How to Set Up a Trust

A trust is one of the most important estate-planning tools you may not be using. Here are answers to common questions about how to establish a trust so you can find one that’s right for you.

Nearly everyone is familiar with the concept of a will, a legal document that states where and to whom a person’s assets transfer after their death (in addition to other concerns, such as who will care for minor children). However, many are unaware that, even with a will, those beneficiaries must deal with a process known as probate unless proper estate planning is done in advance.

Probate is the legal process of transferring titles and assets out of the name of someone who passed away and into the name of their beneficiaries. In Washington state, assets usually take a year to pass through the probate process. During probate, the court appoints an estate administrator and gives them the authority to manage the estate until it is transferred to the recipients. A family member usually performs this service; however, the role could be filled by a third party.

Probate is a public process, which means the second your assets hit probate, they become a matter of public record, and anyone with a search engine can find this personal information. Probate can be an extremely cumbersome procedure. Even a seemingly straightforward case, such as a deceased parent leaving a house to their only child, can drag on and typically needs an attorney to resolve due to formal pleadings and delays. However, one of the main complications that can throw a wrench into the gears of probate is family infighting. When a family member believes they did not get a fair share, or there is a dispute over a sentimental item, the probate process can turn into a very public family squabble that drags out for sometimes years.

The most efficient way for your beneficiaries to skip the probate process is for you to work with an estate attorney and discover how to create a trust.

How to start a trust

A trust is a legal document that dictates how and when to transfer assets to beneficiaries (such as children, grandchildren, and other heirs) or charities. Establishing a trust allows assets to remain available during a person’s lifetime and designates where the remaining assets pass after death. A significant difference between a will and a trust is that the trust avoids the probate process. Generally, when setting up a trust, there are three parties involved:

  • The grantor (or trustor) is the person creating a trust.
  • The trustee is the person who administers the trust once the grantor passes away or if the grantor becomes incapacitated.
  • The beneficiaries are the people and institutions who gain the assets held by the trust.

For example, a grandparent decides to establish a trust for their grandchildren’s education to give them a leg up when they begin new careers. The grandparent is the grantor. The grandchildren are the beneficiaries. The person appointed to maintain the trust and make payments on behalf of the grandchildren, perhaps one of their parents, is the trustee.

Another benefit of many trusts is that they can protect wealth from certain creditors or other financial complications while the grantor continues to control it. Trusts are especially useful in complex family situations, such as when there is the potential for family infighting or children from more than one marriage. In addition, creating a trust can protect the beneficiaries’ assets after the grantor passes away. For example, if a beneficiary gets divorced, has creditors, or isn’t fully mature financially, a trust can help to keep their assets secure.

While there are many different trusts, they all fall under one of two distinctions. Trusts are either revocable or irrevocable.

A revocable trust means that after establishing a trust, the grantor continues to retain control of everything in the trust during their life. Revocable trusts are flexible and can be dissolved anytime if circumstances or intentions change. The grantor of a revocable trust can also be the trustee or a co-trustee. A revocable trust typically becomes irrevocable upon the death of the grantor.

An irrevocable trust means that the grantor cannot alter it after setting up a trust. So, the grantor has no control or access to the trust, and its terms and conditions are fixed and cannot be changed. Essentially, the assets in an irrevocable trust are removed from an estate. So, an irrevocable trust lowers the number of assets subject to estate taxes. Additionally, the grantor has no tax liability on any income generated by the trust’s assets, although beneficiaries will likely have some income tax consequences. Assets in an irrevocable trust may also be protected from legal judgments against the grantor.

The most common type of trust used in Washington state to protect and ensure assets pass to beneficiaries according to specific wishes is a revocable living trust.  

How a revocable living trust works

When pondering questions like, “How to make a trust?” and “Which trust is right for me?” the answer is usually a revocable living trust.

A revocable living trust is unique because after establishing a trust, the grantor initially plays all three roles: grantor, trustee, and beneficiary. When property and other assets are transferred into a revocable living trust, the grantor is no longer the legal owner of those possessions. The trust is now the legal owner.

However, in practical terms, little else changes. A grantor still has the rights to those possessions and may transfer vehicles, bank accounts, a personal retirement account, investments, real estate, and other property to the trust. Since the grantor is also the trustee and beneficiary, everything in the trust exists for their benefit. The grantor/trustee/beneficiary is free to use, acquire, and sell property and assets just as they would before, except those transactions occur in the name of the trust. The grantor is also free to terminate a revocable living trust at any time and take the assets back.

A revocable living trust serves its intended purpose once the grantor passes away. The trust still owns all assets; however, now, the successor trustee manages the assets and makes distributions to beneficiaries according to the terms of the trust.

One significant benefit of using a revocable living trust to pass on property and other assets is that beneficiaries avoid the probate process (but those assets may be subject to estate taxes and are still part of the grantor’s assets). Other benefits of avoiding probate with a revocable living trust include the following:

  • Beneficiaries may receive and benefit from the assets much sooner than they would through the probate process.
  • The details of a trust are private, whereas when a will is in probate, it becomes part of the public record.
  • The administration of an estate in probate can be costly compared to a trust.
  • Avoiding ancillary probate if you own out-of-state property.
  • If the grantor becomes incapacitated, the successor trustee can immediately step in, help with finances and home upkeep, and ensure loved ones are cared for promptly.

