A trust is a legal entity separate and apart from its creator. Each trust must have a "Grantor" (the creator of the trust), a "Trustee" (the party managing the investments and distributions of the trust), and a "Beneficiary" (a party who receives the benefits of the trust, such as distributions of income and principle). A trust can be revocable or irrevocable. In a revocable trust, the Grantor reserves the absolute right to make changes to the trust, or abolish the trust, at any time during the Grantor's lifetime. A "Living Trust" is a trust created during the Grantor's lifetime. With a Revocable Living Trust, the Grantor can also act as the trustee and in addition be the primary Beneficiary under the trust, so long as there are other persons possessing present or future interests.
Advantages of a Revocable Living Trust
1. Avoidance of Probate.
By far the most popular reason to establish a Revocable Living Trust (“RLT”) appears to be the avoidance of the cost and delays of probate. If all the decedent's property that would pass through probate is instead held by the trust at the time of death, then the decedent can avoid probate. In Washington, however, the probate process is very efficient and typically requires minimal Court involvement. Probates in Washington are typically kept open a minimum of four months and are relatively inexpensive.
2. Avoidance of Public Disclosure of Estate Assets.
Formerly, Washington State Probate law required the Personal Representative to file an inventory of the estate within ninety days of his or her appointment. Since January 1, 1998, this filing requirement no longer applies. The Personal Representative is, however, required to file the Last Will and Testament of the decedent with the court. The Last Will and Testament becomes available for the public to view. An RLT will usually avoid public disclosure, thereby ensuring privacy and confidentiality of the distribution scheme in your estate plan.
3. Avoidance of Multiple Probates if Real Property is Located in Other States.
When the decedent holds real property in other states, there usually is the requirement to initiate an ancillary probate in the state where the real property is located. The multiplicity of court proceedings can raise the costs of probate administration to an unreasonable level. Additional time is usually spent when ancillary probates are involved. The use of an RLT, if estate assets are properly transferred into the RLT while you are alive, can avoid ancillary probates.
4. Avoidance of a Guardianship for the Grantor's Estate.
Another popular reason for establishing an RLT is the avoidance of formal, court supervised guardianship of a person's assets while they are alive. The costs of appointing and maintaining a guardianship can be expensive. Additionally, the process by which a guardian of the estate is appointed is likely to cause very private and sensitive information to become public knowledge.
5. The Difficulty of Contesting a Revocable Living Trust.
Another reason to establish an RLT is that it can be substantially more difficult to invalidate an RLT than a Will at the death of the Grantor.
6. Little or No Adverse Tax Consequences.
If the RLT is properly drafted and the RLT is properly managed, there will be no adverse tax consequences for the Grantor or primary or secondary beneficiaries.
7. Observation of Trustee.
If a person contemplates establishing a trust for his or her children at his or her death, then an RLT will allow a Grantor to observe an appointed trustee during the lifetime of the Grantor. If the trustee proves to be unsatisfactory, another individual or entity can be selected before the death of the Grantor.
Disadvantages of a Revocable Living Trust
1. Costs Associated with a Revocable Living Trust.
The cost of preparing, funding, and managing an RLT will sometimes exceed the drafting of a Will and probating the decedent's estate. Washington probate procedure has been streamlined, thereby reducing the costs associated with probate and shortening the time an estate can be probated.
2. Probate May Not be Avoided if Not All Assets are Transferred to the Trust.
An RLT will avoid probate only if all assets which are subject to probate administration are transferred to the RLT during your life. It is not unusual for assets to be overlooked or for additional property to be acquired by the Grantor after establishment of the RLT. If that is the case, those additional assets will need to be probated.
3. The Time Spent and Inconvenience Associated with Maintaining a Revocable Living Trust.
Accurate record-keeping and accounting is required with an RLT. Many people want to simplify their lives, not complicate them. A professional trust manager can be hired. The costs associated with hiring a professional, however, can be rather expensive.
4. Cumbersome to Conduct Business or Engage in Other Transactions.
The Grantor must always wear his or her trustee hat when conducting business with RLT assets. Title insurance companies and purchasers of real property will sometimes be hesitant to conduct business with a trustee of an RLT. The concern is that the trustee does not have authority to act on behalf of the RLT. Usually, additional documentation must be presented. The RLT might have a difficult time borrowing against the assets of the RLT if the RLT does not include proper enabling language in the document.
5. Personal Representative in Probate can Press any Causes of Action the Decedent may have.
Washington State Law allows a Personal Representative of an estate to bring an action on behalf of an estate. If the decedent's estate is distributed through an RLT, then any causes of action the decedent may have could be lost or you will have to open a probate to initiate a cause of action.
6. Revocable Living Trusts do not Reduce Federal or State Taxes at Death.
The tax laws do not favor RLT’s or Wills. An RLT is generally set up for reasons which are not tax-related.
7. Public Disclosure of Grantor's Assets is Possible even with Revocable Living Trust.
If a complaint is filed challenging the validity of an RLT, or if an action to construe or interpret its provisions is begun, the RLT would wind up in the court file and might be available for the public review.
In certain transaction situations, it might be necessary to disclose some or all of the RLT provisions to a bank or financial institution, brokerage firm, transfer agent, or title insurance company who would rely on certain provisions of the RLT.
8. Notice and Procedure for Non-Routine Transactions.
Under Washington statutory law, a trustee is generally prohibited from entering into a significant non-routine transaction unless the trustee provides prior written notice to beneficiaries, and under certain circumstances, obtains an independent appraisal or sells in an open market transaction. This is not the case with a Personal Representative of a probated estate.
9. Other Methods of Avoiding Probate.
There are other ways to avoid probate, especially if a person holds a modest amount of assets.
The traditional community property agreement is an excellent way for some married couples to avoid probate for the death of the first spouse. If, however, there are federal estate tax issues to address, then a community property agreement might not be appropriate to transfer assets.
A joint tenancy with right of survivorship is another way to avoid probate. Also, multiple party bank accounts and paid on death bank accounts avoid probate. One could also designate beneficiaries on life insurance policies, retirement accounts, annuities and other similar assets. There may be some tax and liability considerations when creating a joint tenancy with right of survivorship account, so please consult with an attorney or accountant prior to creating a joint account.
Finally, probate is not a complicated procedure in Washington. Many Counties in Washington allow the filing of a probate without the need for the attorney or client to appear in Court. Additionally, probates in Washington typically involve a modest number of court filings. The Personal Representative usually operates with minimal court supervision and while there are various filing, publication and documentation costs, they are very reasonable. In addition, attorneys in the State of Washington charge an hourly rate rather than a statutory percentage of the estate so the overall costs associated with probate here may be significantly lower than in other states.