What is a Revocable Living Trust?
A revocable living trust is a common estate planning instrument for determining who will inherit your property when you pass away. Most living trusts are “revocable,” meaning they may be changed when your circumstances or intentions change. Because you create revocable living trusts throughout your lifetime, they are “living.” This is referred to as “inter vivos” by lawyers.
To avoid probate, most individuals establish living trusts. The court-supervised process of winding up a person’s estate is called probate. Probate may be costly and time-consuming, and it is frequently more of a hindrance than a benefit. Property bequeathed to beneficiaries through a living trust can avoid probate.
What is an Irrevocable Living Trust?
Irrevocable trusts cannot be revoked after they have been established. This distinguishes them from revocable trusts, which can be terminated until the trust maker’s death when they become irreversible (the grantor). When it comes to trusts, the term “living” refers to the fact that the trust affects the grantor’s lifetime.
On the other hand, an irrevocable living trust takes effect during the grantor’s lifetime and cannot be revoked. To add to the confusion, a “testamentary” trust is established during the grantor’s lifetime but does not take effect until the grantor’s death.
What Are the Different Types of Irrevocable Trusts?
There are several forms of irrevocable trusts created for various objectives. The two most prevalent reasons for creating an irrevocable trust are reducing taxes and protecting property.
Irrevocable Trusts to Reduce Taxes
Grantors commonly use irrevocable trusts to avoid or decrease taxes. For instance:
When the second spouse dies, the trust is utilized to decrease estate taxes. When the first spouse passes away, the trust receives most of their assets. The surviving spouse has access to trust property (and trust income), but they do not own it. As a result, when the surviving spouse passes away, such property is not part of their inheritance.
Qualified Terminable Interest Property (QTIP) Trusts
A trust that couples use to postpone paying estate taxes until the second spouse passes away.
Qualified Domestic Trust (QDOT)
When one spouse is a non-citizen, this trust is similar to QTIP trusts.
A trust was created to lower income and estate taxes by making charitable contributions. There are three types of charitable trusts:
- Charitable Remainder Trusts. You place the property in a trust, designate a charity as the eventual beneficiary, and then designate someone else to receive income from the trust for a specified period.
- Charitable Lead Trusts. You place the property in a trust, choose a charity to receive revenue from the trust for a specific period, and name another person as the final beneficiary.
- Pooled Income Trust. You pool your funds with others and earn trust income for a predetermined time. The trustee and eventual beneficiary of pooled charitable trusts is a charity.
These trusts are intended to help wealthy families save money on estate taxes. A grandchild or group of grandkids is the last beneficiary. The kid is usually an income beneficiary but never owns the property, so the trust property is not liable to estate tax when the child dies. A generation-skipping transfer tax applies to this form of trust.
Life Insurance Trusts
These trusts save inheritance taxes by excluding life insurance proceeds from a taxable estate. Instead, the insurance policy is owned by the trust. The policy’s beneficiary can be anyone, but the trustee must be someone other than the policy’s former owner. Once the trust is established, the grantor does not influence the insurance, and the trust must last for at least three years before the grantor’s death.
Grantor-Retained Interest Trusts (GRATs, GRUTs, GRITs, and QPRTs)
By eliminating property from a taxable estate, these trusts also help to decrease estate taxes. The trust creator places the property in the irrevocable trust and specifies ultimate beneficiaries, but they maintain a portion of the trust for a defined time. That interest might be in the form of a fixed annuity from the trust (Grantor Retained Annuity Trusts or GRAT), a variable annuity (Grantor Retained Unitrust or GRUT), trust income (Grantor Retained Income Trust or GRIT), or the right to reside in the trust property, which could be a house (Qualified Personal Residence Trust or QPRT).
After that period has passed, the final beneficiaries will possess the property outright, and the IRS will value the gift when the trust is established. No savings will be generated if the grantor does not outlast the trust’s terms.
Irrevocable Trusts for Protecting Property
Irrevocable trusts can also be used to achieve other objectives, such as preventing assets from being wasted or protecting the assets of a disabled person.
