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A Living Trust or a Will – What is the Best Approach?

Van Nuys Law Office PLLC

1734 NW Market Street

Seattle, WA 98107

Tel. 206.784.9000

Should I have a Will or use a Living Trust? The popular word on the street is that people should use a “living trust” instead of a Will. A living trust is the common name for a revocable inter vivos trust. That means it is a trust established to take effect during the life of the person who creates it who can revoke it while he or she is alive and competent. Many people are convinced they should use a living trust rather than a Will in order to avoid probate. But, is that a good idea? How effective is the living trust?

For most people, these trusts are not necessary and have limited benefit. What’s worse, many who enter into revocable living trusts make the common mistake of failing to fund the trust properly so it ends up not working as intended. A trust takes some particular care and feeding to accomplish the intended results.

Should I use a Living Trust to avoid probate? The primary advantage touted regarding revocable living trusts is that it will avoid probate. Generally, this is true but people often have to probate some assets in any event. In many states probate is very expensive. California is a prime example. By contrast, the probate in Washington State is relatively inexpensive, especially if there are no significant complications.

What is probate? Probate is the legal process by which the title to your property will be transferred to those people you wish to benefit upon your death. Probate is also the process by which your Last Will and Testament is submitted to the court, and those having a legally-recognized interest in your estate have the opportunity to “contest” your Will if they have a valid reason to do so. Probate is also the process by which your creditors must submit claims for payment, which claims must be submitted within certain time limits.

f you do not have a Will, there is technically not a “probate,” but a similar process is followed in court. Since you have not designated who should inherit your property the court will follows a State of Washington statute stating how your property will pass. Since there is no Will, this process is called an estate administration, but this process shares many of the statutory rules and the process is similar to the probate of a Will.

What property is subject to probate? When you die, property you own or in which you have an interest will be subject to probate administration. You most likely own some property or assets that will not be subject to probate because title to this property passes automatically. Examples of “non-probate” property include:

1. Property owned as “Joint Tenants With Rights of Survivorship,”

2. Property subject to a beneficiary designation other than your “estate” such as life insurance, annuities, IRA’s, other retirement plans,

3. Property with a “Pay on Death” or “Transfer on Death” designation (usually available for bank accounts),

4. Property subject to a Community Property Agreement that specifically states that such property passes to your surviving spouse upon your death,

5. Property titled in a revocable living trust.

How does a revocable living trust avoid probate? A revocable living trust avoids probate because there is not any property titled in your name upon your death. This holds true, however, only if you were careful to change title of all you assets, transferring them to the trustee, before your death. For example, if John Doe establishes the “John Doe Revocable Living Trust,” and transfers title to all property owned by him (e.g., real estate, bank accounts, stocks, cars) to the “John Doe Revocable Trust,” then upon John’s death, he doesn’t own any property—his trust does—and thus probate is avoided. The trust would provide for how property will pass upon John’s death.

Probate avoidance sometimes is an important goal. For example, if John Doe owned real estate in other states, his estate could be subject to probate in multiple states. Even though Washington’s probate process is very streamlined and flexible, other states have probate processes that require mandatory attorney, executor and appraisal fees and require extensive court supervision.

Further, if you are concerned about your Will becoming a public document, then avoiding probate may be an important goal to you. Finally, if you are already assisting an elderly parent with his or her financial affairs, your parent may find a revocable trust to be a convenient means by which to manage your parent’s assets and pass the assets to your parent’s beneficiaries upon death. If your parent named you as trustee you would have the power to manage the assets in the trust.

Are you really avoiding probate? Continuing with the John Doe example from above, if John failed to re-title all of his assets into the name of his trust, or if he later purchased property in his own name instead of the name of his trust, then a probate may nonetheless be necessary.

Washington probate. Probate in Washington is a very streamlined process compared to some states. For example, in California, there are mandatory attorney and appraisal fees. Further, some states closely supervise the administration of an estate, thus adding to the cost. Washington has what is called “non-intervention” probate, meaning the court does not intervene with a high level of scrutiny.

