Hi, I’m Beau, and today we’re going to talk about trusts.
We’ll begin with a situation that comes up frequently. You’ve probably had a friend, colleague, or family member say to you, “You should have a trust.” What do they mean? What options are available? Why would you want a trust? What exactly is a trust? Those are the questions we’ll cover in this presentation.
Before we begin, I should mention that although I am an attorney, none of this presentation should be considered legal or tax advice. It is intended only as a general overview to help you understand the options that may be available to you. Today, we’ll discuss what trusts are, the different types of trusts, common trust terms, special needs trusts, and some additional trust considerations. Let’s get started.
What Is a Trust?
To understand trusts, we first need to understand what they are and why the terminology can be confusing. One challenge is that there is no standardized naming convention for trusts. When a client comes into my office and says, “My friend told me I should have a trust,” my first question is usually, “What kind of trust did your friend recommend?” Most people don’t know. If I were to ask the friend who made the recommendation, they often wouldn’t know either. The reason is simple: there are virtually an infinite number of possible trusts. A trust exists whenever we place restrictions on the use or control of property. Since there are countless ways to create those restrictions, there are countless types of trusts. Many of the names people use are simply shorthand descriptions of certain common features. Ultimately, however, a trust is defined by its terms. The name itself is often less important than the instructions contained within it.
Outright Gifts vs. Trusts
Broadly speaking, there are two ways to transfer assets: outright or in trust. An outright gift means the beneficiary receives the property and can do whatever they want with it. This applies whether you’re making a lifetime gift or leaving assets through your estate plan. If I give someone money and say, “Do whatever you want with it,” that’s an outright gift. Likewise, if my will leaves assets to someone with no restrictions, that’s also an outright gift. Sometimes people include language such as, “I hope you use these funds for college,” or “I hope you use this to pay off your car.” Legally, that is called precatory language. It expresses a wish or recommendation but creates no binding obligation. The beneficiary still has complete control over the asset.
A trust is different because it imposes enforceable restrictions on how assets can be used or controlled. For example, I might say that funds can only be used for education or that a beneficiary cannot access the assets until a specific date. Once those restrictions become enforceable, we’re no longer dealing with an outright gift. We’re dealing with a trust. In fact, even if the document doesn’t specifically use the word “trust,” it can still create one if enough restrictions are imposed. Those are known as implied trusts. Typically, implied trusts are less desirable because they often require court involvement to determine exactly what the restrictions mean. Once established, a trust becomes its own legal entity, much like an LLC or corporation. It generally has its own tax identification number and operates under its own governing rules.
The Building Blocks of a Trust
Every fully formed trust needs certain basic elements. First, we need to identify the beneficiaries. Who is supposed to benefit from the trust? Next, we determine how long the trust will last. Will it continue for a beneficiary’s lifetime, until a certain age, or until a specific event occurs? We also need to decide what the trust can be used for and under what circumstances money can be distributed. Finally, someone must be placed in charge of the trust. That person is known as the trustee. The specific terms of the trust are what matter most. While trust names may vary, the actual instructions determine how the trust operates. Generally, trust terms can be extremely flexible. As long as the instructions are not against public policy, you can design almost any arrangement you want. For example, you can’t require someone to break the law or encourage divorce, but you can direct assets toward education, charitable giving, home purchases, or any number of other legitimate goals.
Revocable vs. Irrevocable Trusts
One of the most important distinctions in trust planning is the difference between revocable and irrevocable trusts. A revocable trust can be modified, amended, or revoked by the person who created it. An irrevocable trust generally cannot be changed once it has been established. Another distinction involves timing. If a trust is created during your lifetime, it is known as an inter vivos trust. These trusts may be either revocable or irrevocable, depending on how they are drafted.
The Living Trust Question
When most people say, “You should have a trust,” they are usually referring to a revocable living trust. A living trust is often presented as an alternative to a will. Instead of having your assets pass according to a will, you transfer ownership of your assets into the trust during your lifetime and allow the trust’s instructions to determine what happens after your death. To make this work, assets must be formally transferred into the trust. Bank accounts may need to be retitled, and real estate generally must be deeded into the trust’s name. The decision between a will-based plan and a living trust-based plan is highly dependent on state law. What makes sense in one state may not make sense in another.
