Trusts can be powerful planning tools, especially for families and individuals with significant wealth. Their superpower is that they can provide a combination of positive outcomes that are hard to find in any other structure: privacy (contents of trust and terms are private); control (who gets what when); tax savings; and expediency (assets in trust bypass probate).
But there’s a catch: Trusts are powerful tools ONLY IF they are used properly and in context of your situation. Otherwise, trusts may be performing optimally but not getting the results you want.
How can you be sure which trust structures will best serve the needs, goals and aspirations of you and your family? That is a question we help each of our trust clients answer and then implement in context of an overall wealth plan and their unique circumstances. (See LNW Trust Services below.)
Let’s begin with the basics: What a trust is, the benefits of a trust, common types of trusts.
What a trust is
A trust is a legal entity in which you, the grantor, place assets in a trust account for the benefit of one or more beneficiaries. A beneficiary is often a family member, but can also be a close friend, nonprofit organization or even a beloved pet. The trust document is drafted by an attorney you choose, usually an estate planning lawyer, and names a company and/or individual as the trustee(s).
The trustee is key to the success of the trust. The trustee administers the trust and may also manage its assets. The trustee is a fiduciary, meaning they are legally required to act in the best interests of the trust beneficiaries at all times — when administering the trust, managing the assets, and distributing income and principal to the beneficiaries.
How a trust operates is greatly determined by the state in which it is based (its situs). That is why LNW has a company based in Washington State and another based in South Dakota. For example, in Washington State trust beneficiaries must be notified of their status on their 18th birthday. Trusts based in South Dakota need not notify beneficiaries.
LNW TRUST SERVICES
Since 1967, LNW has provided comprehensive trust services to families with multigenerational wealth as trust advisor, corporate trustee and asset manager.
LNW is a fiduciary across all our operations: in investment management, as a registered investment advisor (RIA), as well as at our two trust companies:
The Laird Norton Wetherby Trust Company established in Seattle in 1967; and
The LNW Trust Company of South Dakota established in 2023 in Sioux Falls and serviced from our offices in Seattle.
Benefits of trusts
Trusts are established for many different reasons and can accomplish multiple goals all at once. The following is a sample of the common issues a trust can help resolve:
- Reduce estate tax
- Protect privacy
- Avoid the expense and delay of the probate process
- Avoid probate in other states where assets
are owned - Manage assets if you become incapacitated
- Provide for family members over
many generations
- Provide for family members who have
special needs or who cannot responsibly
manage their finances - Provide for children and grandchildren in the
event of a second marriage - Manage assets on behalf of minor beneficiaries
(under 18 or 21 years old) - Support a charity or nonprofit
- Avoid operational disruption during a
business succession
Common types of trusts
There are many different types of trusts, each designed to address one or more issues or concerns. A key distinction is between “revocable” and “irrevocable” trusts:
Revocable — Trust is in effect during the lifetime of the grantor. Grantor has control over the trust assets, which continue to be part of their estate. The grantor can change the terms of the trust or terminate it at any time.
- Grantor continues to pay taxes on the income generated by the trust
- The trustee can manage the assets in the trust should the grantor become incapacitated
- When the grantor passes away, all the assets in revocable trusts can transfer to the named beneficiaries OR to an irrevocable trust for their benefit without going through the probate process
Irrevocable – The grantor relinquishes control of the assets within the trust, and those assets are outside the grantor’s estate. Trust terms cannot be modified or terminated without the permission of the beneficiaries and other interested persons.
- Grantor transfers assets into the trust that are then managed for, and ultimately transferred to, the beneficiaries
- Income generated from the trust is typically distributed to the beneficiaries
- Income that is not distributed to the beneficiaries is taxed to the trust at high rates
Specialty Irrevocable Trusts
Marital Trust – Allows property to pass from the grantor upon death to their surviving spouse without being taxed:
- Allows the couple’s heirs to avoid probate when the surviving spouse dies
- Upon the death of the surviving spouse, if the assets in the trust are more than the federal estate tax exclusion, they will be subject to federal estate taxes (and state estate taxes if applicable).
Crummey Trust – Allows the grantor to make lifetime gifts to the trust free from gift or estate taxes, as long as the amount is equal to or less than the legally permitted amount:
- The legally permitted amount is currently $18,000 per trust beneficiary per year
- Takes advantage of the gift tax exclusion when transferring money and/or assets to another person
- Places time limitations on when the recipient can access the gift
Irrevocable Life Insurance Trust (ILIT) – The trust holds life insurance policies and is a way to remove assets from the
taxable estate:
- Grantor has no incidents of ownership over the insurance policies owned by the trust
- The trust is designated as the primary beneficiary of the life insurance policies
- Can provide the grantor’s family with a source of cash to pay estate taxes while at the same time not increasing the grantor’s overall estate tax burden
- Many life insurance trusts are also Crummey Trusts (see above) allowing for funding that is not subject to gift taxes
Qualified Personal Residence Trust (QPRT) – Holds the grantor’s primary or secondary residence for a period of time and in doing so removes a portion of its value from the taxable estate:
- Puts the residence in trust for a specified number of years; the longer that period, the lower the current gift value of the residence.
- Grantor can continue living in the property after the period specified but must pay rent to the new owners (the beneficiaries or a trust for their benefit).
Special Needs Trust – Designed to support a beneficiary with mental or physical challenges who may be receiving government benefits:
- May be funded using the assets of the beneficiary or funds from a family member
- Distributions to the beneficiary are intended to supplement public benefits rather than replace them
- Specific rules and restrictions must be followed to allow the beneficiary of the trust to remain eligible for Supplemental Security Income (SSI) and Medicaid
Charitable Lead Trust – Holds assets given by the grantor to be used for the benefit of philanthropic organizations:
- Can also benefit beneficiaries designated in the trust, typically family members
- Depending upon the terms, the charitable trust may have an advantageous tax status
- In order to be valid, the trust must fulfill specific distribution requirements
What is right for you
Trusts are powerful tools IF they are created in context of what you need and want to accomplish and then administered to get those results. What does that mean for you and your family? We can help you find out. We work closely with each of our clients and their outside advisors (attorney, CPA, etc.) to ensure that any trust(s) they establish will add value to their wealth plan, assets and their life goals. That is a critical first step. Once the trusts are established, we serve as trustee/co-trustee and manage the assets within the trust(s) often over many generations, working closely with the beneficiaries.
