What is a Trust? The Basics

Simply put, a trust is an agreement in which one person (grantor/settlor) transfers assets (personal and/or real) to another person (trustee), and instructs the trustee to hold the property for the benefit of another person (beneficiary). In essences, it’s a contract. The trustee holds legal title to the assets of a trust, can enter into contracts with respect to those assets or acquire and dispose of those assets, but must be mindful of the beneficiary, since the beneficiary holds equitable title to those assets. Thus, there is a bifurcation of title.

There are various trusts, however we will not go into the details of each one. Types of trusts include: inter-vivos trust, testamentary trust, revocable trust, irrevocable trust, purpose trust, marital deduction trust, survivor’s trust, exemption trust, special needs trust, split-interest trust, and sprinkling trust.

Under California law the requirements for a valid trust are: the trust must have a settlor; the settlor must demonstrate intent to set up the trust; some property must be transferred to the trust; the trust must have a beneficiary; and the trust must have a valid trust purpose. A trust that transfers real estate must be in writing, however an oral trust is valid with respect to personal property.

How should title be transferred? Assets can be retitled, for example the title should read: John Doe, Trustee of XYZ trust dated 1/1/1990. Keep in mind that in respects to real estate, a grant deed would generally be necessary. Another form that assets can be transferred is through a Heggstad assignment. This is generally a petition to the court that evidence’s the settlor intent to transfer the property to the trustee and thus avoid probate.

In California, a trustee is subject to the supervision of the Superior Court. However, generally the courts will only get involved if someone files a complaint against a trustee. It’s also important to keep in mind assigning successor trustees otherwise risk the courts appointing a trustee who may not be someone that the settlor would have preferred.

What are the benefits of a trust? Generally, most desire to create a trust in order to avoid probate. What is probate? Probate refers to the court supervised process of administering an estate. In other words, collecting the assets, paying liabilities and taxes, finding and distributing assets to heirs. Probate can be time-consuming, expensive and are a matter of public record. Another benefit is to maintain continuity of a business without interruptions. If a settlor has a business it’s easier to transfer the business to a trust and name a trustee that is familiar with that business therefore when/if something happens the business can still run smoothly. Other benefits, which we won’t get into, include: planning for incapacity; income, gift and estate tax planning opportunities; segregation of assets to prevent commingling; privacy and/or name camouflage; assets protection against creditors.


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