Only a few years ago, people set up living trusts almost exclusively to save on taxes. Today, they are used to avoid Probate and for other purposes. This article explains the living trust. It is not meant to be a comprehensive discussion of the subject, but it should help you to understand a typical living trust and its plan.
What is a living trust?
It is imaginary, a “legal fiction.” It is created by a trust document, either a “trust agreement” or “declaration of trust.”
- The trust document designates one or more individuals or corporations to act as “trustee.”
- The trustee is directed to accept title to or ownership of property, either real property or personal property. The property in the trust is sometimes referred to as the trust “corpus” or “res.”
- The trustee owns property “as trustee” only, not individually.
- The property is to be held and used for the benefit of one or more “beneficiaries.”
- The trust document sets out in detail how the trust is to be administered. It contains the directions of the person who sets up the trust (the “grantor” or “settlor”). If it is properly drafted, that document will guide the trustee and the beneficiaries throughout the entire term of the trust.
There are different kinds of trusts. A trust included in a will (which is to take effect only after a person dies) is called a “testamentary” trust. A trust set up during a person’s life is called an “inter vivos” trust or “living” trust. This is not the same as a living will, which directs removal of life support in the face of certain death. A trust that can be changed after it is signed is called “revocable.” A trust that cannot be changed is called “irrevocable.” Irrevocable trusts are most often used in estate tax planning or where the grantor wants to lock in certain terms of the trust. Most people want to keep their trusts flexible and set up revocable trusts.
Advantages of the Living Trust
When the trust is done right, it works like magic and avoids all Probate! It even avoids multiple Probate proceedings in different states where real estate or other assets are located.
- Money and assets are distributed sooner.
- The trust is private, although not totally. Some financial institutions may require or request copies of the trust agreement before complying with its terms, but there are virtually no “public” aspects as with Probate.
- Save attorney’s fees and costs. Assets are transferred to the trust while the grantor is alive and competent, and multiple sets of bank accounts are not necessary.
- A more orderly process. Without a trust, it is often more difficult to find asset information at death and to collect the assets.
- Flexible. So long as the grantor’s intentions can be expressed in words, they can be embodied in a trust.
- Easy to amend. A trust can be amended by a document signed only by the grantor. No witnesses or other formalities are necessary as with a will or codicil. The reduced cost of amendments may ultimately save some of the additional up-front costs of a living trust.
- Less important if the original documents are lost. Copies of a trust document can substitute for a lost original. If an original will is lost or misplaced, the law presumes and a Court can rule that the will was revoked, and the estate will then be distributed only to the decedent’s heirs according to strict Illinois law.
- A trust is more difficult to contest than a will or codicil, because the grantor not only signed the documents but acted on them.
- So long as all interested parties agree, it is easier to “change” the terms of a trust than a will, even after the grantor dies or becomes incompetent.
Disadvantages of the Living Trust
- Up-front costs are more than for a will.
- Assets must be properly transferred to the trust. Time must be spent by the grantor after the trust is set up to see that all of the transfers are made. If they are not, the trust may provide little or no savings, and Probate may still be necessary.
- Claims of creditors of an estate are cut off six months after appointment of the executor (with some exceptions). Claims against a trust can be pursued for two years from the date of death.
- Some assets may not be held in a trust without adverse income tax effects.
Neither Advantages Nor Disadvantages But Important
- A will is still necessary, although it is simpler, is less likely to need updating, and will probably never have to be “used.”