In short, by avoiding probate, a revocable living trust can save your heirs time and money.  

Do you still need to create a will if you have a revocable living trust?

While a revocable living trust is an alternate means of transferring property that would otherwise go through probate, it should always be paired with a will as part of your estate plan. It’s common for some assets to get left out of a trust, especially if it is maintained for many years during a grantor’s lifetime. For example, if there’s no will, a vehicle registered in the deceased’s name or a bank account in the deceased’s name with no listed beneficiary will go through probate according to Washington state’s intestate succession law. If there was an intended recipient for those assets, the probate process might yield a different result.

The most common way to protect assets that are not in a revocable living trust is to create what’s known as a pour-over will. With a pour-over will, any assets held in the deceased’s name but not included in their revocable living trust are automatically transferred to the trust after they pass away. Please visit our page on wills for more information.  

What is a Testamentary Trust?

In an estate plan, a testamentary trust is used by those who don’t want to create a revocable living trust but still desire some control over how beneficiaries use their assets. It’s usually recommended for younger people with minor children who don’t have time to fund a trust by re-titling assets or don’t have the budget for a revocable living trust. While a grantor creates a revocable living trust during their lifetime, a testamentary trust is created by the terms of a will.

Some reasons people establish a testamentary trust, rather than leaving money and property directly to an heir, include the following:

  • Concerns about asset management, particularly if the beneficiary is young or has issues like a gambling or addiction problem.
  • Protecting assets from the beneficiary’s creditors.
  • Preventing assets from leaving the family due to divorce or the death of a beneficiary.

The terms of a testamentary trust may dictate that a certain amount of money is paid to the beneficiary monthly, annually, or upon certain landmarks like college graduation or a specific birthday. Testamentary trusts are also established for particular purposes, such as paying for education or medical care. In contrast, the beneficiary of a will is free to do whatever they choose with an inheritance.

One significant drawback to a testamentary trust is that it does not avoid the probate process.  

Additional types of trusts

The two trusts described above are specifically designed for estate planning. However, other types of trusts play an essential role in providing for your family, managing tax obligations, protecting assets, and more. Depending on your circumstances and goals, your estate planning attorney may suggest one or more of the following:

  • Irrevocable life insurance trust (ILIT) – This trust holds a life insurance policy on the grantor. Because the trust owns the policy, the proceeds are not typically taxed as part of the grantor’s estate (although they become taxable as part of the beneficiaries’ estates). An ILIT can hold either an “individual” or “second to die” (also known as a “joint and survivor”) life insurance policy. A “second to die” policy insures two lives and pays benefits once the second party passes away.
  • Generation-skipping trust –This trust transfers assets to grandchildren or later generations tax-free (as long as the beneficiaries are at least 37½ years younger than the grantor). Because the content in a generation-skipping trust avoids estate taxes that would apply if the next generation inherited them, these trusts are part of the tax planning process to preserve wealth.
  • Charitable lead trust – This type of irrevocable trust is known as a “split-interest” trust because it donates assets to a charity for a predetermined amount of time, typically several years or the life of one or more persons. At the end of this term, the remaining assets are distributed to noncharitable beneficiaries, such as children, grandchildren, etc. These trusts benefit the final recipients by providing estate tax savings or income tax deductions on the remaining assets.
  • Charitable remainder trust – A charitable remainder trust is another “split-interest” trust, but it’s basically the opposite of a charitable lead trust. A charitable remainder trust provides income for beneficiaries for a defined time. Any remaining assets are donated to a charity. These are tax-exempt irrevocable trusts intended to reduce taxable income.
  • Spendthrift trust – This type of trust limits the beneficiary’s access to the trust’s assets. Instead of distributing an inheritance all at once, the trustee has discretion over how and when distributions are made to a beneficiary. This type of trust helps protect an inheritance from poor spending habits, creditors, and unfortunate life events, like a divorce.
  • Special needs trust – These trusts are for dependents with physical or cognitive disabilities who receive government benefits, such as Social Security disability or Medicaid. This trust ensures that the beneficiary receives some income without risking their eligibility for programs that require their income to remain below a specific limit.

Work with an experienced wills and estates lawyer

When planning for your family’s future security, it’s in your best interest to receive knowledgeable guidance. That assistance doesn’t have to be painful or prohibitively expensive.

For more information on how to open a trust and for all estate planning needs, please contact Harbor Law Firm. Our firm makes your 2023 (and beyond) estate planning process as simple and stress-free as possible. Our services include:

  • Knowledgeable guidance customized to your specific circumstances and goals.
  • A fully remote process that never requires you to leave home.
  • Early morning, evening, and weekend hours to fit your schedule.
  • An adaptable process for exchanging documents and collaborating.
  • Flat-rate pricing, so you’ll never be surprised by a legal bill.

We also offer complimentary consultations and can speak with you outside regular business hours. For more on our remote estate planning process, visit this page on our website. Please click here to schedule your complimentary consultation.