Spendthrift trusts allow you to safeguard (and govern) contributions made to people who may not be able to manage their finances on their own. You place the property in a trust, and the trustee (who might be you) distributes funds to the beneficiary according to the trust’s conditions. Because the recipient cannot access trust property independently, it is safe from creditors – at least until payments are given directly to the beneficiary.
Special Needs Trusts
A special needs trust gives financial assistance to a person with disabilities without jeopardizing their eligibility for government benefits. A parent or other relative places property in a trust to benefit a person with special needs. The trust’s provisions enable the trustee to utilize trust funds to purchase items for the beneficiary. Still, because the beneficiary never owns trust property, it is not counted as an asset when applying for government assistance.
What Are the Advantages of a Living Trust in Washington State?
A living trust provides you, the trustor, with several benefits. While a trust may look complicated at first, it serves as a haven for all of your property and assets once established.
Flexibility and Control
One of the most significant advantages of a living trust in Washington State is its freedom during your lifetime. A revocable living trust gives you total control over your assets and property during your lifetime. Furthermore, you retain ownership of your possessions even after your death. Your trust’s successor trustee must carry out your wishes as stated in the trust.
As the trustor of your trust, you have the authority to select how distributions are made over time. For example, a trust can keep the property for the benefit of a young kid until that child reaches adulthood—or even until that child is far into middle age and beyond. You also can make total payouts to recipients rather than a single large distribution.
Although probate administration in Washington State is more efficient than in some other jurisdictions, a properly financed living trust can also avoid probate. Probate is usually expensive and takes months to complete. A court oversees the distribution of your estate.
As a result, asset distribution does not occur until the probate process is completed, which in Washington State takes at least four months. So, while probate isn’t overly complex in Washington, it’s certainly not a fun or quick process.
One of the most important advantages of living trusts is their privacy. The terms of your trust, beneficiaries, and trust property are never compelled to be made public by law. On the other hand, probate demands that a will be made public, along with the payments that will be made to your heirs and their names. For this reason, many people choose a living trust.
A living trust also protects you if you lose the ability to make legal decisions later on. In such an event, your loved ones would have to go to court and seek guardianship over you to manage your financial or medical decisions if you don’t have a trust (or power of attorney document). If all of your assets and property are held in your living trust, your appointed trustee will be able to manage them without the need for a conservatorship.
Do You Need a Living Trust in Washington?
You may save your loved ones a lot of time, stress, and money by setting up a living trust to transfer your property to them after your death. Property left through a will (rather than a living trust) may be held in probate court for months or even years, resulting in court costs and attorney fees.
Unfortunately, Washington is not one of the states that have entirely implemented the Uniform Probate Code, a model statute that simplifies the probate procedure. For “small” estates, Washington does provide reduced probate procedures.
If the estate has enough money to satisfy its obligations, it can potentially pursue a probate shortcut known as “settlement without court action” and:
- The executor or personal representative is the one who requests if there is a will.
- If there is no will, the surviving spouse makes the request, the estate is wholly made up of community property, and you have no children or grandchildren from another relationship. The estate is entirely made up of community property.
The court may also allow the motion if it believes it is in the creditors’ and beneficiaries’ best interests. Suppose your estate qualifies for one of these expedited procedures. In that case, the probate process will be simple, short, and reasonably affordable, so you may not need to create a living trust solely to avoid probate.
In Washington, you can also transfer real estate using a transfer-on-death deed, which can keep your house out of probate without a living trust. On the other hand, a living trust can be a smart alternative if you have other major assets you want to keep out of probate.
Do You Still Need a Will If You Make a Living Trust in Washington?
A will is still required. This may sound perplexing—after all, isn’t the objective of a living trust to prevent the need for a will? Yes, it is, and your wishes may never be carried out. However, you should still write one for one or all of the reasons listed below:
Designating a Guardian for Minor Children
You can’t name a guardian for your minor children through a trust. If you have little children, you should prepare a will naming a guardian for this reason alone.
