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What
is a living trust?
A living trust is a trust that is funded with assets and that can be
amended and revoked by the person creating the trust. The person creating the
trust, often called the settlor or the grantor, typically
retains all the benefits to the property placed into the trust. The grantor
can also be the trustee in Ohio, although the grantor's spouse or a trust
company also often serves as trustee. The terms of a living trust are
established in a written agreement signed by the grantor and the trustee. A
living trust can be funded with bank accounts, stocks and bonds, a home and
other assets. The terms of the living trust should provide for the disposition
of the property in the trust both during the life and following the death of
the grantor.
What
is the purpose of a living trust?
A living trust may have many purposes. A common goal is to avoid probate.
Assets within a living trust will generally not be subject to the jurisdiction
of the probate court, either while the grantor is living or following the
grantor's death. Assets owned in individual name and not contractually
payable on death will generally be subject to probate.
What
is probate?
When an Ohio resident dies owning probate property, a legal proceeding is
begun (1) to determine the last valid will of the decedent, if any, (2) to
determine the nature, extent and value of the decedent's assets, (3) to
establish the valid debts of the decedent and (4) to establish the method of
distribution of the assets to the heirs or beneficiaries of the decedent after
payment of applicable debts, taxes and expenses. This proceeding is
known as probate. A more detailed explanation of the probate process is
available in the publication "What You Should Know About...Probate",
published by the Ohio State Bar Association.
Is
use of a living trust the only way to avoid probate?
No. Assets that are owned jointly with others with rights of
survivorship will pass upon death to the survivor by operation of law and will
not be probate assets. However, care should be exercised before creating
a joint account, particularly with someone other than a spouse, because the
joint tenant will have rights in the joint property immediately on
creation. Payable-on-death accounts and any assets that are
contractually payable to beneficiaries, such as life insurance or pension
benefits, will also avoid probate. Transfer-on-death registration for
securities and motor vehicles, and transfer-on-death deeds for real estate
also will avoid probate.
Will
I save estate taxes with a living trust, compared with a will?
No. It is a common misconception that estate tax savings can be
achieved with a living trust, but not with a will. While use of a living
trust will avoid probate proceedings, avoiding probate does not mean avoiding
estate taxes. The assets in a living trust are part of a person's gross
estate for estate tax purposes, just the same as probate assets.
However, both the will and living trust, when properly written and with advice
on the proper ownership of assets during lifetime, may include estate tax
avoidance techniques that may save substantial tax dollars for the benefit of
the family.
Will
having a living trust avoid challenges by my beneficiaries or heirs?
Disgruntled heirs or beneficiaries can challenge the validity of a living
trust on legal grounds similar to those available for challenging a
will. It may be alleged that a living trust is invalid because the
grantor was incompetent at the time of establishing the trust or was unduly
influenced by some person to establish the trust in a particular manner.
Further, although the time period for challenging the validity of a will can
be limited to three months, there is a longer time period (usually two years)
under which the validity of a living trust may be challenged. The cost
of defending the validity of a will, where the executor acts in good faith, is
payable from the probate estate. Under Ohio law, the court determines whether
similar expenses in defending the validity of a living trust would be borne by
the trust assets or by the trustee personally.
What
are the advantages of a living trust compared to probate?
Compared to probate, there are many differences, but also some
similarities in the manner in which property is administered in a living trust
following the death of a grantor. Among the characteristics of
administration of a living trust that a person may find desirable are:
Privacy.
The terms of a living trust are contained in a private document, while the
terms of a will, including beneficiary designations, become a matter of public
record once the will has been filed with the probate court. In addition,
other information filed with the court during the probate process, such as the
inventory of assets and the written account of all receipts and disbursements
of the estate, also become matters of public record. The administration
of a living trust is generally not made public.
Control.
The absence of any requirements to file a will or any other reports with a
court increases the independence and control of the trustee, relative to an
executor.
Lower
costs. Some publications make extravagant claims about the extent of
the costs of the probate process. The typical components of cost in the
probate process are:
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Court costs |
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Appraisal fees |
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Executors' commissions |
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Attorney fees |
While
court costs will vary with the activity in the estate, presently a typical
cost range will be $200-$250. A living trust would not bear these costs.
Appraisal fees will typically be incurred in probate for real property, and
may be incurred for other "hard to value" assets, such as expensive
artwork or closely held corporations. These costs would typically not be
required by a living trust. If, however, the decedent's assets are of
such value that an estate tax return must be filed (which will often be the
case), it will be necessary for the trustee of a living trust to secure
appraisals of those assets to help establish value for estate tax
purposes. Appraisals also aid in establishing the basis of the assets
for federal income tax purposes.
Executor's
commissions are set by state law and are based, generally, on a percentage of
the value of the assets of the estate. At present, the commission varies
between one and four percent of the value of the assets (combined with the
income on those assets) depending on the nature, amount and title of the
assets at death. However, surviving spouses and other family members
often serve as executor and may waive these commissions. A trustee of a
living trust is generally entitled to a fee for services performed similar to
those performed by an executor, although the level of compensation is not set
by law.
An
executor may hire an attorney to assist in the administration of a probate
estate. Similarly, a trustee may hire an attorney to assist in the
administration of a living trust following the death of the grantor. If
the terms of the living trust do not require the preparation of an inventory
or the preparation of accounts, as typically they do not, the attorney fees
will generally be lower for services to the trustee because time related to
probate filings will not be incurred. However, the cost of attorney
advice and services with regard to income tax and estate tax issues is likely
to be equivalent whether provided to the executor of a will or to a trustee.
