Creating a trust in California can help you efficiently and cost effectively pass your property to your heirs plus it can also help you with management of the property during your lifetime. California has an extensive set of laws for the creation and operation of trusts.
A trust is a contracted legal device in which you can place your assets to be used by you or your future beneficiaries.
Like a last will and testament, a trust has provisions about which assets go to whom and how the assets can be used. When you pass away, you want to be confident that your belongings and property will go to the right people. Creating an estate plan will help you do that, and a trust can be part of it.
Trusts can also be used while you're still alive.
You could, for example, create a trust fund for your children's future education and living expenses plus it could be used to protect them from creditors. We can help you can create a living trust as part of your estate plan. In most situations in California, a revocable living trust is the normal planning tool around which everything revolves for both individual and couples.
Below we will go over more about how a trust works, its benefits and disadvantages, and the difference between types of trusts, including revocable vs irrevocable.
Key Takeaways
- A trust is an efficient and cost effective way to pass down property to your loved ones and heirs.
- One of the most significant benefits of a trust is avoiding probate court.
- A trust also allows you to control how and when your beneficiaries receive your money.
- Some types of trusts help minimize taxes or qualify for government benefits.
How does a trust work?
Here’s an overview of how a trust works, which may not be as complicated as you think:
- You create a trust document which is essentially a contract between you, your trustee (usually you will act as your initial trustee) and your trust beneficiaries (for example your children or could even be charities)
- You transfer assets into the trust (re-deed real estate and transfer accounts)
- Your trustee distributes assets from the trust (upon your death your nominated successor trustee implements your wishes as set forth in the document)
Create a trust agreement
The maker of the trust is called the grantor (also can be referred to as the trustor or settlor) who creates the trust by drawing up a trust agreement. This legal document includes all the information about how the trust works, including names of the grantor, trustee(s), beneficiaries, and basic administrative provisions. Think of it like a flowchart for what happens when, how gets what when, and how it all happens.
The named trust beneficiaries receive the trust assets. You should also list contingent beneficiaries in case the primary beneficiaries are unable to receive the assets.
From the start a trustee is appointed to manage the trust and they have a fiduciary duty to act in the trust’s best interests. Normally the initial trustee is the same person as the grantor. The successor trustee can be a financial institution, an independent fiduciary, or any person you choose. If you are the grantor and trustee, you must name a successor trustee to take over when you die.
Transfer assets into the trust
The grantor decides what assets should be placed in the trust. Normally you transfer your house and other real estate into the trust. You should also fund it with significant money and bank accounts, and can even have the proceeds of a life insurance pay out to the trust upon your death. 401Ks and IRAs can be routed to the trust in some instances but usually the named individual beneficiaries will suffice.
The trustee distributes assets
The trustee distributes assets according to the trust agreement. That might mean beneficiaries receive trust assets upon the grantor’s death. But it could also mean beneficiaries just receive trust income after the grantor dies. It all depends on the trust.
Once an asset has been distributed to the beneficiary, the beneficiary becomes the owner of the asset. The asset is no longer property of the grantor’s estate
Trust vs wills
A last will and testament is another way to pass assets on to your heirs but it could subject you to a probate court. Trusts and wills can often work in conjunction with each other.
For example, you can also use a special type of will called a pourover will to move assets into a trust that already exists.
Irrevocable trust vs revocable trust
There are two main ways to categorize trusts: irrevocable and revocable trusts.
Revocable trust
A revocable trust can be modified by the grantor. It is also called a living trust or inter vivos trust, because it's created while you're alive. When you die, your revocable trust typically becomes irrevocable (because you're dead and can no longer make changes to it).
With a revocable trust, you can continue adding or removing trust property, changing the beneficiaries, and updating the rules governing the trust during your lifetime. It becomes irrevocable upon your death and at time distributions must be made to the beneficiaries.
Irrevocable trust
An irrevocable trust can't be modified or revoked except under very specific circumstances via a court order. When you move an asset into an irrevocable trust, you no longer own the asset as you gifted/transferred it to the trust.