Accounting for Property That You Have Not Transferred to Your Trust
It frequently occurs: people establish a trust but fail to legally transfer property to the trust (for example, they never get around to changing the deed on their house). Or, after establishing their trust, people purchase or inherit property and forget or are unaware that they are the trustee of their trust.
The property will not be allocated according to the trust’s provisions in either case. As a backup, you should establish a will that specifies how assets not in the trust should be dispersed.
According to Washington state law, if you don’t have a will, any property not transferred via your living trust or another way (such as joint tenancy) will be distributed to your closest relatives.
Can a Living Trust Reduce Estate Tax in Washington?
Most likely not. Most people do not have to worry about it because the federal estate tax only applies to estates valued at less than $12 million.
On the other hand, Washington has its state estate tax, which kicks in at a far lower level.
Suppose your estate is worth more than $12 million (or you and your spouse or partner have a combined estate worth more than $24 million). In that case, you may be able to decrease or eliminate federal estate taxes by using a more sophisticated trust (such as an AB trust).
How Do You Make a Living Trust in Washington?
To make a living trust in Washington, you:
- Choose whether to make an individual or shared trust.
- Decide what property to include in the trust.
- Choose a successor trustee.
- Decide who will be the trust’s beneficiaries and who will get the trust property.
- Create the trust document. You can get help from our skilled trust attorney.
- Sign the document in front of a notary public.
- Change the title of any trust property with a title document—such as your house or car—to reflect that you now own the property as trustee of the trust.
What Property to Put in a Living Trust?
The main reason for establishing a revocable living trust is to avoid paying probate expenses. In general, the higher the value of an object, the more it will cost to probate it. As a result, you’ll probably want to put your most valuable assets in the trust. Consider including:
If you’re like most people, your home, condominium, or property is the most valuable asset. Many people set up a living trust to avoid going through probate. By transferring your real estate through a living trust, you may likely save your family money on probate charges.
Even if you owe money on your property, you can put it into your living trust. A debt secured by the property, such as a mortgage or deed of trust, will accompany the property into the trust and the beneficiary. As a result, the debt will pass along with the property to the new owner when you die.
Small Business Interests
It might be devastating to tie up an active small business during probate. Your executor must operate the firm for several months, but a court must also oversee it. If you want your beneficiaries to take over the firm and keep it functioning, you should use a living trust to transfer business interests to them immediately after your death.
When transferring your interest to your living trust, different types of corporate entities face distinct issues:
If you (or you and your spouse) run a sole proprietorship and own all of the company’s assets, you may transfer them to your living trust like you would any other asset. You should also transfer the company’s name since this will transfer the related consumer goodwill.
You should be able to quickly transfer your partnership share to your living trust if you run your firm with partners. If you have a partnership ownership certificate, you must update it to name the trust as the owner of your share. A partnership agreement may limit or prohibit transfers to a living trust. However, this is uncommon. If yours does, you and your partners should consult an attorney before making modifications.
Closely Held Corporation
A closely held corporation cannot sell stock to the general public. A few persons (or just one) possess all of the company’s shares and are actively involved in its management (or are relatives of people).
Usually, you can transfer shares in a closely held corporation using a living trust by naming the stock in the trust instrument and having the stock certificates reissued in your name as trustee. Check the corporation’s bylaws and any shareholder agreements to see whether you have any restrictions on transferring your shares to a living trust.
The right of surviving shareholders (or the business itself) to purchase the shares of a deceased shareholder is a widespread regulation. In that situation, you can transmit the shares through a living trust, but the heirs may have to sell them to the other shareholders.
Limited Liability Company
Before you may transfer your interest to your living trust, if your small business is an LLC, you’ll need the cooperation of a majority of all of the other owners (see your operating agreement). It shouldn’t be difficult to persuade the other owners; all they need to know is that you, as trustee of your trust, will have the ability to vote on LLC decisions.
You could also wish to change your trust document to provide the trustee (you) explicit authorization to participate in the limited liability corporation. Another option for addressing this issue is to transfer your economic stake in the LLC but not your voting rights. The transfer itself is simple—you may create your form and refer to it as an Assignment of Interest.
