Trusts
What is a trust?
Generally, a trust is a relationship created with the intention of placing the right to possession of property, whether in land, personal property, or both, with one person (the trustee) for the benefit of another person (the beneficiary). Such a transfer must identify the property which is to be included in the trust (the corpus or principal) and show an actual delivery or surrender of control over the trust property to the Trustee. The person who creates the trust is usually referred to as the grantor.
How is a trust created?
A trust may be created by an individual or, under certain circumstances, by a court. A trust may be created for any purpose which is not illegal or against public policy.
When a trust is created by an individual, it is usually done through some form of a writing. These are usually referred to as express trusts. Express trusts may be created while the grantor is still alive (a living trust or inter vivos trust) and immediately effective, or it may be included within the language of an individual's Last Will and Testament and intended to be effective after his death. Many times a grantor will provide for both types of trusts. In such cases, the individual's Will typically contains language that directs that certain assets of his estate are to pour over and be administered according to the living trust previously created by him. A more detailed comparison between living trusts and testamentary trusts follows herein.
How are trusts classified?
Generally, a trust may be classified in two ways. It may be revocable or irrevocable A revocable trust is one in which the grantor reserves the right to revoke the trust, in whole or in part, any time he chooses to do so - but while still alive. A trust may be declared to be irrevocable from the moment the trust is created (usually, this is done for tax purposes), or it may refer to a revocable trust which becomes irrevocable at the moment of the grantor's death.
When would the Probate Court declare or create a trust?
Some times an express trust may not clearly reflect the grantor's intent, or it may be defective in some other respect. Such defects may arise when a trustee or beneficiary is not sufficiently identified, when the property of the trust is not clearly or fully identified, or when the delivery or surrender of the trust property to a trustee may be in question. In such instances, a court may be called upon to declare a constructive or resulting trust; to determine what the grantor intended, if there is evidence to support such a construction or result. Rather than being an express trust, such a trust is then said to be implied by law.
There are some instances in which a Probate Court may create a trust for or on behalf of individuals subject to its protection. The authority to do so generally arises in two situations; guardianships and wrongful death settlements.
What is a revocable guardianship trust?
Under its broad authority as the Superior Guardian of every guardianship and ward subject to its jurisdiction, the Probate Court may create (as grantor) a revocable trust for its ward; one which terminates when the need for the guardianship ends. This usually occurs under one of three circumstances: the guardianship was based upon the ward's minority and he has now attained the age of majority (18 years); the guardianship was based upon the ward's disability and the disability has ended; or the ward's death. Under this same authority, the Probate Court may also authorize that gifts of the ward's assets be made in trust Afor others.
What is a special needs trust?
A special needs trust is another species of trust which the Probate Court may create under its broad authority as Superior Guardian. Such trusts are usually created when the ward (whether a minor or incompetent adult) has funds, income or a stream of future income (annuity payments) and a legally recognized mental or physical disability which would entitle the ward to participate in qualifying government funded programs, or to receive disability income from a government agency. The ward's funds, or income might disqualify him or her from participation in or the receipt of such assistance. However, the Probate Court may decide to create a special needs trust for the ward so that the ward is still eligible to participate in the governmental assistance programs.
In such instances, the ward's funds or income may continue to be used for his or her benefit, but only as a supplement to governmentally funded assistance; to provide a means of supplying the ward with goods, services or other beneficial needs which the governmental agency does not provide. Upon the death of the ward or the termination of the guardianship, the government has a right to recover the sums it advanced for the ward's benefit during the guardianship, subject to the approval of the Probate Court. Any funds or assets which remain in the guardianship, after satisfaction of the governmental claims, may either be released to the former ward or, in the event of the ward's death, such assets would pass to his or her estate for its administration.
Great care must be exercised in the creation and administration of such a trust. Compliance with the many federal and state laws regulating such trust may require the skill and expertise of legal and other professionals.
What is a wrongful death trust?
Ohio law provides that the next of kin of a decedent may sue for the decedent's wrongful death, when appropriate. While such suits may only be instituted by the fiduciary appointed by the Probate Court, the underlying claim is for the benefit of the next of kin, not the estate. [Note: The estate may also have a separate Asurvival@ action it may institute on its own behalf. Such a Asurvival@ action may or may not be related to the decedent's death].
