What is a trust?

By Taylor Kenck

This post is Part Four of the Series “Estate Planning Basics”

A trust is a legal relationship between property and a fiduciary—or a person entrusted to care for the property.

A trust is an important tool for estate planning. Not every client needs a trust, but for some Washington residents, a trust can open up many avenues of opportunity to benefit themselves and their loved ones.

The purpose of this post is to describe what a trust is under Washington State law, and also to dispel some of the common misconceptions surrounding trusts.

THE TRUST AS A LEGAL RELATIONSHIP

When people think of a trust, they often erroneously envision it as a legal document, much like a will. While this thinking is common, the mental image is not correct.

A trust is a legal relationship between an individual (the “trustee”) and the property, established for the benefit of defined beneficiaries. So, it is not a legal document, but rather a legal relationship. In fact, in some cases, a trust can even be created orally. For that reason, envisioning a trust as an official piece of paper is not accurate–and that mental image can even create some problems down the road (see COMMON MISCONCEPTION below).

There are a number of ways to create a trust under Washington State law, and there are also a number of different types of trusts. However, the main idea for all these trusts is that the person creating a trust (the “trustor”) transfers the property to a “trustee,” who manages the trust property for the benefit of a person or group of people (collectively known as the “beneficiaries”). See the Revised Code of Washington 11.98.008, 11.98.011 for more information.

While it isn’t technically required, most trusts are created and controlled by a trust instrument. That means that typically there is a written document. This instrument helps with the formation and funding of the trust, and it also provides guidance to the trustee throughout the course of the relationship. But again, that piece of paper is not the trust; the trust is the relationship itself.

THE RELATIONSHIP

As discussed above, a trust is a legal relationship between a trustee and specific property established for the benefit of defined beneficiaries. The relationship between the trustee and the trust property is the cornerstone of it all. For that reason, it is important to discuss trustees and trust property a bit more.

The trustee is an individual or entity that receives legal title to the property of the trust. As that definition suggests, a trustee can be an individual or even a professional entity (for example, many large banks have departments dedicated to acting as trustees). There can even be multiple trustees acting as a group. Ultimately, the trustee has the power to manage and control the specific property to the fullest extent outlined in any existing trust instrument and also to the extent allowed under law.

The property that the trustee controls is typically called the “trust property” under Washington Law. While Washington State law does create limitations on trusts, for the most part, this trust property can be almost anything. The trust property could be real estate, for example a principal residence or even a family cabin. It could be financial assets like money or specific portfolios. It could also be tangible property like a treasured art collection. Often a trust will include many different types of property.

So to summarize, the trustee receives title or ownership to the trust property–whatever it may be–and they have the power and duty to manage this property for the benefit of the trust’s beneficiaries.

COMMON MISCONCEPTIONS

Like we discussed above, the most common misconception about trusts is the idea that the trust instrument is actually the trust. Again, the correct view is that a trust is a legal relationship, not a piece of paper.

Because of this common misconception, it isn’t unheard of for people to prepare and execute a trust instrument and then act as if a trust exists and is currently in effect. Often, this means that the person making the trust (the “trustor”) never actually transfers the title of the property to the name of the trustee. This is called an unfunded trust. An unfunded trust can create huge problems down the road because if the trust never has title over the property, then it might as well not exist.

Another common misconception is that all trusts avoid probate. I have heard clients on multiple occasions say something suggesting this. However, it is not necessarily true. Some trusts can be used to avoid probate, but other common trusts will not avoid probate. In fact, there is a type of trust that actually requires probate in order to exist (testamentary trusts). So, the idea that all trusts avoid probate is incorrect. However, some types of trusts can be effective tools for avoiding probate. (See “What is probate?” for more information on the probate process).

CONCLUSION

Trusts are important tools for estate planning. A trust is a legal relationship between a trustee and the trust property established for the benefit of defined beneficiaries. Viewing the trust as a relationship instead of as a legal document is crucial to understanding its true nature. While trusts are not a necessary part of most Washington residents’ estate plans, they are excellent options for some clients.

Crestview Law is happy to meet with you and evaluate whether a trust is a good fit for your estate planning goals. There are a lot of important considerations, and Crestview Law is determined to empower clients to make decisions with comfort and confidence.

Please contact Crestview Law to schedule a free initial consultation to find out more.

Crestview Law has physical offices in Wenatchee, but we can serve clients throughout the state with our many virtual tools.