Revocable living trusts are a hot topic today among people considering estate planning.
Some lawyers and salesmen aggressively market trusts, promising that a trust will avoid taxes, probate and even lawyers themselves. In the slick sales pitch it is often hard to sort fact from fluff. What is the truth about trusts? Is a trust always better than a will?
The truth is whether a trust is better than a will depends upon the circumstances.
• What is a trust? A trust is an arrangement in which title to property is placed in a person (or a corporation) called the trustee, who is only authorized to use the property for the benefit of a person or institution, called the beneficiary.
The trust agreement or declaration determines what the trustee can do with the trust property. The trust agreement is a contract between the person who makes the trust (called the grantor, trustor or settler) and the trustee. The agreement describes the trustee’s powers and duties and gives the trustee instructions about the beneficiaries – who they are and how the trustee is to use the trust property for their benefit. The trust agreement, along with the law, determines the rules of the trust.
When a person creates a living trust, it is generally to hold their property and use it for their benefit while living, and then to distribute it to others after their death.
In contrast, a person can make a will which creates a testamentary trust. A testamentary trust only exists after the person dies. The will names the trustee and beneficiaries, and states the rules for the trust.
During the life of the grantor, the grantor may amend, cancel or change a revocable living trust. If the grantor revokes the trust, the trustee returns all of the trust property to the grantor, who then continues to own it as before, outside of any trust.
In contrast, a grantor may not revoke an irrevocable trust, and usually cannot amend an irrevocable trust, unless all of the people interested agree. Grantors seldom use irrevocable trusts except when making a gift through a trust.
Some trust agreements require that trustees hold and administer the trust property for the benefit of several generations of beneficiaries. However, other trust agreements can be very simple. One basic rule generates that simplicity. A person can act as the grantor, trustee, and one of the beneficiaries of a revocable living trust, all at the same time. In most living trusts, the grantor is the initial trustee. The trust simply holds the title to the grantor’s property.
• A revocable living trust does not give extra tax benefits. People marketing trusts frequently claim that a revocable trust will avoid income or estate taxes. A revocable trust does not directly affect the grantor’s income taxes: the grantor pays income taxes on all trust income directly. If anything, a trust may have some complicated tax disadvantages, although they do not apply to most people.
Similarly, a revocable trust is no better than a will for avoiding estate taxes. All of the estate tax avoidance provisions available for use in a trust can also be used in a will.
• Does a trust avoid probate? Is that good? What is probate, and should you try to avoid it? Probate is the word given to administration of an estate under a will. A probate administration can be very simple, inexpensive and speedy, or long, expensive and complicated, depending upon the circumstances. The determining factors are usually the complexity of the estate and the abilities of the people who assist in the administration.
If all assets are titled in a trust, then the trustee controls and distributes the trust property after death, and no court probate administration is required. But is that worth the expense of creating a trust and the work of retitling all accounts and property into the trust name?
The cost of probate in Washington is often small and no more than the cost of probate administration. Settlement of an estate through trust or probate administration involves similar work. If done properly, both often require the personal representative or trustee to consult with professional advisors, often including an attorney, accountant and appraiser.
In Washington state, the personal representative and attorney hired to do the legal work agree to the attorney’s charges, typically charged on an hourly rate basis, or a set fee. In Washington, many simple estates are administered for less than $1,000.
An estate large enough to cause estate taxes should always include the help of a professional tax advisor, such as an attorney or accountant, whether or not probate or trust administration is used. The tax savings will usually far exceed the cost.
• What is the experience and competence of the trustee and successor trustee? If the grantor/trustee, and the successor trustee are careful, organized and attentive to detail, and if they know when to ask for help, they may be capable of administering the trust competently without substantial outside professional help. Unqualified or inattentive trustees may create serious problems. Since the trust does not require any contact with professional advisors, harm caused by mistakes or neglect may go undetected.
• Are the heirs going to disagree? In most estates, the factor which most determines the expenses is whether or not the heirs fight with each other or the trustee. If the heirs will fight about their shares or complain about the administration, probate is usually better than trust administration.
In probate administration, the personal representative can step into the court system to resolve disputes between heirs or beneficiaries. Sometimes the formal court process makes the beneficiaries feel their interests are secure, and conflict is avoided. Also, in probate administration no one may complain after the estate closes. In a trust, the trustee remains liable to any dissatisfied beneficiary for the period of the statute of limitations, normally three years.
Trusts fail to avoid probate for a simple reason: assets are not titled in the name of the trust. When that is the case, probate administration is often required to gain control over that “loose” asset. The trust only avoids probate administration as to assets the trust owns. Many people fail to apply enough vigilance and keep assets titled in the trust.
If a person owns real property in more than one state, a trust is often advisable. Multiple probates in separate states require considerably more time and expense than probate in Washington alone, especially when the other state uses a complex probate process.
• Is a trust better if you are disabled? If you are the original trustee of your trust and become disabled, the trust agreement will name the next trustee. The trust can avoid the delay, costs and inflexible legal standards of a court-ordered guardianship. Usually, however, a power of attorney naming a trustworthy relative or friend as “attorney-in-fact” is the simplest and most efficient method to give control over assets to another during a period of disability. A power of attorney costs significantly less than a trust.
• Is a trust more private?
If privacy is important, a trust is preferable to a will. In the probate of a will, the original will is filed in court. Any member of the public can obtain a copy. In contrast, a trust is an entirely private arrangement; no one files anything in court. Only the parties to the trust will know the terms.
• Are trust administrations faster than probate? In a simple estate with no creditors, the estate assets can be distributed to the beneficiaries very quickly. However, the estate administrator cannot act until they file papers and receive authorization from the court. That process can take weeks in some counties, and only days in others. In contrast, a trustee already has authority, and can administer the trust without waiting.J. Bruce Smith is an attorney and partner with Barron Smith Daugert,PLLC, Bellingham, who limits his practice to trusts, wills, estates and related matters.