The difference between an Estate and a Trust can be confusing in the grand scheme of planning, or more commonly when an administration is occurring after the passing of a loved one. Let our San Diego estate planning attorneys help you break down the basics to help you understand.
What is an estate?
An estate refers to the entirety of a person’s property and assets at the time of death that was left in their personal name without a beneficiary designation. This includes all forms of property, like real estate, cash, bank accounts, stocks, bonds, 401k, other investments, personal belongings and other tangible or intangible assets. When a person passes away with property in their personal name, their estate is responsible for settling all their outstanding debts. Afterward, any remaining assets will be distributed to the beneficiaries as named in their will, or if the person died without a will, according to state intestacy laws. Depending on the value and type of assets left behind, this is commonly handled in a Probate Court proceeding, but more about that below.
What is a trust?
A trust is a legal arrangement in which a trustee holds and manages assets for the benefit of another person or group of people, called the beneficiaries. Trusts can be set up and utilized during a person’s lifetime, where the creator of the trust is the lifetime beneficiary and controller of all trust assets, with specific instructions on what to do with remaining assets at the trust creator’s death. They don’t need to go through probate court, making the process faster and more private. Furthermore, trusts can have more flexibility for tax planning, asset protection, and control.
Trusts can be extremely helpful for several reasons, including managing assets for minors, keeping family out of probate court, providing for beneficiaries with special needs, making charitable donations, or protecting assets from creditors.
To make things more confusing the property within a Trust is referred to as the Trust Estate, but you may still have a personal estate if you leave anything in your personal name with no beneficiary. It’s important to remember that a Trust can only control what is in it, and trust funding is perhaps one of the most important steps of creating an estate plan (and unfortunately one of the most common areas for mistakes).
Here are a few examples of trusts:
- A revocable trust is where the grantor can change or terminate the trust.
- An irrevocable trust is where the grantor cannot change or terminate the trust once it is established.
- A living trust is established while the grantor is still alive.
- A testamentary trust is established through the grantor’s will and takes effect upon their death.
- An Asset Protection Trust protects a grantor’s assets from creditors and lawsuits.
- A Spendthrift Trust is established to protect the assets from the beneficiary’s creditors.
- A Charitable Trust is established for charitable purposes, like tax deduction and grant-making.
- A Special Needs Trust is established to provide for the needs of a beneficiary with disabilities without impacting their government benefits.
In practice, most Trusts created by an estate planning attorney will be a combination of the above in one trust or a set of trusts (or other techniques) to accomplish your goals, with each Trust controlling specific assets. What’s right for you is highly dependent upon your goals and wishes in creating your plan.
What is Probate?
Probate is the legal process of administering the estate of a deceased person. The probate process typically begins when a person dies, and someone (often an executor) files a petition with the probate court to open a probate case. After the court approves the petition, the court appoints an executor to manage the estate and fulfill the responsibilities as required by law. During the process, the executor collects all the estate assets, pays off any debts and taxes, and distributes the remaining assets to the beneficiaries. The probate process can be time-consuming and costly and involve legal and court fees. Besides time and money, it is also a public process and will surely produce no shortage of headaches. The length of the probate process depends on several factors, including the estate’s complexity, the state’s laws where the probate occurs, and the presence of disputes among the beneficiaries or other interested parties, but 1-2 years is an average for a simple proceeding in California.
In review, estates and trusts are both legal structures used for planning the transfer of assets after death. The difference between an estate and a trust is that an estate is responsible for managing and distributing the assets of a deceased person. A trust is a legal arrangement where a trustee holds and manages assets for the beneficiary. Trusts can be set up during a person’s lifetime and can avoid probate court while offering additional protections.
Call Jenkins & Jenkins Today
Knowing the difference between an estate and a trust, and making sure you have the proper plan in place, can mean the security of knowing your beneficiaries are protected. Jenkins & Jenkins, Estate Planning Attorneys is a leading estate planning law firm in San Diego and throughout California. Allow us to help you determine what best suits your end-of-life intentions. We understand the importance of recognizing the distinctions between these two approaches which is why our team always goes above and beyond to ensure that you have the tools, guidance and resources that you need as you begin to make these decisions. Get in touch with us today to schedule your appointment!