Estate plans are often drafted years, or even decades, before they take effect. During that time, a beneficiary’s life and circumstances can change dramatically and so estate planning drafting must be flexible. Someone who was once fully capable of managing an inheritance may later face cognitive decline, disability, or another form of incapacity. Without built-in flexibility, a personal representative or trustee might be forced to distribute assets outright to someone who can no longer manage them or face the expense and delay of various solutions that could involve the court. The new Washington Uniform Custodial Trust Act (WUCTA), codified as Chapter 11.140 RCW, offers another tool for estate planners to use to make plans even more adaptable.
What Does the New Act Do?
The WUCTA, codified as Chapter 11.140 RCW, establishes a simple way to hold and manage property for an incapacitated adult without the complexity of a full discretionary trust or the burden of court oversight. A custodial trust under the WUCTA functions much like an account created under the Washington Uniform Transfers to Minors Act (UTMA), for example:
- Under RCW 11.140.020 and 11.140.030, the custodial trust is created by titling an asset in another person’s name as the custodial trustee, and the custodial trustee manages the assets but does not own them personally.
- The RCW 11.140.070 requires that the custodial trustee “… observe the standard of care that would be observed by a prudent person dealing with property of another and is not limited by any other law restricting investments by fiduciaries.”
- If the beneficiary is incapacitated, the custodial trustee “shall expend so much or all of the custodial trust property as the custodial trustee considers advisable for the use and benefit of the beneficiary and individuals who were supported by the beneficiary when the beneficiary became incapacitated, or who are legally entitled to support by the beneficiary.”
- Income from custodial trust assets is reported on the beneficiary’s personal income tax return, with accounts set up to use their social security number.
However, unlike an UTMA account, a custodial trust does not automatically terminate at age 25 (or age 21). Instead, a custodial trust continues until the beneficiary chooses to end it (if competent), or until the beneficiary’s death. This means that a WUTCA custodial trust can be an excellent, simple “fallback” distribution method included in estate planning documents to account for an errant outright distribution to a beneficiary who is over age 25 but shouldn’t receive money outright.
What Doesn’t the New Act Do?
It’s important to be clear about what WUCTA cannot do. Under RCW 11.140.070(2), a competent beneficiary can terminate the custodial trust at any time simply by giving written notice to the trustee. In addition, these custodial trusts do not provide creditor protection or assistance for qualification for benefits. In short, it’s not a panacea. If a client’s plan truly needs to restrict access for a beneficiary who has legal capacity but may remain irresponsible, financially vulnerable, or have special needs, a traditional trust is the more appropriate tool.
When Could You Use a Custodial Trust?
As estate planners know, even the most carefully drafted estate plan can’t predict every possible change in a beneficiary’s life. A child who was fully capable at the time the plan was signed may later suffer an accident, illness, or cognitive decline before receiving their inheritance. A beneficiary once considered financially responsible may lose the ability to manage property. Without savings language, a personal representative or trustee might be forced to distribute assets outright, even when doing so would put the beneficiary at risk.
Traditionally, estate planners and fiduciaries have relied on a series of imperfect options to avoid making an outright distribution to a beneficiary who is incapacitated at the time of distribution. These approaches have included establishing a custodianship, an UTMA arrangement, using the limited alternative distribution powers under RCW 11.98.070(16), or negotiating a postdeath solution through a TEDRA agreement. The new ability to transfer property into a custodial trust adds yet another backstop option—one that can often be simpler than these other approaches in the right circumstance.
Update Your ‘Savings Language’ Provisions in Estate Planning Documents
With the adoption of the WUCTA, now is a good time to review and update the “savings language” in your estate planning documents. Your boilerplate can be expanded to address a wider range of unanticipated circumstances by authorizing the personal representative or trustee to use alternative distribution methods when appropriate. For example, your updated provisions might allow for:
Redirection of assets to an existing trust for the same beneficiary that was created under the same Will or Revocable Trust.
Distribution of assets to an UTMA custodian for beneficiaries under age 25.
Creation of, and distribution of assets to, a WUCTA custodial trust for incapacitated adult beneficiaries (over 18 or 25) who do not otherwise have a trust or custodian in place.
This broader savings-language framework preserves the flexibility practitioners value while extending the familiar protections of traditional savings provisions to new situations under the WUCTA.