Wrongful death suits are not litigated in the Probate Court. However, any settlement or judgment reached under such lawsuits must be reported to the Probate Court which appointed the fiduciary or representative of the decedent's estate. The Probate Court must approve of such settlements and, among other matters, determine how the money from the settlement or judgment should be dispensed.
Whenever one or more of the beneficiaries of a wrongful death claim is a minor (under the age of 18), the Probate Court may decide to create a wrongful death trust for the minor(s). Such trusts then regulate how the money apportioned for the benefit of each minor shall be held, invested and/or expended for the minor's benefit until the trust terminates. Such trusts may remain in existence until each minor-beneficiary reaches 25 years of age, unless sooner terminated by the Probate Court.
What is a testamentary trust?
A testamentary trust is a trust created within a decedent's Last Will and Testament. By its terms, it leaves certain (or all) of the decedent's property in the control of one or more persons, as trustee(s), for the benefit of one or more others - - the trust beneficiaries. The language of the testamentary trust usually includes a statement of its purpose, the identity of the beneficiary(s), a description of the property of the trust and the duties and powers of the trustee(s).
A testamentary trust may be created for the benefit of individual persons, charitable purposes or both.
Such trusts are administered through the Probate Court until all provisions of the trust have been fully effectuated. While a testamentary trust for the benefit of individual persons may be made to end at some future point, a charitable trust may, depending upon the value of the assets which comprise the charitable portion of the trust, go on in perpetuity.
A testamentary trust may, by its provisions, limit probate administration by including language that the property subject to such a trust shall pour over to an living or inter vivos trust separately created by the decedent prior to his or her death.
What is a living trust?
A living trust is a trust that is funded with assets and that may be amended or 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 under an individual name and not contractually payable on death will generally be subject to probate. Additionally, 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?
No. 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 some 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 these administrations that a person should consider 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, but could be if the beneficiaries choose to enforce their rights to a report or accountings. It should also be noted that sometimes the more important document filed in the probate court administration of a decedent's estate is the Estate Tax Return, if one is required to be filed. This document may list many Ajoint and survivorship@ assets which may not be subject to probate administration, but may yet have to be reported for tax purposes. However, such returns are maintained as wholly confidential (private) records by the probate court.
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. However, this could prove risky.
Costs
Some publications make extravagant claims about the extent of the costs of the probate process as compared with living trusts. Other than court costs, the typical components of both include:
- Appraisal fees
- Executor's/Trustees commissions
- Attorney Fees
- Transfer fees.
While court costs will vary with the activity in the estate, presently a typical cost range may be one-time costs of about $200.00. A living trust would not bear these costs, but may produce other annual costs and expenses.
Appraisal Fees
Appraisal fees may 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 corporate stock. These costs may 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 / Fees
Executor's commissions are paid one time, are set by law and are based, generally, on a percentage of the value of the assets of the estate. At present, the commission varies from between one and four percent of the value of the assets (combined with the income on those assets) depending upon 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. The trustee of a living trust usually assures itself an annual fee for services performed similar to those performed by an executor, although the level of compensation for such a trustee is not set by law. It is set by the terms of the trust agreement and is generally not subject to a court's review or approval. The Executor's fees may be reviewed and approved, denied or modified by the Probate Court, however, that is not the case with trustees' fees.
Attorney's 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, the attorney fees may 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 may be greater because such tax issues arise each year. In a probate administration, no attorney's fees may be paid without the approval of the Court. However, the trustee of a living trust usually exercises that authority under the trust.
Time of transfers
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 relatively soon after death and, once appointed, the executor may be 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. The distribution of assets to beneficiaries may be delayed in probate because the executor may be held personally liable for the claims of creditors left unpaid after assets have been distributed to beneficiaries. The executor may also be personally liable for unpaid federal and Ohio estate taxes. The trustee of a living trust may also be held personally liable for unpaid estate taxes and, in some circumstances, unpaid creditors.
Avoidance of multiple probate proceedings
If homes or other real property are owned in a number of different states, use of a living trust may be 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 identified and re-registered, re-titled and 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
The costs associated with creating a living trust are generally more than those for creating a Will and the court costs for probate. Also, the need for a Will is not eliminated. 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 some burdens of the probate process, persons creating a living trust should consider that the trustee they appoint will not be accountable to a court 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. 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." 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(or audit by) 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 - may also avoid 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.
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