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Bypass Trusts

Ohio Bypass Trusts – Cleveland, Ohio Attorney

Cleveland, Ohio Trust Attorney

Ohio Bypass Trusts

Bypass trusts, or “credit shelter” trusts, have historically been an important estate planning tool that shields probate assets against estate taxes.  Most often, a bypass trust is found in your spouse’s will.  Each spouse directs that if you are the first spouse to die, then your solely owned assets be used to fund the bypass trust with up to whatever personal estate tax exemption is at the time.  Since 2013, the estate tax exemption is $5.25 million.  After death, money is used to fund the trust.  The money can come from a variety of sources including, probate assets, assets in a revocable living trust, life insurance policies, and retirement accounts.  Note however, that some retirement accounts cannot avoid certain federal taxes.

For example, say Molly dies leaving her son $1 million in a 401K plan.  Molly directs the money to a trust.  The trustee is to pay the trust ‘income’ to the son annually, and distribute the principal to the son when he reaches age 35.  The 401k plan distributes a $million lump sum to the trustee a few days after Molly’s death.  Barring an unusual provision in the trust instrument or applicable state law, the entire $1 million plan distribution is considered the trust ‘corpus.’  On the federal income tax return for the trust’s first year, the trust must report $1 million in gross income.  The trustee invests the money that’s left after paying the income tax on the distribution, and pays the income from the investments each year to Molly’s son.

If properly structured, assets in a bypass trust will not be included in your surviving spouse’s estate.  Instead, the money will ‘bypass’ your spouse’s taxable estate at their death and pass tax free.  Any amount in excess of the current federal estate tax exemption would then be distributed outright to the surviving spouse or is used to fund a marital trust or qualified terminable interest property (QTIP) trust.

Although bypass trusts have been used for years, they have become somewhat unnecessary.  Since 2013, the new laws allow a surviving spouse take up to $5.25 million tax free.  This is because the new laws allow this amount under the federal estate tax exemption.   Thus, unless you have a fairly large amount of assets, a living will would do the trick and allow for $5.25 million to be passed on tax free.

For larger estates, bypass trusts can offer advantages.  For example, growth in the assets of a bypass trust are not excluded from the gross estate of the surviving spouse and may run up against the estate tax exemption amount in effect when the surviving spouse dies.  In addition, any lifetime gifts you make that are taxable will decrease your estate tax exemption amount – decreasing the amount that can be put into the trust at your death.

For more information on trusts, living wills, or other estate planning tools, call Cleveland, Ohio attorney Dan Baron at Baron Law.  Baron Law provides legal representation to business owners and individuals.  Call today for a free consultation at 216-573-3723.  You will speak directly with a Cleveland, Ohio attorney who can help you with your legal needs.

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Estate Planning – Protecting your Children Through Testamentary Trusts

From Cleveland, Ohio Estate Planning Attorney Dan Baron:

Estate planning attorneys will tell you that testamentary trusts are a great way to protect your children and plan for your estate.  Below are 10 things to know about testamentary trusts and how they might fit into your estate plan.  To learn more, contact Cleveland, Ohio estate planning attorney Dan Baron at Baron Law LLC.

  1. What is a testamentary trust?

A testamentary trust is a trust usually coupled with your last will and testament.  Contrary to many living trusts, a testamentary trust is revocable and will not take effect until you die.  The trust provides for the distribution of all or part of an estate and often proceeds from a life insurance policy held on the person establishing the trust.   You can have more than one testamentary trust in your will.

  1. Why choose a testamentary trust?

Most often a testamentary trust is used to protect your children.  For example, if husband who has a will dies in an automobile accident, his estate would pass to his wife.  However, if both husband and wife are die in the accident, leaving their two minor children behind, a simple will will not provide a plan for the estate. Thus, a testamentary trust may provide guidelines as to how the estate is passed to their children.   There are other trusts to consider.  Contact your estate planning attorney to learn more.

  1. How do you create a testamentary trust?

As mentioned above, the most common way in Ohio to create a testamentary trust is to include the necessary language in your will.  The creator of the trust (known as the “settlor”) dedicates a Trustee who then administers trust.  For example, in the event both spouses die, the trust might make the estate pass to their children at the age of 18.  Or, the estate might pass in the even one of the kids gets married.  It is recommended that an estate planning attorney create your trust.

