Many of us share similar objectives when it comes to estate planning, including the desire to: (a) plan for our disability; (b) provide for our spouse and/or children; (c) provide for the distribution of our assets (and payment of any debts) after our death; and (d) avoid or reduce federal and state estate taxes. There are numerous approaches that can address your various goals. One such example is the creation of a trust.
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 the "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.
Depending on the purpose of your trust, you may wish to create a revocable living trust, an irrevocable trust, or a testamentary trust. A revocable living trust is a trust that is created and funded during your lifetime that you retain the power to amend or revoke. An irrevocable trust is a trust that you create during your lifetime but that you relinquish the power to modify. A testamentary trust is a trust that is created and funded at your death.
Who controls the assets of a trust? In short, the trustee. For a revocable living trust, you can name yourself as the trustee and you therefore retain control of the assets during your lifetime. As long as you are the trustee of your own revocable trust, no special tax returns or accountings are required. If anyone else serves as trustee, at the very least they must provide you with an annual accounting of the income and expenses of the trust, if not also file an independent tax return for the trust.
Purpose
There are a variety of reasons that you might wish to use a trust as part of your estate plan, such as: (a) privacy; (b) avoiding probate; (c) providing for an individual with a disability; (d) providing for an individual who cannot be trusted with a lump sum inheritance (e) providing for minor children; and (f) avoiding or reducing estate taxes.
Privacy
Under Illinois law, your last will and testament must be filed with the circuit clerk in the county where you resided at the time of your death. Meaning, any provisions that you make in your last will and testament will become public record at your death. Trusts, on the other hand, are not generally part of the public record. Certain information must be provided to the beneficiaries of a trust, but the general public would generally not be privy to the terms of the trust. If this is your primary concern, various provisions can be added to the trust to ensure that no beneficiary files a lawsuit regarding the trust (filing a lawsuit would make the terms of the trust part of the public record) and even to limit the information that beneficiaries are entitled to receive.
Note that a testamentary trust set forth in your last will and testament would not serve this purpose. The entire terms of the trust, as set forth in your will, would be of public record.
Avoiding Probate
Under Illinois law, if you have less than $100,000 in assets (and no real estate) in your name individually, then your executor (or if you do not have a will, then a close relative) can prepare and use a "small estate affidavit" to administer your estate. (See Your Guide to Estate Planning for more information.) Otherwise, your estate will need to be probated. This means that a petition is filed with the court, an order is entered directing that a particular individual (or corporate entity) serve as the representative of the estate, and that person (or company) must report to the beneficiaries and to the court regarding the collection of assets, the payment of debts, and the ultimate distribution to the appropriate beneficiaries. As part of this process, the representative is required to publish notice in the local paper and to contact known creditors. The representative must then wait six months (from the date that notice is first published in the paper) before they can wrap up the estate. Given the numerous requirements in the probate process, it is advisable that the estate representative have legal counsel assist them throughout the process. Generally speaking, even a relatively straight-forward estate will take at least nine months and several thousand dollars to administer.
One benefit to the probate process is that after the six months claims period has expired, presuming that the representative followed the appropriate notice rules, no further claims may ever be filed against your estate. The probate process also provides clear rules for how to handle creditors when the claims are greater than the value of the estate.
If creditors are not an issue, having your assets held in trust would avoid the entire probate process. This means that the trustee can begin making distributions shortly after your death. Note that this only works if your assets were already held in trust at the time of your death (see Section 3 that reviews transferring assets to your trust). Creating a testamentary trust still requires that your will be probated and then the assets are distributed to your testamentary trust.
Please note that, in general, creating a trust does not avoid creditors. Speak with an attorney regarding any concerns you may have about this. By de fault, your trustee will pay off any final debts that may be outstanding before making any distributions.
Providing for an Individual With a Disability
If your intended beneficiary has a disability, you may wish to leave their inheritance in trust to help them with their money management. Moreover, if that disabled individual is (or is likely to be) receiving state or federal aid, you may wish to leave their inheritance in a trust for their benefit, so as to not disqualify them from that state and/or federal aid. The latter is called a "special needs trust" or a "supplemental needs trust."
