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Living Trusts

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 will also 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 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.

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:

  • 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 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 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.

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 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.

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, 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."

Living Will and Durable Power of Attorney for Healthcare

 

Recent legislation allows a trust to be taxed like an estate if the trustee of a living trust elects to do so.

If the 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.

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. 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.

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.

 

 

What is a living will declaration?
A living will is a legal document you can complete now that declares what your wishes are regarding the use of life-sustaining treatment if you should become terminally ill or permanently unconscious. A living will:

  • becomes effective only when you are unable to communicate your wishes and are permanently unconscious or terminally ill;
  • spells out whether or not you want life-support technology used to prolong your dying;
  • gives doctors the authority to follow your instructions regarding the medical treatment you want under these conditions;
  • can be changed or revoked by you at any time, but cannot be changed or revoked by anyone else;
  • will be followed for a pregnant woman only if certain conditions apply; and
  • specifies under what conditions you would want artificial feeding and fluids to be withheld.



What is a durable power of attorney for health care?
A durable power of attorney for health care is a legal document that authorizes another person to make health care decisions for you if you are unable to make informed health care decisions for yourself.

A durable power of attorney for health care:

  • names an individual you trust to make a wide variety of health care decisions for you at any time you cannot do so for yourself - whether or not your condition is terminal;
  • becomes effective only when you cannot make your own decisions regarding treatment;
  • requires the person you appoint to make decisions that are consistent with your wishes; and
  • will not overrule a living will in the event you have both documents.



I don't know about life-support equipment, or what treatment I'd want. How do I get more information?
Each of us has the right to learn about our options and should assume responsibility for our own health care decisions. It is important to talk to your doctor and get your questions answered.

If I have a living will, do I need a durable power of attorney for health care too?
Many people will want to have both documents because they address different aspects of your medical care. A living will gives your instructions directly to your doctor and it applies only when you cannot communicate your wishes and are in a terminal condition or are permanently unconscious.

A durable power of attorney covers a wide range of health care decisions - like approving surgery or changing doctors after an accident - that do not require a patient to be dying. Often a spouse or relative is selected to act on your behalf when you cannot, because they know you well enough to know what you would want done.

If my living will says I don't want to be hooked up to life-support equipment, would I still get pain medication?
Yes. A living will only affects care that artificially or technologically postpones death. It would never affect care that eases pain. For example, you would continue to receive oxygen and medical care that includes pain medication, spoon feeding and being turned over in bed.

Can I specify that I do not want cardiopulmonary resuscitation (CPR)?
Yes. You may include a clause authorizing a "DNR order" in your living will. DNR stands for "do not resuscitate." The standard form for living wills now includes such a DNR provision. This living will DNR is useful for conveying your wishes to family members and medical staff; however, it will not be activated unless two doctors have agreed that you are either terminally ill or permanently unconscious, and your personal doctor has agreed that you can no longer express your wishes regarding health care. Your attorney can help answer questions about DNR orders and the provisions concering DNR that may be included in a living will. For more information about DNR orders, see the publication, "What you should know about…DNR Orders," published by the Ohio State Bar Association.

Who decides that I am dying or permanently unconscious without hope of recovery?
If you've indicated that you don't want your dying to be artificially prolonged, two doctors who have examined you must agree that you are beyond any medical help and that you will not recover.

A living will may be important for a senior citizen, but why is this a priority for someone in their twenties?
A living will is designed to give you and your family peace of mind whether you are 25 or 75 years of age. Traffic accidents are the leading cause of death among Ohioans under the age of 45. When Nancy Cruzan was 25 years old, she was thrown from a car and went into an irreversible coma. Because she didn't have a living will or durable power of attorney, her family had to struggle in the courts, including the United States Supreme Court, for seven years before life-support machines could be turned off.

Would my family be notified before doctors stop life-support treatments?
It is very likely your family would be informed. Although doctors do not need your family's permission to follow the instructions provided through your living will, they are required to make reasonable efforts to notify a person named in your living will, or a family member, before following your instructions to withdraw life-support. If that person feels your living will isn't being properly followed, or isn't legally valid, an immediate hearing can be scheduled in probate court to determine if there are legal grounds not to follow your instructions. By law, no one can change or overrule your living will if it was freely and correctly executed.

If my condition becomes hopeless, can I specify that I want my feeding and fluid tubes removed?
No special instructions are needed to allow the withholding of nutrition and hydration if you are in a terminal condition and they don't provide you with comfort or relieve your pain. However, if you want to allow your doctor to withhold artificial nutrition/hydration if you are permanently unconscious, your document needs to expressly state this.

My mother is in a nursing home. If she gave me her durable power of attorney for health care, could I act on her behalf in every area affecting her treatment?
Yes, but not until she is no longer able to make those decisions on her own behalf. A durable power of attorney for health care covers not just life-sustaining treatment, but all aspects of medical treatment once the patient is unable to express his or her own wishes. A regular power of attorney over a relative's business affairs doesn't apply to medical situations. You need a special durable power of attorney for health care.

If I want to designate someone to make health care decisions for me, must it be a member of my family?
No. You may appoint any adult you wish as long as it isn't your doctor or the administrator of a health care facility in which you are being treated.

I had a durable power of attorney for health care before the 1991 law went into effect. Do I need a new one?
You may. Check with your attorney to make sure that the document you have includes specific language that is required under the 1991 law.

Where can I find the standard forms for a living will or a health care power of attorney? Can I draw up my own?
The Ohio State Bar Association has developed standard forms with the Ohio Hospice & Palliative Care Organization, the Ohio State Medical Association, and the Ohio Hospital Association to make it easier for the people who choose to have these documents. You may obtain a copy of these forms by mailing a request along with $3 to the Ohio Hospice & Palliative Care Organization at 1646 W. Lane Ave., Suite 2, Upper Arlington, Ohio 43221.

You do not have to use the standard forms. However, for either document to be valid, it must include specific language spelled out in the Ohio Revised Code. Your physician and attorney will have copies of the standard forms, as will many organizations.

What do I do after I fill out a living will declaration or form for a durable power of attorney for health care?
Make several copies. Give one to a trusted member of your family. Keep another with your personal papers. Leave copies with your physician and your lawyer, and, perhaps, your clergy person.

Can I have documents saying that if I become critically ill, I want treatment to be continued using every available means to keep me alive?
Yes, but you should talk to an attorney. You will not be able to use the standard forms for the documents. You should also talk to your physician about the effect of your decision.

Definitions
Ohio's Living Will Law uses several words that have meanings that might be helpful to explain here.

Life-sustaining treatment - any medical procedure, treatment, intervention or other measure that when administered to you serves principally to prolong life.

Hydration - fluids that are artificially or technologically administered through tubes.

Nutrition - refers to food that is artificially or technologically administered through tubes.

Permanently unconscious - to a reasonable degree of medical certainty: (1) you are irreversibly unaware of yourself or your environment; and (2) there is total loss of cerebral cortical functioning - which results in your having no capacity to experience pain or suffering.

Terminal condition - an irreversible, incurable and untreatable condition caused by disease, illness or injury from which, to a reasonable degree of medical certainty: (1) there can be no recovery; and (2) death is likely to occur within a short period of time if life-sustaining treatment is not administered.

Comfort care - nutrition and/or hydration when administered to diminish pain or discomfort, but not to postpone death; and any other medical care that diminishes pain or discomfort - like pain medication and turning a patient - but does not postpone death.

Reprinted courtesy of the Ohio State Bar Association

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