If you live in California, you may explore estate planning options within the state. It can be difficult to decide whether a will or a trust is the correct mechanism for you, as each has unique features and benefits. It’s important to understand both options before deciding.
What Is a Trust?
A trust is a legal arrangement that allows one party to transfer assets to another for the benefit of a third party. The party transferring the asset is called the grantor or settlor, and the party to whom the asset is transferred is called the trustee. The third party is called the beneficiary. In certain instances, all roles can be filled by the same person.
For example, you could create a trust and transfer your home into that trust, while continuing to manage and live in the home for the duration of your life. In that instance, you would be the grantor, trustee and beneficiary.
The trust document could name you as the trustee until your death or disability, at which time another person would take over as trustee for the benefit of any named beneficiaries under your trust. Trusts are commonly used in estate planning to manage and distribute assets during the grantor’s lifetime or after their death.
A trust may be revocable or irrevocable. A revocable trust can be altered or revoked once established, but an irrevocable trust typically cannot. There are different types of trusts, including the following:
- Living trusts are created during the grantor’s lifetime. Depending on the terms of the trust instrument, they take effect before or after the grantor’s death.
- Testamentary trusts are created through wills and take effect after the grantor’s death.
- Life insurance trusts allow the grantor to transfer their life insurance policy into a trust.
- Charitable trusts are created for the benefit of a charity or nonprofit organization.
- Special needs trusts are created for beneficiaries with disabilities and are structured to not disqualify the beneficiary from receiving government benefits.
The type of trust you create depends on your individual circumstances.
What Is a Will?
A will is a legal document specifying an individual’s wishes concerning asset distribution upon death. The individual who creates the will is called the testator, whereas the person receiving the assets named in the will is called the beneficiary. Usually, the testator appoints an executor in the will. An executor is responsible for managing the assets and working through the probate process to ultimately distribute assets to the named beneficiaries. Put simply, probate is the process of distributing a deceased individual’s assets.
There are different types of wills in California, including the following:
- Simple will: This will type is the most straightforward. The testator names their beneficiaries and the executor of their estate in a document. Most often, simple wills are a beneficial option for people with relatively few assets.
- Joint will: These are single wills executed by married couples who usually want to leave assets to each other and transfer jointly owned assets to beneficiaries.
- Holographic will: These are handwritten wills signed by the testator. In California, holographic wills are valid and enforceable when they meet specific requirements.
- Testamentary trust will: This is a more complex kind of will that allows testators to create trusts for their beneficiaries. The trust will be used to manage and distribute the testator’s assets after their death.
There is also a fifth option, called a pour-over will. This is a common type of will used in conjunction with a revocable living trust, serving as a “catchall” for the estate assets.
What Are the Benefits of Trusts and Wills in California?
Trusts have many benefits, such as:
- Control over distribution: Trusts allow you to specify how and when assets are distributed, providing clarity and control.
- Avoiding probate: Assets in trusts can usually bypass the probate process, saving time and money.
- Tax benefits: Irrevocable trusts can provide tax advantages, such as reducing estate taxes or protecting assets from income taxes.
Similarly, wills offer advantages like:
- Clear asset distribution: Like a trust, a will allows you to determine how your assets should be distributed
- Formal recognition of wishes: Wills serve as formal recognition of your wishes, potentially preventing disputes.
What Is the Difference Between a Will and a Trust?
There are differences between wills and trusts, although both are mechanisms for estate planning. Here are a few ways they differ:
- Asset transfer: When you create a trust, you must transfer assets into it. The trust terms determine how those assets are to be managed and ultimately distributed. Wills only specify how assets should be distributed.
- Effective date: Trusts can be effective before or after the grantor dies, while wills are only effective when the testator dies.
- Probating process: Trusts generally avoid probates, allowing for quicker asset distribution, but wills must usually go through probate.
- Privacy: Typically, wills become public records during probate. Since trusts avoid probate, beneficiaries can maintain a higher level of privacy.
- Tax benefits: While some trusts can offer tax advantages, wills generally do not.
- Time and monetary investment: Setting up a trust is a more comprehensive process, making it more time-consuming and expensive than drafting a will.
Do You Need a Will or Trust in California?
A will or trust is helpful for anyone who owns assets. However, certain life events or circumstances can make it even more important to have an updated will or trust in place. Here are some examples:
- Marriage: A change in marital status sometimes warrants the creation of a will or trust. A will or trust can ensure your spouse is provided for and your assets are distributed according to your wishes.
- Changes in family dynamics: If you divorce or remarry, updating or creating a will or trust to reflect the new circumstances can help protect your interests.
- Parenthood: If you have children, establishing a will or trust can help you address their financial needs until they reach adulthood.
- Health changes: If you or your loved one experiences a severe health issue, you can create or update your will or plans to outline your wishes regarding medical care or asset management.
- Business ownership: If you own a business, a trust or will can help you create a succession plan. This arrangement promotes a smooth business ownership and management transition after death or during incapacity.
- Changes in financial situation: If your wealth increases or you incur substantial debt, creating or updating your will or trust can help you protect yourself and your beneficiaries.
Factors to Consider When Choosing Between a Trust or Will in California
Trusts and wills allow you to outline your intentions for your estate and provide guidance to loved ones after you’re gone. Before deciding which mechanism to choose, consider the following factors:
1. Goal of Asset Distribution
The purpose of distributing your assets is a crucial factor. For example, a trust would be ideal if you want to transfer assets to a minor during your lifetime or manage properties during incapacity. In contrast, a will can be the better choice if your main priority is to avoid confusion after death.
2. Probate Concerns
A trust is generally the better option if you want your beneficiaries to bypass the probate process. A trust allows you to distribute assets directly to beneficiaries without court involvement. The probate process, which is almost certainly required if you leave only a will, can be complex, costly and time-consuming.
3. Tax Consideration
As mentioned, some trusts can provide tax benefits nonexistent in wills. If minimizing tax liability is a priority, consider setting up a trust. Remember to consult a trusted professional for personalized advice to make informed decisions.
Why Trust Us?
Barulich Dugoni Suttmann & Cummins Law Group, Inc. has provided estate planning services to Californians since 1989. We have extensive experience in the industry and understand federal, state and local laws. Our well-trained attorneys are diligent and proactive, and we strive to provide effective and personalized legal solutions.
We believe every case is unique, so we listen carefully and dedicate time to develop strategies that yield practical results.
Get Professional Legal Assistance Today
Barulich Dugoni Suttmann & Cummins Law Group, Inc. provides a range of estate, business and tax planning services. We can examine your situation based on the California law on wills and trusts and help you determine whether a will or trust is ideal. We can also draft the necessary documentation to reflect your intention. Contact us today to speak to one of our trusted professionals.
