A trust is an agreement under which money or other assets are held and managed by a trustee for the benefit of the beneficiary(s). Different types of trusts may be created to accomplish specific goals. Each kind may vary in the degree of flexibility and control it offers.
The common benefits that trust arrangements offer include:
Certain elements are necessary to create a legal trust. The basic elements include a trustor, a trustee, one or more beneficiaries, trust property, and generally a written trust agreement.
The person who creates a trust is called a trustor. This person may also be referred to as the “grantor” or “settlor”.
The trustee is the individual, institution, or organization that holds legal title to the trust property and is responsible for managing and administering those assets. If not designated by name, a trustee will be appointed by the court. In some cases, a trustor can serve as the trustee. It is also possible for two or more trustees to serve together, or for both an individual and an organization to act as co-trustees. Separate trustees may also be named to manage different parts of a trust estate.
The beneficiary is the person or entity who is to receive the benefits (such as income) of a trust. In general, any person or entity may be a beneficiary, including individuals, corporations, associations, charities, units of government, or animals.
A trust must hold property to be administered. The trust property may be any asset such as stocks, real estate, cash, a business or insurance. In other words, either "real" or "personal" property may constitute trust property. Trust property may also include some future interest or right to future ownership, such as the right to receive proceeds under a life-insurance policy when the insured dies. Property is made subject to the trust by transfer to the trustee.
The trust agreement is a contract that formally expresses the understanding between the trustor and trustee. It typically contains instructions to describe the manner in which the trust property is to be held and invested, the purposes for which its benefits (such as income or principal) are to be used, and the duration of the trust.
Trust agreements may be expressed in writing, by oral agreement or may be implied, and the trustor usually has considerable latitude in setting the terms of the trust. A trust involving an interest in land must be in writing in order to be enforceable.
There are many kinds of trusts. Trusts may be classified by their purposes, by the ways in which they are created, by the nature of the property they contain, and by their duration. One common way to describe trusts is by their relationship to the trustor's life. In this regard, trusts are generally classified as either living trusts ("inter vivos" trusts) or testamentary trusts.
Living Trusts. Living Trusts are created during the lifetime of the trustor. Property held in a living trust is not normally subject to probate (the court-supervised process to validate a Will and transfer property on the death of the trustor). In Washington, because such property is not subject to probate, it need not be disclosed in the court record and confidentiality may be maintained. Such trusts are widely used because they allow the trustor to designate a trustee to provide professional management.
Under some circumstances, Living Trusts will allow income to be taxed to a beneficiary and result in income tax savings to the trustor. However, it should be noted that income earned by a trust established for a beneficiary under the age of 14 may be taxed at the beneficiary's parent's tax rate. The transfer of property to a living trust may also be subject to a gift tax.
Testamentary Trusts. Testamentary Trusts are created as part of a Will. This type of trust becomes effective upon the death of the person making the Will (the "decedent") and is commonly used to protect, conserve or transfer wealth. The Will provides that part or all of the decedent's estate will go to a trustee who is charged with administering the trust property and making distributions to designated beneficiaries according to the provisions of the trust.
Before the trust property transfers to the Testamentary Trust, it will normally pass through the decedent's estate. When the estate is probated, those trust assets will be subject to probate. The assets, which will form the corpus of a Testamentary Trust, also are potentially subject to creditor claims and to an estate and generation-skipping transfer tax at the time of the decedent's death.
A Testamentary Trust gives the trustor substantial control over his or her estate distribution. It also may be used to achieve significant savings in the future. For example, by using a Testamentary Trust, a trustor can provide for a child's education or can delay the receipt of property by a child until the child gains financial maturity. Moreover, given the proper form of trust, property may be exempted from death taxation on the later death of a trust beneficiary. However, a generation-skipping transfer tax may still apply.
Living Trusts can be "revocable" or "irrevocable." The trustor may change the terms or cancel a Revocable Living Trust. Upon revocation, the trustor resumes ownership of the trust property.
