Let’s start by getting clear on what a trust is. A trust is a written document where one person (the settlor) gives another person (the trustee) certain assets (money, real estate, vehicles – whatever) to manage for the benefit of another person (beneficiary). We use the word trust to refer to both the document that created the trust and also sometimes the accounts where trust funds are held.
There are two broad categories of trusts: testamentary and living. A testamentary trust is created in your Last Will and Testament and is meant to be used after your death. Testamentary trusts are often called by other names to reflect the purpose of the trust, such as credit shelter trust (to avoid estate taxes), marital trust (to hold assets for the benefit of a surviving spouse) or children’s trust (to provide for beneficiaries who are minors or under a certain age). The beneficiary of any trust is the person who is entitled to receive payments or distributions of principal, income or both under a trust. The trustee is the person who manages the funds and other assets held in the trust. Since a testamentary trust doesn’t spring into existence until after your death, you obviously can’t be the trustee. Typically, you will name a family member or friend to serve as trustee of a testamentary trust, or you can select a professional trustee or financial institution such as a bank serve as trustee.
A living trust is created and used during your life and beyond and can be revocable or irrevocable. The main differences between a revocable and irrevocable trust are the ability to modify or completely revoke the trust (guess which one that is) and also who can manage the trust assets. You can manage a revocable trust, but an irrevocable trust must be managed by someone other than you if you are also the beneficiary of the trust.
So why set up a living trust? The main reason is to avoid probate. Probate is the process of having your Will filed with the Court when you die, proving it is valid and having the Court oversee the administration of your estate (meaning, the assets you own at death). The cost of probate (typically, about $5,000 or more) and the loss of privacy are two good reasons to have a trust. Another reason is to avoid probate in two states if you have a second home or land in another state.
In Washington, we are fortunate that our law allows married couples and registered domestic partners to avoid probate when the first spouse or partner dies if they have a community property agreement. A community property agreement automatically transfers ownership of assets held in the deceased spouse’s name to the surviving spouse without going through probate. The caveat here is that some financial institutions will require you to jump through some hoops to transfer title to a surviving spouse if both spouses or partners are not listed as co-owners, but generally these issues can be resolved without going through probate. Sometimes there is a good reason not to have a community property agreement (for example, where one or both spouses or partners have significant wealth or children from another relationship). In these cases, a trust can provide for the survivor and achieve other goals such as tax avoidance and providing for children.
Managing a trust is not a huge deal – the main challenge is getting the trust set up and properly funded. This means working with an attorney to determine what kind of a trust you need and creating the trust document. Please don’t use trust forms over the internet! The laws of every state are different. I’ve seen more problems with these canned documents than you can imagine. If you are going to have a trust, spend the money to have it set up right to reflect your situation and your wishes. For most of my clients, the cost is $1,500 or less. Also, it’s critical to properly “fund” the trust. Think of a trust as a vase and your assets (bank accounts, cars, house) as flowers. You have to put your flowers into the vase (meaning, transfer your assets into the name of your trust) for the trust to be effective. I’ve straightened out more trusts than I care to remember that weren’t properly funded – especially for folks coming from California where everyone seems to have a trust but hardly anyone funds them.
So should you have a trust? Here’s my general advice to clients. Don’t bother with a living trust before age 70 unless you 1) have significant wealth, 2) own real estate in another state, 3) do not want a community property agreement, 4) are single (including widow or widower) and want to avoid probate, or 5) are terminally ill or have a debilitating illness where you don’t expect to be able to manage your assets in the future. Every situation is unique. Be sure to discuss the option of a trust with your attorney when you are making your Will so your attorney can help you evaluate whether a trust makes sense for you.
Jessica Jensen is the owner of Jessica Jensen Law in Olympia, Attorneys for the Business of Life. Her holistic general practice focuses on business, real estate, wills, trusts and estates, uncontested and collaborative divorce, and business and real estate litigation. She can be reached at 705-1335 or jessicajensenlaw.com.