and his children were named beneficiaries. Brainard did not have any children, though he planned on having them in the future. The Tax Commissioner brought Brainard to court, challenging the tax remoteness. The Tax Commissioner was successful. The Court reasoned that a Trust must have real beneficiaries, not potential beneficiaries.
Considering a Trust? Speak with the Oakland trusts and estates firm of Melanie Tavare.