§3.6 Irrevocable Trusts

JurisdictionWashington

§3.6 IRREVOCABLE TRUSTS

All trusts used in estate planning are either inter vivos or testamentary trusts. An inter vivos trust is a trust established during the trustor's lifetime, while a testamentary trust is established upon the trustor's death. A more detailed discussion of testamentary trusts is found in §3.4, above.

Trusts may be revocable or irrevocable. An irrevocable trust is a trust that the trustor has not retained the right to revoke. An inter vivos trust may be revocable or irrevocable, but revocable inter vivos trusts generally become irrevocable upon the trustor's death. Additionally,

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because a testamentary trust is established upon the death of a trustor, all testamentary trusts are irrevocable trusts. In this section, references to trust will be to irrevocable trusts.

(1) Generally

An individual may desire that property be placed in an irrevocable trust for the benefit of a beneficiary. A trustor's goals play a central role in deciding on when and whether to create a trust for the benefit of a beneficiary rather than gifting or leaving a bequest to that beneficiary outright and free of trust. An individual may elect to structure his or her estate plan to provide that distributions are made to a trust for the benefit of one or more beneficiaries, rather than make an outright bequest to that beneficiary, for several reasons—tax and nontax motivated— including creditor protection, control and timing of distributions, and use of the generation-skipping transfer tax. Amore detailed discussion of the benefits of testamentary trusts is found in §3.4, above.

A trustor may desire to create flexibility in the trust language for the provisions of the trust to withstand unexpected changes in law or life circumstances. The Washington Legislature has adopted two laws that affect the administration of irrevocable trusts and make Washington state a more attractive jurisdiction in which to administer such trusts. The acts concern directed trusts and decanting and are discussed in more detail below.

(2) Directed trusts

As of July 2015, Washington law permits trustors to create what are commonly referred to as "directed trusts." See RCW 11.98A.100. See generally Ch. 11.98A RCW (Directed Trust Act). A directed trust is an irrevocable trust wherein the trustee is directed by a statutory trust advisor in implementing the trust's terms. Under the Directed Trust Act, a trustor may direct certain functions of trust administration to third parties (the "statutory trust advisors"), rather than conferring all authority, duties, and liability upon the trustee. An example of a directed trust is one in which the trustor provides in the trust agreement that the "directed" trustee is directed to invest trust assets through a specific investment advisor.

(a) Creation of directed trusts

The Directed Trust Act applies to a trust only if it is expressly invoked in a governing instrument. See RCW 11.98A.010. Invoking the Directed Trust Act may be done in a will, trust instrument, court

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order, exercise of power of appointment, or binding agreement under RCW 11.96A.220 appointing, designating, or providing for a method for appointing a statutory trust advisor under Chapter 11.98A RCW. RCW 11.98A.020. The Directed Trust Act will apply to a trust only if the trust has situs in Washington state. Id. A trust typically is sitused in Washington if the trustee resides in Washington, the trust holds real estate located in Washington, or at least one of the trust beneficiaries resides in Washington. RCW 11.98.005.

Practice Tip: The trustor should include language in the trust to provide for application of the Directed Trust Act, stating that the trustee shall be a directed trustee and that trust advisors serve as statutory trust advisors all subject to the provisions of Chapter 11.98A RCW. Conversely the trustor may desire to add language limiting the application of the Directed Trust Act.

(b) Statutory trust advisor

Under the statute, a statutory trust advisor is defined as one or more persons, including a trust advisor, special trustee, trust protector, or committee, who, under the terms of the governing instrument, has a power or duty to direct, consent to, or disapprove an action, or has a power or duty that would normally be required of a trustee. RCW 11.98A.030. An appointed statutory trust advisor is not required to sign the trust agreement. Instead, the statutory trust advisor "may accept appointment by written notice to the trustee, by taking affirmative action to exercise powers or perform duties granted to the statutory trust advisor or by any other means provided in the governing instrument." RCW 11.98A.030(5). Further, the statutory trust advisor may, at any time, decline to serve or may resign by written notice to the then-serving trustee of the trust, unless another procedure is provided in the governing instrument. RCW 11.98A.030(8).

Powers and duties of statutory trust advisor

The role of the statutory trust advisor may vary greatly depending on the trustor's goals and objectives for the trust. The powers and duties granted to a statutory trust advisor under the governing instrument may include, but are not limited to, the following:

(a) The power to direct the acquisition, management, disposition, or retention of any trust investment;

(b) The power to direct a trustee to make or withhold distributions to beneficiaries;

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(c) The power to consent to a...

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