§3.5 Revocable Living Trusts
Jurisdiction | Washington |
§3.5 REVOCABLE LIVING TRUSTS
A revocable trust is a trust created by a trustor that the trustor retains the right to revoke, either alone or in conjunction with another person during the trustor's lifetime. See Ch. 11.103 RCW (revocable trusts). If revoked during the trustor's lifetime, the trust corpus reverts to the trustor or may be distributed to some other person, as directed by the trustor. Upon the trustor's death, the formerly revocable trust becomes irrevocable and is administered and distributed pursuant to terms specified by the trustor. See generally Austin W Scott, Scott's Abridgement of the Law of Trusts §§57-57.1 (1960); George T Bogert, Trusts §22 (6th ed. 1987).
(1) Purpose and use of revocable living trusts
While the trustor of a revocable trust is living, no beneficiary other than the trustor is entitled to receive any information or notice regarding the trust such that the control of assets held in the trust is essentially the same as if the trustor held title in his or her own name. RCW 11.98.072. Revocable living trusts may be useful in many situations, as discussed below.
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(a) Probate avoidance
The most commonly recognized use of a revocable living trust is to avoid probate upon death. In some states, the probate process is cumbersome, time consuming, and expensive. Washington's nonintervention probate procedure has simplified probate in this state so that living trusts are not as commonly used, especially for simple estates or in situations with a potential trustor reluctant to incur the cost and effort to transfer property during lifetime. When a trustor does not want to transfer all assets during his or her lifetime, a revocable living trust may be established for lifetime transfers of real estate located outside of Washington, while the trustor's assets in Washington remain subject to a Washington probate.
(b) Property management
A revocable trust may be useful for current management of assets or future management by others when and if the trustor becomes incapable of doing so. A revocable trust for current management of assets is useful to provide for
(1) | disabled or elderly persons; | |
(2) | inexperienced persons with recently inherited wealth, or young individuals who have just received property from an I.R.C. § 2503(c) trust, a custodial account under the Uniform Transfers to Minors Act, or other sources; and | |
(3) | persons without time to manage their affairs due to travel, business, or lack of interest. |
A trustor may anticipate a need for future management in the event of health issues. Such a trust may be established by
(1) | a client in the early stages of dementia or Alzheimer's disease who may elect to use a trust to become familiar with how it works and to gradually phase in a fully funded trust over a period of time; | |
(2) | spouses or domestic partners who are older, especially if the principal manager of the community affairs is ill. A revocable trust provides a mechanism to provide management of the community assets if the manager spouse is expected to die prematurely; | |
(3) | a principal, or an attorney in fact in connection with a durable power of attorney that permits an agent or attorney in fact to fund the trust in the event of disability or incompetency, |
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to avoid a guardianship procedure or the complications with financial institutions when using a power of attorney. |
Other management purposes can be achieved by a trustor through use of a revocable trust, especially as a revocable trust may be ideal to hold only selected assets. For instance:
(1) | Individuals who move from a common-law state to Washington may use a trust to segregate and retain the character of their separate property. See RCW 11.103.030(2)(c) (establishing that "the character of community property or separate property is unaffected by its transfer to and from a revocable trust"). | |
(2) | Parties to prenuptial agreements may transfer their separate property to revocable trusts to ensure tracing of assets and to simplify the description of such assets in the schedules to the prenuptial agreements, as well as their future management. | |
(3) | When a fractional interest in an asset or group of unique assets (e.g., oil or gas royalty interests or real property) is received by a large group of family members, a revocable trust can be a good vehicle to centralize the management of these assets and the record title. | |
(4) | Out-of-state real property can be placed into a revocable trust to avoid having to conduct an ancillary probate in another U.S. jurisdiction with respect to that property. Caution should be exercised and legal advice in the foreign jurisdiction should be obtained before considering holding title of non-U.S. real estate in a revocable trust. | |
(5) | A trustor desiring to acquire and hold assets in a form that maintains confidentiality or privacy for the trustor may designate someone else to hold record title as trustee but still retain all rights to revoke or modify the trust. Steps must be taken to assure that only the other person's name and identifying information appears in the public record—e.g., use a certification of trust that does not show the trustor's name, use a designation for the trust that does not include the trustor's name, and make sure that the trustor's address or other identifying information is not on a real estate excise tax affidavit. |
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Practice Tip: | Real property located outside of Washington is not subject to Washington estate tax. If the real property is transferred to an entity, such as a single-member limited liability company, the ownership interest of the decedent is a personal property interest that may be subject to Washington estate tax. Real property held in trust retains its character as real estate located outside of the Washington taxing jurisdiction. |
(2) Potential issues with revocable trusts
The benefits and objectives of a revocable trust should be weighed against any possible disadvantages and against some of the common, incorrect perceptions about the benefits of such trusts.
Revocable trusts affect the title of property during the trustor's lifetime—which title changes from the trustor to the trustee. The revocable trust form alone, without proper drafting and advice, does not accomplish estate and generation-skipping transfer tax objectives. Marketing by services that "sell" revocable trusts sometimes leads to misunderstandings about tax benefits, and these misimpressions must be corrected. Either a will or a revocable living trust, with the right tax guidance, may accomplish tax savings or tax deferral objectives.
A revocable trust is not necessary or helpful for all estates. As discussed in the section regarding nonprobate assets, there may be other less cumbersome vehicles to transfer property upon death for certain estates with few assets or with no potential estate tax burden. If the objective is to avoid an ancillary probate for transfer of real property outside the decedent's state of residence, a transfer-on-death (TOD) deed should be considered if recognized in the jurisdiction for the real property.
To the extent that probate avoidance is the primary objective for use of a revocable trust, the trustor must transfer title of all property to the trust during the transferor's lifetime. If any significant probate assets are outside of the trust upon the trustor's death, a probate may be necessary.
Practice Tip: | If a revocable living trust is created to permit avoidance of probate, the trustor also should sign a "pour-over will" that provides for transfer upon death of any property that inadvertently or intentionally was not transferred to the revocable living trust during the trustor's lifetime. |
A trustor who holds title to real estate in a revocable living trust and who seeks to finance the purchase or to refinance loans on the property may be required by the lending institution to take additional steps. A common request is that the trustor sign a personal guarantee of the loan made to the trustee of the trust. For real estate in a revocable living trust, this requirement is no different than if the trustor personally held title and signed the loan documents in his or her own name.
Title insurance policies should be checked to make sure that a transfer of real estate by quitclaim deed does not adversely affect title coverage for the property.
(3) Requirements to establish, administer, amend, and revoke
This section discusses how revocable living trusts may be established, administered, amended, and revoked.
(a) Forming the trust
By agreement or declaration
A revocable trust may be created by an agreement in connection with which property is transferred by the trustor to one or more trustees. When the trustor also is the sole trustee and, arguably, there is no transfer of property, a declaration of trust can be used. 1 Mark L. Ascher, Austin W. Scott, & William F. Fratcher, Scott and Ascher on Trusts §3.1.1 (5th ed. 2006 & Supp. 2018).
RCW 11.98.008 provides that a trust may be created by, among other actions, (1) transfer of property to another person as trustee during the trustor's lifetime or (2) declaration by the owner of property that the owner holds identifiable property as trustee.
Oral trusts may be created under RCW 11.98.014 and need not be evidenced by a trust instrument, but the creation of an oral trust and its terms may be established only by clear, cogent, and convincing evidence.
Trustor as trustee and beneficiary
The trustor can be the sole trustee and the principal beneficiary of a revocable trust if other persons possess a present or future interest in the trust, even if those persons...
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