The tradeoff for this loss of ownership is that you are usually trying to minimize your exposure to estate taxes upon death or provide creditor protection to the beneficiaries.
Benefits of a trust
A trust provides a safe way to allocate your property and protect if future use by your loved ones. If you’re thinking about getting a trust consider these reasons:
More control
When you establish the trust, you set the terms, and they are enforced just like a contract. For example, you can draft a trust document that allows your children to access the money in the trust when they turn 30. You can then limit the amount of money a trust beneficiary can withdraw at any time, which you might want to do if you don't have confidence in the spending habits of your children. You can also give your trustee full discretion on how much to pay out and when before the age of 30. Pick a trusted person or institution to be the trustee.
Avoid probate
Trust assets can usually avoid probate, which is the legal process of proving a will or determining the rightful heirs when there isn't one. The probate process can get expensive, time-consuming, and painful, especially when someone disagrees with how the assets are being distributed and decides to contest the will. California probate hearings can routinely be set for hearing 3-4 months out so that adds to the delay. Note that not all estates are subject to probate. There are a variety of criteria to look at including the value of the assets held in the decedent's sole name; whether the assets are held in joint tenancy or have a pay-on-death designation or have a designated beneficiary; and whether the value of the assets at issue are less than the amount even required to be probated.
Probate is a public filing. Anyone with access to the court system records can see what probate assets you have or who you intended to pass them onto. Trust matters on the other hand are private which in general is a good thing but sometimes problematic if you have a trustee that does not diligently administer your estate.
→ More on how to avoid probate
Minimize taxes
A trust can help a large estate reduce or avoid estate tax. If your estate is worth a certain amount, known as the estate tax exemption amount, you may be subject to an estate tax. With proper planning, including sometimes using a combination of revocable and irrevocable trusts, you can minimize the value of the estate and pay less taxes on it, ultimately helping your beneficiaries get a larger inheritance. The estate tax applies to estates worth at least $13.99 million in 2025.
→ Learn more about the estate tax
Asset protection
Certain trusts can shield beneficiaries and the grantor from creditors and lawsuits. If your beneficiary is sued or in debt, the assets that were already designated for them in a properly structured trust cannot be used to pay for liabilities, since the assets in a trust are owned by the trust and the beneficiary does not directly own the principal or interest which would normally be subject to creditor claims. Note however that your common grantor revocable trust offers little or no creditor protection for you as the maker of the trust.
Disadvantages of a trust
There are a few reasons why a trust may not be right for you.
Trusts can be costly
Trusts are more expensive to set up than a will because they are more involved at inception. Trusts will give you substantial savings over time though. Wills are cheaper to set up at the front end but can be more costly at the tail end of things.
Trust agreements can be burdensome
Consider the scenario of a discretionary trust for your child that is set up after your death. The trustee is wholly in charge of disbursing assets, which means they may clash with the beneficiary. Who you choose as your trustee is important.
Proper trust drafting is important
It is important to seek proper legal advice and it is recommended to have an estate planning attorney draft the terms of your trust to avoid any complications or to just give you proper counsel along each step of the way. You do not need to have an attorney draft your trust but the terms of your trust need to make sense and your trustee must be able to understand and implement the trust terms after your death.
Alternatives to a trust
Trusts are just one part of your estate plan, but you have several options that can ensure your beneficiaries are taken care of after you're gone.
Here are some ways you can pass down your assets without a trust (or in addition to one).
Life insurance
If you have in-force life insurance coverage when you die, the death benefit will be paid to the primary beneficiaries named in the policy. Life insurance benefits are tax-free if you paid your premiums with after-tax earnings, and they do not have to go through probate.
Payable-on-death accounts
You can name a beneficiary to your bank accounts, brokerage accounts, and retirement accounts. Payable- or transferable-on-death accounts do not go through probate.
Contact us at (925) 472-8000 for more information or if you questions.