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Oftentimes a living trust is desirable. It avoids the fees, delay, and publicity of probate. Living trusts also protect beneficiaries in ways that a will cannot do. They can also reduce or eliminate federal estate taxes. The downside is that they cost more than wills and ownership of assets must be changed. Before we look at the advantages and disadvantages of living trusts, let’s first understand what a living trust is and how it works under Ohio law.
WHAT IS A LIVING TRUST?
A Settlor (a person who establishes a trust) can set up a trust during his life or at death. A living trust is one a Settlor creates while he is alive. On the other hand, a trust effective at death is a testamentary trust. The living trust usually refers to an instrument with these four features: the Settlor can revoke or amend it; the Settlor receives all the income; the Settlor serves as the Trustee; and the Settlor continues to file a normal 1040 return.
The Trustee of the living trust owns the property inside of the trust. The beneficiaries of the living trust have the right to enjoy those assets. The terms of the instrument determine who benefits from these assets and under what conditions. Of course, the Settlor, who is usually the Trustee, is almost always the main beneficiary of the living trust.
To fully use the living trust, the Settlor transfers property to the Trustee. Thus, the Settlor must sign over to the Trustee title to his bank and brokerage accounts, real estate, life insurance policies, even cars and personal property, to have the living trust control these items. A key point is that an asset not owned by the Trustee is not controlled by the living trust.
The choice of trustee and successor trustee is of vital importance. If the Settlor can no longer handle his affairs, a Co-or successor Trustee named in the trust takes over these duties.
HOW IS A LIVING TRUST DIFFERENT FROM WHAT I HAVE?
Most people do not have a living trust. The vast majority of married couples own their property in a joint and survivor format. Under this method, the survivor of the couple at the first spouse’s death automatically owns all assets the couple held in this fashion. There are no estate taxes to pay because all items so passing qualify for the marital deduction. Further, these assets do not pass through probate. Although the probate court and estate tax authorities have some involvement in the post-death process, joint and survivor assets will avoid the heavy administration of property passing under a decedent’s Will. Likewise, other items, such as annuities, life insurance, and payable on death accounts, bypass the probate court and receive the small scrutiny enjoyed by joint and survivor assets. If a non-spouse receives these items, then such recipient usually pays estate taxes on this property.
At death, a living trust works quite similar to joint and survivor property. Assets inside the trust avoid the probate process. The Trust, not the decedent’s Will, determines where the property goes. The probate court reviews the trust and the tax authorities require some attention, but post death administration is a fairly easy process. The successor Trustee gives the property to the beneficiaries named in the instrument. No record in probate court reveals who received property or how much they got. If the surviving spouse is the beneficiary, then there’s no or little estate tax. If a non-spouse comes into the decedent’s property, then estate taxes may be due.
WHAT ARE THE ADVANTAGES OF A REVOCABLE LIVING TRUST?
Reducing or Eliminating Federal Estate Taxes
For married couples with a high net worth, living trusts can help to reduce or eliminate federal estate taxes. Avoiding these taxes is important because the rates can exceed 50%. This works by having some of the first decedent’s property remain in trust instead of passing outright to the surviving spouse. When used this way, a Trustee, who may or may not be the surviving spouse, legally owns the assets. The surviving spouse normally has income for life and whatever she needs for health, support, maintenance, and education.
Protecting Vulnerable Beneficiaries
A trust provides much more protection to vulnerable beneficiaries than a will. If one has a will, Ohio requires the Executor to make distribution to all beneficiaries whether they can handle it or not. If a beneficiary is in a bankruptcy, divorce, or has a substance abuse or gambling problem, then he gets the money. However, if a beneficiary with one of these problems takes under a living trust, then the Trustee can withhold distribution until the danger passes. Further, if a beneficiary receives means tested Social Security income, then he cannot have more than $2000 in countable assets. But, a living trust oftentimes permits a beneficiary to have access to an inheritance and keep their SSI and Medicare card. This protection makes a living trust a valuable planning tool regardless of the level of wealth involved.
Avoiding Probate and Its Expenses
The living trust’s avoidance of probate does not eliminate the requirement of preparing and filing the decedent’s final income tax return or filing and paying estate taxes. The Trustee, or the Executor of the Will if there is no living trust, collects the decedent’s assets, pays his debts, and makes distribution to the beneficiaries. This process can be time consuming and costly. However, a living trust greatly reduces the fees and delay. For example, a living trust can save a third or more of the normal attorney fees. Months can be cut off of the normal process if one uses a trust instead of a will.
