Revocable living trusts have become a popular alternative
to the traditional Washington will as a way to pass property
on when you die. Even though Washington's probate system is
among the simplest and least expensive in the nation, many citizens
are attracted by the possibility of even quicker and easier
asset transfers.
But revocable living trusts have some drawbacks. Here, to help you
decide if a revocable living trust is right for you, are answers
to some of the most frequently asked questions about these trusts.
What is a revocable living trust, and how does it work?
A revocable living trust is an arrangement you make for
management and distribution of your property. Like a will, the
trust is "revocable," meaning that you can modify or
eliminate it at any time.
These trusts are established by a written agreement or declaration
which appoints a "trustee" to administer the property,
and which gives detailed instructions on how the property is to be
managed and eventually distributed. If you want your trust to substitute
for probate (court administration of property after death) or for
guardianship (court administration after incapacity), you must give
the trustee detailed instructions about how to handle these situations,
and you should legally transfer substantially all of your property
to the trustee. A revocable living trust agreement or declaration
is usually longer and more complicated than a will, and transfers
of assets to the trustee can be time-consuming and expensive.
Who can establish a revocable living trust?
Any competent adult can establish a revocableliving trust.
Husbands and wives can establish a trusttogether, and can provide
that their community andseparate property assets be held in differentaccounts.
Who can be the trustee?
In Washington, any competent adult can be the trustee,
including the person setting up the trust. A Washington bank or
trust company is often a good choice.
You can appoint more than one trustee, can delegate different duties
to each trustee, and can retain the power to remove the trustee and
appoint a new one. Appointing an alternate trustee is essential if
you are the first trustee and the trust will carry on after you die
or become incapacitated.
How is a revocable living trust established?
As mentioned above, you should take two steps. First, sign
a written agreement or declaration. Then, legally transfer all
trust assets to the trustee. Deeds, stock transfers, new bank accounts,
and other legal documents may be necessary. Assets not formally
transferred to the trustee will probably not be considered part
of the trust and might still be subject to probate.
Your will can add up to $30,000 in assets to the trust at your death
without probate, and you can have life insurance and certain pension
accounts paid directly to it. If you want a trust just to avoid guardianship,
you can use a durable power of attorney to finish funding the trust
if you become incapacitated.
What is probate, and how does a revocable living trust avoid it?
Are there better ways to avoid it?
Probate is the legal process for transferring your property
when you die. It is supervised by a court. Probate usually involves
validation of your will, appointment of a personal representative,
collection of your assets, notification and payment to your creditors,
and transfer of your property to the beneficiaries under your will.
A revocable living trust avoids the probate process because you
collect your assets and transfer them to the trustee before you die.
If you fail to do this, you will not avoid probate.
The trustee must keep separate records for trust assets and might
have to file separate income tax returns for the trust. If the trustee
does not obey these rules, the trust may not avoid probate.
If you die owning real estate outside Washington, a court proceeding
might be required in each state where real estate is located. A revocable
living trust can avoid these extra court proceedings and can substantially
reduce probate fees.
Sometimes it is not a good idea to avoid probate. For instance,
a probate personal representative has special powers to deal with
your creditors and can force them to file claims within four months
or lose their claims. The trustee of a revocable living trust has
no such powers.
Even if you want to avoid probate, there may be better ways to do
it. Washington married couples can leave all of their property to
the survivor through a simple written "community property agreement," which
costs very little to prepare and involves no transfers to a trustee.
Joint tenancy ownership of specific assets, with the right of survivorship,
can be a cost-effective way to avoid probate. There are several ways
to pass bank accounts at death without probate, including joint accounts
with right of survivorship, trust bank accounts, and so-called "payable
on death" accounts. Most pension plans and life insurance policies
pass under beneficiary designations which avoid probate without use
of a revocable living trust. If you have a modest amount of property,
one or more of these non-probate assets could be a better way for
you to avoid probate.
(For more information, see What You Should Know About Probate; another
Citizens' Rights pamphlet published by the WSBA.)
What is a guardianship, and how does a revocable living trust avoid
it?
Guardianship is the legal process for management of your
property and providing for your personal needs when you become disabled
or "incompetent." It is court-supervised and it usually
involves a formal, public determination that you can no longer handle
your own affairs; the appointment of a guardian "of the estate," to
manage your assets, and a guardian "of the person," to
care for you; the listing of your assets in the court file; court-supervised
investment of your property; and the preparation and filing of periodic
reports and accountings. If your assets are complicated and your
family members cannot agree on how they should be managed, or if
litigation is necessary to protect your assets, guardianship can
be a cost-effective way to manage your assets. If you have no such
special needs, however, it can be unnecessarily complicated and expensive.
