G.Mitchel Lippert, Attorney at Law

TO TRUST OR NOT TO TRUST?

    This probate matters column discusses whether or not a person should consider having an attorney experienced with trusts create a trust into which part or all of his or her assets would be placed.  A trust is a legal entity created according to state and federal law which is usually operated as stated in a trust agreement.  When an asset such as a bank checking accoount is placed in a trust, the title of the account is changed from being in the owner’s name to being in the name of the trustee of the trust.  As long as the trust will ultimately benefit someone in addition to the owner of the asset placed in the trust, its trustee may often be the original owner of the asset if living and mentally competent.  The bank checking account of “John Doe” would be placed in his trust by being retitled the account of “John Doe, Trustee of the John Doe Trust” with a further description not required on checks “under a trust agreement dated Jan.2, 2013”.  This puts the account under the control of John Doe as trustee, and upon his incompetency or death the successor trustee named in the trust agreement, to be managed, invested, and distributed.
    Two basic kinds of trusts are the living, or intervivos, trust and the testamentary trust.  A living trust may be immediately put to use by the person having it created, called the grantor, settlor, or trustor.  It does not come under the authority and oversight of the probate court unless asked to address a matter involving the living trust.  To the contrary, a testamentary trust cannot be used until the grantor has died, is usually set forth in the grantor’s will, and is under the authority and oversight of the probate court.  Of course, the grantor of a testamentary trust cannot be the trustee of this kind of trust.
    Since Ohio law now provides the means by which most of a person’s assets can be directed upon death to the desired beneficiary(ies) without probate administration, it is now unnecessary to have created and put one’s assets in a living trust solely for the purpose of avoiding their required probate court transfer to beneficiaries.  If avoidance of probate court administration is not the only reason for creating and using a living trust, what are other reasons for having a living trust?
    Another frequent reason for having a living trust is to limit the use of a trust’s assets, which would otherwise be distributed to a beneficiary when he or she becomes an adult at eighteen years of age, by the trustee carrying out the requirements stated in the trust agreement.  These requirements would include at what age or ages an outright distribution(s) would be made to the beneficiary(ies) and stating for what the assets may be used before their complete distribution.  For example, if a husband and wife want their assets to be equally divided and distributed to their three children, who are currently in their thirties, when both parents are deceased, what do they want done if one of their children dies before both of them leaving two surviving grandchildren, ages ten and fourteen years?  One choice is to have the assets be divided and distributed only to the surviving children.  This choice would withhold financial assistance from the grandchildren whose parent is now deceased, who might need assistance more than the surviving children.  If the grandchildren (children of a deceased child) receive their parent’s share of the grandparents’ assets,  the grandparents’ living trust could direct they be used for the grandchildrens’ basic needs, if necessary, then as needed to help finance the cost of any post high school education, make a down payment on a house, or start a business followed by the outright distribution of remaining funds at a certain age when the grandparents hope the grandchildren will be financially mature. Until the total distribution of assets in the trust, they will be managed, invested, and distributed as carried out by the trustee according to the language of the trust agreement.
    Since the space for this column is limited, the next installment will take a look at some other reasons for using a trust.  Moreover, any discussion of other types of trusts and their purposes will only acquaint you with some of the beneficial uses of trusts.  To find out if there is a type of trust suited to and beneficial for your situation, consult an attorney experienced in trust matters. 


     
          



               


TO TRUST OR NOT TO TRUST?
Part Two


    This is a continuation of my last column and is to further explore some of the various uses of trusts.
    One fairly common use of a trust called a marital deduction, credit shelter, or AB trust has been to reduce or eliminate estate taxes.  While the need for this type of trust still exists in some circumstances, changes in the value of assets not subject to estate tax has greatly reduced this need.  For persons who die this year and after there is no Ohio Estate Tax.  Although the Federal Estate Tax continues to exist, the value of assets exempt from it are significant as found in the American Taxpayer Relief Act (ATRA) signed into law January 2, 2013.  For anyone who dies this year 5.25 million dollars in value of their assets minus the taxable value of any gifts made while living is free from this tax.  The tax free amount increases each year based on inflation.  Further, if a married person dies this year and doesn’t have 5.25 million dollars or more in taxable assets, the amount of this exemption which is not used can be passed to their surviving spouse simply by an election on the Federal Estate Tax form 706.  For example, if the spouse who died this year has only two hundred fifty thousand dollars worth of taxable assets, five million can be added to the surviving spouse’s exemption, making it 10.25 million dollars in value of assets free from Federal Estate Tax this year with inflationary increases in future years.  This is called portability. 
    If a child or children to whom assets of considerable value may be transferred have substantial assets of their own, some or all of the assets of a grandparent may be passed to a grandchild or grandchildren.  This avoids any estate tax on these assets for the child or children of the person who died, is called a generation skipping transfer, and would best be carried out by a generation skipping transfer trust.  An important caveat is that the total value of assets transferred to grandchildren, that is, skipping the children’s generation, should not exceed 5.25 million dollars in value this year.  This generation skipping transfer tax exemption is also increased annually by an inflationary amount.  Assets transferred in value more than the generation skipping transfer tax exemption when a generation is skipped result in a 40% generation skipping transfer tax in addition to a federal estate tax of 40% or more on those assets over the exempt amount in value, resulting in a total federal tax liability of 80% or more.   
    A type of trust which can be used to greatly reduce or eliminate the amount of federal estate taxes owed by an estate having a value that would otherwise have significant federal estate taxes is an irrevocable life insurance trust (ILIT).  The trustee of this trust must be independent, that is, cannot be the person who establishes the trust.  Once the trust is created, the trustee applies for life insurance on the life of its creator (the
grantor).  The trust is named beneficiary of the insurance.  By the grantor’s annually gifting funds to the trust with the beneficiaries being given written notice of their right to withdraw each’s share, the trust obtains sufficient funds to pay the annual premium assuming the beneficiaries do not withdraw the funds.  If the insurance is in force on the grantor’s death, the insurance proceeds are paid to the trust  and used to pay any estate tax owed with the balance going to the beneficiaries.  The benefit of a properly created and carried out ILIT is that the life insurance proceeds are not taxed.
    A final type of trust I will discuss is a Supplimental Needs Trust.  This trust is created to provide funds for non-basic needs of a disabled child or adult who is receiving federal funds for his or her basic needs.  Funds placed in this trust are permitted only to be used for the disabled person’s expenses that are not basic needs, that is, for those things which can enrich the disabled person’s life.  Receipt of funds for the non-basic needs in this way does not affect the government assistance also being received.
    These descriptions of some of the kinds of trusts  and their uses are to acquaint you with some of the beneficial uses of trusts, there being other kinds of trusts with other benefits.  On January 1, 2007, Ohio law pertaining to trusts was revised and updated in  the Ohio Trust Code.  This code describes other types of trusts including trusts for pets, charitable trusts, wholly discretionary trusts, and legacy trusts.  To learn more about a trust which might be suited to and be beneficial for your situation, consult an attorney experienced in trust matters.