Speed
of transfer. A trustee could begin making distributions of assets to
beneficiaries moments after the death of the grantor. An executor cannot
make distributions until he or she is appointed by the court after the will is
admitted to probate, but this appointment generally occurs within days after
death and, once appointed, the executor is legally empowered to distribute all
the probate assets to the beneficiaries. However, it is not necessarily
prudent for either a trustee or an executor to immediately distribute assets.
Distribution
of assets to beneficiaries is usually delayed in probate because the executor
may be personally liable for claims of creditors left unpaid by the estate because
assets have been distributed to beneficiaries. The executor also may
personally liable for unpaid federal and Ohio estate taxes. The trustee
of a living trust can also be held personally liable for unpaid estate taxes
and, in some circumstances, unpaid creditors.
Avoidance
of multiple probate proceedings. Finally, if homes or other real
property are owned in a number of different states, use of a living trust may
be especially useful to avoid separate probate proceedings in two or more
states.
What
are the disadvantages of a living trust compared to probate?
Lifetime effort. The implementation of a living trust is
likely to be more time consuming and far more tedious than would be the case
with only a will. The single most common defect in the implementation of
a living trust, where the goal is to avoid probate, is the failure to transfer
ownership and title of assets into the name of the trustee. Simply
creating the document will not work; the assets must be re-registered,
re-titled or otherwise validly transferred to the trustee of the living
trust. Further, an individual needs to remain vigilant that all assets
acquired after creation of the living trust are placed into the living
trust. Otherwise, those assets may pass through probate.
Lifetime
costs. While a living trust may have cost advantages relative to
probate following death, a will generally has cost advantages relative to a
living trust during an individual's lifetime. The costs associated with
creating a living trust are generally more than those for creating a
will. Also, the need for a will is not eliminated as it is often
necessary to dispose of assets at death that may not have been transferred to
the living trust during the grantor's lifetime. In addition, there are
costs incurred in properly transferring assets to the living trust during
lifetime. If the trustee is not the grantor or a member of the grantor's
family, periodic trustee fees usually will be incurred if the living trust is funded.
Absence
of court review. The administration of a living trust will not be
supervised by any court. While this avoids the paperwork burden and
expense imposed by the probate process, persons creating a living trust should
consider that the trustee they appoint will not be accountable to a judge for
the honest and accurate distribution of assets unless a beneficiary were to
bring a lawsuit.
Taxation
disadvantages. The Internal Revenue Code contains a number of income
tax provisions that are more beneficial to estates than to living trusts
operating after the death of the grantor. As examples, an estate is
entitled to establish a fiscal year, whereas a trust must report on a calendar
year. An estate is entitled to a personal tax exemption of $600 for each
tax year, whereas the living trust exemption is $300 in the case of simple
trusts and $100 for complex trusts. Federal legislation
allows a trust to be taxed like an estate if the trustee of a living trust
elects to do so.
Will
a living trust help me while I am living?
A living trust may provide a structure for the management of a person's
assets. This structure could be particularly useful if the trustee has
investment expertise, such as a trust company, or the trustee retains
investment counsel. The asset management function of a living trust can
become particularly important if the grantor becomes incompetent or is
otherwise incapable of handling financial affairs. If a living trust is
in place, it is not then necessary to have a guardian appointed by the probate
court to administer the now incompetent grantor's assets. On the other hand,
the execution of a durable power of attorney - a document by which an
individual (the principal) gives another person (the attorney-in-fact) the
power to manage the principal's assets - also avoids the necessity of a court
guardianship.
Will
a living trust save income taxes?
No. The income of the living trust will be taxable to the grantor as if
the trust did not exist for income tax purposes. In most cases, the income
from the living trust may be reported under the grantor's Social Security
number, and the trust need not obtain a separate
taxpayer identification number nor file annual tax returns.
Will
a living trust protect my assets against creditors?
Creditors are entitled to reach the assets of a living trust during the
grantor's lifetime. Even where the trust is irrevocable, if the transfer is
made to that trust while there are unpaid creditors of the grantor, creditors
can generally reach the assets of the trust. Creditors may generally reach the
assets of any trust to the extent that the grantor can enforce his or her own
rights to trust assets. Upon the death of the grantor, creditors of the
grantor may or may not be barred from enforcing claims against a living trust,
depending on the circumstances of creation and administration of the living
trust. A surviving spouse may not have elective share (forced
inheritance) rights against a living trust as would be available against
probate assets.
Can I
preserve assets in a living trust and still qualify for Medicaid?
No. The assets in a living trust are countable resources for
purposes of Medicaid qualification. The assets in the living trust are
treated just the same as if they were owned by the grantor.
If I
decide a living trust may be right for me, how should I set one up?
If you decide that the use of a living trust may be right for you or if
you are uncertain whether a living trust would be beneficial, it would be wise
to consult with an attorney who is knowledgeable in probate, estate planning
and tax matters. After obtaining information from you concerning the
nature, title and value of your assets and liabilities, and following
discussions with you concerning your goals for the use of your property during
lifetime and following death, your attorney will be able to advise you in
advance of the costs for consultation and, following the consultation, provide
you with an estimate of legal and other expenses involved with the drafting
and implementation of a living trust. The drafting of a living trust,
like most other legal documents, requires professional judgment if the best
results are to be ensured. A lawyer can help you avoid the pitfalls and
help you choose the legal instruments and plan best suited for your situation.
The
information contained in this pamphlet is general and should not be applied to
specific legal problems without first consulting your own attorney.
(Updated
02/10/2005)
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