ArticlesA TRUST FOR YOU?A TRUST IS SIMPLY AN ALTERNATE WAY OF DISPOSING YOUR PROPERTY AT DEATH WITHOUT PROBATE. This is about how a trust can help you. Although there are several different kinds of trusts, we will concern ourselves here with the LIVING or INTER VIVOS TRUST. It offers you and your family certain benefits both during your lifetime and after your death, which makes having one well worth the cost of setting it up. Before we talk about the benefits of a living trust, let's have a clear understanding of what "trust" is. A trust is a fictitious financial entity. It is fictitious in that it can exist only because the law says it can exist. A good analogy is a corporation. A trust is an entity in that it is a "being" separate and apart from other beings (such as the human beings that create or own it). As a separate entity or being it can own property. This is why it is a "financial" entity, because a trust exists for just that purpose--to hold property for specified purposes. HOW IS A TRUST CREATED? A trust requires a written document which sets forth, among other things:
Finally, to create a trust, property must be transferred to the trust. It is not an uncommon mistake to draw up the trust document and fail to transfer property into it. So, care and attention must be paid to this detail. LIVING TRUSTS IN PARTICULAR A living trust differs from other trusts used in estate planning in that it begins operation during the lifetime of the person who sets up the trust. In other words, as soon as the grantor (the person who creates the trust) signs the trust and puts property in it, the living trust starts to operate according to the instructions in the trust document. This is in contrast to a "testamentary trust" which is contained in a Last Will and Testament. A testamentary trust does not receive property and start operation until after the death of the person who signed the Will, and even then not until the Will is probated. The key to a living trust's usefulness in estate planning is found in its separate existence. Since it is an entity in and of itself, its continued existence and operation is not affected by the death or incompetency of its creator or any of the beneficiaries. Even the death or illness of the trustee does not stop the trust from continuing on, since the written trust instrument simply provides for a new trustee to take the place of the departed trustee. A LIVING TRUST AVOIDS PROBATE The main complaint voiced by most people about probate is that there is an interruption of benefits and a delay in the receipt of the property from the deceased person's estate. The probate process is not only time consuming, but it can be costly too. Property held in a living trust can avoid being probated at the death of the creator and/or beneficiary of the trust, thus providing an uninterrupted flow of benefits from the trust to the new beneficiaries, saving both time and money. The probate avoidance feature of a living trust also means the creator's family retains the privacy they deserve. Illinois law requires that a Will be filed with the court in the county where the decedent resided at the time of his death within 30 days after his death. Once filed with the court, the Will is a public record and thus open to inspection by anyone. If that Will is admitted to probate, all of the documents filed in conjunction with the probate of the estate are likewise available for the public's viewing. A living trust, on the other hand, does not have to be filed with the court, nor does it have to be recorded; and since it does not have to be probated, the affairs of the trust are kept private. A LIVING TRUST AVOIDS GUARDIANSHIPS Probate avoidance is not the only advantage of a living trust. People today are living longer and longer because of modern medicine. As a result of this there is often a period of time before death occurs where an individual is incapacitated from being able to properly manage his property. In the absence of a living trust or a durable power of attorney, the law imposes a guardianship (formerly called "conservatorship") on an incompetent person's property, which is, in effect, a court supervised trust. The disadvantages of a guardianship are (1) it is costly to create, (2) it takes time to create (which can also be costly), (3) it requires a hearing to be held in court, which means it is open to the public, (4) selection of the guardian is up to the court and not the incompetent person, (5) the property in the guardianship still has to go through probate at the death of the incompetent person. If a living trust is in place and operational when incapacity occurs, a guardianship will be unnecessary because the trustee simply continues to manage the trust property the same as would a guardian or conservator, but without the expense and delay of a court proceeding. A durable power of attorney will accomplish the same thing without a living trust, but it will not avoid probate of the estate at death because a power of attorney ends automatically at the death of the giver of the power. FLEXIBILITY Another advantage of a living trust is its flexibility. A trust can be drawn so as to cover and adapt to a variety of situations which may occur over one or more generations. For instance, some people want a trust to simply provide for the management of their property while they are living, avoid probate at their death, then have the trustee distribute their property to their children free and clear of the trust. Some, however, have special concerns or situations which point to a need to continue the trust well past the time its creator has passed on. The most common example is