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 $10,900,000 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 & Jessa M. Gary are attorneys in private practice in the Columbus and Dayton area.