Most of us share the same objectives when it comes to planning our estate: 1) provide for our spouse and/or dependent children; 2) distribute our property; 3) plan for our disability; 4) organize our finances; and 5) avoid or reduce our estate taxes. Unfortunately, most of us fail to put together a plan that achieves all of these goals. There are many approaches that can be used; some are relatively simple, while others are quite complex. The choice of the right plan for your situation requires careful consideration after receiving qualified professional advice.
How are assets distributed at your death?
Certain assets may be distributed at your death without court proceedings because of the way the asset is titled or because the asset permits a beneficiary to be named. These assets are often referred to as "non-probate assets." Assets held in joint tenancy with rights of survivorship are nonprobate assets because on the death of a joint tenant title automatically passes to the surviving joint tenant unless it is proven that the funds were placed in joint tenancy solely for purposes of "convenience."
Assets with beneficiaries designated, such as life insurance, IRAs and retirement accounts are also nonprobate assets because the asset will be distributed to the beneficiary at the owner's death without court proceedings. Assets that are not nonprobate assets, however, such as bank or investment accounts in your name individually, are usually distributed pursuant to the instructions in your will, or if you do not have a will, by the rules provided for by law (intestate rules). These are probate assets. After your death the court supervises the distribution of your probate assets.
Probate is a legal process for administering and managing the estate of a person who died. A court appoints and supervises a responsible individual or trust company, usually as designated by you in your will, who administers and distributes assets. If you have a will, the person appointed is called an "executor;" if you do not have a will, then the person appointed is called an "administrator." In Illinois, a simplified version of probate called independent administration is available in many cases, but your attorney may still be required to appear in court. Probate has standard procedures for the orderly payment of claims and distribution of assets that may shorten the period for creditors to make claims against the estate.
Probate has the advantage of involving a judge to help sort out disputes and supervise unsophisticated executors. Because a court is involved, however, probate can be somewhat cumbersome, with the need for preparation of special court documents and attorney appearances in court. With a sophisticated trustee or when all the beneficiaries are in agreement, avoiding probate may be desirable.
An alternative to leaving your instructions for distributing your probate assets after your death in a will is to put those instructions in a revocable living trust.
This pamphlet attempts to answer your questions about living trusts. The answers to these questions will give you a general overview of the advantages of using a living trust as your primary estate planning document.
What is a trust?
In its simplest form, a trust is the designation of a person or corporation to act as a trustee to deal with the trust property and administer that property in accordance with the instructions in the trust document. The person who creates the trust is known as the "grantor," "settlor," or "trustor." The persons who receive income or other distributions from the trust are called "beneficiaries." A trust in essence creates a duty for the person designated as trustee to hold and manage the trust property for the benefit of the beneficiaries as named in the trust document.
What is a "living trust"?
Unlike a will, which only becomes effective upon your death, a living trust (also called a "revocable trust" or an "inter vivos trust") goes into effect during your lifetime and is revocable (capable of being changed, amended, or terminated). A living trust is created by a trust agreement document that specifies who is to be the trustee and that explains how the trust should be administered both during your lifetime and after your death, among other things. It is important to keep in mind, however, that the trust document merely sets up the trust, which will remain empty until it is properly funded, or in other words until assets are actually put into the trust. To maximize the advantages of a living trust, it is essential that you properly transfer your chosen assets to the trust at some point.
You have a lot of flexibility when it comes to setting up your living trust. You may choose to name yourself as trustee and maintain control of the assets you put into the trust, or you may designate someone else. You can also name co-trustees, even if you are one of them. Similarly, you may be the sole beneficiary of the trust during your lifetime, or you may name others, such as your spouse and children, as additional beneficiaries. If you become incapacitated, the trust provides for a successor trustee to manage the trust assets. Upon your death, the living trust contains instructions for the distribution of your assets, just as a will would.
What are the advantages of a living trust?
The two primary advantages of a living trust, to the extent you transfer your assets to the living trust during your life, are the avoidance of probate and the avoidance of guardianship proceedings.
Assets held in trust at your death do not have to go through the probate process. When you set up and transfer your assets to a living trust, the trust is considered the owner of your assets. When you die, there is no probate because the trust already owns your assets and not you. The assets are then distributed according to the instructions in the trust.
