Who Needs a Trust?

A trust is similar to a will in that it controls how property is disposed of after death. However, a trust offers several advantages, and you need not be wealthy in order to benefit.

A will is a testamentary document, meaning that it goes into effect at death. A revocable living trust goes into effect during life, and it can be revoked by the person who establishes it at any time. Hence the name "revocable living" trust. The person who establishes the trust is referred to as the trust “settlor.” The person responsible for carrying out the terms of the trust is known as the trustee. The settlor usually serves as trustee until the settlor’s disability or death. When the settlor dies, the trust can no longer be revoked by anyone and the trust assets are disposed of as provided in the trust document.

Typically, all of the settlor’s assets are transferred to the trust after the trust document is signed. Assets are transferred to the trust simply by changing their ownership so that they become the property of the trust. The settlor has an unlimited right to receive income and principal distributions from the trust. Managing one's assets and finances is not appreciably more difficult after setting up a trust.

There are several reasons to consider establishing a revocable living trust:

1)     Probate Avoidance. Assets transferred to a trust during the settlor’s lifetime will not be part of the settlor’s probate estate. The avoidance of probate and its related costs and delays is one of the primary benefits of establishing a revocable living trust. A “pour- over” will should always be prepared in conjunction with a living trust. Often there are assets that are not transferred to the trust during the settlor’s lifetime. A pour-over will essentially specifies that all assets owned by the settlor at the time of death will pass directly to the revocable trust.

2)     Privacy. Wills and other probate documents can usually be accessed by the public, while living trusts provide privacy because they are not a matter of public record.

3)     Planning for Incapacity. The trust instrument will designate a trustee who is responsible for carrying out the terms of the trust. The trust will also name a successor trustee who will assume management responsibilities if the settlor is no longer able to do so because of physical or mental infirmities. A durable power of attorney may also be used to plan for incapacity. The attorney-in-fact under the durable power of attorney is given the authority to manage the principal’s financial affairs if the principal is no longer able to do so. Banks and brokerage firms generally prefer to deal with trustees rather than attorneys-in-fact.

4)     Estate Tax Reduction. Married individuals use A/B trusts to take full advantage of the estate tax exemptions available to both of them. There are many other types of trusts that can minimize or eliminate estate taxes. The type of trust recommended by your attorney will depend on your goals and circumstances.

5)     Control of Assets After Death. One of the primary differences between a trust and a will is that a trust can be used to distribute assets to beneficiaries over time rather than in a lump sum. Trusts are almost infinitely flexible in this regard.

6)     Protection of Trust Principal from Creditors of Trust Beneficiaries
Protection is not absolute, and depends on how the trust is drafted.

The Three Essential Estate Planning Documents

Everyone who owns property or has minor children should have the following documents, which are the components of a basic estate plan.

1. Last Will
A will names the executor of your estate, identifies your preferred guardian if you have minor children, and provides instructions regarding the distribution of your assets to your chosen beneficiaries. If you do not name a guardian for your young children, a probate court will appoint someone who may not be the person you would have chosen yourself to serve in that role. Likewise, without a will, your assets will be distributed in accordance with an Ohio law known as the Statute of Descent and Distribution. The statute may not distribute your assets in accordance with your wishes.

2. Durable Power of Attorney for Finances
Otherwise known as a General Durable Power of Attorney, this document gives a person you select the authority to pay your bills and manage your financial affairs. You can choose for the power of attorney to go into effect immediately, or you can choose for it to go into effect only in the event that you become incapacitated and are unable to manage your finances. Powers of attorney are not just for the elderly. People can become seriously ill or injured at any stage of life. Having powers of attorney for finances and health care in place will save your family many headaches and will ensure that there are no delays in the management of your finances and healthcare, should you become incapacitated.

3. Durable Power of Attorney for Health Care
This document gives the person you select the authority to make health care decisions regarding your care. You can choose for the power of attorney to go into effect immediately, or you can specify that it will go into effect only upon your incapacity.