In general, a Revocable Living Trust is used when the trustor does not want to lose permanent control of the trust property, is unsure of how well the trust will be administered, or is uncertain of the proper duration for the trust. With a properly drafted revocable trust, you may:
The assets in this type of trust will generally be includable in the trustor's taxable estate, but may not be subject to probate.
An Irrevocable Living Trust may not be altered or terminated by the trustor once the agreement is signed. There are two distinct advantages of irrevocable trusts:
However, these benefits will be lost if the trustor is entitled to (1) receive any income; (2) use the trust assets; or (3) otherwise control the administration of the trust in a manner that is inconsistent with the requirements of the Internal Revenue Code.
Just as a Will may be revoked or amended at any time prior to death, a Testamentary Trust may be changed or canceled.
Revisions can be made by drafting a new Will or by using a simple document called a "codicil" to make changes or additions to your Will or Testamentary Trust. To be effective, however, any such modifications must be executed in the same manner required for Wills, i.e., witnessed and preferably notarized.
In creating a trust, you should consider several factors and obligations, including:
Dependency exemptions, capital gains and losses, income, gift, estate and generation-skipping transfer taxes also should be considered when planning certain types of trusts. Likewise, you may want to think about naming alternative or contingent beneficiaries and trustees.
Once a trust has been established, a periodic review of the status of the trust is advisable; you may want to obtain professional assistance appropriate to the requirements of the trust.
There is no specified time during which a trust must remain in effect. Each situation must be evaluated separately. In general, however, Washington State law will not allow a private trust to continue longer than 21 years after the death of the last identifiable individual living who has an interest in the trust at the time the trust was established. Charitable trusts, on the other hand, may continue indefinitely.
A trustee - whether an individual or institution - holds legal title to the trust property and is given broad powers over maintenance and investment. To ensure that these duties are properly carried out, the law requires that the trustee act in a certain manner. In general, a trustee must:
The trustee must administer the trust property only for the designated beneficiaries and may not use trust principal or income for his or her own benefit. In other words, a trustee is usually prohibited from borrowing or buying from the trust, from selling his or her own property to it, and from using the trust assets as collateral for a personal debt.
In selecting a trustee you should consider the potential trustee's competence and experience in managing business or financial matters and the potential trustee's availability and willingness to serve.
Individuals and certain corporations (or a combination of both) may serve as trustee. Each selection offers distinct advantages and drawbacks that should be considered. For example, an institution, such as a bank, usually offers specially trained managers to provide administrative, counseling and tax services. Other typical advantages include the institution's continuity and reliability of service, and its ready availability. Most banks charge a fee for trust services, and some may not want to manage small trusts, so you may want to compare options.
As an alternative, an individual, such as a relative, family friend or business associate, may serve as trustee. An individual, unlike an institution, may be willing to serve for little or no fee. Furthermore, this person could add a more personal touch for special understanding to the needs of the beneficiaries. However, you will want to be certain that any nominated individual has the skill and experience necessary to properly manage the trust property.
Trusts come in a variety of forms and can be established in many different situations. Some common forms of Trusts include:
There are many different reasons why you might want to have a Trust:
If any of the above situations apply to you, you should consider using a Trust as part of your estate planning.
Probate is the legal process where a court oversees the payment of debts and distribution of property under a Will or by the laws of intestate succession (decedent dies without a Will). This can be a slow and costly process if the estate is even moderately large and complicated, and certain details of the estate are made public as part of the court proceedings. Several states have summary procedures for small estates, but if your estate doesn’t qualify for a summary procedure, your estate typically goes through probate. If you transfer assets to a Trust while you are alive, then when you die, the assets belong to the Trust, not to you (or your estate), so they are not included in probate, but will be distributed in the way you direct in the Trust documents. The process of distribution will be private and confidential.
Minor children cannot inherit property, but require an adult to manage property for them until they reach the legal age of majority in the state where they live. A parent can nominate a guardian for the child’s financial matters in a Will, but the probate court will have the final say on whether to approve the appointment. If you transfer assets to a Trust that is for the benefit of your children while you are alive, you can name the Trustee(s) and alternate Trustee(s) who will control the Trust when you die. It’s possible for a court to remove a Trustee you have appointed, but generally only for a breach of the trustee’s fiduciary duties, so you have more control over who will control your children’s assets.