A living trust is especially useful if you own real estate in more than one state. The general rule is that real estate is probated where it is located. Owning real estate in more than one state will give rise to one main probate administration in the state of your legal residence and another (called "ancillary administration") in each additional state in which you own real estate. However, because probate is not required for property held in a trust, you can bypass ancillary administration by transferring your out-of-state real estate to a living trust.
Another advantage to a living trust is that it provides for comprehensive disability planning. If you become incapacitated, a living trust provides for a successor trustee to take over the control of the trust. The successor trustee invests the trust funds and uses them for your benefit, according to the instructions in the trust. No other disability plan provides these complete instructions. The successor trustee cannot use the assets for his or her own benefit, although he or she may receive compensation (if allowed under the terms of the trust). Additionally, the trust avoids the necessity of having a family member or other person named as a guardian by the probate court to manage your assets.
In addition, there are two secondary advantages to a living trust. One is privacy. Unlike a will, the contents of a living trust are not a matter of public record. Like most court records, probate files are open to the public. Anyone can go to the courthouse and review your probate file, which will most likely identify the value of your probate estate, your place of residence, and the names and addresses of your legal heirs. In Illinois, under the simplified procedure for probate administration known as "independent administration," an inventory and accounting do not have to be filed with the court, and therefore the key documents showing the assets of the decedent are not made public. Even though the independent administration process reduces the amount of personal information accessible to the public, a living trust nevertheless provides the ultimate in privacy because it does not pass through probate at all.
Second, creating and amending a trust is usually simpler than creating and amending a will. Unlike a will, a living trust does not generally require a formal signing ceremony with required words spoken before at least two attesting witnesses. Only the grantor's signature is required to create a valid trust instrument, although if the trust may own real estate it is wise to have the signature notarized to meet recording requirements.
Who controls the assets of a trust?
The trustee named under the trust controls the assets of the trust. In a living trust, the individual who creates the trust in most cases acts as trustee. If you choose to act as your own trustee, you retain broad powers to control and use the assets you put into trust. When someone other than you is the trustee, the trust sets forth specific instructions for the investment and use of the trust assets during your lifetime. Typically, even if someone else is acting as trustee, you will be the beneficiary of the trust and can amend or revoke the trust during your lifetime. As long as you are acting as trustee of a living trust that you created, no income tax returns nor accountings are required. You also may appoint someone other than yourself to act as trustee if you feel you want your assets professionally managed, or if you want them in the hands of an independent party, although this may lead to additional work such as the filing of a separate income tax return for the trust.
How do I fund my living trust?
The primary advantages of a living trust –avoidance of guardianship and probate – are realized only if you fund the trust before becoming incapacitated or dying. The trust controls only the assets which are registered in its name, so any asset that has not been transferred to the trust before your death will likely have to pass through probate, thus undermining one of the primary advantages to having a living trust. You should therefore have all of your assets that would otherwise be probate assets transferred to the trust, (although there may be instances where leaving certain assets out of the trust is more beneficial or even necessary). This is not a problem when the trust is set up, but every time you acquire or exchange assets that would otherwise be probate assets, you must make sure they are registered in the name of the trust. The amount of time and fees associated with retitling property depends on the number and type of assets you have, where they are located, and how they are titled. Usually, you can do the retitling of assets other than real estate yourself by following your attorney's instructions.
Not everyone is able to fund their living trust immediately after creating it. Even if you do not fund the living trust during your life to avoid guardianship proceedings and probate, your living trust can still effectively work as your estate plan if you sign a "pourover" will that distributes your probate assets at your death to your living trust. If anyone did look up your will at the courthouse, they would know only that your will left your assets to the trust.
Other ways to avoid probate
In Illinois, if the assets in your estate titled in your individual name have a gross value of less than $100,000 and do not involve real estate, then your will does not necessarily have to be probated. Your assets can instead be distributed after an attorney prepares a small estates affidavit.
To avoid probate for an estate worth more than $100,000 or for one that includes real estate, your property must either be held in a trust or pass directly to a beneficiary by operation of a beneficiary designation or pursuant to some special type of property ownership, such as joint tenancy. You can also avoid probate for residential real estate by using a Transfer on Death Instrument.
