TRUSTS

What is a living trust?
A trust exists when one person (often called the grantor or the settlor) gives property to another person (called the trustee) to hold and manage for one or more other persons (called the beneficiaries).  A living trust simply describes a trust that the grantor can amend (change) or revoke (cancel).  Through the terms of the living trust, the grantor keeps all the benefits of any property placed into it for the rest of his or her life.  The grantor also can be the trustee, but the grantor's spouse or a trust company also often serves as trustee.  A living trust can be funded with any property such as bank and brokerage accounts, stocks and bonds, a home and other real estate.  Some living trusts may not be funded initially, but rather at a later time or at the grantor's death.  Estate Planning Lawyer Kenneth Sheppard can help you create a trust and advise you when a trust should be funded and with what property.  The terms of a trust are described in writing in a document often called the declaration of trust or trust agreement.

What is the purpose of a living trust?
A living trust may have many purposes.  A purpose often given for living trusts is to avoid probate.  It is true that property owned by a living trust will not be probate property and will not be subject to the jurisdiction of the probate court after the grantor dies.  People also establish trusts to protect property for their families and to avoid or reduce potential estate taxes.

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 that are subject to probate; (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. 

Can I avoid probate without using a living trust?

Yes.  There are several other ways to avoid probate.  For example, if you own assets jointly with one or more people who have rights of survivorship, then those assets will pass by law to the survivor(s) when you die, and not be subject to probate.  However, you should be careful before creating a joint account because the joint tenant will have rights in the joint property as soon as you create the account.  Payable-on-death (POD) bank accounts and any assets that are payable to beneficiaries according to a contract (such as proceeds from life insurance policies or pension benefits) will avoid probate, as will transfer-on-death (TOD) deeds for real estate, or transfer-on-death designations for securities and motor vehicles. 

Will I save estate taxes with a living trust, compared with a will?
No.  It is a common misconception that you can save on estate tax with a living trust, but not with a will.  While you can use a living trust to avoid probate proceedings, this does not mean you will avoid estate taxes.  The assets in your living trust are part of your gross estate for estate tax purposes, just the same as probate assets.  However, when properly written and with advice on the proper ownership of assets during lifetime, both the will and the living trust may include estate tax avoidance techniques that may save substantial tax dollars for your family's benefit.

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 period for challenging the validity of a will can be limited to just a few months, there is a longer time period (usually two years) allowed for challenging the validity of a living trust.  The cost of defending the validity of a will, where the executor acts in good faith, is payable from the probate estate.  Similarly, the cost of defending the validity of a trust would be paid from the trust assets.

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 generally is 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.  The costs of the probate process can be expensive.  The typical components of cost in the probate process are:

• court costs
• appraisal fees
• executors' fees
• 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 typically will be incurred in probate for real property, and may be incurred for property such as expensive artwork and interests in private companies.  A living trust may or may not incur these costs.  In Ohio, if a decedent's gross estate exceeds $338,333, the estate must file an estate tax return.  In order to accurately complete the estate tax returns, it will be necessary to appraise the value of the estate's assets.  Appraisals also can establish the basis of estate property for federal income tax purposes. 

Executors' fees 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, spouses and other family members often act as executors and often waive any executors’ fees.  A trustee of a living trust also is entitled to a "reasonable" fee.  Again, spouses and other family members who act as trustees often waive any such fees.

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 generally will 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 the moment after the grantor’s death.  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.

An executor may be personally liable for the claims of creditors left unpaid by the estate as well as any unpaid federal and Ohio estate taxes.  Consequently, the executor generally will not make final distribution to the beneficiaries until the executor is satisfied that all valid claims have been paid and all estate taxes have been finally determined and paid.  The trustee of a living trust also may 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, the 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.  Implementation of a living trust is often more time consuming than establishing a will.  A common defect in implementing a living trust, where the goal is to avoid probate, is the failure to transfer ownership and title of property to the trustee of the living trust.  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, if avoiding probate is an important goal, then the grantor needs to make sure 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 generally are more than those for creating a will.  Also, the need for a will is not eliminated as it often is 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 has some provisions that are more beneficial to estates than to trusts, but living trusts can elect to be taxed like an estate for a limited period to eliminate these tax differences.

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 may not be necessary to have the court appoint a guardian for the grantor's estate.  Even if this becomes necessary, the trustee of the living trust, rather than the court-appointed guardian, would continue to have authority over property owned by the trust.  One way to help reduce the need for a court-appointed guardian is for the grantor to have a durable financial power of attorney.  Through such a document, an individual (called the principal) gives another individual (the attorney-in-fact or agent) the power to manage his or her assets. 

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.  Creditors generally may reach the assets of any trust to the extent that the grantor can enforce his or her rights to trust assets.  Upon the death of the grantor, 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 believe that a living trust may be right for you or if you are not sure if a living trust is right for you, consult with Estate Planning Attorney Ken Sheppard who is knowledgeable in probate, estate planning and taxation.  After gaining information about you, your family, and your assets, and listening to your goals, Mr. Sheppard will be able to discuss with you the best ways of achieving your goals and help you decide whether a living trust is best for you.  To achieve the best results, the drafting of a trust agreement requires professional judgment.

What are some of the reasons why I should think about creating a trust?

1.      Avoid probate

2.      Take care of minor children.

3.      Pay for expenses, such as funeral bill, medical bills.

4.      Create a scholarship fund.

5.      Hold real estate, cash, securities or property.

6.      Save on federal and state estate taxes.

7.      Pass your assets to future generation with specific instructions.

8.      Reduce challenges by heirs  

When a Trust is done right, it will protect you in many ways.  Contact Attorney Ken Sheppard to learn how you can obtain these protections.

Read more about the different Estate Planning services we offer:

• Estate Planning & Taxes

• Wills

• Powers of Attorney

At Sheppard Law Offices, Co., L.P.A. we listen, we advocate, and we care about the individuals and families who come to our office.  Contact our Columbus (Westerville) or Newark Law Offices to schedule a free one-half (1/2) hour initial consultation.  We look forward to serving you.