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.
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.
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.
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 will also avoid
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.
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 four months, there
may be a much longer time period under which the validity of a living trust
can be challenged. The cost of defending the validity of a will, where the
executor acts in good faith, is payable from the probate estate. It is not
clear under Ohio law whether similar expenses in defending the validity of a
living trust would be borne by the trust assets or by the trustee personally.
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:
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.
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
costs. Some publications make extravagant claims about the extent of the
costs of the probate process. The typical components of cost in the probate
- Court costs
- Appraisal fees
- Executor's commissions
- Attorney fees
While court costs will vary with the activity in the estate, presently a
typical cost range will be $150-$225. A living trust would not bear these
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 may be prudent 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.
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
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.
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.
of assets to beneficiaries is usually delayed in probate because the executor
is personally liable for claims of creditors left unpaid by the estate
because assets have been distributed to beneficiaries. The executor is also
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.
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
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
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, trustee fees usually
will be incurred if the living trust is funded.
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
Living Will and Durable Power of
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legislation allows a trust to be taxed like an estate if the trustee of a
living trust elects to do so.
estate has substantial dollar value and is composed of a number of complex
business entities such as partnerships or closely held corporations, there
can be additional tax disadvantages to the use of a living trust. While a
trust can hold "S" corporation stock up to two years following the
grantor's death, an estate may hold the stock until the completion of administration.
If it is possible that the estate (or living trust) could be held open for an
extended period of years, either because of an anticipated dispute with the
Internal Revenue Service or because of an intention to take advantage of an
extended time period within which to pay estate taxes (provisions of the
Internal Revenue Code allow deferral of a portion of the estate tax liability
when a qualifying percentage of closely held business assets are included in
the estate), the administration expenses incurred by an estate qualify for
deduction for estate tax purposes over the course of the entire deferral
period, whereas administration expenses within the living trust would only be
available for the three years following the filing of the estate tax return.
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
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. Also, if the grantor is not the
trustee or a co-trustee, then the living trust must obtain a separate
taxpayer identification number and thereafter file annual tax returns.
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.
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.
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.