In the proper situation, a revocable living trust can benefit individuals living in high cost probate states, avoid multiple probates, and prepare for the incapacity of an individual with a corporate trustee; however, there are no special tax savings associated with revocable living trusts.
A person can hold his or her property in a revocable living trust. The following three circumstances provide the most beneficial situations for using a revocable living trust:
- The first situation occurs when an individual owns real property in the State of California or another state with high probate costs. California state law provides for fixed probate fees. These statutory probate fees can be higher than an hourly charge, since California bases the fees on the estate value instead of the work provided by the attorney.
- The second situation occurs when a person owns real property in more than one state. A person uses the revocable living trust to avoid ancillary probates in more than one state.
- The third situation occurs when a person needs assistance from a corporate trustee or another person to handle his or her affairs. Basically, the person gathers all of his or her assets together for ease of administration by a corporate trustee or another individual.
To be effective, the revocable living trust should contain all of a person’s property, except for his or her retirement plans. Any property outside of the revocable living trust is subject to probate unless it passes by beneficiary designation. Deeds must be filed transferring real property to the trust. Bank and brokerage accounts must be changed to reflect the trust as the owner. Contracts must be assigned to the trust. Vehicles and other property must also be transferred to the trust.
A trust consists of three parties: a grantor, a trustee and a beneficiary. The grantor gives property to the trustee to hold and distribute for the benefit of the beneficiary. With a revocable living trust, one person generally holds all three positions: grantor, trustee and beneficiary.
A revocable living trust typically identifies the family of the person setting up the trust. The person setting up a revocable living trust is named a “grantor,” “settlor” or “trustor.” These are all names for the same person.
The trustee controls the trust property according to the instructions in the trust document.
Generally, the grantor also serves as the initial trustee of a revocable living trust.
2. Amending a Trust.
In a revocable living trust, the grantor reserves the right to change or revoke the trust at any time. Typically, during the grantor’s lifetime, the grantor can use as much of the trust income and principal as he or she desires. On the grantor’s death, the trustee distributes the property according to the trust terms. In effect, the trust acts as a will substitute.
3. Will Substitute.
Grantors can distribute their property under a revocable living trust just as they would under a will. A revocable living trust can include bypass trust provisions to allow a married couple to utilize both of their amounts exempt from estate tax just like a will. Revocable living trusts cannot provide any special federal or Washington state tax savings that are not also available in wills. Revocable living trusts also do not work if the grantor wants to include a special needs trust (Medicaid planning) for a spouse. In addition, a will should be used to name the guardian of any minor children. A grantor should use a will to transfer any property outside the trust to the trust upon the grantor’s death.
4. Power of Attorney Substitute.
A person can use a revocable living trust as a substitute for a power of attorney. If a grantor becomes incapacitated, then the successor trustee under a revocable living trust can act on all of the trust property for the grantor’s benefit. Typically, a grantor cannot change or revoke a revocable living trust during a period of incapacity. A successor trustee to an incapacitated grantor pays the grantor’s bills and other expenses. In this sense, a revocable living trust can be used to avoid a guardianship if a person becomes incapacitated for any reason.
5. Revocable Living Trust v. Will in Washington.
Many people wonder whether a revocable living trust is better than a will. Revocable living trusts and wills each have their appropriate use.
The general rule is if a person owns property only in Washington state, a will works better than a revocable living trust.
6. All Property Distributed By Will.
First, a will covers all property owned by an individual that is not passing by a beneficiary designation. In comparison, a revocable living trust only covers property placed in the trust.
For example, David owns a house, a car and 3 bank accounts in his name. If he dies with a will, the personal representative distributes all of his property according to the terms of the will.
If David owns a revocable living trust and has placed the house, the car and the 3 bank accounts in the revocable living trust, then the trustee distributes all of his property according to the revocable living trust.
However, if David distributes his property according to the revocable living trust, but has not placed the house, the car and the 3 bank accounts into the trust, then his personal representative must file a probate to transfer the property into the trust. After the personal representative transfers the property to the trust, then the trustee distributes the property according to the trust terms. A probate and a trust administration combined costs more than just a probate or just a trust administration.
7. Need to Change Property Titles.
Many people diligently place all of their property into the name of the trust when they initially create the trust. As time passes, people fail to keep all of their property in the trust name, which creates the need for a trust administration and a probate at the time of their death. In comparison, except for beneficiary designations that pass property outside a will or a revocable living trust, a person does not change account or property titles in order for a will to distribute a person’s property to their intended beneficiaries.
8. No Need to Avoid Probate.
Many people believe that probate should be avoided at all cost. If a person lived in a state such as California, with its high statutory probate fees, this would be true; however, Washington State charges a $240 probate filing fee. The other costs associated with a probate or trust administration remain the same, except for the cost of the initial and closing probate paperwork. The higher initial set-up costs for a revocable living trust generally offset the additional probate costs. Generally, revocable living trusts cost $1,000 to $2,500 more than wills with similar provisions, plus the cost of placing the property, bank accounts, brokerage accounts and vehicles into the revocable living trust.
Some people claim that a revocable living trust keeps a family’s affairs private. The Washington state legislature changed the laws to allow a personal representative the right not to file an inventory when a person dies. However, the personal representative must file the person’s will within 40 days of the person’s death. Thus, who would receive a person’s property remains available to the public if they request a copy of the will from the court clerk’s office where the will was filed.
10. Creditor Protection.
Also, a revocable living trust does not provide any added protection from creditors. A creditor of the grantor can attach any property placed into the revocable living trust. At the time of death of either a grantor or a testator of a will, the successor trustee or the personal representative can file Notice to Creditors. By publishing Notice to Creditors, all unknown creditors and any known creditors who received actual notice will not be able to file a creditor’s claim against the estate or the trust after the later of 30 days from actual notice if the creditor should have been known, or four months from the date notice was first published.
11. Distribution of Property.
Other claims about revocable living trusts include that the trustee will distribute the assets sooner than a personal representative under a will. A prudent trustee or personal representative will not distribute the property until after the four-month time period has passed for the notice to creditors being published, or after any estate taxes have been paid and the IRS has mailed out the closing letter stating that no additional taxes are due.
12. Tax Savings Provisions.
Revocable living trusts and wills can contain the same tax provisions. This includes both the bypass trust to utilize both a husband and wife’s amount exempt from estate taxes and the generation-skipping exemption provisions which allow a husband and wife to each pass the amount exempt from federal generation-skipping taxes to their grandchildren without the generation-skipping tax applying to them.
In conclusion, except for the three specified situations, a Washington resident typically is better served by a will than a revocable living trust. Since the will covers all property not passing by beneficiary designation, and probate is not a huge problem that needs to be avoided in Washington, wills generally cost less to create. A person does not need to change ownership of his or her assets or use a special title for a will to work effectively.