Probate can be avoided by holding property in joint tenancy with another person or persons due to the fact that the jointly held property automatically goes to the surviving tenant(s) upon your death. However, there are several disadvantages to joint tenancies. To sell real estate, stocks, and many other types of assets held in joint tenancy during your lifetime, you must have the signature of all joint tenants. Thus, if your joint tenant is uncooperative or becomes incapacitated, you cannot readily sell or transfer your assets in their entirety. Bank accounts can be more of a problem because most deposit agreements give all parties the right to withdraw funds, meaning your joint tenant has the right to unilaterally withdraw funds at any time without your consent. In addition, if your joint tenant has creditor problems, the creditor can garnish the jointly held asset to satisfy the debt. Finally, adding someone as a joint tenant may be considered a gift to that person and a gift tax may be imposed. In summary, although there are advantages to using joint tenancy, they are usually outweighed by the disadvantages.
Can a living trust avoid estate taxes?
Both a living trust and will, if properly drafted, can be used to reduce or eliminate estate taxes under certain circumstances, and especially for married couples. It is not necessary to create a trust to avoid estate taxes. Tax saving clauses that are included in your living trust are virtually identical to the tax saving clauses that would be included in your will. However, in addition to potential tax savings derived from a comprehensive estate plan, a living trust can also assist in organizing your finances. Thus, a living trust is well suited to both of these purposes.
Does a living trust speed up the distribution of my assets?
The amount of time required for the distribution of assets for both living trusts and probate estates vary greatly depending on the circumstances. Probate estates usually remain undistributed for at least six months after the probate process has started to allow creditors an opportunity to present claims. A partial distribution can be made within the first six months if family members are in need. The trustee of a living trust has the same responsibilities as an executor in a probate administration: identify and transfer assets, render an accounting, pay creditors, file and pay estate and income taxes, and resolve any pending litigation. Usually this will take roughly the same amount of time as administering a probate estate. If a federal estate tax return is due, the trustee or executor may elect not to distribute all of the probate or trust assets until the return is audited and the tax paid. Probate can be delayed by disputes in court. A living trust does not automatically protect the trust assets from a dispute. Disappointed family members or creditors may file a lawsuit against the trust which could delay distribution. Most often, however, the length of the distribution process depends on how long it takes to liquidate the assets, regardless of whether they are held in a living trust or in a probate estate. For example, real estate will normally take longer to liquidate and distribute than will bank accounts.
Can I avoid creditors with a living trust?
This topic should be discussed with your lawyer. In general, your assets cannot be protected from your creditors by putting them into a living trust. At the time of your death, your trustee will pay off any final expenses and debts that may be outstanding. Moreover, because you retain control over the trust assets either by retaining the right to revoke the trust or by retaining the power to control the assets by acting as trustee, the assets held in a living trust will still be included in any calculation to determine if nursing home care, for example, is to be paid for by public aid.
Will a living trust save me money?
The cost of preparing a living trust as part of your estate plan is generally about the same as incorporating a similar estate plan in a will. There may, however, be additional costs associated with creating a living trust. These generally include the preparation of additional documents required to transfer assets into trust name and fund the trust, especially if real estate is transferred. Cost savings from a living trust may occur after the death of the grantor. Because there is no probate involved, there are no court costs and no attorney's fees for preparation of probate documents or court appearances. In some instances, these savings are substantial. Even without probate, there may be fees for attorneys, accountants, and other professionals who assist the trustee in liquidating and distributing the assets of the trust. The trustee is normally entitled to a fee, just as an executor or administrator would be.
How do I create a living trust?
It is always important to have appropriate professional advice in tackling something as complicated as a will or living trust. In Illinois, only attorneys are allowed to assist in this process. If you need help finding a lawyer, see information on back panel concerning Illinois Lawyer Finder.
The use of a living trust is an important estate planning option. While a living trust can serve a number of valid purposes, it is generally not the only answer. Simply executing a living trust will not materially affect the disposition of your assets, will not save estate, taxes and may not reduce administration costs after your death. On the other hand, a well-prepared living trust as part of your overall estate plan has many benefits and will facilitate the implementation of a plan that meets your goals.