A trust is a fiduciary arrangement that allows you to name a third party—called a trustee—to hold assets on behalf of beneficiaries. It’s a versatile financial tool through which you can direct how your money and property will be handled after you die, or in some cases, while you are still living.

Any type of asset can be placed in a trust, including bank accounts, stocks, bonds, mutual funds, and real estate.

Common Reasons for Creating a Trust:

  • Preservation of family assets for future generations
  • Concerns over becoming incapacitated
  • Providing for beneficiaries with unique circumstances (minors, elderly, people with disabilities, issues with substance abuse or overspending, pets)
  • Preservation of eligibility for government benefits
  • Desire to maintain flexibility and control of distributions for beneficiaries
  • Blended family
  • Ownership of real estate outside of Washington State
  • Estate tax strategies
  • Minimizing costs of distributing assets at your death by avoiding probate

The most common reason given by our clients who say they want a trust is to avoid “probate,” which is a legal process that disburses the estate of a deceased person. In many states, such as California, the probate process is costly. However, in Washington State, probate is relatively simple and inexpensive and a trust is not usually the most cost effective choice. A trust document identifies three important people, beginning with the Grantor, or the person who creates the trust. The Beneficiary is a person who receives trust benefits. A trust will sometimes name several beneficiaries. The Trustee is the person who manages the trust and is legally obligated to act for the good of the beneficiaries

Legally, any competent adult or corporate entity can act as a trustee. No government licensing exists, although people convicted of a felony or a crime of “moral turpitude” are disqualified.

Trustees could be either a non-professional person, such as a friend, or a professional institution, such as a bank, trust company or guardianship company.

People Named in a Trust

  • Grantor: Person who creates the trust
  • Trustee: Person who manages the trust
  • Beneficiary: Person who receives trust benefits

Choosing a non-professional trustee who has personal knowledge about you and your beneficiaries can sometimes be a big advantage. They may be able to make certain decisions more effectively than a stranger. They might also perform the trustee duties at little or no cost. However, unless they have experience managing trusts or large investments, they may not obtain the best financial results and they might not correctly follow the Washington Trust Act.

Professional trustees are usually more familiar with accounting, reporting and legal requirements and can manage a trust efficiently. Banks and trust companies carry professional insurance and are subject to government oversight. Professional management costs more. Annual fees generally run about 1.0 percent to 1.3 percent of trust assets.

Two Types of Trust

  • A Testamentary Trust is created in conjunction with a will and only takes effect after your death. Examples include a trust for your children or grandchildren; for your surviving spouse; for people with special needs; or for animals.
  • A Living Trust becomes effective while you are still alive and continues after your death. This type of trust is helpful for people who don’t have the time or expertise to manage their finances. Others may want to ensure their assets are well managed in case they become incapacitated.

Living Trusts can be broken into two additional categories: Revocable and Irrevocable Trusts.

A trust that can be changed after its creation is known as a Revocable Trust. Many people prefer this type of flexibility to adjust the terms if circumstances changes.

Others may prefer to create an Irrevocable Trust, which puts their assets out of their control forever. This can help protect a person who may feel pressured to support friends or relatives. The grantor can be named as a beneficiary, securing their own income from the trust as long as they live.

As you might imagine, trusts can serve a wide range of purposes. If you have questions about trusts, or are thinking of creating one, please contact your Paracle advisor, who would be happy to assist you and connect you with an estate planning attorney to discuss this further.

Thank you to estate planning attorneys, Mary Anne Vance from Vance Law and Jennifer King from STK Law for contributing to this article.

Disclaimer: This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. This material provides general information only. Paracle Advisors does not offer legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.