In Washington, for example, many of the commonly cited advantages of living trusts are less significant than people often believe. While it is true that living trusts generally avoid probate, they still require a similar administration process after death. In many circumstances, trust administration and probate involve comparable levels of effort, cost, and complexity.
Living trusts are generally more expensive to establish and require ongoing attention to ensure assets remain properly titled. For many Washington families, a will-based estate plan can accomplish the same objectives more simply and at a lower cost. One area where living trusts can be particularly useful is ownership of real estate in multiple states. Even then, however, alternative solutions may exist, such as LLCs, transfer-on-death deeds, gifting strategies, or other planning tools.
Testamentary Trusts
While I often do not recommend living trusts for many Washington families, I frequently recommend testamentary trusts. A testamentary trust is a trust that is created within a will and comes into existence only after death. These trusts allow you to impose restrictions, create protections, save on estate taxes, protect assets from creditors, provide support for children, or care for beneficiaries with special needs. Unlike living trusts, testamentary trusts do not require funding or administration during your lifetime. They become irrevocable only after death.
Common Trust Types
Several common trust structures appear regularly in estate planning.
Spousal trusts are often used to provide support for a surviving spouse while preserving assets for children or reducing estate taxes.
Children’s trusts are used when beneficiaries are minors or when parents prefer to delay outright distributions until beneficiaries reach a certain age or milestone.
Grandchildren’s trusts can be used to provide education funding, support, or long-term wealth preservation.
Special needs trusts are designed for beneficiaries receiving means-tested government benefits and require special drafting to preserve eligibility for those programs.
Children’s and Grandchildren’s Trusts
Children’s trusts are particularly common when beneficiaries are minors. Parents can decide whether assets should be held in a single trust for all children or divided into separate trusts. Sometimes it makes sense to pool assets so resources can be directed toward whichever child has the greatest need. In other situations, especially where there are significant assets, separate trusts may make more sense. Trusts can also stagger distributions over time. For example, a beneficiary might receive one-third of the trust at age 25, another third at age 30, and the remainder at age 35. Alternatively, distributions may be tied to specific goals such as completing higher education.
Grandchildren’s trusts often follow similar concepts and can be customized based on family objectives and available resources.
Special Needs Trusts
Special needs trusts, also called supplemental needs trusts, serve a very different purpose than traditional support trusts. The goal is to preserve a beneficiary’s eligibility for government assistance programs such as Medicaid while still enhancing their quality of life. Because many government programs are means-tested, providing direct financial support could disqualify the beneficiary from receiving benefits. A properly drafted special needs trust avoids that outcome by supplementing rather than replacing government assistance. Trust funds may be used for travel, entertainment, electronics, personal care, clothing, hobbies, and other quality-of-life enhancements. However, distributions must be carefully structured to avoid interfering with government benefit eligibility. These trusts are often established for the beneficiary’s lifetime, with any remaining assets passing to other beneficiaries after the special needs beneficiary’s death.
Trustees and Trust Administration
Every trust requires a trustee, which is the person responsible for managing the trust and carrying out its instructions. Sometimes family members serve as trustees. Other times, a professional trustee may be more appropriate. Professional trustees are experienced in trust administration and are compensated for their work. In some situations, particularly where there are family conflicts, blended families, or complex assets, a professional trustee can provide valuable objectivity and expertise. Trustees have legal duties and responsibilities. They must manage trust assets prudently, keep records, follow trust instructions, and balance the interests of different beneficiaries. Trusts also involve tax considerations, reporting requirements, and administrative responsibilities. While trusts provide valuable flexibility and protection, they also create additional complexity, cost, and ongoing obligations.
Final Thoughts
When someone tells you, “You should have a trust,” the real question is, “What kind of trust, and why?” For many people, a revocable living trust may not be necessary. However, trusts embedded within a will can be extremely valuable for estate tax planning, protecting children, caring for beneficiaries with special needs, or providing greater control over how assets are used after death. The right answer depends entirely on your family, your assets, your goals, and your specific circumstances. As always, we’re happy to discuss your individual situation and help determine whether a trust may be appropriate as part of your estate plan. Thank you for attending.
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