If you leave assets to children in a Will, the children receive full control of the assets when they come of legal age. In most states this is 18, and if the assets are large, an 18 year old may not be ready to manage that amount of money. If you set up a Trust, you can control when the young person will receive full control of the assets, such as at age 25 or 30. Some older adults are also unable to manage money well. This may be the result of a developmental disability or just because the person lacks appropriate financial judgment. If you want to leave assets to a Beneficiary in that situation, you might want to set up a Trust that will control the assets throughout the life of the Beneficiary. People also want to leave money for the care of pets that survive them, and a Trust is a good way to do that.
If your estate is over the minimum amount for paying Federal Estate Tax, Trusts can be used to exempt some of your assets from your taxable estate. This can reduce your total estate to an amount below the estate tax minimum. You can also receive tax benefits during your lifetime by setting up a Trust that makes a donation to charity when you die but keeps the income for you while you are alive.
Probate laws differ from state to state, so to avoid unforeseen results under different laws, if you own real property in different states you can put that property in a Trust while you are alive so there will be no change when you die. The Trust will continue to own the property, and there will be no reason for the various states to be involved in how the property is distributed.
If you want to make sure that certain property is not divided between beneficiaries, which might result in the property being sold, you can put property in separate Trusts and give separate instructions for distribution. That way, it won’t be possible for a court to decide that the property can be divided and/or sold.
If you become incapacitated from old age or some accident or illness, someone will need to take care of your financial affairs for you. By setting up a Trust where another Trustee will take control of your assets if you become incapacitated, you can prevent someone from filing a petition to be named your Conservator. A court will only appoint a Conservator if no other arrangements have been made, so the court is not likely to grant a conservatorship to someone else if you have already made adequate arrangements for your own care. This allows you to choose who you want managing your affairs and allows you to exercise future control in the way you set up the Trust.
In a conservatorship hearing, all of your affairs are made public, including details of your alleged incapacity. Most of us would not want the details of our private lives to be discussed by others in a public courtroom, so a Trust that avoids this is useful. Trusts can also provide privacy regarding your assets. If you don’t want all the details of your assets and the assets you are passing to others to be made public, you can use a Trust to preserve privacy.
A Trust, if properly drawn and funded, can be extremely helpful in many situations such as:
The cost of creating and administering a Trust can vary considerably, depending on its type and duration. A lawyer's fees to create a Trust, for example, will usually be based on the time involved in consulting with you and in planning and preparing documents. Therefore, before you hire a lawyer, you should discuss fees (for example, whether hourly or flat fees are charged). Ask for an estimate or arrange a written fee agreement.
A trustee's fee may vary with the skill and expertise the trustee offers. Charges may also be influenced by the size and complexity of the Trust estate. This affects the nature and amount of services required, such as record-keeping, asset management and tax planning.
In addition to legal and trustee expenses, there may be accounting, real estate management or other service fees. Other common charges include annual, minimum, withdrawal and termination fees.
The text, graphics, arrangement and presentation of materials contained on this Web site are copyrighted by The Law Office of Gary E. Gill, P.S. All rights reserved. You may download and print materials from this Web site solely for the purpose of reading the materials and retaining them for reference purposes. Any other use of the materials, including copying, distribution, retransmission or modification, without express prior written permission, is prohibited.
Your use of this Web site does not create an attorney-client relationship between you and The Law Office of Gary E. Gill, P.S. The materials set forth herein are provided for informational purposes only and do not constitute legal advice. Similarly, email messages sent to The Law Office of Gary E. Gill, P.S., or any of its employees do not create an attorney-client relationship.
The materials presented on this website are intended solely for informational purposes. Links to other websites are provided for the user’s convenience. They do not constitute endorsements of the linked websites. The information provided does not constitute the legal opinion or legal advice of the Law Office of Gary E. Gill.