A property interest held by one person, the trustee, at the request of another, the settlor, for the benefit of a third party, the beneficiary. Black's Law Dictionary (8th ed. 2004).
The easiest way to conceptualize a trust, is to picture a triangle, the settlor is on top with the trustee on the left corner and the beneficiary on the right corner. The settlor creates, the trustee manages and the beneficiary enjoys.
For illustration, Samuel and Selma, the settlors, transfer title to their Santa Cruz beach house to Thomas, the trustee, to hold in trust for the benefit of their son, Bobby, the beneficiary. Thomas now holds legal title to the beach house, so if you looked up county property records for the beach house, Thomas would be the record owner. Conversely, Bobby now holds equitable title to the beach house, meaning he can enforce his rights to enjoy the beach house in court if necessary.
2. Who can create a trust? (Top)
The creation of a trust involves a contractual relationship between the settlor and a trustee. Estate of Bodger, 130 Cal.App.2d 416 (1955). Thus, “a person entirely without understanding has no power to make a contract of any kind.” California Civil Code §38.
Conversely, if you have the common sense to know that the sky is blue, gravity exists and the sun rises in the east and sets in the west, you have the mental capacity to execute a contract and thereby a trust.
3. What items can be placed in trust? (Top)
Various property interests may be placed in trust: real and personal property, securities, bank accounts, mutual funds, individual retirement accounts, businesses and pets.
For example, you could place your family home, Bank of America checking and savings account, General Electric stock and your 401(k) into a trust.
4. How can a trust be created? (Top)
(1) A declaration (oral or written) by the owner of the property that he holds property as trustee;
(2) A transfer of property by owner during the owner’s lifetime to another person as trustee;
(3) A transfer of property by the owner, by will or other instrument taking effect upon the death of the owner, to another as trustee;
(4) An exercise of a power of appointment to another as trustee or;
(5) An enforceable promise to create a trust. California Probate Code §15200
5. How long do trusts last? (Top)
Most trusts, namely living trusts, typically last for the lifetime of the settlor(s).
As for the maximum duration, California law provides that a trust may last at least 90 years before the rule against perpetuities is applied. California Probate Code §21205. The rules against perpetuities is an incredibly antiquated law that no attorney really understands, trust me. Regardless, a trust can last up to 90 years.
6. What are the essential elements of a valid California trust? (Top)
(1) A settlor, the owner of the property that will be subject to the trust. California Probate Code §15200;
(2) The settlor's intent to create a trust. California Probate Code §15201;
(3) Trust property. California Probate Code §15202;
(4) A trust beneficiary. Probate Code §15205; and
(5) A valid trust purpose. Probate Code §§15203-15204.
7. What are the main advantages of creating a trust? (Top)
The most common reason for establishing a trust is to avoid probate, a costly and lengthy judicial procedure in which the decedent’s estate is distributed. Please click on the “Probate” link for more information about probate.
Other reasons include the opportunity for tax planning at death, such as estate taxes, and trusts can provide care for minor children in case of sudden incapacity or early death by the settlors.
8. What are the main disadvantages of creating a trust? (Top)
While the avoidance of probate can be a trust’s greatest strength it can also be its greatest weakness. The lack of judicial supervision makes it relatively easy for a trustee to abuse their powers by self-dealing or converting trust assets to their own benefit. From the example in Question 1, Thomas (the trustee) could sell the beach house to himself for below market rate or prevent Bobby (the beneficiary) from using the beach house. However, there are legal remedies for such.
Furthermore, even the most well-intentioned trustee may inadvertently create a legal quagmire by acting, or failing to act, without proper legal advice. For example, a trustee could get into trouble if they were to sit on a decaying piece of property for a long time because a trustee is under a duty to act wisely in managing trust property.
Additionally trusts are costlier and more cumbersome to create than a standard will because trusts require more legal and administrative work. Wills are usually under 10 pages while a trust can run for hundreds of pages if complex.
9. What are some common misperceptions about trusts? (Top)
Fiction: Assets held in trust are not subject to Estate Taxes (death taxes).
Fact: Although a trust may offer opportunities for tax planning, a trust does not prevent the application of the estate tax when the estate’s size otherwise requires it. Please click on the “Estate Tax” link for more information about Estate Taxes.
Fiction: Minimal or no post-death administration is required if the trust is fully funded.
Fact: Trust administration mirrors a probate proceeding in many tasks albeit without the requirement of filing court forms and trying to clear probate notes. Instead of taking 12 months for probate, the trust administration process takes 3 to 4 months.
Fiction: The creation of a trust requires the settlors to file additional tax returns.
Fact: If you were to create a living trust, you would not need to file an additional tax return. Treas Reg §1.671-4(b)(1).
Yes and no, inevitably anybody who is reading this will pass away someday. Consequently, your assets will be distributed to somebody else since “you cannot take it with you.” Thus, you will be the subject of an estate plan eventually. The choice then is whether you want to direct the distribution of your assets to your beneficiaries via a trust or have California law (see Wills page) govern who will inherit your assets.
11. I have more trust questions how can they be answered? (Top)
Please call my office at (408) 866-8382 or email me at