Keeping bank accounts in your living trust is simple. All you have to do now is update the bank, savings, loan, or credit union documentation. Instead of creating a living trust, consider adding a payable-on-death beneficiary to your account. After you die, what’s left in those accounts will go directly to the recipient, bypassing probate.
Individual retirement accounts and 401(k)s cannot be put into a trust; you must own your funds as an individual. On the other hand, a trust can be named as a beneficiary.
Some types of property are difficult to manage under a living trust. It is not a legal issue but rather a practical one. Cars or other vehicles that you utilize regularly are an excellent illustration. It might be complicated to have registration and insurance in the trustee’s name, and some lenders and insurance providers are baffled by automobiles officially held by living trusts.
You may transfer title to your living trust if you have priceless vintage cars or a mobile home permanently tied to the land and deemed real estate under your state’s legislation. You should be able to discover a cooperative insurance business.
Depending on where you reside, there may be many options for avoiding probate for automobiles that are less complicated than a living trust.
Property You Buy or Sell Frequently
There’s no point in transferring property to your living trust if you don’t anticipate owning it at your death. Remember that the probate procedure you’re trying to avoid doesn’t start until after you’ve passed away. When purchasing property, however, acquiring and owning it in the name of the trust is typically not much more difficult.
The profits from a life insurance policy that you own at your death are not subject to probate. If your trust’s primary purpose is avoiding probate, you probably won’t need to name your trust as the beneficiary of your life insurance policy.
Even though the life insurance policy proceeds go straight to the designated beneficiaries without going through probate, they are considered part of your estate for federal estate tax reasons. Talk to our skilled trust attorney about strategies to keep life insurance money out of your taxable estate if you’re concerned about estate taxes, which most people aren’t.
All brokers and mutual fund firms will assist you in registering stocks, bonds, and mutual funds as trustees of your living trust. It’s easier to open accounts with a large investment firm to consolidate all of your investments. You can transfer your entire account to the living trust, automatically buying and selling stocks in the trustee’s name.
All securities in the account are held in trust after the account is in the trustee’s name. That implies you can utilize your living trust to give a specified recipient the entire contents of the account. You can either set up several brokerage accounts or leave the contents of a single account to many beneficiaries to own together if you wish to leave shares to separate beneficiaries.
Instead, consider registering for transfer on death. Almost all states currently enable “transfer-on-death” registration of securities ownership. After you die in certain states, you can choose someone to receive your securities, such as mutual funds and brokerage accounts. There will be no need for probate.
Actual cash cannot be transferred to a living trust. A cash account, such as a savings account, money market account, or certificate of deposit, can be transferred to your living trust. You can then designate a beneficiary to receive the account’s contents.
A living trust isn’t the only technique to avoid paying probate fees. Other probate-avoidance methods may be used instead for specific assets. Even if some property must go through traditional probate, attorney and appraisal fees are usually proportional to the value of the probated property so that the expense will be minimal.
Why Hire Our Skilled Trust Attorney?
Many factors influence whether or not a living trust is good for you, including the specific tax planning and distribution rules that each client requires. With a living trust, the adage “you don’t know what you don’t know” has never been more accurate, so seeking legal assistance from an experienced trust attorney is critical.
You can, and should, choose where your assets go when you die. Instead of leaving such critical choices to the courts, consult with our experienced trust attorney for the help you need to make sensible estate decisions. We are committed to assisting you with all aspects of your estate planning and are ready to assist you with legal services such as:
- Drafting a will
- Creating a living trust
- Creating business, education, retirement, and other trusts
- Drawing up health care and general powers of attorney
The decisions you make about your estate will impact how your assets are split and whether or not estate taxes must be paid after your death. Consult a professional at Jones Legacy Law to ensure that your intentions are followed out.
Please contact us so that we may examine your estate and assist you in creating a plan that correctly reflects your preferences. We take pleasure in developing long-term connections with our clients. To find out if a living trust is suitable for you, contact our office for a free consultation.