Depending on the amount of money at issue, there are additional options for leaving assets for the benefit of a disabled individual, including the use of an ABLE account. So, you should speak with an estate planning attorney if you wish to leave any assets for the benefit of a disabled individual.
Providing for an Individual Who Cannot Be Trusted With a Lump Sum Inheritance and/or a Minor Child
By leaving assets to a trustee for the benefit of another individual, you can address a handful of potential problems. For example, if you would like to provide for a loved one who is irresponsible with money (e.g., they have substance abuse problems), then leaving their inheritance in trust ensures that the money is spent for their benefit over time, rather than immediately squandered.
Similarly, if your intended beneficiary is a minor, they cannot legally manage their own financial affairs. So, you may wish to leave their inheritance in trust to provide instructions as to whether and how their inheritance can be used before they reach adulthood. If you do not create a trust, there are default provisions of law (e.g., the Uniform Transfers to Minors Act) that allow for the distribution to someone on the minor child' s behalf. However, money held pursuant to the Uniform Transfers to Minors Act is distributable to the minor as soon as they reach age 18. If you leave the inheritance in trust for the minor's benefit, then you can control when (or if) a lump sum distribution is made.
Avoiding or Reducing Federal and/or State Estate Taxes
You are legally able to transfer a certain amount of assets to beneficiaries of your choosing without any estate tax consequences. That amount is called the "estate tax exemption" amount, as it is exempt from either/both federal and state estate taxes. Any assets transferred at your death that are over and above the exemption amount will be taxed.
In Illinois in 2020, the current estate tax exemption amount is $4 million. This means that between your various life insurance policies, investment/retirement accounts with named beneficiaries, and other assets, up to $4 million may be transferred at your death without any tax liability. In 2020, the federal exemption amount is $11.58 million, and is indexed for inflation through the end of 2025. The federal exemption amount for 2026 is currently unknown. Also, there is an unlimited marital exemption on both the state (of Illinois) and federal level, meaning that you can leave your entire estate to your spouse if you so choose, without tax consequences.
If your estate is likely to face federal or state estate taxes, you should speak with an attorney about preparing a trust. If properly drafted, a trust can be used to reduce or eliminate those estate taxes. The type of trust that will result in the most estate tax savings for you depends on a variety of factors including but not limited to the amount of your assets, who you would like to inherit, and who you are comfortable trusting to be in control of various assets.
Creating a 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, you may call Illinois Lawyer Finder at (800) 922-8757 or search online at www.IllinoisLawyerFinder.com.
The use of a trust is an important estate planning option. While a trust can serve a number of valid purposes, it is generally not the only answer. If you think a trust might be beneficial to your estate plan, you should speak with an attorney. In addition to the basic trust formation requirements, depending on the goal of your trust, various terms should (or should not) be included. In other words, simply executing any old document as your trust may not materially affect the disposition of your assets, may not save estate taxes, and may not reduce administration costs after your death. On the other hand, a well-prepared trust as part of your overall estate plan has many benefits and will facilitate the implementation of a plan that meets your goals.
Funding Your Trust
The primary advantages of a trust are often realized only if you fund the trust during your lifetime while you are competent. 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, undermining one of the primary advantages to having a living trust. You should discuss with your attorney and financial advisor regarding the transfer of all of (or most of) your assets that would otherwise be probate assets into the trust. Moving forward, every time you acquire or exchange assets that would otherwise be probate assets, you must make sure you evaluate whether to have them registered in the name of the trust.
The amount of time and fees associated with retitling property in the name of the trust 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 create a living trust but do not fund your trust during your life, your trust can still effectively work as your estate plan and serve several purposes, so long as you sign a "pour-over" will that distributes your probate assets at your death to your trust. If anyone did look up your will at the courthouse, they would know only that your will left your assets to the trust.
For additional information, please see Your Guide to Estate Planning.
Prepared by the Illinois State Bar Association's Trusts and Estates Section (2017)