Revocable Trusts
What is a revocable trust?
A trust exists when one person (often called the grantor or settlor) gives property
to another person (called the trustee) to hold and manage for one or more other
persons (called the beneficiaries). Under the Ohio Trust Code, a revocable trust
(sometimes also known as a “living trust”) is a trust that the grantor can amend
(change) or revoke (cancel) during his or her lifetime. Through the terms of the
revocable trust, the grantor keeps all the benefits of any property placed into it for
the rest of his or her life. The grantor also can be the trustee. The grantor’s spouse
or a trust company also often serves as trustee. A revocable trust can be funded
with any property such as checking accounts, savings accounts, brokerage
accounts, stocks and bonds, a home and other real estate. Some revocable trusts
may not be funded initially, but rather at a later time or at the grantor’s death. An
attorney can help advise when a trust should be funded and with what property.
The terms of a trust are described in writing in a document often called the
declaration of trust or trust agreement. This document is signed by both the
grantor and the trustee.
Why should I consider incorporating a revocable trust into my estate plan?
You may wish to create a revocable trust to accomplish one or more purposes.
First, you may wish to fund a revocable trust in order to avoid probate. If you,
acting as a grantor, re-title your property in the name of the trustee of a revocable
trust, that property generally is not subject to the jurisdiction of the probate court
after you die. Second, a trust can provide estate management for your family after
your death. Finally, you may wish to create a trust to reduce or defer estate taxes.
Before adopting a revocable trust, you should consult with an attorney.
What is probate?
When an Ohio resident dies owning probate property, a legal proceeding is begun
(1) to determine the last valid will of the decedent, if any; (2) to determine the
nature, extent and value of the decedent’s assets that are subject to probate; (3)
to establish the valid debts of the decedent; and (4) to establish the method of
distribution of the assets to the heirs or beneficiaries of the decedent after
payment of applicable debts, taxes and expenses. This proceeding is known as
probate. A more detailed explanation of the probate process is available in the
publication, “What you should know about . . . Probate,” published by the Ohio
State Bar Association.
Is use of a revocable trust the only way I can avoid probate?
No. There are several other ways to avoid probate. For example, if you own assets
jointly with one or more others who have rights of survivorship, those assets will
pass by law to the survivor(s) when you die, and not be subject to probate.
However, you should be careful before creating a joint account, because the joint
tenant will have rights in the joint property as soon as you create the account.
Payable-on-death (POD) bank accounts and certain assets that are payable to
designated beneficiaries such as proceeds from life insurance policies or pension
benefits will avoid probate. Transfer-on-death (TOD) designations for real estate,
securities and motor vehicles also avoid probate. You should consult with an
attorney before structuring your property to avoid probate, because each method
of avoiding probate described above has advantages and disadvantages.
Will having a revocable trust avoid challenges by my beneficiaries or heirs?
Disgruntled heirs or beneficiaries can challenge the validity of a revocable trust on
the same legal grounds as those available for challenging a will. It may be alleged
that a revocable trust is invalid because the grantor was incompetent at the time
of establishing the trust or was unduly influenced by another person to establish
the trust in a particular manner.
Although the period for challenging the validity of a will can be limited to three
months, a longer period (usually two years) is allowed for challenging the validity
of a revocable trust. The cost of defending the validity of a will, where the
executor acts in good faith, is payable from the probate estate. Similarly, the cost
of defending the validity of a trust would be paid from the trust assets.
What are the advantages of a revocable trust compared to probate?
The characteristics of administration of a revocable trust that a person may find
desirable are:
Privacy. The terms of a revocable trust are contained in a private document, while
the terms of a will, including the names of the beneficiaries, become a matter of
public record once the will has been filed with the probate court. In addition, other
information filed with the court during the probate process, such as the inventory
of assets and the written account of all receipts and disbursements of the estate,
also become matters of public record. The administration of a revocable trust
generally is not made public.
Control. The absence of any requirements to file a will or any other reports with a
court increases the independence and control of the trustee, relative to an
executor.
