Understanding Wills and Trusts in Estate Planning

A Last Will and Testament (will) is one of the most commonly used and familiar estate planning tools. Frequently a will is used alongside another common tool used in developing comprehensive estate plans: a trust. Trusts may be structured in several different ways, depending on the individual estate planner’s needs and goals – a fact which can make them both highly effective tools for creating a custom estate plan, and intimidatingly complicated to set up. Individuals working to create their estate plans and evaluating their options regarding wills and trusts may benefit from having a conversation with an understanding attorney in their area who is familiar with estate planning practices and the laws that apply in the particular state.

What Is a Will?

A Last Will and Testament is a legal document that allows one individual, the document’s testator, to provide instructions regarding the final disposition of their affairs. Generally these instructions focus on the appointment of an executor, who will serve as the personal representative of the estate, which is the legal term for the property an individual leaves behind at their death, and the designation of beneficiaries. A beneficiary, in the context of a will, is any party to whom the testator has made a gift via their will.

Bequest vs. Devise vs. Inheritance

According to Cornell University’s Legal Information Institute, a “devise” is any gift of real estate made to a beneficiary by a testator through the latter’s Last Will and Testament. Traditionally, “bequest” has been used in common law to mean a gift of personal property, rather than real property, made in the same way – to a beneficiary, by a testator, by means of the testator’s legally valid will. Both terms have been used in contradistinction to the related concept of inheritance, which in the context of common law has often meant the passage of property from the estate of a deceased person (known as a “decedent”) to the individual’s heirs when the person has died without a valid Last Will and Testament – otherwise known as dying intestate.

Ohio’s probate code applies specialized meanings to some of these terms; the definitions applied under state law are no more complex than those an estate planner is likely to encounter anywhere else, but the divergence between Ohio’s statutory definitions and the way these same terms are used in some other areas can sometimes feel bewildering to individuals who are used to seeing (or who are just now getting used to seeing) words like “bequest” and “devise” used in the context of estate planning discussions based on common law or rooted in other states. Simply understanding the difference between the statutory definitions used in Ohio and the “common law” meanings that often appear elsewhere can go a long way toward clearing up any confusion. 

Definitions of Bequest and Inheritance Under Ohio Law

O.R.C. § 2107.011 specifies that “inheritance,” for the purposes of Ohio probate law, may be used to refer to any transfer of real estate precipitated by the death of the property’s owner, regardless of whether the individual left a valid will. Similarly, the same statute establishes that in Ohio a “bequest” can be used in a narrower sense, to refer to “any testamentary disposition” of real property.

A “testamentary disposition” (in Ohio or elsewhere) is any gift made via will – so while bequest and devise traditionally have referred to testamentary dispositions of personal property and real property, respectively, and inheritance has in common usage meant a non-testamentary disposition of any property via intestate succession, in Ohio probate law both inheritance and bequest may be used to refer to transfers of real property (the statute does not address uses of the word “devise”). Inheritance, for the purposes of determining dispositions of a decedent’s property under Ohio law, is a broad term covering any transfer of real property pursuant to the death of the property owner, whereas bequest is a transfer of real property specifically made via the decedent’s will (the statute does not address uses of the word “devise”).

Real vs. Personal Property in Ohio Probate Law

A probable explanation for Ohio’s departure from traditional meanings broadly recognized in common law appears in a separate statute, O.R.C. § 2104.01. This statute specifies that when a decedent’s estate must be administered through intestate succession, intestacy laws will not differentiate between “ancestral” property (property inherited through the paternal line) and “nonancestral” property (any other property, but especially property inherited through non-paternal relatives), nor between “real” property (i.e., real estate holdings) and personal property (assets other than real estate that belonged to the decedent at the time of death). Under this practical and egalitarian approach to managing intestate succession, there is no need for separate terminology to draw a legal distinction between real vs. personal property – but there remains considerable need for a clear legal distinction between property disposed via Last Will and Testament vs. property whose descent must be determined via state intestacy laws.

Wills and Probate Proceedings

Probate is the process by which final administration of a deceased person’s estate is carried out. Probate may be accomplished through either the execution of a valid Last Will and Testament or court-ordered proceedings for intestate succession.

Determining Jurisdiction for Probate in Ohio

In simple cases, the court with jurisdiction to probate a decedent’s estate is likely to be the probate court of the county of which the individual was a resident at the time of their death. However, Ohio’s provisions allowing a testator to not only deposit their will with a probate court, but to request a probate court to determine the will’s validity during the testator’s own lifetime, open up additional possibilities, which are laid out in O.R.C. § 2107.11.

