The “Living Trust”

A Living Trust is simply a trust established during your lifetime rather than at death. The living trust has become a popular estate planning vehicle which offers certain benefits that a testamentary trust (a trust established at death) cannot offer. A properly funded and structured living trust avoids probate and guardianship and provides creditor protection for asset passed on to your spouse, children or other beneficiaries. After all, why give it if others can take it away?

Here is what a living trust can do for you: 

Probate Avoidance

Probate simply means “to prove” your will and settle your estate in a court of law. A judge makes sure that your heirs are notified, your debts and taxes are paid and your estate is distributed according to your will; or if you do not have a will, according to state law.

Your estate will undergo probate if you own real estate or the gross value of your "probate estate" is $100,000 or less. Your probate estate includes anything that you own at death that is not automatically transferred to other beneficiaries by reason of law or contract (i.e. life insurance, joint property, retirement plans, etc.). If you own property in other states, your estate will undergo additional probate proceedings in each state that you own property in.

A properly funded living trust avoids probate because it holds all your assets and, therefore, you have no probate estate to administer. To properly fund your living trust, all probate assets must be transferred to your living trust before death. This means re-titling your real estate, accounts, and assets in the name of your living trust so that your probate estate is less than $100,000 at death.

Disability Planning, Asset Management and Guardianship Avoidance

If you are unable to manage your financial affairs, a court will appoint a guardian to handle your affairs for you. Most people assume that a court will automatically appoint your spouse or other close relative to handle your financial affairs, but this is not always the case. A court may appoint a stranger (usually an attorney or other public fiduciary) who gets paid from your estate to manage your financial affairs. Moreover, your guardian must periodically report to the court and get court approval for most actions taken on your behalf. Again, this is a public, expensive, and time consuming process, which is easily avoided with a living trust.

Although the management of your assets may be accomplished with a “power of attorney,” the power of attorney may become less effective as time goes by and frequently requires court intervention.

A living trust allows you to select one or more individuals to act as successor trustee in the event you cannot handle your financial affairs. Your successor trustee simply assumes the responsibility to handle your financial affairs and, thus, avoids the need for a court appointed guardian. For purposes of appointing a successor trustee, the determination of your inability to handle your financial affairs may be left to anyone you choose. For example, your physician, your spouse and the majority opinion of your adult children may determine whether or not you can handle your financial affairs. The possibilities are endless, but the result is the same; guardianship is avoided.

Privacy

For those who value privacy, a living trust is a considerable benefit. In Illinois, a will must be filed with the probate court within 30 days after death. Once the will is filed it is subject to public view and scrutiny. A living trust on the other hand is a “private document” which ultimately distributes your estate to beneficiaries without public disclosure.

Fiduciaries

Most states limit who may act as an executor under a will. Some states prohibit residents from another state or country from acting as executor and thus, unduly restrict your freedom to choose fiduciaries (persons who act on your behalf). No such restrictions exist for a living trust. You may choose a successor trustee regardless of where your trustee resides. This allows for much greater flexibility in selecting the person or institution, which will ultimately be responsible for the orderly administration of your estate.

Spousal Share

Illinois law allows your spouse to renounce your will and, instead, claim an elective share of your probate estate (assets you have in your name at death). Your spouse may elect to receive either one-third of your probate estate if you have children or one-half of your probate estate if you have no children. However, if your assets are owned by a living trust, no such election is possible and, thus, you have effectively prevented your spouse from receiving an elective share of your probate estate.

Other benefits that can be achieved in any trust, whether living or testamentary, include creditor protection for beneficiaries and tax savings, but only if additional and specialized drafting is done.

Having said that, here is what a living trust will not do for you.

A living trust will not:

• Protect your assets from your creditors. Although a properly structured trust established for the benefit of your spouse, children or other beneficiaries can protect trust assets from their creditors, your living trust will not insulate you from creditors.

• Reduce your estate taxes, unless your trust incorporates tax planning. Did you know that a testamentary trust (a trust established by will) reduces transfer taxes as effectively as a living trust does, without the nuisance associated with properly funding the living trust.

• Avoid probate, unless the trust is properly funded during your lifetime. This means transferring your probate assets to your trust before death. This can be an arduous and time consuming process.

• Reduce income taxes.  Since you will have full control over your trust, your trust is ignored as a separate entity for income tax purposes. Income taxes neither increased nor decreased by reason of your living trust.

• Eliminate the need for a will. If you have minor children a will is necessary for you to appoint a guardian to raise your children. Without it, a court may appoint a stranger to raise your children. Furthermore, a “pour-over” will is used in conjunction with your living trust to “pour” into your trust any assets that have not been transferred to your trust during your lifetime.

• Prevent an estate contest. If someone thinks they have a claim to your estate or wish to contest the validity of your will or trust, they will file suit. The only difference may be the court in which they file a claim. Typically, probate court is the proper forum to file suit involving a will and chancery court is the proper forum to file suit involving a trust. If someone wishes to sue, they will.

• Fund itself. In order for a living trust to achieve the objective it was designed for, it must be properly funded before death. This means changing title to all your property, real estate and accounts to your living trust.

• Automatically change beneficiary designations. For example, if you transfer your home to your living trust you must add your trustee as an "additionally insured" to your homeowners insurance policy and your title insurance policy in order to be covered by those insurance policies.