where there is a risk the property will be wasted once it is in the hands of the next set of beneficiaries. This can occur where (1) the new beneficiary is a minor or child; (2) the new beneficiary is a spendthrift; (3) the new beneficiary's spouse is a spendthrift or is in a risky business venture; and, (4) the new beneficiary is an incompetent or disabled person. In these situations, the trust can be extended for some specified period of time (even for the lifetime of the beneficiary), with the beneficiary being given periodic distributions of income, and under certain circumstances, distributions of principal from the trust to meet special needs. Or it could be left up to the trustee to decide how much income and principal is distributed from time to time. As long as the beneficiary's inheritance remains in the trust, and assuming the trust is properly drafted, the beneficiary, his spouse and his creditors or his spouse's creditors cannot reach the trust property, thus ensuring the property will always be there for the beneficiary. YOU MAY BE THE TRUSTEE The idea of transferring property to another individual as trustee seems to be the biggest fear people have about a living trusts. Giving up control of one's property is not a comforting thought, but fortunately this is not necessary since you can be trustee of your own trust. To fully utilize a living trust, however, a mechanism must be built into the trust document which allows for a smooth transition of control from you to a successor trustee should you no longer be able to act as trustee. By far the best method is to provide for your doctor to make this determination rather than have your lawyer or family members do so. While most people like to keep hold of the reins as long as possible, there are some who prefer that someone else bear (or at least share) the burden of management of their property. In that instance, you can name another person or bank to be the trustee, or you can name a co-trustee to help you. These arrangements work particularly well for widowed individuals whose deceased spouse had always managed the finances. Family members, being the closest to you and thus the most familiar with your needs, are usually the best candidates for successor or co-trustees. A bank with trust powers can be a trustee, however, and offers expert management of the trust property. A LIVING TRUST CAN BE REVOCABLE If you decide after you have created a living trust that it is not for you after all, you can revoke it and bring all the trust property back into your name. Being able to revoke the trust also means you can alter or amend it from time to time. This is most useful as circumstances do sometimes change calling for revision of the trust. The revocability of the trust, along with the ability to act as your own trustee, make the living trust something which is desired instead of something to be feared. A LIVING TRUST CAN BE USED TO IMPLEMENT AN ESTATE TAX SAVINGS PLAN The size of your estate may require some tax planning to save on estate taxes at your death. While a living trust will not in and of itself exempt your estate from estate taxes, it can be used to implement a tax savings plan the same as if a Will were used. DISADVANTAGES OF A LIVING TRUST A living trust will required a little extra work both initially and down the road. To start operation a trust must be funded. This involves transferring title to the property to the trustee (even if that trustee is you). Real estate must be deeded to the trustee, and personal property that is evidenced by some writing (e.g. car titles, stock certificates, bonds, certificates of deposits and bank books) are signed over into the name of the trust. Personal property that does not have a title is simply listed on a schedule which is attached to the trust document. Additional property which is brought into the trust later, or replacement property for property which is later sold, does not have to be placed on this schedule as long as it is registered in the name of the trust when it is acquired. All of this, of course, means you are going to have to prepare a list of your assets and take the time and effort to properly transfer those assets to the trust. Your lawyer will help you accomplish this though. Although this may seem to be a formidable job, you should keep this in mind---the transfer of the title to all of your property will have to be done someday. If you become incapacitated during your lifetime, your court appointed guardian will have to do just that. When you die, your executor or administrator will likewise do it. By you (being the one who is most familiar with your property interests) accomplishing the transfer to a living trust, you will have everything in place for those who will be taking over for you when the time comes. As long as you are trustee, it is not necessary with a living trust to file a separate income tax return to report the trust's income. You may continue to list the income from the trust on your personal Form 1040. When your successor trustee takes over, however, he will be required to file a separate tax return (called Form 1041). CONCLUSION As you can see, the disadvantages of a living trust are relatively minor when compared to the benefits to be gained from having one. Is a trust for you? Think it over, and if you think a living trust is right for you, talk to your attorney. But do not wait until it is too late, because you must be competent in order to create a living trust. Some people say "I'll wait until I feel myself slipping, then do a living trust". It may already be too late by then. Prepared by:
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