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AVOIDING
PROBATE WITH LIVING TRUSTS
By Douglas
R. Jackson
If a person
dies with or without a will, he may be subject to probate, depending on
how his/her assets are titled at the time of death. Common methods of
avoiding probate are gifting during one's life, establishing joint tenancy
with rights of survivorship in real property, joint and survivorship bank
accounts, payable on death accounts, transfer on death accounts, transfers
with retained life states, and revocable intervivos trusts (living trusts)
for those assets titled in the name of the trust.
Each method listed above has its own peculiarities under Ohio law. There
is no single method that is best for everybody. A client's desires must
be carefully analyzed by an attorney to determine whether a will with
some of the above mentioned non-probate techniques is better than a trust.
Assets must be carefully reviewed by the attorney; also, tax implications
must be balanced, particularly Federal Estate Tax, if applicable.
Often, if a will is part of the estate plan, it is combined with a Durable
Power of Attorney that may come into existence immediately or upon incapacity
(commonly referred to as a Springing Power of Attorney.) Health care decisions
reflecting a client's desires also should be discussed with the attorney.
Such documents as a Durable Power of Attorney for Health Care may permit
another to make health care decisions for you if you are not physically
or mentally able to make those decisions for yourself. A Living Will may
also be considered. This document basically states that the one signing
it does not want life sustaining treatment if he/she is statutorily defined
in a terminal condition or a permanently unconscious state.
A living trust (revocable intervivors trust) will avoid probate for those
assets titled in the name of the trust. A married couple will often be
all three parties to the trust while they are living--1) grantors, or
the people who make the trust; 2) trustees, managers of trusts assets;
and 3) beneficiaries, people who receive benefits from the trust. Upon
the death of the second spouse, the named successor trustee will distribute
the assets according to the grantors' wishes.
Tax language may be incorporated into the trust so as to reduce or eliminate
federal estate tax in many instances. Often times, this is referred to
as a "credit shelter trust" or the creation of an A/B trust.
In either event, when the estate of a married couple exceeds $1,000,000
in total asset value (stocks, bonds, home and possessions, autos, CD's,
annuities, insurance, IRA and 401(k) plans, etc.), an experienced attorney
will often incorporate the appropriate tax language in such a trust.
One of the major advantages of a living trust, beyond probate avoidance
is the capability of the trust to avoid guardianship proceedings in many
instances. When the grantor(s) becomes incapacitated, many trusts will
provide that the successor trustee (usually a child of the grantor) may
step in and manage the assets for the incapacitated individual.
An obvious advantage of a living trust is that asset distribution can
occur more rapidly after death than with a will. This is true primarily
because the probate process is avoided and delays caused by probate are
then by-passed. Also, attorney fees for settling a trust are minor compared
with those charged in probating a will. A well-laid out trust will often
provide simple-to-follow instructions for the successor trustee to follow
upon the death or incapacity of the grantor(s).
Assets that are distributed via trust distribution as a result of the
death(s) of the grantor(s) will also receive a step up in basis. In other
words, those assets transferred at death to a beneficiary will receive
a new cost based on fair market value at the time of the grantor's death.
Many times, this is preferred rather than receiving a gift during life
and subjecting the recipient to capital gains tax when that asset is subsequently
sold.
For farmers and small business owners, the fact that a successor trustee
can be named to take over the management of their farm or small business
at incapacity or death without guardianship proceedings or court interference
is often a major advantage of a trust when considering an estate plan.
Options to purchase business property may be granted to specific beneficiaries
in the living trust, with life insurance used to provide funds with which
to exercise the options.
With a living trust, the grantors maintain control of their assets for
as long as they desire. If they no longer feel able to control their assets,
they may resign and appoint a corporate trustee or the successor trustee
may assume power. Problems associated with joint tenancy with rights of
survivorship with children are also avoided. For example, one who uses
joint tenancy to avoid probate may be exposing their assets to a divorce
proceeding if one of the grantor's children are subsequently divorced,
the claims of a child's creditors, or possibly even a judgment if the
joint tenant/child was involved in a personal injury claim that went against
that child.
Proper estate planning does involve legal advice that is reserved to attorneys
who are licensed by the State of Ohio to practice law. Make sure that
you talk to and actually meet with the attorney who will draft your document,
whether it includes a will or a trust, from start to finish. Attorneys
have malpractice insurance if a mistake occurs; non-attorneys not authorized
to practice law do not.
Douglas R. Jackson is an attorney in private practice in the Columbus Dayton
area. He is a member of the National Academy of Elder Law Attorneys and
the Ohio State Bar Association.
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