Illinois trust drafting

Trusts in Illinois

Trust Primer
Trusts, in and of themselves, are not complex instruments. A Trust is a contractual arrangement wherein one party gives property to another party to be held for the benefit of yet another party. The terms of the trust “contract” or more correctly, the “trust agreement” define and describe the rights and duties of the parties involved in the transaction. Because a trust is a contractual agreement, it is quite flexible and can be adapted to many varying uses. One instance in which a trust can be employed to great benefit is in the context of estate planning.

Three Party System
There are three main parties to a trust transaction. First, the “settlor” or “trustor” is the party which gives property to the trust. Second, the “trustee” is the person or entity (a bank or other institution can act as a trustee) responsible for holding on to the trust property. Finally, the “beneficiary” is the person on whose behalf the trust property is being held. Nothing prevents a single individual or entity from acting in all three capacities. When such an occurance takes place, the trust is said to be a “grantor trust”. Generally, each of the three parties to a trust transaction will have different rights and duties with regard to the trust. These rights and duties are spelled out in the trust agreement and by Illinois law.

Life or Death Trust
Most trusts are created in two ways. A trust may be “inter vivos” meaning that it is created during life or “causa mortis” meaning that it is created at death. An inter vivos trust is commonly referred to as a “Living Trust” because it is created through a trust agreement executed while a person is living. A causa mortis trust is usually referred to as a “testamentary trust” beacause it is created through a will which becomes effective at a person’s death.

One benefit of a living trust is that the trust usually has set terms which have predetermined the distribution of certain property at the time of a beneficiary’s death. In such cases, the property contained in the trust can avoid probate. Although probate in Illinois is not always a situation to be avoided and in many cases is no more inconvenient than a post-death administration of the terms of a trust, many situations exist where a trust can avoid a burdensome probate administration. In addition, because a trust is a private document, it is not subject to public display in the way a will and the subsequent administration of a will might be.

Control for the Incapacitated
In the common living trust scenario, a grantor will set up a trust for him or herself and act as the trustee of the trust until that person dies or is adjudged incompetent to manage his or her affairs. In the event that a person without a trust is adjudged to be incompetent, that person’s loved ones must go to the probate court to have a guardian of the estate of the incapacitated person’s assets established. This is a costly procedure and requires strict court intervention, budgeting and accounting on a regular basis. In the alternative, assets in a trust remain the property of a trust and remain for the benefit of the beneficiary of the trust, but when the beneficiary becomes incapacitated, a pre-determined successor trustee takes over the administration of the trust on behalf of the now incapacitated beneficiary without court intervention or supervision.

Control From beyond
Another tremendous advantage of utilizing a trust in estate planning is the ability to control wealth after death. Many time, the heirs or beneficiaries of an estate are not quite ready or might never be ready to handle the responsibility that comes from holding and managing large sums of money. A trust can help in that it sets up, ahead of time, the rules with regard to trust assets. For example, a set of parents may provide that all of their money is placed into a trust for their ten year old daughter with provisions that the trust assets are to be managed by an aunt and are to be used for health, support and a college education until the daughter reaches age 25, at which time half of the assets remaining in the trust will be distributed to daughter with the final half being distributed when the daughter reaches ace 35. Such a plan has numerous benefits. First, it avoids the requirement of going to probate court to have a guardian appointed to hold assets on behalf of a minor. Further, it allows the grantors the knowledge that a person they trust will be taking care of their assets on behalf of their daughter. Finally, it ensures that the daughter will not “run wild” with wealth at an early age.

Estate Tax Avoidance
A trust, by itself, does avoid the probate system, however, a trust does not automatically avoid the burden of estate taxation. In years where a Federal Gift and Estate Tax Unitified Credit exists, the credit amount ($3,500,000 in 2009) is subject to estate taxation. Further, any assets which pass between married persons upon the death of the first spouse are excluded from taxation at the time of the first spouse’s death by what is known as the unlimited marital deduction (an unlimited amount of property can be passed between spouses without taxation).

Under the current tax code, the unlimited marital deduction, however, steps in front of the unified credit. A spouse passing $3,500,000 of assets to a surviving spouse will not pay estate tax as a result of the unlimited marital deduction. In such a case, the deceased spouse does not utilize any of his or her unified credit. As a result married couples will never pay estate tax at the death of a first spouse. This sounds good, but there is a trap awaiting the family of the surviving spouse upon the surviving spouse’s death. At the time of that spouse’s death, the surviving spouse still has only $3,500,000 in unified credit. This can lead to excessive estate taxes at the death of a second spouse.

For example, if a husband and wife each own $3,500,000 worth of assets in their individual names and husband dies, leaving all of his assets to his spouse, the wife will not pay estate tax because of the unlimited marital deduction. Thus, wife now holds $7,000,000 worth of assets. Upon wife’s death, $3,500,000 of the $7.000,000 will be shielded by tax because of the unlimited marital deduction. The remaining $3,500,000 will be subject to an estate tax that begins at 45%. Thus, wife’s estate will pay roughly over $1,575,000 in Federal Estate Taxes. Further, the Federal government requires that this tax be paid within nine months of the date of death.

The problem with the above situation is that husband and wife had a combined $7,000,000 in assets and a matching $7,000,000 in unified credit. They were, however, only able to utilize $3,500,000 worth of their unified credits. By utilizing what is commonly referred to as an A-B Trust or acredit shelter and marital trust, a married couple can take advantage of both spouse’s unified credits. Such a scenario would be beneficial to any married couple with roughly over $3,500,000 in assets.

The World of Estate Planning
Trusts can be employed in a number of ways to plan one’s estate, protect assets and even create wealth. A number of techniques are available to limit and restrict assets and their disposition during life and at death which can be of great benefit to asset holders.

Services and Fees
Trust drafting and review services vary based on each client’s individual estate planning needs.  All revocable living trusts include pour over wills, powers of attorney for property and health care, and HIPPA disclosures.  Trust preparation services are generally priced on a fixed fee basis to be determined prior to document drafting.  Trust review services are performed for $260 per hour.  We commonly prepare wills with testamentary trusts, non-tax planning revocable living trusts, irrevocable life insurance trusts, and estate tax planning (A-B credit shelter trusts) revocable living trusts.

How to Get Started
The first step to the trust drafting process is to give us a call to obtain an estate planning questionnaire.  Once you complete and return the questionnaire, we can set up an appointment to meet and discuss your planning goals and opportunities. To get this process started, please feel free to contact Richard Magnone. We are generally willing to have a short (5 to 15 minutes) initial discussion over the telephone to determine if we can assist in your situation and to determine if we might be an appropriate match to work with you.  Face to face Initial consultations are by appointment only and a consultation fee is generally charged.  To get this process started, please feel free to contact Richard Magnone via email or by phone at 773-399-1122.