Information About Living Trusts

Living Trust - Definition

A "living trust" is written legal agreement between a person ("Grantor") and him/herself ("Trustee") to hold assets during that person's lifetime and then pass these assets to a successor Trustee who then holds or distributes them according to the Grantor's wishes. The Grantor can amend or revoke the living trust at any time during his/her lifetime and continues to enjoy the right to use any property held in the trust just as they would without a trust. Assets a living trust may hold include bank accounts, stocks and bonds, insurance policies and real estate.

Living Trust - Purpose

A primary purpose to establish a living trust is to avoid "probate" - a court supervised process required to administer a person's estate after their death. In most cases, assets in a living trust will not be required to go through the probate process. Benefits of avoiding probate include generally lower administrative and legal costs, greater privacy and quicker asset distribution.

Living Trust - Not For Everyone

If your goal is to avoid probate you might still be able to do so without a trust. For instance, some assets can be titled so that they transfer directly to intended beneficiaries upon a person's death. If you hold only assets that can be titled in this way and you provide for alternative transfers in case intended beneficiaries die before you, you may not need a trust. Your attorney can help you re-title assets to avoid the need for a trust.

Probate - Definition

Probate is the process of administering a person's estate. Certain property ("probate property") must be "probated" by an appropriate "probate" court in order to transfer assets according to a person's last will and testament or in the event no will exists, according to the Ohio Intestacy Statutes. Probate property is all property that is not covered by an enforceable legal document or contract providing for succession on the death of the owner. The probate court oversees the determination of the deceased's assets' value and the method of distribution to their heirs. This process is required to take place in the probate court of the county where the deceased resided. If the decedent also owned property in another state, additional proceedings may be necessary in that state.

Why Probate?

When you die, someone needs to be in charge of your assets so that they are transferred to your intended beneficiaries according to your wishes. Without a trust in place, a probate court must oversee the process to protect your assets for your heirs, creditors and other people you owe. During the probate process an inventory of all your assets is submitted to the probate court soon after your death so that a proper accounting of what is available to pay your debts and beneficiaries is established at the onset. Public notices must then be posted to notify creditors and possible heirs that they must present their claims to the court within a set period of time, usually 6 months. The court will evaluate the veracity of each claim and order the distribution of assets to each claimant according to establish rules of priority.

Estate - Definition

An estate is all property or other assets of value that a person owns at any given time. If you die leaving an estate but no will you are consider to have an "intestate" estate if you have a valid will you leave a "testate" estate.

A Living Trust Does Not Save Taxes

Many people erroneously believe that setting up a living trust saves taxes. That is simply not the case. There is no difference between assets in or outside of trust when it comes to estate taxes. However, note that only estates worth more than $5.4 million are subject to federal estate tax and there is no Ohio estate tax. If the value of your estate exceeds $5.4 million it is true that there are creative ways to use living and irrevocable trusts to minimize estate taxes.

Trusts Can be Challenged Just Like Wills

There is no difference between wills and trust when it comes to disgruntled heirs or beneficiaries. Both are subject challenges regarding validity and the intent of the deceased. However, there are provisions that can be added to both trusts and wills that will discourage challenges. One of the most common is a provision that automatically prohibits a beneficiary from collecting anything from the estate if they raise a challenge. This is called a "No Contest Clause".

Living Trust Advantages

  • Privacy. Probate estates are by their nature public procedures. Anyone can review records created in a probate case. Trust documents need not be filed or published in any public forum.
  • Control. No judge or other court official is required to administer the terms of a trust. On the contrary, everything administered through the probate process is overseen by a court official.
  • Cost. Though the cost to prepare a living trust and re-title assets into it can be expensive at the time, it is usually much less than costs involved in the probate process. A probate estate will often be subject to over 4% of the total estate value in various administrative costs and legal fees.
  • Legal Fees – Legal fees required to properly administer a trust are usually much less than those that will be charged to manage the probate process because there is substantially less work to be done with a well written trust. Nevertheless, trustees often require the advice of an attorney regarding income tax and estate tax issues in the event the estate is large enough to be subject to estate taxes. Note too that income generated while a trust is being administered must be reported on a separate trust income tax return which is usually prepared and filed by an attorney or accountant.

Living Trust Disadvantages

  • Commitment. Maintaining a living trust requires conscious effort. You need to remember that any asset of consequence you own must be titled to you as trustee to remain in trust. You need to train yourself to think of everything as "in trust" or "note in trust". This is obviously a bit tedious but once you get the hand of it the benefits of keeping all assets of consequence out of probate will result in significant benefits and simplicity for your heirs.
  • Costs. Setting up a trust isn't cheap. Several hours of professional legal work is required to make sure you cover everything and all assets are properly titled. Most trusts also require periodic updating to reflect your current thinking about who is the best trustee for the job and who should benefit most from your estate plan. However, keeping a simple will updated is nearly as costly and the benefits from maintaining your trust far outweigh the cost of probate.