Is a Living Trust Right For You?
Some promote living trusts as the cure-all for estate and financial planning. Oftentimes a living trust is desirable. In many situations, though, a living trust is unnecessary. Before we look at its advantages and disadvantages, let’s first understand what it 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 estate tax due to the marital deduction. 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 worth more than $2,000,000 (this increases to $3.5 Million in January 2009), living trusts can help to reduce or eliminate federal estate taxes. Avoiding these taxes is important because the rates reach 47%. Under current law, married couples can use living trusts to shelter $4 Million from these death transfer taxes. In January 2009, married couples can use living trusts to shelter $7 Million from these death transfer taxes. 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, rather than the surviving spouse, legally owns the assets. The surviving spouse, though, normally holds an equitable right as a beneficiary to enjoy the funds in this “credit shelter” or “bypass” trust for health, maintenance, and support.
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 even with a living trust. But, the fees and expenses, as well as the length of time involved, are usually less than the probating of an estate where a comparable amount of assets pass under 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.
Maintaining Confidentiality
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 almost always 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 to restrict 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 much more expensive and time consuming than conventional estate planning with a simple Will. In our office in 2005, a married couple’s fees for simple Wills, powers of attorney for health and finances, and living wills were usually less than $600. However, living trusts and the other essential instruments may cost $1500 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 funds it during his lifetime. The attorney should supervise this process to make certain it is properly done. 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.
Working with Assets in a Living Trust
Third parties deal differently with assets when a Trustee owns them. For example, the deputies at the auto title office may want to see the trust document. Expect to end up at the end of the line while these non-attorneys try to understand the instrument. Getting the house refinanced will not be as simple. Although our office prepares and files a memorandum of trust with the County Recorder, not all lawyers do this. As a result, the bank’s attorneys may not know whether or not the Trustee has the right to sign the loan papers and receive the cash at closing. If the lawyer tried to cut corners and did not perform this task, then this omission will delay the loan application process. Finally, we have seen some brokerage houses charge up to $100 to change title to a Trustee. Once again, this is because they may want to review the terms of the living trust. This takes them extra time and expense.
Once the Settlor funds the living trust, he must remember to put all new assets into it. If the assets are not inside the trust, then at death they may pass through probate. This defeats the functions of the living trust and can result in unintended consequences.
Your Current Estate Plan May Be Just Fine
If none of the advantages discussed in the first part of this article apply to you, then there may be no good reason to have a living trust. You may not have $2,000,000 in assets, so planning for federal estate taxes may be unnecessary. In this case, simple Wills may be all that is needed. This may be your first marriage and all of your children get along well. You may not wish to limit a beneficiary’s access to his share past his 21st birthday. You may already have a power of attorney for financial affairs that permits a third party to handle your assets in the event of your incapacity. A living trust is not a substitute for a living will and a power of attorney for health care. You may already have these documents and they may be fine. As the old saying goes, “If it ain’t broke, then don’t fix it.”
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. Couples whose estates exceed $2,000,000 usually benefit by having living trusts as part of an overall approach to reduce or eliminate the federal estate tax. If a person is unmarried, or the total assets are less than $2,000,000, then a living trust may not be as important. But, a living trust may more effectively carry out an estate plan than a simple Will. And, whether or not a person has a living trust, every adult needs a Will, living will, and powers of attorney for health and financial affairs. 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.