- On September 30, 2014
Living Trust Planning
The typical and basic estate planning goals of clients include:
- Maintaining “control” and disposing of property as they choose;
- Avoiding death probate;
- Minimizing taxes;
- Protecting against disability and guardianship (“living probate”); and
- Insulating property from creditors.
These basic goals can be addressed through the use of a revocable living trust (“living trust”). Many clients are not familiar with living trusts, but are familiar with wills. Perhaps then the best place to start is to compare a will and a living trust by discussing disability, death probate, creditor issues and taxation.
- Disability. Generally, studies have shown that in any one given period of time, a person is four times more likely to become disabled than to pass away. This reality has made disability planning increasingly important. If a person becomes mentally disabled and is unable to manage his or her affairs, someone must step in and manage the disabled person’s affairs.When a disabled person only has a will, a court proceeding called a “guardianship proceeding” (a “living probate”) will need to be undertaken to have a guardian appointed to manage the financial affairs and personal care of the disabled person. Guardianship proceedings are costly, public, and sometimes humiliating for the disabled person, as his or her mental disability must be proven to the court. Once disability is proven, the court will then select the individual to act as guardian. This person will need to report to the court and account for the disabled person’s assets at least annually. These accountings take time and can be expensive.If the now disabled person previously implemented a living trust based plan, the court proceeding would more than likely not have been necessary. When forming the trust the disabled person could have chosen which particular family members or trusted friends would determine incapacity (usually with the concurrence of a doctor) rather than a judge. The disabled person would also have chosen the trusted person (or financial institution or bank) who would manage his or her assets rather than a judge. Furthermore, the chosen trustee of the living trust has a “proactive” duty to protect the disabled person’s trust and associated financial affairs. This proactive duty is important as an agent under a durable power of attorney (commonly used in will based planning) must also use a disabled person’s assets for that person’s benefit, however, the duties of an agent are more often abused as such duties are not as well defined and regulated when compared to a trustee’s duties.The use of a living trust protects the disabled person by providing controls over who makes the determination of incapacity relating to the trust matters, decisions regarding the management of trust assets and trust affairs, reserving powers to make gifts, and the standards to be used when addressing such issues. The living trust also keeps decisions private and avoids the cost, delay, and humiliation of court proceedings.
- Death Probate. When an individual passes away, any probate property (i.e., bank accounts, real estate, personal property, etc.) in his or her name falls under the jurisdiction of the probate court of the state in which the decedent was domiciled (usually the place of residence), or in the case of real estate, where the property is sitused. Thus, estates of individuals having real property in multiple states may have to go through multiple probate proceedings. The probate court will then oversee the transfer of those assets from the deceased individual to his or her executor. The executor will then manage those assets for a period of time (statutorily at least 6 months but often times 1-2 years), wind-up the deceased person’s affairs and eventually distribute the assets according to the will of the decedent.The probate process is conceptually quite simple: pay off the debts of the decedent and ensure the transfer of the assets from the decedent to his or her family (or whomever he or she selects). In reality, however, the probate process can be expensive, inefficient, public and unnecessary. The probate process is a court supervised process. The executor will need to have an attorney to open the estate, to make sure that all local and state rules are followed, to periodically account to the court or the beneficiaries, and to close the estate. In many cases the attorney will also conduct the investigation to locate all of the decedent’s assets and to make the transfers of assets from the decedent to the executor. Because most executors are not intimately familiar with the decedent’s financial affairs, the investigation and inventory process is often quite costly.The probate process is also a public process. All documents filed with the court, including any inventories of the decedent’s assets, are public records.Had the decedent executed and fully funded a living trust, the probate process would be unnecessary. Assets in a living trust are not probate property. By placing the assets in the trust during his or her life, the decedent can save his or her family the cost of the inventory process, the cost of the court proceeding, the delays inherent in probate, and keep the transfer of assets private and not part of the public record.
- Control of Property and Protection from Creditors. A simple will allows an individual to select who will receive some of his or her assets. Once the person receives the assets, they can do whatever they want with the assets, and the recipient’s creditors can generally reach those assets. For example, if a child receives an inheritance outright and has creditors, the creditors will likely gain access to those funds. If the child places the inheritance in a joint account with his or her spouse, the assets can become divisible marital property and be lost in a divorce settlement (a very “taxing” event indeed). With a living trust, the parent can control all of the assets to protect them from being lost. This can be done, in part, through the use of a convenience trust allowing the child immediate unfettered withdrawal rights to all trust funds. This method provides for limited divorce protections (by leaving assets in the trust they may generally be considered non-marital property); however, the child will definitely not be protected from general creditors.A trust for the child may allow the child staggered withdrawal rights to trust assets over time (i.e., 1/5th every five years until child is 45 years of age or the like); but, at all times the trustee is able to use the funds for the benefit of the child. During the staggering period the child is protected from himself/herself (i.e., immaturity, poor spending habits or lack of business/financial acumen, etc.) and enhanced divorce and general creditor protection is provided. An even more restrictive child trust further limits the child’s withdrawal rights with the trustee having the ability to use the funds for the benefit of the child (various discretionary standards regarding distribution may be used). This method provides even greater creditor protection (especially with an “independent trustee”; however, with a financially responsible child, the parents may choose the child as trustee) as well as Generation Skipping Transfer Tax (GST) protections.
- Minimize Illinois and Federal Transfer Taxes. Both the federal and Illinois estate taxes are in effect:
- The federal estate tax exemption is $5.34 million per person ($10.68 million per married couple). The current federal estate tax rate is 40%. (Note: President Obama’s current budget contemplates a federal estate tax exemption of only $3.5 million).
- The federal gift tax exemption is also currently $5.34 million per person.
- The federal generation skipping transfer tax (GST) exemption is $5.34 million per person.
- The Illinois estate tax exemption is $4 million per person ($8 million per married couple). The current Illinois estate tax rate ranges from 8% – 16%.
Fully funded living trust planning can assist in fully utilizing the above exemptions.
- Conclusion. A fully funded living trust can enable you to maintain control and dispose of your property as you choose, while avoiding the costs and delays inherent in the death and living probate processes, save significant inheritance and estate tax, and protect your beneficiaries from their creditors (including from divorcing spouses or ex-spouses).
To protect your assets for future generations, please call Kelleher & Buckley, LLC at 847-382-9130 or email us at firstname.lastname@example.org to speak with one of our attorneys to establish an estate plan for you and your family.
Kelleher & Buckley, LLC provides competitive legal, tax, advisory and business services, continuously striving to exceed our clients’ expectations, attract and retain talented people and be the law firm of choice for individuals and businesses alike.
Pursuant to requirements related to practice before the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.