A trust is a relationship, not an entity. It is created by a settlor (also referred to as a donor or grantor), who transfers legal title to property (the corpus) to a trustee, who holds the corpus for the benefit of one or more beneficiaries. The beneficiaries’ rights of enjoyment are set forth in the terms of the trust (also known as a “Declaration of Trust” or “Trust Agreement”). Trusts may be “Testamentary” (created at death, pursuant to the terms of a Will), or “Inter Vivos” (created during the settlor’s lifetime).
Under the Ohio Trust Code, a revocable trust (sometimes also known as a “living trust”) is a trust that the settlor can amend (change) or revoke (cancel) during his or her lifetime. Through the terms of the revocable trust, the settlor keeps all the benefits of any property placed into it for the rest of his or her life. The settlor also can be the trustee. The settlor’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 settlor’s death.
Why you may want to consider including a revocable trust in your estate plan:
You may wish to create a revocable trust to accomplish one or more purposes. One valid and legitimate purpose would be to avoid probate. If you, acting as a settlor, re-title your property in the name of the trustee of a revocable trust, that property is generally not subject to the jurisdiction of the probate court after you die. In essence, the trust – rather than the probate court – provides estate management for your family after your death.
A revocable trust, however, is not the only way you can avoid probate. For example, if you own assets jointly with a right of survivorship, those assets will pass by law to the survivor(s) when you die, and not be subject to probate. Be careful, however, about creating a joint account. The joint owner on the account 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.
A trust can also offer additional benefits, such as:
- Maintains 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.
- Avoids ancillary 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.
- Eliminates an election to “take against the Will.” Assets in a revocable trust are not part of the probate estate, so a surviving spouse’s elective share rights (“forced inheritance”) – available against probate property – are not available against a revocable trust.
- A trust may serve as a contingent beneficiary. This may be helpful if there are minor children, or children with poor spending habits.
- Estate and income tax planning.
- Protect trust assets from creditor’s claims against the settlor’s estate. Be aware, however, that creditors are entitled to reach the assets of a revocable trust during the settlor’s lifetime.
- Protect trust assets from creditor’s claims against the beneficiaries.
- Control the disposition of assets. 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.
Cautions – what a trust cannot do:
- A trust cannot avoid all taxes, nor does it make the property exempt for Medicaid purposes;
- Trusts cannot avoid all expenses. Establishing a trust is almost always more expensive than preparing a Will, although the administration of a trust at the settlor’s death is often less expensive than probating the Will;
- Trusts cannot avoid litigation;
- In most instances, a trust cannot protect the trust assets from the settlor’s creditors while the settlor is living.
Implementing a revocable trust is more time consuming than establishing a Will. The mere signing of a revocable trust agreement will not effectively avoid probate. The Settlor’s assets must be re-titled or otherwise validly transferred to the trustee of the revocable trust during the settlor’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.
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 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 settlor’s lifetime. Further, the Will is the appropriate document to name guardians for minor children. If the trustee is not the settlor or a member of the settlor’s family, periodic trustee fees usually will be incurred if the revocable trust is funded.
The Ohio Trust Code (OTC) governs the establishment of trusts in Ohio. A trust may be created only for lawful purposes which are not contrary to public policy. A trust is void to the extent it was created due to fraud, undue influence or duress.