If your Will states you want the executor to serve with “non-intervention powers” then the court will likely step back and let the executor do all that is necessary to administer the estate, usually without need to return to court for approval. This does not mean that the executor is free to do what he or she pleases. On the contrary, the executor owes special duties to the beneficiaries, and the beneficiaries may bring any questionable activities to the attention of the court.

However, assuming a normal estate administration with a diligent executor and cooperative beneficiaries, probate administration in Washington is very reasonable. You will need to consider the cost of establishing and maintaining a revocable living trust as that cost is weighed against the cost of preparing and probating a Will. In both cases, upon death, there are costs associated with valuing, reporting and transferring the assets. By contrast, with a revocable living trus there is the additional cost of initially transferring the assets to the trust to avoid probate. Further, aa clear deadline for potential creditors to try to collect money from your estate. Generally, there is a very short period of time, two to four months, for creditors to file their claims if the appropriate notices are given in a probate-type procedure. Otherwise, creditors’ claims could pop up many years after your death.

Estate tax savings. Some people believe (or are led to believe) that establishing a revocable living trust will produce estate tax savings not available otherwise. This is simply not true. The methods available to take advantage of both spouse’s exemptions to federal estate tax may be utilized in a set of Wills or a revocable living trust. There are other special types of trusts used to reduce estate tax, and those Wills are irrevocable, meaning that once you establish them you cannot revoke or change them. Two popular examples are the charitable remainder annuity trust and the irrevocable life insurance trust.

Reasons to consider establishing a revocable living trust. If you have any of the following circumstances or concerns, a revocable living trust—either in addition to a Will as your primary planning instrument or in lieu of a Will as your primary planning instrument—may be right for you:

1. You own out-of-state real estate (including most interests in timeshare condominiums);

2. You are very concerned about privacy (you may be in a “non-traditional” relationship and do not want certain family members knowing the particulars of how your property is passing; you may be a public figure); or

3. One or more of your children or some other trusted person is actively assisting you with your financial affairs.

Are there other reasons to use a trust? One of the advantages of using a trust is that you can have more control over the way income and assets are distributed to your chosen beneficiaries. For instance, you may think your son is a bit irresponsible now and you think it wiser to distribute his share at various stages in his life, such as a third at age 25, a third at age 30 and the balance at 35. Or, you may want to give your daughter an incentive to attend college by withholding her inheritance until she receives her degree.

You can accomplish these goals using a trust. But, you have the choice of having the trust be part of your Will, or have the trust stand alone as a Living Trust.

Sometimes the best approach is to have both a Living Trust and a Will, with the Will handling the odds and ends that are overlooked in the Living Trust. You can have your Will dump left-over assets into your Living Trust. This is called a “pour-over” Will.

What is the most important factor in establishing a trust? No matter what kind of trust is used, the most important factor is who you select to be trustee. Will the trustee really be capable of fulfilling his or her duties? Is he or she both capable and trustworthy?

[1] A trust is a contract between the person establishing the trust (called the “Grantor,” “Settlor,” or “Trustor”) and the person charged with administering the trust, the trustee, to hold property for the benefit of one or more beneficiaries. It is common with a revocable living trust that the person who establishes the trust is also the trustee as well as the current beneficiary.

Posted February 26, 2008

Trustee’s Duties After Death of Grantor/Beneficiary

What are the Trustee’s duties following the death of the grantor/beneficiary?

While many of a trustee’s duties in settling a trust are similar to those of an executor, certain formal requirements necessary to probate a will and handle an estate can be avoided.

There are three main duties of the trustee:

(1) Assembling the assets of the trust;

(2) Paying debts, expenses and death taxes; and

(3) Distributing the assets to the beneficiaries.

Assembling the Trust Assets

In most cases, it is easier to assemble the assets of a revocable living trust than an estate, since all property held in trust must be clearly identified as such. For example, a bank account or stock held in trust by the grantor as trustee for himself could be titled “Stanley Jackson, Trustee, U/D/T dated April 2, 2005, F/B/O Stanley Jackson.” If the grantor has named a different trustee, then the assets would be titled “Sally Johnson, Trustee, U/D/T dated April 2, 2005, F/B/O Stanley Jackson.”