If you transfer all of your assets to a revocable living trust and
give your trustee detailed instructions on how to handle your assets
if you become disabled, there should be no need for a guardianship.
Your written agreement or declaration can specifically authorize
your trustee to rely on a letter from your physician as proof of
your incapacity.
A guardian can establish, or complete funding of, a revocable living
trust if (1) the trust would be a more efficient way to administer
the property of the incapacitated person and (2) use of the trust
would be consistent with the person's overall estate plan. A special
court order is needed to do this, however.
Is a durable power of attorney a better way to avoid guardianship?
For many people, it is. A durable power of attorney is
a simple and inexpensive way to avoid guardianship. This brief
document appoints another person as your "attorney in fact," to
handle your assets and, perhaps, to make medical care decisions
on your behalf if you become incapacitated. It is less detailed
than a revocable living trust agreement or declaration, and it
is less expensive because it is so short and involves no transfers
of assets before incapacity.
As mentioned before, one compromise approach to revocable living
trust planning is not to transfer all assets to the trustee immediately,
but to specifically authorize the attorney in fact to complete trust
funding if you become incapacitated. This can make initial trust
establishment much less time-consuming and expensive, and still avoid
the possibility of guardianship. This approach might not avoid probate,
however.
Does a revocable living trust avoid taxes?
No. By itself, a revocable living trust does not avoid
income, estate or gift taxes. Standard provisions for saving estate
and gift taxes can be included in a revocable living trust or a
will. And a federal estate tax return still must be filed after
you die, if your property exceeds $600,000 in value. You should
not set up a revocable living trust just to save taxes.
What does a revocable living trust cost?
The exact cost of a revocable living trust depends on how
valuable and complicated your assets are, whether standard documents
can be used, how many assets must be transferred to the trustee,
and whether tax planning is needed. Before you direct an attorney
to set up a trust for you, ask for estimates of how much it will
cost, how much writing a will would cost, and how much probating
your estate would cost. The fee arrangement should be in writing.
If you do not plan to serve as trustee, you should consider any
fees you might have to pay the trustee and whether those fees would
replace fees you are already paying to manage your assets.
A standard revocable living trust package should include the trust
document, the transfer of assets to the trust, a "pour-over" will
to add any other assets to the trust, and a similar durable power
of attorney; it also might include descriptive materials and related
legal documents, such as a directive to physicians or "living
will."
What are the main advantages of a revocable living trust?
- Avoidance of probate; specifically, avoidance o f expensive
multiple probate proceedings when you own real estate
in several different states.
- Avoidance of guardianship.
- Reduction of delays in distribution of your property after
you die, although delays caused by filing an estate tax
return cannot be avoided.
- Privacy, because your trust instrument would ordinarily
not be filed in court.
- Continuity of management of your property after your death
or incapacity, especially if you do not serve as the trustee.
- For married couples with substantial separate property,
segregation of those assets from their community property
assets.
What are the main disadvantages of a revocable living trust?
Expense of planning - It is more complicated than a will
to draft, and asset transfers can take time and can result in various
additional costs.
Expense of administration - If you appoint a bank or trust company
as trustee, you will have fees to pay (though these may take the
place of investment advisory fees and other fees you are already
paying); if you do not, someone will still have to take the time
to maintain the trust, and under Washington law that person would
be entitled to a reasonable fee. One way or the other, setting up
a revocable living trust will mean significant professional fees
in the future.
Inconvenience - Once the trust is established, you must be sure
that trust books are maintained and that all assets continue to be
registered to the trustee; persons dealing with the trustee (such
as banks and title insurance companies) may want to review the trust
instrument to check on the trustee's powers and duties.
Protection of assets - If you are worried about litigation or creditors,
a probate personal representative may be better able to protect your
assets; the same applies to guardianship.
Unforeseen problems - Revocable living trusts can raise a variety
of new problems regarding title insurance coverage, real estate in
other countries, Subchapter S stock, and many other issues. Only
a skilled attorney or other estate planning professional can tell
you whether, on the whole, a revocable living trust is right for
you, your family, and your assets.
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