A Trust is a legal arrangement whereby one person, the Trustee, owns property given by another person, the Grantor (also referred to as a Settlor, Trustor, or Trust Maker) for the benefit of a third person, the beneficiary. One of the most common type of trusts is the “Revocable Living Trust.” Revocable Living Trusts are fully revocable and amendable at the request of the Grantor. You generally are the Grantor, Trustee and Beneficiary while you are alive and able. Assets transferred into a Revocable Living Trust can be withdrawn at any time. “Living” refers to the fact that it is established while you are alive and remains under your control until your death or incapacity. Revocable Living Trusts can be excellent vehicles for disability planning, privacy, and probate avoidance. A Revocable Living Trust provides no asset protection for the Grantor during his or her life.
A Will – or a “Last Will and Testament” – is a legal document that tells the probate court how you want your property distributed after you die and who has the power and responsibility to wrap up your affairs. It is purely a death instrument and is only effective when "probated." Because the Will takes effect only after a court determined that it is a valid document, a judge must act before your executor can step in and manage your estate.
Persons who die without creating a Will die intestate. Each state has laws that determine how an intestate person’s property will be distributed. This means that the person who dies without a will or other estate plan will have absolutely no control over their property upon their death. Property may go to people you don’t want and in ways that you never intended.
Probate is a court-supervised process for distributing the individually owned assets of a deceased person. If there is a Will, the court will review the Will to ensure that it complies with local law and is authentic. The court will then appoint a Personal Representative (sometimes referred to as the "Executor") to administer the estate. If there is a Will, the Will governs the priority of persons seeking appointment. If there is not Will, state law will determine this. Creditors are paid and then assets are distributed to beneficiaries in accordance to the instructions written in the person's Will. Probate is a public process and can be slow and expensive. Probate occurs wherever assets are located, thus if assets are located in multiple states, multiple probates may be required. In California, probate is required if someone dies intestate and has $50,000 of real estate (gross value without taking into account mortgages or other debts) or $150,000 of personal property. Assets that are in a Revocable Living Trust are not part of the probate estate and are not counted in determining if the probate threshold has been met.
Life insurance is a unique asset in that it serves numerous diverse functions in a tax-favored environment. Life insurance proceeds are received income tax free and are part of the decedent’s estate for estate tax purposes. If the life insurance policy was owned by an Irrevocable Life Insurance Trust instead of the decedent, then the life insurance proceeds are not included in the estate. An Irrevocable Life Insurance Trust (ILIT) is a very popular wealth planning devices. It is a Trust designed to own a life insurance policy, usually on the lives of you and your spouse. You gift funds to the Trust periodically and the Trustee uses the funds to pay premiums on the life insurance policy.