Lower costs. Some publications make extravagant claims about the extent of the
costs of the probate process. The typical components of cost in the probate
process are:
• court costs
• appraisal fees;
• executors’ commissions; and
• attorney fees.
While court costs will vary with the activity in the estate, they often average $200-
$250. A revocable trust would not bear these costs.
Appraisal fees might be incurred to determine the value of real estate for estate
tax purposes, if estate tax is applicable. Appraisal fees may also be incurred for
property such as artwork, jewelry, collections, and interests in private companies.
A revocable trust also may incur these appraisal costs. If estate tax applies, the
estate or trust must file an estate tax return. In order to accurately complete any
estate tax returns, it will be necessary to appraise the value of the estate’s assets.
Ohio’s estate tax has been repealed for decedents dying after December 31, 2012.
Appraisals also can establish the basis of estate property for federal income tax
purposes.
Executors’ commissions are set by state law and are based, generally, on a
percentage of the value of the assets of the estate. At present, the commission
varies between one and four percent of the value of the assets (combined with the
income on those assets) depending on the nature, amount and title of the assets
at death. However, spouses and other family members often act as executors and
often waive any commissions. A trustee of a revocable trust also is entitled to
payment for services, but the law does not set the amount of such payment. A
trustee is entitled to a “reasonable” fee appropriate to the circumstances. Again,
spouses and other family members who act as trustees often waive the trustee’s
fees.
An executor may hire an attorney to assist in the administration of a probate
estate. Similarly, a trustee may hire an attorney to assist in the administration of a
revocable trust following the death of the grantor. The terms of the revocable trust
typically do not require the preparation of an inventory or the preparation of
accounts. Therefore, the attorney fees are often lower for services to the trustee
because the attorney does not need to spend time preparing probate filings.
However, the cost of attorney advice and services with regard to income tax and
any estate tax issues is likely to be similar regardless of whether the advice is
provided to the executor of the estate or to the trustee.
Speed of transfer. A trustee may begin making distributions of assets to
beneficiaries moments after the death of the grantor. An executor may not
distribute assets until after he or she is appointed by the probate court after the
will is admitted to probate. Appointment generally occurs within one to two weeks
after death. Once appointed, the executor is legally empowered to distribute all
the probate assets to the beneficiaries. However, usually it is not prudent for
either a trustee or an executor to immediately distribute assets.
An executor may be personally liable for the claims of creditors left unpaid by the
estate as well as any unpaid federal and Ohio estate taxes. Consequently, the
executor generally will not make final distribution to the beneficiaries until the
executor is satisfied that all valid claims have been paid and all estate taxes have
been finally determined and paid. The trustee of a revocable trust also may be
held personally liable for unpaid estate taxes and, in some circumstances, unpaid
creditors.
Avoidance of multiple probate proceedings. If homes or other real property are
owned in a number of different states, a revocable trust may be especially useful
for avoiding separate probate proceedings in two or more states.
What are the disadvantages of a revocable trust compared to probate?
Lifetime effort. Implementing a revocable trust is often more time consuming than
establishing a will. The mere signing of a revocable trust agreement will not
effectively avoid probate. The Grantor’s assets must be re-titled or otherwise
validly transferred to the trustee of the revocable trust during the grantor’s lifetime
in order to avoid probate. Any assets acquired AFTER the revocable trust is
created also must be titled in the name of the trustee in order to avoid probate.
Lifetime costs. While a revocable trust may have cost advantages relative to
probate following death, a will generally has cost advantages relative to a
revocable trust during an individual’s lifetime. The costs associated with creating a
revocable trust generally are higher than the costs of creating a will. The
execution of a revocable trust does not replace the need for a will. A will generally
names an executor to administer assets that were not transferred to the trust
during the grantor’s lifetime. Further, the will is the appropriate document to name
guardians for minor children. If the trustee is not the grantor or a member of the
grantor’s family, periodic trustee fees usually will be incurred if the revocable trust
is funded.