Generally, if a testator who has deposited a will with an Ohio probate court is living outside the state at the time of their death, and no probate proceedings are undertaken in the other state, then the will may be submitted to probate in the county of Ohio in which it was originally deposited. Similarly, if a testator has requested an Ohio court’s declaration of validity of their Last Will and Testament pursuant to O.R.C. § 5817.10 and the probate court has declared the will to be valid in response to the testator’s request, and no probate proceedings are initiated in any other state, or in any other county within Ohio, then the will may be submitted to probate in the same county in which it was previously found to be valid at the testator’s request.

Intestacy Laws and Intestate Succession

Whenever an individual dies intestate, the probate court with jurisdiction over the decedent’s estate is legally required to administer the estate and distribute any assets still remaining after the decedent’s final taxes have been filed and all of their outstanding debts have been satisfied according to the state’s intestacy laws through a process known as intestate succession. Like other states, Ohio aims to make its procedures for intestate succession as fair as possible – but the legal methods for determining “next of kin” status, as even-handed as state legislatures may try to make them, cannot account for the deeply personal nature of even strictly familial relationships, to say nothing of close friendships or the devotion felt by many individuals in long-term romantic partnerships, even if, for any number of reasons, the couple has decided not to legally marry.

Consequently, one of the main reasons for creating a Last Will and Testament is to prevent the necessity of intestate succession, by providing in its place a more personalized set of instructions for ensuring that the assets included in the estate go to beneficiaries specifically chosen by the testator. Many beneficiaries take special comfort in these final gifts from a loved one, especially when the bequests (or devises, in the case of real estate) are clearly chosen from the decedent’s personal possessions to fit the individual needs and personalities of each beneficiary – a thoughtfulness that is inherently absent in any intestacy proceedings.

What Is a Trust?

A trust is a legal entity created for the purpose of holding assets “in trust” – that is, by one party for the benefit of another party. A trust that contains financial assets exclusively is sometimes referred to as a “trust fund.” Financial assets, also sometimes called “liquid” assets, are among the types of property most commonly placed into trusts, but in legal terms trusts can and sometimes do hold valuable property in various other forms, such as real estate, precious or heirloom jewelry, and works of art.

State vs. Federal Trust Laws

While trust funds are subject to federal taxation requirements overseen by the Internal Revenue Service (IRS), the laws governing how trusts are established and determined to be valid are to a large extent set by state legislatures. Given that one of the several reasons individuals may form trusts is precisely to manage not only their wealth, but its attendant wealth transfer taxes, the intersection of state trust laws with federal tax regulations determining how the various trust structures will be taxed can give rise to a number of complexities, which individuals considering the formation of a trust as part of their overall estate planning strategy often find it helpful to discuss with an estate planning attorney practicing in their state.

Ohio Laws Regarding Trust Fund Setup

While the terms under which a trust is administered may vary widely from one trust to another, as well as across the various types of trusts, generally speaking each state’s laws regarding trust formation will establish a set of minimum criteria required for a trust to be valid in that state. In Ohio, the formation of a valid trust requires each of the following:

• Assets: Any trust must hold property of some kind.
• Trustor: Also known as the grantor or settlor, this is the party who creates the trust. Generally the trustor is also, as described by the IRS, responsible for initially “funding” the trust by transferring assets into it.
• Trustee: A trust may have multiple co-trustees, with no upper limit specified under Ohio’s trust laws – but no trust is legally valid until it has at least one trustee, who assumes responsibility for managing the assets placed into the trust by the grantor or settlor.
• Beneficiary: Just as any trust must have at least one trustee, each trust must have at least one beneficiary. Multiple beneficiaries (for instance, all of the settlor’s children or grandchildren) are very common with several types of trusts.
• Trust instrument: A trust is formed by a legal agreement known as a trust instrument. Although O.R.C. § 5804.07 allows for the creation of oral trusts, the overwhelming majority of trusts are formed by the execution of a written document. State law, under O.R.C. § 5817.03, further provides for a settlor to request, during their own lifetime, an Ohio court’s declaration of the validity of the trust they have formed, so estate planners in Ohio have recourse to ensure their own peace of mind.

O.R.C. § 5804.02(A)5 prohibits the formation of a trust of which the trustor or settlor is both the sole trustee and sole beneficiary; however, § 5804.02(E) limits this prohibition by stipulating that a definite intended beneficiary who holds a “vested, contingent, or expectant” interest in the future “beneficial enjoyment” of the trust and its assets is sufficient to satisfy the demands of a “definite” beneficiary who is not also the sole trustee. If you have questions about ensuring the legal validity of your trust in light of the trustee or trustees and beneficiaries you intend to designate, consider speaking with an experienced estate planning attorney from Rhodium Law to review your trust fund setup plans.

