Trust Terms and Basic Concepts

— Mary Anne Vance, Attorney at Law


1. What is a Trust?

• A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of beneficiaries.
• There are many types of trusts and each trust specifies exactly how and when the assets pass to the beneficiaries.

2. Who are the important people named in a Trust?

• GRANTOR- person who creates trust
• TRUSTEE- person who manages trust
• BENEFICIARY- person who receives trust benefits

3. Who can be a Trustee?

• Any competent adult or corporate entity
• No government regulation or licensing required
• Most common trustees are:
  • Yourself
  • Friend
  • Family Member
  • Non-profit guardianship
  • Bank and Trust Company
• Trustee cannot be someone convicted of a felony or a crime of "moral turpitude."

4. What are the most common reasons for a person to create a Trust?

• Preservation of family assets for future generations
• Concerns over becoming incapacitated
• Beneficiaries with unique circumstances (examples: disabilities, minor/elderly, issues with substance abuse or over-spending, pets)
• Preservation of eligibility for government benefits
• Inheritance tax planning strategies
• Desire to maintain flexibility & control of distributions for beneficiaries
• Blended family
• Non U.S. citizen spouse
• Ownership of real estate in multiple states

5. What can a Trust do?

A trust allows you to direct how your assets will be handled after you die. If you’re worried about how your wealth will be distributed, or the financial and emotional issues your heirs may face, you may want to consider creating a trust. A trust can:

• Provide peace of mind
• Minimize the burden on your heirs
• Protect beneficiaries with special circumstances (disabilities, issues with substance abuse or over spending, minors/elderly heirs, pets)
• Guard against family conflicts and inheritance issues
• Avoid probate court

6. What governs how a Trust is managed?

• The terms of the Trust document
• The Revised Code of Washington, Chapter 11.98.
  This is a complex statute that directs how to create and administer a trust and it also describes the rights of beneficiaries and duties of trustees.

7. Types of Trusts

• TESTAMENTARY TRUSTS – Created in the language of the Will and only effective when you are dead
  • Designates who will be the trustee, beneficiaries and trust purpose
  • Not effective until you die
  • Types of Testamentary Trusts:
    • Trust for Children and Grandchildren
    • Trust for Surviving Spouse
    • Trust for Special Needs People
    • Trust for Animals, RCW 11.118
  
  
• LIVING TRUSTS:
  • The trust is effective while you are alive and after your death
  • The trust names the trustee, the beneficiaries, and the Trust purpose
  • The trust can be changed by you during your life if it is a Revocable Trust
  • The trust cannot be changed if it is an Irrevocable Trust
    
  
  Revocable Trusts (commonly called "LIVING TRUSTS") — Effective when you are alive and after your death
  • You create the trust while you are alive
  • The trust is effective while you are alive
  • You create a trust you can easily change during your life but no one can change after your death
  • You can be the trustee and the beneficiary
  • You transfer all your assets into the name of the trust: real estate, bank accounts, car titles, etc.
  • At your death the assets pass to the beneficiaries you name in the Trust without need for probate (court approval)
  • A disadvantage: more expensive to create than a Will and can be difficult to manage during your life
  • Note: Washington State has less expensive probate costs than other states. Most people choose to keep it simple and write a Will and do not create a Revocable Trust in Washington State.
  
  Irrevocable Trusts — Effective when you are alive and after your death
  • You create the trust while you are alive
  • The trust is effective while you are alive
  • The trust puts your assets out of your control forever
  • You can never change the terms of the trust
  • You name someone other than yourself as trustee
  • You can be a beneficiary during your life
  • All your assets are transferred into the name of the trust: real estate, bank accounts, car titles, etc.
  • At your death the assets pass to your named beneficiaries without need for probate (court approval).
  • A primary advantage of the Trust is to safeguard assets if you are worried about being taken advantage of by someone

8. Other Types of Trusts

• Special Needs Trust:
  • Can be either a Living Trust, effective when you are alive, or a Testamentary Trust created in your Will and effective only when you are dead
  • Trust purpose is to leave money to a person who might otherwise qualify for government assistance payments (disabled or senior) because they are impoverished. Since the assets are owned by the Special Needs Trust (not the person) your gift or bequest does not cause them to be disqualified for government benefits.

9. Trusts designed to save on inheritance taxes if your estate is greater than $5 million per person:

• A Qualified Personal Residence Trust (“QPRT”)
  • Allows you to transfer your residence or vacation property to an Irrevocable Trust, but you retain the right to live in the home for a term of years (usually 10 years) and at the end of the term your children become the owners. Generally not used unless a married couple’s estate is greater than $10 Million.
• Marital Trust / Credit Shelter Trust / Bypass Trust / Trust A / Trust B
  • Created in your Will
  • Provides benefits to a surviving spouse
  • Shelters assets from inheritance tax on death of surviving spouse
• Irrevocable Life Insurance Trust
  • Your life insurance policy is owned by the trust rather than you thereby causing its value to be excluded from inheritance tax at your death.
• Charitable Lead Trust
  • Reduces taxable income by donating income to a charity and then the remainder is transferred to your beneficiaries
• Charitable Remainder Trust
  • Allows you to receive income for a period of time and then asset goes to a charity.

10. Types of Trustees

• NON-PROFESSIONAL PEOPLE: such as friends and family.
  • Advantages:
    • Personal knowledge of you and your beneficiaries
    • Low cost
  • Disadvantages:
    • Can die or become incapacitated
    • No experience as a trustee
    • Not familiar with trust laws
    • Not experienced in investing money on a large scale using conservative principles
    • Not experienced in dealing with bad acting beneficiaries
    • No trust accounting system in place
    • Costly because they must rely on attorney for advice
      (NOTE: Trustee cannot be convicted of a felony or guilty of a crime of moral turpitude, RCW 11.36.021)

• PROFESSIONAL/CORPORATE TRUSTEES:
  • Trust companies organized under the laws of Washington State and nation banks when authorized
  • Individual persons, often former trust officers of a bank
  • Non-profit companies incorporated by the State of Washington
  • State colleges and Universities
  • Advantages:
    • Experienced as trustee in accounting, reporting, and administrative services
    • Oversight from their own trust committee
    • Oversight by government agencies
    • Not much need to consult with an attorney
    • Systems already in place for accounting
    • Bonded or insured
    • Experienced in dealing with bad acting individuals or special needs beneficiaries
  • Disadvantages:
    • Costs money, generally 1% - 1.3% of trust assets as an annual fee
    • Less personal knowledge of you and your beneficiaries

11. Reasons a professional trustee might be right for you:

• My spouse handled all of our money management. He/she passed away. I am unfamiliar with my assets, and not sure which of my friends I can trust.
• I need help managing large amounts of money I received after a sale of my business, settlement from a lawsuit, divorce, or inheritance.
• I am seeking security and peace of mind and want my investments professionally managed while I am travelling.
• I need help while I am serving as an executor of my parent’s estate or trust.
• If I become incapacitated, I want my assets to be secure and professionally managed.
• I am concerned about my parents’ ability to manage their finances and I do not have the time to help them.
• How can I best protect my children and their inheritance after I die? I do not want to burden my family and friends.

Sources: Boeing Employees Credit Union
Forbes Magazine 2010
Revised Code of Washington

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Contact me if you have specific questions or would like to schedule an appointment.

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Seattle, WA Estate & Trust Lawyers

Mary Anne Vance
Reed Longyear Malnati Corwin & Burnett
801 2nd Avenue, Suite 1415
Seattle, WA 98104
(206) 624-6271

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