In this article...
Why is a trust the most popular estate planning technique? In this Learn About Law article we talk about Revocable Living Trusts and how they're used in an estate plan.
In this article, we will explain revocable living trusts in Illinois. We will answer the following questions:
- What is a revocable living trust?
- Why is a trust the most popular estate planning technique?
- What does a trustee do?
- What happens if the grantor of a trust becomes mentally incompetent?
- How does a revocable living trust avoid probate?
- What is the difference between a revocable living trust and a will?
What is a Revocable Living Trust?
Revocable living trusts are estate planning documents that, like a will, are used to state the creator’s wishes regarding the disposition of their property after they pass away. Unlike a will, a revocable living trust is a legal entity that can own property.
Because of this feature, trusts have many benefits that wills do not, such as:
- Allowing the creator’s estate to avoid probate when they pass,
- Allowing the creator to have long-term control over how the assets are managed for the benefit of the trust beneficiaries after her death, and
- Providing for the management of the creator’s assets in the event of the creator’s mental incompetence.
Why is a trust the most popular estate planning technique?
- Your loved ones will save thousands of dollars in attorney fees because your estate will not go to probate court.
- Your spouse and children will have immediate access to your assets rather than waiting a year or longer while your assets are tied up in probate.
- If you are incapacitated, your spouse or children can immediately access your assets for your benefit without the need for a costly and lengthy guardianship proceeding.
- You will retain complete control of your assets during your lifetime.
What Does a Trustee Do?
The person who creates a revocable living trust is known as the grantor. The grantor will name a series of trustees who will act in succession to manage the assets of the trust according to the terms of the trust for the benefit of the beneficiaries named in the trust.
During the grantor’s lifetime and while the grantor remains mentally competent, the grantor will be both the trustee and the beneficiary of the trust. This means that the grantor’s only obligation as trustee is to manage the assets owned by the trust for their benefit as they see fit. For this reason, when you transfer your assets from ownership in your individual name to ownership by the trust, you will not notice any practical difference. Grantors retain complete control of any assets owned by their trusts.
What Happens if the Grantor of a Trust Becomes Mentally Incompetent?
If the trust grantor becomes mentally incompetent through old age, sickness, or disease, the role of trustee will pass to the first person named by the grantor as a successor trustee who is willing and able to act in that role. All needed for this to occur is a doctor’s certification that the grantor can no longer manage their own affairs.
The successor trustee will now be responsible for managing the trust’s assets for the grantor’s benefit during the remainder of the grantor’s lifetime. Without a revocable living trust or a power of attorney, a guardianship proceeding would be necessary to grant the ability to manage the disabled individual’s affairs. These can often be costly, time-consuming, and stressful for the disabled individual’s family.
How Does a Revocable Living Trust Avoid Probate?
Probate is a court case during which the court oversees the executor’s or administrator’s gathering and distributing of a deceased person’s assets. In Illinois, probate is typically required for a deceased person’s assets to be distributed to beneficiaries and heirs if the deceased individual owned any real estate or more than $100,000.00 in non-real estate assets. For more on this, check out our article: When is Probate Required in Illinois?
We want to avoid probate if possible for three primary reasons:
- Probate cases take at least a year to complete. During this time, the deceased individual’s loved ones and intended beneficiaries of the estate may not have access to the assets that are intended for them;
- Probate is a court case. This means that the executor will typically hire an attorney. Attorney fees and court costs may consume 5% to 10% of the estate’s value.
- Probate can be time-consuming and stressful for the executor and the deceased individual’s family members.
We help our clients avoid probate by transferring any real estate they own and significant savings accounts to their trust. They do not lose any control over these assets during their lifetimes. However, the assets they transfer to their trusts will not be part of their estate when they pass away for the purpose of probate.
The goal is to ensure that the client does not own any real estate outside their trust and owns less than $100,000.00 of other assets outside their trust or is payable on death accounts when they pass. If this is the case, then probate will not be necessary.
Instead of going through a probate case, the trustee named in the trust will be able to distribute assets immediately to the trust beneficiaries without the need to hire an attorney. The trustee will do this by showing a copy of the trust, the grantor’s death certificate, and a document called a Small Estate Affidavit to the financial institutions responsible for the grantor’s accounts.
What is the Difference Between a Revocable Living Trust and a Will?
Both a will and a trust allow the document’s creator to state how they would like their assets distributed when they pass. However, unlike a trust, a will does not allow the creator’s estate to avoid probate.
If a deceased individual had a will but not a trust, a probate case would typically be opened, and the deceased person’s assets will be fully distributed according to the terms of the will at the conclusion of the case. If one of the heirs is a minor child, the assets will typically be distributed to the minor’s guardian.
A trust, on the other hand, allows long-term control over assets. If the terms of the trust dictate, the trust assets may be distributed immediately to the beneficiaries. However, many of our clients choose to have their successor trustees manage trust assets for the benefit of their children until the children are old enough to manage them on their own responsibly.
Parents of young children typically choose to allow their children to demand payment of ⅓ of the balance of their trust upon reaching the age of 21, ⅔ upon reaching the age of 25, and the rest of the balance upon reaching the age of 30. This prevents the child from blowing their inheritance frivolously when they are too young to manage it responsibly.
During the entire life of the trust, the trustee will typically have the discretion to pay the child more than these amounts if the trustee determines that doing so is in the child’s best interest. The trustee can deny the request if an 18-year-old asks for trust funds to buy a sports car. The trustee can distribute the funds if the 18-year-old asks for funds to pay for college.
Grantors can get as creative as they like in laying out how they would like trust assets invested, managed, and distributed after they pass.