Revocable Living Trusts
Over the last ten to twenty years, revocable living trusts (aka “inter vivos” trusts) have realized tremendous gains in popularity and visibility as a beneficial alternative to using a Will as the primary dispositive document. No longer merely a tool for the very wealthy, living trusts have gained broad acceptance. And for good reason — in most situations it is a far more flexible and efficient tool for managing property during life (including periods of incapacity) and disposing of (and managing) property after death.
Illinois Living Trust Basics
A living trust is simply a written property agreement wherein the grantor transfers property to a trustee for the benefit of named beneficiaries. There are three vital parties to every trust:
- Grantor(s). Also known as the “settlor”, this is the person tor persons that creates the trust, specifies the terms and transfer property into the trust.
- Trustee(s). The person(s) (or entity) that takes legal title to the property and is entrusted to carry out the terms set forth by the grantor in the trust document.
- Beneficiaries. The person, persons or entities that are entitled to receive property from the trust (income and/or principal distributions) at various times and stages.
In the case of a typical revocable living trust — the grantor, initial trustee and initial primary beneficiary is the same person — you. This is commonly referred to as a “self declaration of trust”. In some situations, the property may be transferred to someone else as trustee, which may be known as a “trust agreement”. In either case, the trust is a “living” trust because it is created and becomes effective immediately during your lifetime (as opposed to a testamentary trust created under a Will upon death).
Creating and Funding an Illinois Revocable Living Trust
The living trust is a written document, usually drafted by a qualified estate planning attorney, that sets forth how you, as grantor, want your property managed and distributed during your life and after your death. After it is drafted and signed, it must be funded to be effective. A trust only controls property that is specifically titled in the name of the trust. Real estate, bank accounts, stocks, bonds and many other types of assets can be re-titled to change the ownership into the name of the trustee of the trust. Funding is a very important, yet often overlooked, step in the estate planning process. A living trust that is not properly funded will likely not achieve all of your goals.
Trust Operation During Grantor’s Life
During your life, you may serve as trustee of your trust and you would deal with the assets in the trust, now as trustee, exactly as you did before. You do not lose any control over your assets — you remain able to buy, sell, transfer, invest, gift, etc. just as you did with property in your own name or in joint tenancy. Taxable income from trust property continues to be reported exactly as before, with no additional filing or reporting requirements during your life while you are trustee. Moreover, the living trust is completely revocable and amendable by you, meaning that you are free to change your beneficiaries and successor trustees, and other terms of the trust.
The successor trustee(s) is the person or entity (e.g. bank) that you designate to manage the trust after you are no longer trustee. This successor trusteeship will be triggered in three distinct and important situations:
- Resignation. You may choose to resign as trustee for any reason to allow the successor trustee to take over and manage the assets for your benefit. This is a valuable tool for someone who no longer feels they are capable of managing their property and desires for a third party to manage their financial affairs (e.g. pay bills, invest assets, etc.). In this way, you choose who you want to manage your assets and you set the terms that they are required to follow.
- Incapacity. If you should become incapacitated (as defined by the terms of your trust), the successor trustee that you name would take over as trustee to manage the trust’s assets and expend them for your benefit and care. Without a funded trust, incapacity may force family members to petition the probate court for a finding of incapacity in order to establish a guardianship estate to manage your assets.
- Death. Upon your death, the successor trustee(s) takes over and executes the plan that you have prepared for your beneficiaries. This is accomplished without the necessity of going to court to open a probate estate, thereby minimizing the cost, delay, hassle, publicity and other pitfalls associated with probate.
Post-Death Illinois Trust Administration
After your death, your trust becomes irrevocable and the successor trustee takes over without court petition or supervision and privately carries out the terms that you set forth in your trust (learn more on our Trust Administration page). The successor trustee is a “fiduciary” (like an executor) and is responsible for managing the trust in accordance with its terms and the Illinois Trusts and Trustees Act. The trust may provide for quick administration, distribution and termination or may allow for the trust (and/or additional trusts created by the document after death) to continue on for a period of time for the benefit of your beneficiaries. This can be very useful for estate tax planning and to meet other important estate planning objectives to meet your beneficiaries’ individual needs.
Advantages of an Illinois Revocable Living Trust
Sometimes touted as an estate tax-saving device, living trusts, in themselves, produce no inherent estate tax savings. The same estate tax savings that can be achieved through a living trust can be obtained through a testamentary trust (a trust contained within a will that becomes effective only upon your death). However, the living trust has a number of features that a Will (with or without a testamentary trust) cannot duplicate, including:
- Probate Avoidance. A properly funded living trust will avoid the additional cost, complexity, delay and burden of probate proceedings after your death. Avoiding probate is especially useful if you own real estate in more than one state because a separate probate estate must generally be opened in each and every state where a decedent owned real estate (known as “ancillary” probate).
- Avoiding Guardianships and Incapacity Planning. If you should become disabled or incapacitated, successor trusteeship in your living trust can be quickly and privately triggered. This allows the successor trustee that you have designated to take over and manage your assets for your benefit, without requiring your family to go to court to have you declared disabled.
- Privacy. Unlike wills, which are filed with the county courthouse after death and become public record in perpetuity, a trust is a private document that is not filed anywhere and cannot easily be discovered by disgruntled non-beneficiaries or other overly curious individuals.
- Asset Protection for Beneficiaries. You can set up your trust in such a way that your beneficiaries will have a built-in layer of asset protection to protect themselves from some creditors and a disgruntled or former spouse. Please note that a revocable living trust does not provide additional asset protection for the grantor(s).
- More Difficult to Challenge or Renounce. A living trust is generally less likely than a Will is to be challenged because a built-in court forum with statutory notice requirements is not created for disinherited, disgruntled or feuding heirs to air their grievances. Additionally, a spouse’s right to renounce the Will generally does not apply to assets in trust.
- Easier to Amend. Trusts are generally “easier” to amend than Wills because less formality is required, though amendments should still always be made carefully and in consultation with your estate planning attorney.
- Flexibility. Trusts have a tremendous amount of inherent flexibility with respect to the terms and conditions that you wish to specify in order to provide solutions for your unique goals and wishes. If you can express your intentions with words, the trust terms can generally carry out those intentions. Among other uses, individuals use commonly trusts to plan for:
- Special needs beneficiaries
- Second marriages
- Estate tax marital deduction/credit shelter planning
- Spendthrift or creditor-risk beneficiaries
- Children and young adults
- Incentive trusts
- Special or business assets
The principal disadvantage of a living trust plan is the additional cost and effort to set up and fund the trust. Whether the advantages outweigh the disadvantages is an individualized decision that should be made in consultation with your family and your estate planning attorney.
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