The following blog is the first in a series of a more in-depth look at estate planning tools. This one covers trusts.
Why would I want a trust?
For high net-worth individuals, there are a variety of trusts, which can be created to help with tax consequences. Currently the federal estate tax exemption is at $13.61 million, and the Washington state estate tax exemption is $2,193,000. This means that if your estate is not anticipated to have more than $2 million you probably don’t need a trust to help you plan for tax consequences at either level.
In addition, if you are married, you may pass your entire estate to your spouse, without having to worry about paying an estate tax.
There are a variety of methods you can use to combat tax consequences including trusts if you are in this category of high net wealth people. However, because this is a very specific subset of people, these different types of trusts are not discussed here.
The other reasons individuals might want trusts is to plan for incapacity, such as having a trust on standby which can be used if the person does become disabled then the agent under a financial power of attorney can begin to transfer property into the trust for it to be managed (see my other blog post on estate planning tools in general for more information power of attorneys). This avoids the need for a conservatorship. Along those lines, special needs trust may be useful for those with long-term care needs who want to remain eligible for Medicaid.
Another reason, might be if the person you want to receive the money has a drug or alcohol addiction or other addiction where they would not be able to manage the property in a reasonable manner.
Moreover, a child trust might be utilized if a parent wishes to leave a large amount of property to a child under the age of 18 or even a later age like 25 or 35. In this event, the property would be managed for the child or children while they were under the designated age in the trust document and once they reach that designated age where they can appropriately manage the property, they receive it.
In addition, an irrevocable trust might be used to protect the property from being taken by a beneficiary’s spouse in the event of a divorce or from that beneficiary’s creditors (spendthrift trust). Finally, it offers privacy and avoidance of probate, but in Washington, there are a variety of ways to avoid probate that might be more beneficial than a trust.
How do you create a trust?
There really is no fancy way to create a trust. It can be created by transferring property to another person as trustee either during your lifetime (living trust) or by transferring the property by will or other way into the trust upon your death (testamentary trust). It may also be created by a declaration of the owner of the property saying that they hold it as a trustee. Finally, it can be created by exercising a power of appointment in favor of a trustee. Revised Code of Washington (RCW) 11.98.008.
However the elements/requirements of a valid trust must also be met. They are as follows: you must have the intention to create a trust, have a definite/certain beneficiary of the trust (with some exceptions for certain types of trusts), the trustee must have duties to perform, and finally, the same person cannot be both the sole trustee and beneficiary. Of course, the trust is also only valid if its purposes are lawful, not contrary to public policy, and they are possible to achieve. RCW 11.98.013
It is important to note also that a trust is not valid unless it has property. An exception is if the trust is created by a will and then it may come into existence immediately on the testator/person who created the will’s death and not only upon the transfer of title to trust.
Oral trusts are valid with the caveat that the creation of the trust and its terms must be established by clear cogent and convincing evidence. RCW 11.98.014.
Usually, however, a trust is created also using a trust document which outlines the purpose of the trust, trustee, the beneficiaries, and the terms of the trust, etc. The document need not take any specific form. Indeed most attorneys use different language, but you may want to meet with a lawyer to make sure the trust accomplishes your intended purpose.
In addition, to create a revocable trust the creator of the trust/trustor must have the level of capacity that would be required to execute a valid will. The capacity needed to create an irrevocable trust is that the creator of the trust/trustor have the capacity that would be required during life to transfer the property free of the trust.
Practically, putting property in trust might look like titling property to the trust such as recording a new deed for your house with the trustee as the owner.
For other types of property without a title, you can put it in the trust by naming it in the trust document or attaching a schedule with the property to be held in trust.
What powers and duties does who I chose to be the trustee/manager of the trust property have with regard to the trust property?
They have broad powers to manage the property in trust. See RCW 11.98.070.
However, there are some limitations on the powers a beneficiary trustee may exercise (meaning a person managing the trust property who will also receive some of the trust property) as per RCW 11.98.200-240.
The trustee also owes a duty to the beneficiaries to manage the trust assets for the benefit and in the best interests of the beneficiaries. The trustee has specific other duties but are not directly related to the purpose of this blog. While the trustor/creator of the trust is alive, the duties the trustee owes are owed directly to the trustor or co-trustors.
In limited circumstances as allowed under RCW 11.97.010, you may write a provision of the trust agreement, which allows for you to waive the trustee from facing certain statutory liability.
These are the basics of trusts. As mentioned in the article, there are a variety of trusts that can be used to accomplish your specific purposes. Contact Jordan, to learn more.