Absence of court review. Generally, the administration of a revocable trust will not
be supervised by any probate court except in very unusual circumstances. While
this avoids the preparation of documents and expense imposed by the probate
process, persons creating a revocable trust should consider that the trustee they
appoint will not be subject to oversight by a judge for the honest and accurate
distribution of assets unless a beneficiary files a lawsuit. Accordingly, an individual
should have a high degree of confidence in the person whom he or she names as
trustee.
Taxation disadvantages. The Internal Revenue Code has some provisions that are
more beneficial to estates than to trusts, but revocable trusts can elect to be taxed
like an estate for a limited period to eliminate these tax differences.
Will a revocable trust help me while I am living?
A revocable trust may provide a structure for the management of a person’s
assets. This structure could be particularly useful if the trustee has investment
expertise or the trustee retains investment counsel. The asset management
function of a revocable trust can become particularly important if the grantor
becomes incompetent or is otherwise incapable of handling financial affairs. If a
revocable trust is in place, it may not be necessary to have the court appoint a
guardian for the grantor’s estate. Even if this becomes necessary, the trustee of
the revocable trust, rather than the court-appointed guardian, would continue to
have authority over property owned by the trust.
One way to help reduce the need for a court-appointed guardian is for the grantor
to have a durable financial power of attorney. Through such a document, an
individual (called the principal) gives another individual (the attorney-in-fact or
agent) the power to manage his or her assets. For more information about
financial powers of attorney, see the Ohio State Bar Association’s publication,
“Financial Powers of Attorney.”
Will my revocable trust save income taxes while I’m alive?
No. For all income tax purposes, you, as the grantor of the revocable trust, will
have to pay taxes on the income earned by the assets transferred to the
revocable trust. In most cases, the trustee of a revocable trust uses the grantor’s
Social Security number for income tax reporting and does not obtain a separate
tax identification number. Generally, the trustee of a revocable trust does not file
annual income tax returns during the grantor’s lifetime.
Will I save estate taxes with a revocable trust, compared with a will?
Estate taxes are not based on the way in which assets are passed to beneficiaries
at the owner’s death. Rather, they are based on the value of the assets you own,
control or benefit from, and to whom the assets pass. Generally, avoiding probate
does not decrease estate taxes. Depending on the terms of your will, revocable
trust or probate-avoidance techniques, estate taxes may be increased, decreased
or deferred. Most people will not have to pay estate taxes, however. Ohio
repealed its estate tax with respect to persons dying after December 31, 2012.
Under current law, unless your property (including trust property) is worth more
than $5,430,000 in 2015 (adjusted for inflation in future years), federal estate tax
will not apply.
Will a revocable trust protect my assets against creditors?
Creditors are entitled to reach the assets of a revocable trust during the grantor's
lifetime. Creditors generally may reach the assets of any trust to the extent that
the grantor can enforce his or her own rights to trust assets. Upon the death of the
grantor, it is uncertain under Ohio law whether creditors of the grantor may
enforce claims against a revocable trust. A surviving spouse may not have elective
share (forced inheritance) rights against a revocable trust as would be available
against probate assets.
Can I preserve assets in a revocable trust and still qualify for Medicaid?
No. The assets in a revocable trust are countable resources for purposes of
Medicaid qualification. The assets in the revocable trust are treated just the same
as if they were owned by the grantor.
If I decide a revocable trust may be right for me, how should I set one up?
If you believe that a revocable trust may be right for you or if you are not sure if a
revocable trust is right for you, consult with an attorney who is knowledgeable in
probate, estate planning and taxation. After gaining information about you, your
family, and your assets, and listening to your goals, your attorney will be able to
discuss with you the best ways of achieving your goals and help you decide
whether a revocable trust is best for you. To achieve the best results, the drafting
of a trust agreement requires professional judgment.
02/10/2015
© February 2015 Ohio State Bar Association
Funding from the Ohio State Bar Foundation
This is one of a series of LawFacts public information pamphlets. Others may be
obtained through www.ohiobar.org/LegalHelp
The information contained in this pamphlet is general and should not be applied
to specific legal problems without first consulting your own attorney.