Wills vs. Trusts: A Use-Based Comparison

The fact that trusts, like wills, can be (and often are) used to facilitate the transfer of assets from one party to another can sometimes lead individuals choosing estate planning documents for the first time to overestimate the similarities between wills and trusts. A side-by-side comparison may be helpful in clarifying where the optimal uses of wills vs. trusts overlap and where these two types of estate planning tools serve distinct goals.

Wills:

• Are generally created by a single individual to direct the disposition of his or her personal property (in Ohio “personal” property will also include the testator’s interest in any “real” property)
• Name an executor to submit the will for probate and carry out final administration of the estate
• May, if properly structured, be used to create a testamentary trust
• May also be used in some cases to provide directions regarding disposition of the deceased person’s final remains (putting this type of information exclusively in the will is not generally recommended, as the will is not always accessed or read until after the funerary arrangements have already been made and even in some cases carried out)
• Are typically simpler to draft, “execute,” and validate than most types of trusts
• Are subject to state laws regarding such terms as share of the surviving spouse and joint ownership or tenancy, but otherwise by their nature highly responsive to individual circumstances and preferences
• Cannot, by definition, avoid probate (probate is the process whereby the terms of the will are read and followed)
• Are activated only by the death of the testator
• Have no effect on individual income tax (but final income tax returns must be filed on behalf of the estate before any gifts to beneficiaries can be regarded as definite)
• Also have no effect on estate tax (but any estate tax must be paid before the remaining assets can be distributed to beneficiaries)
• Other than when used in combination with a testamentary trust, effect a one-time disposition of property (no ongoing asset management strategy)

Trusts:

• Can be created by a single individual or multiple settlors (for instance, multiple family members, or partners in a shared business or charitable concern)
• May be activated immediately or on the grantor’s death (for a testamentary trust)
• May also be set to transfer trusteeship and update beneficiary designations upon a specific “trigger” event or contingency (such as the grantor’s death)
• Inherently avoid probate (the terms of a trust instrument, unlike the terms of a will, are not entered in the public record)
• May in some cases be used to limit individual tax liability (but be advised that using a trust to manage individual income tax liability will typically require the establishment of an irrevocable trust, which may carry its own disadvantages)
• Can specify instructions for ongoing management of assets, which may be useful in establishing a trust to care for a charitable cause, a pet, or even an adult not capable of managing their own affairs
• Property held in the trust may be protected from a beneficiary’s creditors or other claims against their total assets, provided that the beneficiary is not also named as a trustee of the trust
• May be used in combination with other estate planning tools, such as a durable power of attorney, to make sure that appropriate financial arrangements for long-term care of the trust’s beneficiaries will be in place, even if the settlor becomes incapacitated (a strategy often used when the settlor is both a beneficiary and a co-trustee)

Revocable vs. Irrevocable Trusts

In general, trusts can be divided into two categories: revocable and irrevocable. Grantors retain some control over the management of a revocable trust, often through acting as trustees or co-trustees. The settlor’s access to the assets contained in this type of trust, however, typically means that the trust will be subject to estate tax and any property in the trust may be put under lien to pay the estate’s creditors. Grantors cede all control over the assets placed in an irrevocable trust – an action which protects the property held in the trust, but also places those assets out of the settlor’s reach.

Advantages and Limitations of Wills

In general, most estate planning attorneys advise most clients to create wills under most circumstances. Even if the will is used to create a testamentary trust, the will itself provides a relatively clear, familiar, and intuitive mechanism for establishing the potentially more complex functions of the trust. In addition, a Last Will and Testament can direct the disposition of goods that might make for unusual additions to a trust, such as small items of personal property with little monetary value but great emotional significance. A will can designate cherished personal possessions to the individual friends or family members the testator feels would most appreciate them – often the individuals with whom the testator enjoyed using the items during life.

At the same time, wills are by their nature distinctly limited. No matter how the testator disposes of their personal property, a will cannot effectively direct how that property is handled once it comes into a beneficiary’s possession. Will also cannot bypass the probate process, so in addition to the fact that they provide no protection from estate taxes, wills also demand a greater period of time – sometimes substantially greater – than a simple transfer by trust.

Discuss Your Will and Trust Needs With an Ohio Estate Planning Attorney

Wills and trusts both offer clarity and peace of mind, with a degree of customizability that falls in distinct areas. In many cases it may make sense to create both a will and a trust and tailor each document to work in concert with the other, as well as making sure they fit together within a comprehensive estate plan that may include other common estate planning documents, such as a living will or durable power of attorney. The right combination of estate planning tools will always depend on the individual’s goals and circumstances, so consider setting a time to speak with an experienced estate planning attorney in your jurisdiction. Ohio residents can schedule a conversation with Rhodium Law by calling (216) 699-8145 today.