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.
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.
Setting Up a Living Trust
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.
Note: This fact sheet is intended to be reproduced by lawyers and others for free distribution to the public. It may not be reproduced commercially for sale at a profit.
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.
Setting Up a Living Trust
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.
Note: This fact sheet is intended to be reproduced by lawyers and others for free distribution to the public. It may not be reproduced commercially for sale at a profit.
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 joint 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
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.
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 joint 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
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.
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 2 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.
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 2 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.
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