  1. When is a testamentary trust created?

Unlike living trusts, the money is not distributed automatically.  Many people believe that testamentary trusts avoid probate.  However, there still are some probate considerations that are involved.  In Ohio, typically a testamentary trust begins at the completion of the probate process after the death of the person who has created it.  It is recommended that an estate planning attorney help guide you through setting up the trust.

  1. What is the term?

A testamentary trust lasts until it expires, which is provided for in its terms. Typical expiration dates may be when the beneficiary turns 25 years old, graduates from university, or gets married.

  1. How is the probate court involved?

As mentioned above, a testamentary trust will not automatically take effect.  Before the creator dies,  the probate court checks up on the trust to make sure it is being handled properly.  Once the creator dies, the beneficiaries of the estate should contact an estate planning attorney to carry out the trust.

  1. Who can be the trustee of a testamentary trust?

Anyone can be a Trustee for a testamentary trust.  However, it is recommended that the Trustee be someone that the creator trusts.  The Trustee will have great responsibility in administering the deceased’s wishes.

  1. Does the trustee have to honor the terms set out for expenditures in the will?

It depends.  Ultimately it is up to the Trustee to determine whether a certain act or time has occurred in order to distribute the estate.  Some of these events are very easy to figure out.  For example, if the trust provides that the estate be distributed upon a marriage, that event is easy to determine.  Conversely, if the trust provides that a certain dollar amount be distributed upon a child “finding a good job,” it becomes more subjective for the Trustee.  Thus, it’s imperative to hire a qualified estate planning attorney to help draft a will or trust.

  1. When can I opt out of a trust?

Generally, if the person’s estate is small in comparison to the potential life insurance proceeds or other amounts that will be paid to the estate at death, a testamentary trust may be advisable.

  1. How much does it cost to set up a testamentary trust?

It is generally inexpensive to set up a will with a testamentary trust.  In most cases, attorney Dan Baron at Baron Law LLC can set up a testamentary trust for less than $1,000.  If the estate plan is more complicated, the legal fees may be higher.  If you are interested in setting up a trust or estate plan, contact a Cleveland, Ohio estate planning attorney.  Call Baron Law LLC today at 216-573-3723.  You will speak directly with an attorney who can help with your estate planning needs.

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Building a Charitable Contribution in your Estate Plan

Estate Planning Charitable Donations

Have you ever considered incorporating a charitable donation into your estate plan?   Aside from the tax benefits, including charitable giving into your estate plan is a wonderful way to extend your legacy and show your generosity.  And contrary to public belief, charitable giving in your estate plan is not just for the very wealthy.   Through an estate planning attorney, there are several good ways to provide for your family while also giving to your favorite causes.

  1. Charitable Contributions through Your Will

The easiest and least complicated way to include a charitable contribution in your estate plan is through your will.  The amount you charitably contribute won’t reduce your income taxes, but it may decrease your taxable estate.  In addition, this may potentially increase the amount you’ll be able to leave to your heirs.  Talk with an estate planning attorney to learn more.

  1. Charitable Contributions through Your Retirement

You can also contribute to your favorite charity by donating a portion of your retirement account. Donating a retirement account is tax-effective and pretty straightforward.   A donor must simply designate the charity as the beneficiary on your account to receive the tax benefit.  Charities are exempt from both income and estate taxes.  Thus, the charity can receive 100% of the account’s value while your children or heirs receive their portion of the estate through non-retirement assets.  Consult with an estate planning attorney to learn more.

  1. Split-interest gift

Another way to make a charitable contribution is through a split-interest gift.  Through a split interest gift, you can donate assets to a charity but may also retain some of the benefits of holding those assets.  Here, the donor opens and funds a trust in the charity’s name and receives a charitable income tax deduction at the time of transfer.  Just like with other trusts, here the donor retains some rights to the property and may be able to avoid capital gains on the assets transferred.  Talk with an estate planning attorney to learn more about split-interest gifts.

