by Hans M. Zimmer
As an attorney working in the estate planning field for the past 25 years, I usually get asked the very basic question: should I just do a simple will or is a trust better for my estate plan? The answer to this question is never just “yes”, never just “no”, and before the question can be answered, a detailed review of each client’s situation is necessary. In addition, before the question can be answered, a short review of what a will is (and isn’t) and what a trust is (and isn’t) is useful.
What is a will?
In its simplest form, a will is a written document signed by the testator (the person making out the will) and under Ohio law, witnessed by 2 individuals not related to the testator. The will gives direction as to who is to receive your property at the time of your death. The will also appoints an executor who is the person you provide with the authority to administer your estate after your death. In the event you have minor children, the will can also appoint guardians for your children. A will is revocable (can be changed) at any time prior to your death and only becomes effective at the time of your death. Court action is required to “probate” the will, which means to appoint the executor and/or guardian and to issue court orders directing the disposition of your property in the manner stated in your will. All probate court records are available to the public.
What is a trust?
In its simplest form, a trust is a written document that provides for both lifetime and after-death directions as to the management and distribution of your assets. During your lifetime, you act as your own trustee with full control over your assets and the trust document will provide for a successor trustee to manage the trust in the event of your death or disability. Court action is not required to appoint a successor trustee, to manage your property during your lifetime or after your death and none of your financial information ever becomes a public record, before or after your death.
Trust versus Will
Trusts have many advantages over wills but what can’t be overlooked is that trusts do involve more upfront cost. This is true simply because wills are far simpler and less time-consuming to draft. Trusts can save considerable expense and time after a person dies or becomes incapacitated that in nearly all situations more than makes up the added cost of the preparation of the trust. In addition to the cost involved, I like to ask 3 basic questions on the will versus trust issue:
Do you have minor children? If you do, I typically recommend a trust for several reasons:
Without a trust, any funds left to minor children must be placed into guardianship accounts for the benefit of your children. These funds can only be accessed by the guardian by presenting the court with a request to use funds and the court issuing an order allowing the use of the funds. This is true for any expense incurred by the guardian, no matter how reasonable it might seem. The guardian is also required to file an annual account with Probate Court summarizing all income and expenses.
Funds held in guardianship accounts must be disbursed to the minor children at age 18, no matter how large the amount of those funds may be. If you have any desire to keep funds set aside for paying for your child’s college or just want to see that your child makes it on his or her own before getting an inheritance, trusts are the only realistic option.
Funds held in guardianship accounts are subject to restrictions imposed by the Probate Court on permitted investments. Under Ohio law, guardianship funds can only be invested in CDs, money markets or other investments guaranteed not to lose principal. Stock and bond investments are not permitted.
Do you have any children, grandchildren or dependents with special needs?
If you have any individual who may inherit property from you who has special needs, i.e., is disabled, a trust is very appropriate. Many times, individuals with special needs receive government assistance in the form of Social Security Disability, Medicaid or other benefits. In the event those individuals receive an inheritance from you, the government benefits could be eliminated or reduced. Trusts can be structured such that any inheritance from you can still be used for your disabled child or grandchild’s benefit without jeopardizing any government benefits.
Will your estate be subject to estate tax at the federal level?
If the value of your estate exceeds the current threshold limit for the federal estate tax ($5,000,000 until December 31, 2012), the use of a trust with special estate tax planning provisions may be appropriate. The threshold level has changed frequently over the past several years and will change again at the end of this year to an as yet undetermined amount. Rumors have been circulating for figures anywhere between 1 million and 10 million but we will not have certainty on this until very late in 2012. My recommendation to clients has always been to worry about the family plan first, then look at the best way to structure a plan for tax planning. The right thing from the family perspective is the primary concern and a plan to avoid or minimize taxes can be structured to take into account most, if not all, family planning issues.
So what is best for you? I probably haven’t answered that question because as I said in the start of this article, the answer is not always “yes” and not always “no.” Your family and financial situation are the drivers of any decision in this area and what is right for one family will not be right for the next family. It is far beyond the scope of this article to address all the intricacies of wills and trusts, but I hope that this material gives you some information that allows you and your attorneys to make an educated decision on this important issue.