Probate Lawyer

1. Revocable Living Trust: A revocable living trust is a trust created and operated during the lifetime of the drafter and commonly for the benefit or support of the grantor and the grantor’s spouse or another person. It is popular because it may be utilized to avoid probate since all of the assets are transferred out of the grantor’s name during his or her lifetime and into a separate entity (i.e., the trust). The cost savings represented by probate avoidance may be eaten up, however, in creating the trust and transferring assets into the trust, especially if an institutional trustee serves for a long period of time. If the grantor acts as trustee, it will help keep costs down. He or she then would appoint a competent individual to take over as successor trustee upon death or incapacity.

The living trust may provide that upon the death of the first spouse, the trust is divided into two shares. One, irrevocable and naming other family members as remainder beneficiaries; and the other revocable for the benefit of the surviving spouse.

When transferring funds into a trust, capital gain taxes, income and estate taxes may be relevant. Probate avoidance may not save money in many situations.

2. Irrevocable Trust: An irrevocable trust may not be revoked after its creation. All irrevocable intervivos (i.e. “living”) arrangements involve loss of control, and there is always some risk, unless there is an exceptional family unity. Such trusts are sometimes used to avoid creditors, qualifying for state or federal assistance and for tax planning.

Note: Many trusts may be living/inter vivos trusts and many may be trusts which take affect after the death of the grantor (i.e., “Testamentary”).

Appointments/Definitions within Trusts:

  • a. Trustor: With a revocable living trust the “Trustor” is the person (or persons) who creates the trust. Any competent adult can establish a revocable living trust. Husbands and wives can establish a trust together, and can provide that their community and separate property assets be held in different accounts.
  • When creating a trust clients take two steps. First, sign the written agreement or declaration. Then, legally transfer all trust assets to the trustee. In most cases my client is both the trustor and the trustee.
  • b. Trustee: In Washington, any competent adult can be the trustee, including the person setting up the trust. More than one trustee may be appointed, and clients may delegate different duties to each trustee, and can retain the power to remove the trustee and appoint a new one. Appointing an alternate is essential.
  • c. Beneficiaries: The Trustors are generally the beneficiaries of the trust estate so long as they are alive. If they become incapacitated, they will still be the beneficiaries, but the successor trustee(s) will act as trustee. The successor trustee will make sure all finances are handled properly.

TESTAMENTARY TRUSTS

A testamentary trust is created within a will or revocable living trust. It is in contrast to a living trust which is created and funded by the grantor during his lifetime. A testamentary trust does not take effect until the death of the grantor. Testamentary trusts are popular because nothing must be transferred at the creation of the document. There may be capital gains savings in leaving the property out of the trust; however, the estate normally will not avoid probate nor will it avoid estate tax consequences.

  • 1. Marital Deduction Trust: A marital deduction trust is a testamentary trust created to take full advantage of the marital deduction provisions of the Internal Revenue Code. This can be set up either through a will or through a Trust Agreement.
  • 2. Bypass/Credit Trust: Also known as a credit shelter trust, credit trust, or exemption equivalent trust, it is an estate planning tool whereby a deceased spouse’s estate passes to a trust rather than to the surviving spouse, thereby reducing the likelihood that the surviving spouse’s subsequent estate will exceed the estate tax threshold. Typically, the surviving spouse is given a life estate in the trust. Such trust is commonly used for estates subject to estate taxes. The tax exemptions have changed significantly over the years. Please call for current exemptions.
  • The Bypass Trust allows spouses to maximize two (2) exemptions from estate taxation by taking advantage of both spouses’ exemptions; the maximum amount can be passed to the couple’s children or alternate beneficiaries.
  • 3. Educational Trust: An educational trust may be testamentary or living; however, most simple Wills with trust provisions for the children set aside assets for the purpose of college education for the children. Commonly the testator will divide his estate among his children, placing into trust his children’s shares for the purpose of health, maintenance, support and education. The primary purpose may be education. In Washington State, if the assets are not transferred into a trust for management by a trustee and for purposes identified by the testator, the children are entitled to all of the estate assets at age eighteen (18). It is critical that parents and guardians establish trusts to limit the income streams or lump sum payouts to their children at age eighteen (18). Even in small estates there may be substantial life insurance which will go automatically to the children at age eighteen (18) without trust provisions.

OTHER TRUSTS

  • 1. Charitable Remainder Trusts: An irrevocable trust, testamentary or inter vivos, which pays to one or more beneficiaries, at least one of which is not a charity, for a number of years, a specified amount. At the trust termination, the remaining assets are designated for one or more charities. A common charitable remainder trust is a Charitable Remainder Annuity trust which provides for the annual distribution to a non-charitable beneficiary or beneficiaries a fixed amount, not less than five (5%) percent of the initial value of the trust property. The remainder must be held by a qualified charity.
  • 2. Unitrust: A Charitable Remainder Unitrust provides for the payout each year to a non-charitable beneficiary a fixed percentage (at least five percent) of the annually determined net fair market of its assets. The remainder must pass to a qualified charity.
  • A Crummey Trust: Such trust enables the donor to claim an annual gift tax exclusion with respect to a transfer of property into a discretionary trust. The beneficiary of the asset has a non-cumulative power to withdraw property transferred into the trust. Such a power is named after Crummey v. Commissioner (1972), which allowed an annual gift tax exclusion for assets transferred to a discretionary trust for a minor.
  • 4. Annuity Trust: An annuity trust is a trust from which the trustee is required to pay a sum certain annually to one or more individual beneficiaries for their respective lives or for a term of years, and thereafter either transfer the remainder to or for the benefit of a qualified charity or retain the remainder for such a use. The sum certain must not be less than five (5%) percent of the initial fair market value of the property transferred to the trust. A qualified annuity trust must comply with the basic statutory requirements of the IRC Section 664.
  • 5. Insurance Trust: The property of an insurance trust is the insurance policies or their proceeds. The proceeds are often used or earmarked for estate taxes.
  • 6. Personal Residence Trust: For gift tax purposes, a trust wherein all of the property consists of a residence to be used as a personal residence by persons holding term interest in the trust. It is created by and for individuals and their families in contrast to business or charitable trusts.
  • 7. Irrevocable Life Insurance Trust (ILIT): The primary purpose of using an ILIT is to exclude the policy proceeds from taxation in the estate of the insured and the insured’s spouse. This can be accomplished with the surviving spouse deriving certain benefits from the trust while living. The trustee is generally given authority to purchase assets or loan to the estate of the survivor spouse. Usually, an unfunded ILIT will rely on gifts from the trust grantor to provided the funds necessary to pay future premiums. Such gifts may be subject to gift tax when exceeding the current annual exclusions. The use of Crummey powers are necessary to maintain the gift of a present interest.