You may also wish to add a living will to your estate planning package. A living will gives your physician the authority to withhold all life-sustaining treatment and permit you to die naturally, taking no action to postpone your death. It is important to understand that for the living will to go into effect, you must be unable to communicate your wishes to your physician, and two physicians must agree that you are either in an unconscious state with no reasonable possibility of regaining consciousness, or that you are terminally ill and near death with no possibility of recovery. The living will instructs your physician to provide the care necessary to make you comfortable and relieve your pain.

In Ohio the terms of a living will "trump" a health care power of attorney, meaning that your physician can allow you to die in accordance with the living will even if the person holding your health care power of attorney does not agree with that decision. To avoid this result, have your lawyer add language to the healthcare power of attorney indicating that your attorney-in-fact has the last word regarding end-of-life decisions. So why have a living will at all if you are giving your attorney-in-fact the final word? Because by having a living will you make end-of-life decisions much easier for your attorney-in-fact, given that he or she will know your wishes. The living will also reduces the likelihood that there will be conflict between your attorney-in-fact and your other family members.

Finally, you should consult with your lawyer to discuss whether a trust would be a beneficial addition to your estate plan. There are many different types of trusts that meet a wide range of estate planning needs. The most common reasons for establishing an living trust are discussed in "Who Needs a Trust"

New Exemption Portability Rule Not a Panacea

The Federal Tax Relief Act that became law on December 17, 2010 contains a surprising new provision that is designed to help married couples fully utilize both of their lifetime exemptions from gift and estate taxes. An examination of the procedural steps necessary to take advantage of the measure demonstrates that it is not foolproof and should be thought of as a backstop rather than an exemption-saving panacea. In 2011 and 2012, the lifetime exemption amount is $5 million. Certain types of gifts are always exempt from the federal gift and estate taxes. The lifetime exemption amount allows an individual to give, in addition to gifts that are always exempt, $5 million in assets during life or at death without incurring any gift or estate tax liability.

When a married person dies during 2011 or 2012, any portion of the spouse's $5 million exemption that he or she did not use may be used by the surviving spouse’s estate to reduce or eliminate the surviving spouse's estate tax liability. If the first spouse to die uses none of his or her exemption, the entire $10 million may be used by the surviving spouse. Note, however, that the executor of the first spouse to die is not permitted to use any of the surviving spouse's exemption – the exemption amount for the first spouse is set at $5 million.

To illustrate how this exemption transfer works, assume that the first spouse to die, “A” passes away in 2011 or 2012 and that A made gifts worth $1 million during life, thereby using $1 million of his $5 million exemption. He dies with an estate of $2 million, and therefore uses $2 million more of his $5 million exemption to transfer his entire estate free of estate tax. The part of the $5 million exemption not used by A, $2 million, can be transferred by his or her executor to the surviving spouse, “B.” When B dies, assets equal in value to the exemption amount available to B under then-current law will pass to B’s heirs free of estate tax, and because A’s unused exemption amount was transferred by A’s executor to B, up to $2 million in additional assets will also pass to B’s heirs free of estate tax.

To take advantage of this exemption "portability," the executor for the estate of the first spouse to die must make an election on an estate tax return to transfer the decedent's unused exemption to the surviving spouse. The return must be filed even if the filing of an estate tax return would otherwise not be required. If the executor is not aware of the need to make the election, or if the executor misses the IRS estate tax filing deadline and has not been granted an extension, the ability to transfer the deceased spouse's unused exemption amount is lost. A failure by the executor to make the election and to file it on time could mean a seven-figure loss for the surviving spouse. For example, if the deceased spouse did not use $3 million of his $5 million exemption, a failure to transfer the $3 million remaining exemption to the surviving spouse would result in estate tax liability of $1,050,000 for the surviving spouse's estate if the surviving spouse's assets exceeded the value of her remaining exemption amount plus $3 million.

There are several reasons that an executor might fail or choose not to make the election to transfer the deceased spouse’s remaining exemption, including indifference toward the surviving spouse or even a desire to spite or “get even with” the surviving spouse. This might occur, for example, if the executor is a child of a prior marriage who feels that his or her parent was too generous with surviving spouse to the detriment of the child.

Married couples who allow this potentially costly matter to ride on the reliability and decision making of an executor are taking a serious and unnecessary risk. Credit shelter trusts will continue to be an essential component of proper estate planning for the well-to-do married couple.