Q:       What is a trust?
A:        A right of property held by one party for the benefit of another, usually in writing.

Q:       Who are the parties?

       A:        The person creating the trust is called the grantor (or sometimes the settlor, trustor or creator), and the other party is known as the trustee. A beneficiary receives benefits from the trust created by the grantor and administered by the trustee. The trust may, and usually does, provide benefits for more than one beneficiary. Sometimes, the same person may be grantor, trustee and a beneficiary.

Q:       What is a revocable trust?

       A:        A revocable trust, commonly known as a “living” trust, is the most popular kind of trust. During the grantor’s life, the trust is “living,” and the grantor can add to it or subtract from it at any time, for any reason. The grantor may also amend, restate or revoke (cancel) the trust. When the grantor dies, the trust becomes irrevocable. 

Q:       What is the purpose of a revocable trust?

A:        Probate avoidance is one major purpose. Others include privacy, more efficient administration of the grantor’s affairs after death, ongoing financial management of trust property, and ultimate disposition of the balance of trust property.  For example, trusts are often created by parents for the benefit of their children. The trustee has discretion to pay the children’s college expenses and, if funds remain, pay the balance to the children as they mature.

Q:       What is trust property?

A:        The grantor transfers assets to the trustee, including cash, stocks, bonds, real estate, CDs, brokerage accounts, insurance policies and personal property. By doing so, the grantor converts “probate” property (governed by the will) to trust property (governed by the trust).

Q:       What is probate?

A:        “Probate” describes the process of proving a will. In each Ohio county, a probate court oversees the proving of wills, the gathering of assets, the payment of expenses and distribution of the balance to those named in the will. If there is no will, Ohio law governs the administration of a decedent's estate. While it is sometimes slow and expensive, the probate court serves as an overseer to protect and safeguard the decedent’s beneficiaries.

Q:       Will I save estate taxes by creating a revocable trust?

A:        No, but Ohio repealed its estate tax on deaths after December 31, 2012.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. 

Q:       Will I save income taxes by creating a revocable trust?

A:        No. A grantor is considered the owner of the income from the property that is held in trust and is reported on the grantor’s personal income tax return. Upon your death, the trust usually transfers its income to the beneficiaries. In turn, that income is taxed to the beneficiaries at their personal income tax rates.

Q:       What are the advantages of a revocable trust compared to probate?

A:        Privacy. A revocable trust is a private agreement between the grantor and trustee and is not subject to public scrutiny after the grantor’s death. Probate matters are reported to probate court after the grantor’s death and are open to public review.

            Control. A trustee of a revocable trust has more independence, flexibility and control than an executor of a will because a trustee does not file reports and accounts with a court, although the Ohio Trust Code requires the trustee to provide mandatory financial reports to beneficiaries).

            Lower Costs. A revocable trust avoids probate costs, which typically include court costs, appraisal fees, bond premiums, and executor commissions.   Attorney fees are usually less.

            Efficiency. The trustee may distribute trust property to beneficiaries soon after the grantor's death.

            Avoidance of Multiple Probate Proceedings.  If real estate is owned in other states, a revocable trust may be used to avoid separate probate proceedings in those other states.

Q:       What are the disadvantages of a revocable trust?

A:        Initial Cost. Education, preparation and implementation of a revocable trust will be more expensive than creating a will. 

            Absence of Court Review. Because probate court does not oversee the administration of a revocable  trust, the risk of error, whether intentional or unintentional, may be greater than the probate of a will.

            Longer Statute of Limitations. A challenge to a revocable trust must be made within two years, whereas someone wishing to challenge a will must do so within three months.

Q:       Who should prepare my revocable trust?

A:        You should consult with a lawyer skilled in probate, estate planning and tax matters. Be wary of creating a revocable trust without consulting directly with a lawyer first. 

This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by Paul S. Klug, a partner with the Cleveland firm, Ziegler Metzger, LLP. The column offers general information about the law.  Seek an attorney’s advice before applying this information to a legal problem.

Q:       Weren’t estate taxes eliminated in Ohio?

A:        While the Ohio estate tax was repealed effective January 1, 2013, a decedent’s estate may have to pay a federal estate tax if the gross estate is more than $5.34 million dollars (“the exempt amount”).

Q:       What is the tax rate for estates that exceed the exempt amount?

A:        The tax rate is 40 percent.  This rate also applies to generation-skipping transfer tax (when, for example, a distribution is made from a grandparent to a grandchild).

Q:       Can any tax deductions be taken from the decedent’s gross estate?

A:        Yes. Typical deductions include expenses associated with the decedent’s funeral and burial, debts and obligations, gifts to charities and most transfers to the surviving spouse.

Q:       Should an estate file a federal estate tax return if all assets are transferred to the surviving spouse?

A:        Maybe. When the decedent’s gross estate exceeds the exempt amount, a return (Form 706) must be filed even if the taxable estate is zero. Also, the estate may elect to file a return when the gross estate is less than the exempt amount. Doing so may allow the surviving spouse to leave combined net assets of $10.68 million dollars in the estate, but the family would not have to pay federal estate taxes. 

            For example, let’s say a man dies and leaves $4 million dollars to his wife. His wife does not have to file a federal estate tax return.  If the wife has $4 million dollars of her own assets plus the $4 million dollars she inherited from her husband, her gross estate would be $8 million. Approximately $3 million dollars of this $8 million would be subject to federal estate taxes. However, if she files a federal tax return at the time of her husband’s death, she can claim the unused exempt amount of $4 million dollars for her husband as well as her own exempt amount. This will leave her with a combined $8 million dollar exempt amount, which will eliminate the federal estate tax.

Q:       Will accounts held as “transfer on death” or “payable on death” avoid federal estate tax?

A:        No. The transfer of property can be accomplished quickly after a person’s death through the titling of assets as “transfer on death” or “payable on death,” but most of these assets will not escape estate tax liability.

Q:       Can I give all of my property away during my life to avoid estate taxes?

A:        No. The federal tax structure is considered a “unified” estate and gift tax system. This means that transfers made while you are alive are added together with those that are distributed when you die to determine if your total assets exceed the exempt amount. This is called a lifetime computation.

Q:       How does the federal gift tax work?

A:        Under the current law, an individual can give $14,000 (“the annual exclusion”) to another person (the “donee”) without filing a federal gift tax return. The annual exclusion is based on the amount of the gift made to each donee and not on the total amount given by the donor. For example, one parent can give $14,000 to each of his or her four children (a combined gift of $56,000) without filing a gift tax return. If the donor is married, the annual exclusion can double (called “gift splitting”). Thus, this couple could give $28,000 to each child without filing a gift tax return even though only one spouse made the gift. When the aggregate amount exceeds $14,000 per donee, a gift tax return (Form 709) must be filed by April 15 following the calendar year. The excess amount over the $14,000 reduces the future exemption amount available when the donor dies.

Q:       I received a gift of property from my parents. Do I have to pay taxes on its value?

A:        No. You do not have to report the gifted asset as income. However, if you sell the property at a later time, then you will have to pay income taxes based on your parents’ basis. “Basis” is the amount a person pays to purchase a property plus whatever the person spent to improve the property. For example, let’s say a couple paid $15,000 for their home in 1950.  When they deeded the house to their only son in 2014, its value was $100,000. When their son sells the home, he will have a capital gain of $85,000. The son will have to pay taxes on this capital gain amount. 

This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by attorney James B. Curtin of the Columbus firm, Hrabcak & Company, L.P.A. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.