Making gifts to a trust may or may not impose federal gift taxes. In general, the Internal Revenue Service does not tax gifts made by taxpayer-donors to their irrevocable trusts. An irrevocable trust is one that a grantor cannot change. If a grantor places the gift in the trust without retaining any control of the property and without retaining the ability to change the designation of the gift, the trust may be an irrevocable trust.

Trusts are also useful estate planning tools for certain individuals. For example, if you have a niece who loves to spend money gambling, you may think twice before leaving a significant bequest to her since you may be afraid that she will throw her money away in casinos pretty quickly. However, if you create a trust for her, you may be able to control how much money your trustee gives her to ensure she will not dissipate her inheritance too quickly. As the beneficiary of your trust, your niece will be responsible for paying income taxes on her trust income. However, trusts must pay separate income taxes. Similar to the separate entity rules regarding corporations and shareholders, the IRS considers trusts as separate entities, and trusts retaining property in excess of the federal tax limits will have to pay income taxes on the retained income.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

Contrary to popular belief, trusts rarely produce large tax savings. Many people create trusts to avoid placing their assets through probate courts. Thus, although trusts can help you save money on probate expenses, they may not reduce your federal estate taxes. If you create an irrevocable living trust, you may be able to reduce your income tax liabilities because you can effectively remove the assets within your irrevocable trust from your probate assets. You may also want to create a trust to help preserve privacy. Because wills are made as part of public records in probate courts, you can preserve anonymity and the identity of your beneficiaries by creating a trust.

You can create a revocable or irrevocable living trust. An irrevocable living trust is one that is not modifiable. You cannot change the terms of an irrevocable trust instrument or change your beneficiaries. However, if you create a revocable living trust, you can change the terms your trust document or revoke the entire instrument. Although a revocable living trust is more flexible than an irrevocable living trust, you may be able to reduce your tax liabilities by creating an irrevocable trust. This is because the federal tax code considers a gift to an irrevocable living trust as property of the trust since you retain no control over its disposition. However, since you can change the disposition or beneficiary of a revocable living trust, you may not receive any tax benefits. Carefully considering tax implications is an important part of estate planning.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

The Internal Revenue Service (IRS) uses special tax rules for trusts. Understanding these tax rules is imperative for estate planning attorneys. According to the IRS, a trust established under state law must comply with the federal tax laws regarding tax liabilities of trusts. By creating a trust, the owner or grantor of the trust appoints a trustee to become a fiduciary of the trust instrument. A trustee retains legal ownership to administer the assets on behalf of the grantor for the benefit of the trust and its beneficiaries. The written trust document must clearly state the beneficiaries of the trust and appoint a trustee. A trust must also have trust property or assets within the trust. The IRS requires that all trustees or grantors file annual tax returns during tax years in which the trust includes at least $600 of trust assets or income and during each year a beneficiary named in the trust is a nonresident alien.

In limited situations, some trusts are never required to file tax returns. The trust tax return is IRS Form 1041, U.S. Income Tax Return for Estates and Trusts. Contrary to popular belief, an individual cannot impute his tax liabilities to a trust for federal income tax purposes. Because the IRS prohibits assignments of income, individuals are still liable for their income taxes even where their incomes go directly to their trusts.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

Many people associate saving taxes with trusts and with estate planning, in general.  However, there are MANY benefits to revocable living trust planning that have nothing to do with saving taxes.

Non-Tax Revocable Living Trust Benefits

• Staying in control of your assets, though disability planning.  This avoids court interference and saves time, money, and hassle, while keeping your private affairs private.
• Choosing who will help you with financial matters should you become disabled and when you die.
• Protecting and planning for your family, including your spouse, children, grandchildren, and pets.  This means giving what you have to who you want, when you want, and how you want.
• Protecting your children from unintentional disinheritance.
• Providing for a special needs beneficiary, without disqualifying him or her from receiving governmental assistance.
• Protecting an addicted or spendthrift beneficiary.
• Protecting inheritances from court interference by creating trusts for minors and naming a succession of trustees for all beneficiary trusts.
• Creating a common trust for minor children so they receive the same support and footing as older siblings, just as you would in a family.
• Protecting your loved ones’ inheritances from creditors, divorcing spouses, and predators.
• Including incentive trusts to encourage family legacies.
• Avoiding probate; thus saving time, money, hassle, and keeping family and financial affairs private.