Avoidance of Ancillary Administration
Each state holds jurisdiction over real property inside its borders. If a person dies owning property in several states, then each state will call for ancillary administration to transfer title to the real estate. Each ancillary administration needs a local lawyer and imposes more legal and administrative expenses. Transferring real property to a living trust avoids this problem of multiple probating in different states.
When one admits a will to probate, this instrument, and the nature and extent of all assets passing under it, becomes a public record that anyone can inspect. On the other hand, the details of items distributed by a living trust stay private.
Planning for Incapacity
If a person becomes incapacitated, then a court appoints a Guardian to oversee his assets and care for him. The individual no longer controls his care or the management of his assets. Further, each year the Guardian must post a bond and file an accounting of all income and expenditures. Every other year, the Guardian must have a doctor examine the person and declare he is still incapacitated. These rules require attorney and medical expenses that can cost thousands of dollars each year. A living trust can avoid this extra effort and expense.
The living trust protects the Settlor’s assets in the event of incapacity. The trust can make specific provision for the management of the trust assets and state who handles the Settlor’s affairs. In addition, the living trust can require the Trustee to use the trust assets to provide for the care and support of the Settlor without court intervention.
Avoidance of Family Disputes
If an individual believes his heirs may have disputes after his death, then a living trust has several advantages. When there is a Will admitted to probate, Ohio law requires the Executor to send the family members a notice of the person’s death. The Trustee of a living trust does not have to provide such notice. This provides two benefits. First, even if they learn of the trust, the Trustee may distribute the assets before the heirs realize that a trust exists. Such a distribution makes a challenge more difficult. Second, the notice of probate of the Will gives a chance to contest the Will before the Executor distributes the assets. A Will contest ties up the assets until the court resolves the challenge. Once again, living trusts avoid this problem.
Most living trusts operate for some time during the Settlor’s life. This makes the trust more difficult to challenge than a Will. It is tougher to prove incapacity, fraud, or undue influence in the establishment of a living trust if the Trustee/Settlor managed it prior to his death.
Preserving Assets for the Children and the Surviving Spouse
Ohio law gives the surviving spouse a right to take some of the assets out of the probate estate even if the decedent’s Will leaves nothing for him or her. Ohio law gives no corresponding right for the surviving children to take against the terms of the decedent’s Will. On the other hand, current Ohio law does not permit a surviving spouse or children to invade a living trust. For second or subsequent marriages, this is sometimes a concern. Also, a trust is the only way torestrict access to funds past a beneficiary’s 21st birthday. The living trust grants flexibility to address these situations.
WHAT ARE THE DISADVANTAGES OF A REVOCABLE LIVING TRUST?
Costs to Establish and Fund
Setting up a living trust is more expensive and time consuming than estate planning with a simple Will. Living trusts and the other essential instruments may cost $2000 or more. This is because couples are not as familiar with these documents and need more of the attorney’s time to understand them. Also, a living trust works best if the Settlor puts assets in it during his lifetime. The attorney should supervise this process. This adds to the costs. Estate planning with simple wills and joint and survivor property does not require nearly as much time, effort, and money. Keep in mind, though, that a living trust normally saves far more in attorney fees for the beneficiaries than the costs to establish it.
Working with Assets in a Living Trust
Once the Settlor signs the living trust, he must coordinate all current and new assets with it. If the assets are not inside the trust, then they may pass through probate. This defeats the functions of the living trust. In our office, we prepare the deeds to transfer real estate and the assignment to transfer the household goods and furnishings into the trust. We also give detailed written instructions on how to transfer all of the person’s assets into the trust. These instructions are based on the asset information the client provides us, so it is specifically made for the client. Our fees include basic assistance to help the client get all of his assets coordinated with the trust.
WHAT SHOULD I DO?
Each person’s situation is different. Only a competent attorney who regularly handles these types of cases can properly help you decide whether or not a living trust is right for you. A living trust can more effectively carry out an estate plan than a simple Will. Couples with high net worth benefit by having living trusts as part of an overall approach to reduce or eliminate the federal estate tax. A living trust can save attorney fees, promote privacy, and protect vulnerable beneficiaries. If you have questions about any of these matters, then call us as soon as possible at (937) 667-8805. If the time comes and your affairs are not in order, the results can be harsh for those who survive you.
Copyright 2011 by George H. Lovett. All rights reserved. This article is not intended, and should not be construed, as legal advice. The author intends this writing to generally inform and to spur interest and discussion. The author encourages those with questions to consult an attorney of their choice for guidance. The author may be reached at (937) 667-8805 or [email protected].