Some ways to provide split-interest gifts include:

  • Charitable remainder trust (CRT): A CRT is an irrevocable trust that provides either a fixed payment or a fixed percentage to the donor (or other beneficiary) every year.  The term of the trust can for the life of the donor or a set number of years.   At a minimum, the donor must take annual payments from the trust no less than 5% but no more than 50% of the property’s fair market value.  At the end of the term, the remainder goes to the designated charity.  To maximize payments during the lifetime of the donor, the trust should appreciate value while receiving payments in the form of a percentage.   In contrast, if the trust will not appreciate in value, you’re better off receiving a fixed payment each year. Consult with an estate planning attorney to learn more.
  • Charitable lead trust (CLT): A CLT is the reverse of a CRT.  This revocable trust provides income to a charity for a set number of years, after which the remainder passes to the donor’s heirs or beneficiaries.  The CLT is a good choice for those who don’t need a lifetime of income from certain assets.  The trust is often structured to get an income tax deduction equal to the fair market value of the property transferred, with the remaining interest valued at zero to eliminate a taxable gift.  Contact an estate planning attorney to learn more about charitable lead trusts.
  • Pooled income fund (PIF):  Pooled income funds are trusts maintained by public charities. The trust is set up by donors who contribute to the fund.  Just like a CRT, the donor receives income during his or her lifetime.  After the donor’s death, control over the funds goes to the charity. The biggest benefit to a PIF is that contributions qualify for charitable income deductions as well as gift and estate tax deductions.  Talk with an estate planning attorney to learn more.

Charitable Giving is not just for the Wealthy.

There is a misconception that charitable giving is just for the wealthy; however, this is far from true.  Many people give to their alma mater or local church.  The amount does not need to be in the tens of thousands.  In fact, many people give smaller amounts by simply adding the charity in their will.  This blog is not meant to provide legal advice and is for informational purporses only.  For more information regarding wills, trusts, or charitable giving, contact Cleveland, Ohio law firm Baron Law, LLC.  Baron Law is your estate planning law firm in Cleveland, Ohio.  Call today for a free consultation at 216-573-3723.

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Can a Beneficiary Force a Trustee to Provide Information Contained in a Trust?

Cleveland, Ohio Estate Planning Attorney

Can a Beneficiary Force a Trustee to Provide Information Contained in a Trust?

In addition to the blog below, do you have questions regarding estate planning or trust administration?  Call Cleveland, Ohio law firm Baron Law LLC.  An attorney at Baron Law will be able to assist you and provide legal advice for all your wills and trust needs.

If you’re resident of Ohio, then as a beneficiary, you have a right to see a trust and can force the trustee to provide you a look.  Under Ohio law, the Trustee is obligated to give a copy of the trust to beneficiaries if they ask for it.  Cleveland, Ohio estate planning attorney Daniel A. Baron points to Ohio Revised Code Section 5808.13 which provides in part

“A trustee shall keep the current beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless unreasonable under the circumstances, a trustee shall promptly respond to a beneficiary’s request for information related to the administration of the trust.”

The Ohio statute further provides that a trustee must:

“Upon the request of a beneficiary, promptly furnish to the beneficiary a copy of the trust instrument. Unless the beneficiary expressly requests a copy of the entire trust instrument, the trustee may furnish to the beneficiary a copy of a redacted trust instrument that includes only those provisions of the trust instrument that the trustee determines are relevant to the beneficiary’s interest in the trust. If the beneficiary requests a copy of the entire trust instrument after receiving a copy of a redacted trust instrument, the trustee shall furnish a copy of the entire trust instrument to the beneficiary. If the settlor of a revocable trust that has become irrevocable has completely restated the terms of the trust, the trust instrument furnished by the trustee shall be the restated trust instrument, including any amendments to the restated trust instrument.”

Put more simply, if you’re a beneficiary to a trust, you simply need to ask and you will be provided a copy of the trust.  Conversely, if you’re the Trustee and receive one of the requests listed above, you likely have to comply.  Beneficiaries having problems getting information from a Trustee should refer to the above statute.  Trustees who fail to respond risk being removed as the Trustee.  In addition, if there is a law suit, the attorney’s fees would be taken out of the trust, thus reducing the value to all beneficiaries.

This blog is for informational purposes only and is not intended as legal advice.  If you need an estate planning attorney, trust attorney, wills attorney, or other Cleveland, Ohio attorney contact Baron Law LLC at 216.573.3723.  You will speak directly with an Ohio attorney who can assist you with your legal needs.