Though saving taxes is what drives many clients through their estate planning attorney’s door, they are happy to discover an entire list of non-tax reasons estate planning, specifically, revocable living trust planning is right for them.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

Being clear on when each of your estate planning documents, including your living will, applies is important.  A living will is an advanced medical directive, though which you provide informed medical consent for medical treatment (or the withdrawal of treatment) for a situation that potentially may arise in the future.

Specifically, your living will applies or is effective if you are in an end-stage medical condition, meaning that doctors agree there is no coming back.  Usually this means an terminal condition or an irreversible coma or persistent vegetative state.

Unless you are in an end-stage medical condition, your living will does not apply.  For example, if you have a heart attack, but are otherwise healthy, the living will doesn’t apply.  If you slip and fall on the ice and break a leg, the living will does not apply.

An example of when the living will applies:

Janice had long suffered Parkinson’s Disease.  She fell, calling out to her husband, Tom, but never regained consciousness.  Three doctors examined Janice and agreed that she was brain dead and asked Tom if Janice had a living will.  She did; Tom brought in the living will; and, after their daughters arrived to say good-bye, life support was removed.  Janice peacefully died 15 minutes later.

An example of when the living will does NOT apply:

Frank was at home with his family when he began not to feel well; his left arm hurt and it felt as though there was an elephant sitting on his chest.  Frank’s son called 911 and the ambulance took Frank to the emergency room.  Doctors diagnosed Frank with heart disease and treated him. 

Most people don’t want to be kept alive with medical heroics such as life support if there is no coming back.  For those people, a living will is appropriate and effective only when they are in an end-stage medical condition.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

You can avoid ancillary probate the same way as you avoid probate, by not owning anything in your individual name.  Ancillary probate is required if you own real estate in a state that is not your state of residence when you die.  But, let’s start at the beginning…

Probate is the validation of the will and the winding down of someone’s financial life.  It’s a court supervised process, complete with legal hoops and fees, which is used to transfer the title of assets from the name of the decedent to the names of the beneficiaries.

Many people wish to avoid probate because it’s expensive, time consuming, frustrating, and public.  “Public” means that anyone can access your probate file, which includes your executor and beneficiary information, the amount your beneficiaries each received, your assets, and your debts.  Most people want to keep their family and financial information private.  Probate doesn’t permit privacy.

If you own assets in your individual name, and without a beneficiary designation, your estate will be subject to probate when you die.  In addition, if you own a vacation house, second home, time-share, land, or investment property in your own name and in another state, your estate will have to go through ancillary probate.

Ancillary probate requires an attorney licensed in the second state; in addition, if your executor is not a resident of that second state, he or she may have to post a bond with the court to serve.  Some states require at least one executor to be a resident.

Odd to most people, if you die without a will, you may have two different sets of beneficiaries.  One set in your state of residence and one set in the second state where you own the real estate.  When you die without a will, state intestacy laws determine who inherits your assets, not you.  Different states have different intestacy laws, resulting in different beneficiaries.

You can avoid probate and ancillary probate by not owning assets in your individual name.  Instead, own your assets in a fully funded living trust.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

In the previous blog entry, we covered some of the common advantages to creating a revocable living trust. Now, we’ll cover some of the common disadvantages of creating one. Revocable living trusts are often expensive to create, but we can help you reduce some of these costs by carefully planning the details of your trust. Revocable living trusts may be expensive to administer. If you appoint a trust company or bank as your trustee, you will have to pay their administrative fees. If you appoint an individual as your trustee, you will probably still have to pay administrative fees to have this person administer and oversee your trust. Under Washington law, a trustee is entitled to receive reasonable compensation for his time. Furthermore, you’ll have to pay the trustee’s fees for maintaining the assets within your trust and reviewing your trust assets periodically. In addition to paying some administrative expenses, another common disadvantage is that you will have to make sure your trustee is qualified to protect your assets from creditors’ claims. There may also be some unforeseen issues that can arise with your revocable living trust, including title insurance and real estate ownership issues with property located in other jurisdictions.

