Legal-Ease: I have a trust, now what?

A trust is most commonly understood as being a set of rules. Prior to 2013, trusts helped many married people save on estate taxes. Under the current law, in most instances, trusts neither help nor hurt married people’s estate tax obligations, because the trigger/threshold for estate tax obligations to kick in for married people is now almost $26 million.

For most people, the biggest value of a trust is the ability to avoid probate.

Illustratively, owning a car with cruise control does not mean that you are using cruise control. Similarly, simply having a trust does not mean that your assets will avoid probate.

To properly use a trust, assets must be made subject to the rules of the trust, usually by transferring ownership of those assets to the trust.

Of course, a trust cannot own anything itself because a trust is simply a set of rules. Therefore, titling ownership of an asset into the name of the trust (and making the asset subject to the rules of the trust, which rules avoid probate) involves titling the asset into the name of the trustee (trust administrator) specifying that the trustee is just nominally holding title to the asset subject to the rules of the trust.

Thus, technically, putting an asset into a trust retitles ownership into the name of the trustee of the trust.

For example, I could re-title assets into my trust by changing the listed ownership of these assets to “Lee Schroeder, Trustee of the Lee Schroeder Trust.”

Typically, for bank accounts, life insurance policies, real estate and business interests, those assets can be easily titled into the trust through a deed, bill of sale or other ownership change form or document.

Very importantly, retirement accounts (IRAs, 401Ks and pensions) are seldom able to be owned by trusts. The public policy reason for this situation is that retirement accounts that have tax advantages are designed to be used by people during retirement.

Therefore, putting any extra rules (trusts) on money that the government wants people to eventually freely use in retirement would likely decrease the spending of that money. Slowing down people’s spending of retirement funds in retirement is inconsistent with the public policy of encouraging retirees to assertively and completely spend their retirement funds in retirement.

Some people may want to make any “leftover” or unspent retirement funds payable to a trust when the retiree dies. This is challenging because it usually precludes beneficiaries from “stretching” the receipt of the IRA proceeds (and taxes) over a number of years.

Beneficiaries of a trust who receive an IRA through a trust (i.e. if the IRA is payable on death to the trust) are usually forced to liquidate the retirement account in the year of the accountholder’s death and cannot stretch the IRA’s liquidation over years.

Certain trusts called “see through” can be “pay on death” recipients of IRA accounts with stretching capabilities for the beneficiaries, but the requirements on the contents of see through trusts are detailed and strict.

Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.