Some attorneys or institutions use different wording, but the main features are consistent: naming of the trustee, the date of the execution of the trust and the beneficiary. The designation F/B/O means “for the benefit of” (or “for and on behalf of”), and the U/D/T means “under deed of trust” (or “under declaration of trust”).

There are trust assets that can be titled in an individual’s name during his or her lifetime and at death are payable to a beneficiary. For example, Uncle Stan might have owned a $100,000 life insurance policy, payable to “Sally Johnson, Trustee, U/D/T of Stanley Jackson, dated April 2, 2005.” Other assets paid to beneficiaries at a person’s death can include IRAs, pension and profit-sharing plans and other work-related benefits. (But there are very important tax consequences which must be considered by tax counsel.)

It is possible that the trust records contain no information concerning these assets, so it is necessary for you to have access to the grantor’s personal records and to work closely with the executor of the grantor’s estate to make certain that the trust receives all of the benefits to which it and its beneficiaries are entitled. You then file claims for all of the benefits and proceed to collect the other identifiable assets of the trust.

For accounting, and especially for tax purposes, you need a date-of-death balance sheet indicating the value of all trust assets at the grantor’s death. You therefore have to contact banks and stockbrokers for a breakdown of the decedent’s assets held with their institutions, including date-of-death balances for each bank account and security. If the trust is the owner of real estate, obtain appraisals of any real property as well as any personal property in the trust at the decedent’s death. Also obtain all past checking accounts of the trust and copies of all fiduciary income tax returns filed by the trust during the grantor’s lifetime. If any prior accountings had been made to the beneficiaries, you should have this information as well.

Payment of Debts, Expenses and Death Taxes

Because the grantor had the right to revoke the trust at any time prior to death, the federal and state governments impose death taxes on the trust assets (See chapter 6). You must be familiar with the deadlines for filing these returns, and with the death tax laws of the trust’s state (determine whether there are discounts for early payment).

You are also responsible for the payment of any outstanding obligations of the trust, including fees, commissions, and expenses incurred in the administration of the trust assets. It’s also possible that trust assets will be needed to satisfy obligations of the decedent’s estate. Therefore, coordinate your activities with those of the executor of the estate (of course, the trustee can be named as executor).

Distribution

When you are satisfied that all of the assets of the trust have been identified, assembled and correctly inventoried, and all outstanding obligations have been satisfied, prepare an accounting of receipts and disbursements and then make distribution to the beneficiaries. This presents you with two major decisions: (1) How formal an account is necessary, and (2) should you file the account in court in order to be formally (and legally) discharged of your duties and responsibilities?

In a close family situation, where the composition of the trust is not complicated, the size of the trust is relatively small, and the relationship between the trustee and beneficiaries is a good one, an informal account and distribution on the signing of a release can be used. This simplifies the distribution process and avoids publicity.

However, if you have any concern about potential outstanding obligations of the trust (such as future income tax problems, a federal estate tax audit, or conflict with the trust’s beneficiaries), then file a formal court accounting. Send notice of the accounting and the date it will be submitted to the court (certified mail, return receipt requested) to all beneficiaries and other interested parties (according to local court rules), so they will have the opportunity to appear in court and present any objections to the account and proposed distribution.

Once the account and schedule of distribution have been approved by the court, you can be formally discharged from your duties. In many instances, it is advisable to hold a certain sum in the trust for a period of time after distribution, in the event of any additional claims against the trust following distribution (a future audit of income tax or estate tax returns might indicate a deficiency).

Instead of an outright distribution to beneficiaries, the trust may have provided for the trust to continue after the death of the grantor for a certain period of time (for example, until the beneficiaries reach their twenty-first birthday). It is then necessary for you to continue to hold the funds allocated to these trusts in further trust for the beneficiaries and continue to administer the trust until the indicated distribution date. At that time, you can make distribution to the beneficiaries in a manner consistent with the above provisions.

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