“Do I need a trust?” This is one of the most common questions we get from clients. Lots of people seem to know that trusts exist, but very few seem to know their purpose and when they might be needed. In this month’s newsletter we will discuss some trust essentials as well as the basics of a Revocable Living Trust.
First, there are many types of trusts which accomplish different things and are used in different situations. At its most basic level a trust is a unique entity created by a written document, much like a company or organization is an entity created by articles of incorporation or partnership documents. Property or other assets are placed into the trust and the trust document controls how the assets are handled.
Reading the formational documents of a trust can be quite confusing unless you are familiar with some basic terminology.
Settlor/Grantor/Trustor: These are all different names for the person who sets up the trust. In certain types of trusts these terms can also refer to those who place assets into the trust.
Beneficiary: This is the person or persons who receive payments or assets from the trust. Beneficiaries may change over the life of the trust. The most common circumstance being when one beneficiary dies and the trust directs that the decedent’s benefits be directed to someone else (a “contingent beneficiary”).
Trustee: This is the person named in the trust to be responsible for managing trust assets and for following the directives of the trust document.
Revocable Living Trusts
One of the most common trusts is a Revocable Living Trust. This is also sometimes called a Living Trust or Inter Vivos Trust. This type of trust is created during a person’s lifetime and it can typically be amended as circumstances require until the Settlor dies. There are three typical reasons for creating a Revocable Trust.
-Tax avoidance: If your Revocable Trust is set up and managed in the right way, it can help avoid estate taxes. However, in Washington State, the estate tax doesn’t begin until you have over $2,054,000 in assets. Further, the federal estate tax doesn’t begin until you have over $5,430,000. Both of these amounts are indexed to inflation and will continue to slowly rise. If you live in Washington and don’t have more the $2,054,000 in assets you probably don’t need a trust for tax avoidance.
-Probate Avoidance: In many states, probate is a dirty word. The process is often lengthy and expensive. Because trust assets are typically exempt from the probate process, many people in these states (see California) use trusts to avoid probate. In Washington, probate is not so onerous and the advantages of avoiding probate through a trust are often outweighed by the cost of trust creation and management. An important caveat, however, applies to people who own property in multiple states. Typically, each state requires its own courts to oversee the transfer of property within its own borders. This means that owning property in three states often requires three separate probates, each accompanied by the associated costs and hassles. Placing the properties into trust can eliminate this problem. If multistate property ownership isn’t a consideration and Washington is the only state where a probate will be required, the relative ease of Washington’s probate usually tilts the scales against trust formation. Additionally, we often see clients who created trusts but neglected to keep all of their property/assets in the trust. This situation gives you the worst of both worlds. You have the expense of trust creation and management and then you have the costs of probate for the assets you neglected to put in the trust.
-Controlling Assets After Death: Today’s families often look very different than they did just a few generations ago. Second or third marriages are now commonplace and spouses often bring with them children from previous marriages. Occasionally the new spouse and the step-children do not get along and the biological parent worries that their children will be cut out as beneficiaries. Trusts can be written so that a widowed spouse retains sufficient assets and income to live out their life while also protecting inheritances of biological children.
As noted above, trusts come in all shapes, sizes and flavors. A Living Trust is just one example. If you are still wondering if a trust could be right for your circumstances or if you already have a trust and are wondering if it’s really needed, we encourage you to come in and review your situation.
As always, thanks for reading!
Barry M. Meyers
David M. Neubeck
Elder Law Offices of Barry M. Meyers, P.S.
DISCLAIMER: The content of this newsletter is: for information purposes only, subject to change by government agencies, should not be relied upon as current, and, does not constitute legal advice. Reading this newsletter does not establish an attorney-client relationship.