Trusts
A trust is a legal relationship whereby property is held by one party for the benefit of another. A trust is created by a settlor, who transfers some or all of his or her property to a trustee. The trustee holds that property for the trust's beneficiaries.
Trusts can be useful instruments for holding and preserving assets. Different types of trusts, such as Special Needs Trusts or Child Trusts, can be created at different times for a myriad of reasons. Most commonly known is the "Living Trust" (a trust that goes into effect while the settlor is alive), however, there are many misguided beliefs about this type of trust:
Living trusts avoid the delays and the expenses of probate.
Truth: Washington State has one of the most streamlined, simplified and least expensive probate systems in the nation. Moreover, most of the work performed in a probate, such as contacting beneficiaries, settling creditors’ claims, distributing assets and, when required, dealing with estate tax and income tax matters of the estate, will need to be done regardless of whether there is a probate or a living trust.
The delays associated with probate generally are not related to complying with probate procedure, but to complying with the federal estate tax laws. Additionally, for persons with modest estates there are other much less costly or complicated ways to avoid probate than creating living trusts. If an individual’s goal is to avoid probate, it is best to consult with a licensed estate-planning attorney for advice on the most cost effective way to avoid probate for the individual’s particular situation.
Living trusts save taxes.
Truth: Estate tax planning can be done via a living trust or in a will, with little to no difference. A living trust will not save any more estate, gift or generation skipping taxes than an appropriately drafted will. In addition, no income taxes are saved during the life of the grantor of a revocable living trust. The Internal Revenue Service does not recognize the existence of the trust for income tax purposes, and treats the trust property the same as if it were owned by the grantor individually. Of note, it is a common misconception that an estate tax is owed at all. An estate-tax return must be filed only when the value of an individual’s estate exceeds the applicable estate-tax exemption amount, which is currently over $5 million federally, and $2 million in Washington.
Living trusts avoid the need for a guardianship if an individual becomes incapacitated.
Truth: This may be true for decisions about the individual’s financial matters, but that is not guaranteed and it does not allow for decisions about the individual’s health care. A well-drafted durable power of attorney may serve the purpose without the expense and administrative complexity of a living trust.
Once these misconceptions are understood, there are advantages to having a living trust, such as:
· Possibly avoiding a second probate for real property owned in another state. If real property is owned out of state, a living trust that holds that property can avoid the expense of a second (ancillary) probate in the other state.
· May offer greater privacy. Unlike a will, which is filed in court at the time of death and which then becomes a public record, a trust
instrument is generally not filed in court. Thus a trust may offer more privacy to those concerned about the nature of their property or whom they wish to benefit.
Some disadvantages exists as well, such as:
· High up front cost. The cost of drafting a living trust and re-titling one’s assets into the trust can be relatively high by comparison to the cost of a will and ordinary probate.
· Failure to fund the trust. Failure to transfer all assets to the trust before death may necessitate a probate for the assets left out of the trust. Thus, if probate avoidance were a main reason for creating the living trust, its purpose would be defeated and costs would be increased.
· Administrative headaches. Maintaining the trust formalities and its continuing administration may be a problem for some people. If the settlors are also the trustees, they may not remember that they need to buy and sell each asset as trustees, not as individuals. If they do not observe the formalities, they may lose the benefits they hoped to get from use of the trust.
In the end, it is best to consult an attorney or other trusted advisor to see which estate planning option is best for you.
Trusts can be useful instruments for holding and preserving assets. Different types of trusts, such as Special Needs Trusts or Child Trusts, can be created at different times for a myriad of reasons. Most commonly known is the "Living Trust" (a trust that goes into effect while the settlor is alive), however, there are many misguided beliefs about this type of trust:
Living trusts avoid the delays and the expenses of probate.
Truth: Washington State has one of the most streamlined, simplified and least expensive probate systems in the nation. Moreover, most of the work performed in a probate, such as contacting beneficiaries, settling creditors’ claims, distributing assets and, when required, dealing with estate tax and income tax matters of the estate, will need to be done regardless of whether there is a probate or a living trust.
The delays associated with probate generally are not related to complying with probate procedure, but to complying with the federal estate tax laws. Additionally, for persons with modest estates there are other much less costly or complicated ways to avoid probate than creating living trusts. If an individual’s goal is to avoid probate, it is best to consult with a licensed estate-planning attorney for advice on the most cost effective way to avoid probate for the individual’s particular situation.
Living trusts save taxes.
Truth: Estate tax planning can be done via a living trust or in a will, with little to no difference. A living trust will not save any more estate, gift or generation skipping taxes than an appropriately drafted will. In addition, no income taxes are saved during the life of the grantor of a revocable living trust. The Internal Revenue Service does not recognize the existence of the trust for income tax purposes, and treats the trust property the same as if it were owned by the grantor individually. Of note, it is a common misconception that an estate tax is owed at all. An estate-tax return must be filed only when the value of an individual’s estate exceeds the applicable estate-tax exemption amount, which is currently over $5 million federally, and $2 million in Washington.
Living trusts avoid the need for a guardianship if an individual becomes incapacitated.
Truth: This may be true for decisions about the individual’s financial matters, but that is not guaranteed and it does not allow for decisions about the individual’s health care. A well-drafted durable power of attorney may serve the purpose without the expense and administrative complexity of a living trust.
Once these misconceptions are understood, there are advantages to having a living trust, such as:
· Possibly avoiding a second probate for real property owned in another state. If real property is owned out of state, a living trust that holds that property can avoid the expense of a second (ancillary) probate in the other state.
· May offer greater privacy. Unlike a will, which is filed in court at the time of death and which then becomes a public record, a trust
instrument is generally not filed in court. Thus a trust may offer more privacy to those concerned about the nature of their property or whom they wish to benefit.
Some disadvantages exists as well, such as:
· High up front cost. The cost of drafting a living trust and re-titling one’s assets into the trust can be relatively high by comparison to the cost of a will and ordinary probate.
· Failure to fund the trust. Failure to transfer all assets to the trust before death may necessitate a probate for the assets left out of the trust. Thus, if probate avoidance were a main reason for creating the living trust, its purpose would be defeated and costs would be increased.
· Administrative headaches. Maintaining the trust formalities and its continuing administration may be a problem for some people. If the settlors are also the trustees, they may not remember that they need to buy and sell each asset as trustees, not as individuals. If they do not observe the formalities, they may lose the benefits they hoped to get from use of the trust.
In the end, it is best to consult an attorney or other trusted advisor to see which estate planning option is best for you.