There are many things to consider when deciding whether to create a revocable living trust. Generally, only skilled estate planning attorneys can help you decide whether creating a revocable living trust would be appropriate for your individual situation. You can contact our office today to schedule an appointment to discuss your estate planning goals.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

Your attorney can discuss the disadvantages and advantages associated with creating a revocable living trust to help you determine if creating one would be a good idea. As a broad overview of some of the common advantages associated with creating a revocable living trust, you can review this blog entry before you schedule an appointment with our office.

Some of the advantages of creating a revocable living trust include being able to avoid probate. Your trustee will be able to transfer your property more quickly than an executor would be able to pursuant to your written will. There is typically less delay or “lag-time” after your death before your trustee can transfer your trust assets to your trust beneficiaries. You may also be able to avoid potential probate proceedings in multiple jurisdictions if you own property in several states. Another advantage to creating a revocable living trust is privacy. Most likely, your trustee will not have to file your revocable living trust document in court. However, an executor would have to file your will in probate court, which becomes public record. If you select a trustee that normally took care of your financial affairs, your trustee would be able to continue doing so without interruption. Finally, if you are married, you may want to consider creating a revocable living trust to segregate your community or marital property from your general assets. You can use your revocable living trust to transfer your separate property without your spouse’s consent in most cases.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

To establish a revocable living trust, you will need to have your attorney draft a written trust agreement. Under Washington law, anyone who is mentally competent and at least 18 can create a revocable living trust. In limited cases, you may be able to create one if you are under 18 and legally emancipated or married. You will also need to appoint a trustee to administer your trust and transfer your trust property. Any mentally able adult who is at least 18 can serve as a trustee. You can also name a bank or trust company as your trustee. You can appoint multiple trustees as long as you give them written directions as to their responsibilities. Once you identify a trustee, it is generally a good idea to appoint an alternate trustee. This way, if your primary trustee is unable to serve or unwilling to serve as your trustee, your alternate trustee will be able to assume his duties.

Your attorney will then transfer all of your assets into your trust for the trustee to transfer to your beneficiaries at your death. You can transfer bank accounts, real property deeds, investment certificates and other assets that you would like to establish as part of your trust. A trust without trust assets is invalid to transfer your property. You must also properly fund your trust with property or assets. By contacting our office, we can help you ensure that you properly establish and fund your trust pursuant to Washington state law.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

We, often, get this question, “Do I have to list all of my assets if I have a living trust?”  Clients have terror in their eyes when they ask the question because they are not thinking of just bank accounts and life insurance, they are thinking about all of their stuff.  They are wondering if they have to list every television, phone, couch, sweater, Christmas decoration, and piece of cutlery.

While, typically, all assets are funded into a trust, you do not have to list all of your personal possessions.  Your skateboard, garden tools, IPad, and furniture (etc.) are all transferred into your living trust by using a “Bill of Sale.”

A bill of sale transfers all of your personal possessions (that don’t have a title – i.e. account name) from your individual name (or joint names with a spouse) into the name of your trust.  Each time you update your estate plan, your estate planning attorney will likely provide a new bill of sale to transfer all those assets you’ve acquired since the last time you signed one.

However, your estate planning attorney does need to know about high value personal property such as antiques, jewelry, art, and collections because these may affect your estate planning.

In contrast, you do need to list all of your assets that have a title (i.e. name) such as your house, vacation house, time-share, investment property, cars, bank accounts, retirement plans, life insurance, business interests, and investment accounts.  It’s appropriate to fund most, if not all, of these assets so your attorney needs to know about them and plan for them.

While you don’t have to list all of your personal property assets if you have a living trust, you do need to let your attorney know of high value items and provide a comprehensive list of real property, vehicles, and financial interests.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.