Estate Planning

A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” The rules or instructions under which the trustee operates are set out in the trust instrument. There can be a number of advantages to establishing a trust, depending on the individual situation:

Probate avoidance. Upon the death of the donor (the person creating the trust), the trust either continues for new beneficiaries or terminates, depending on the terms of the trust. In either case, this occurs without requiring probate. This can save time and money for the beneficiaries.

Tax savings. Certain trusts can create estate tax advantages both for the donor and the beneficiary. These are often referred to as “credit shelter” or “life insurance” trusts.

Asset protection. Other trusts may be used to protect property from creditors or to help the donor qualify for Medicaid coverage of nursing home care.

Privacy. Unlike wills, trusts are private documents and only those individuals with a direct interest in the trust have any right to know of trust assets and distributions.

Durability. Provided they are well-drafted, another advantage of trusts is their continuing effectiveness even if the donor dies or becomes incapacitated.

Kinds of Trusts:

Trusts fall into two basic categories: revocable and irrevocable.

Revocable Trusts: Revocable trusts give the donor complete control over the trust. He or she may amend, revoke or terminate the trust at any time. The donor can take back the funds he or she put in the trust or change the trust’s terms. Thus, the donor is able to reap the benefits of the trust arrangement while maintaining the ability to change the trust at any time prior to death.

Revocable trusts are generally used for the following purposes:

  1. Asset management. They permit the trustee (the person who manages the trust) to administer and invest the trust property for the benefit of one or more beneficiaries of the trust.
  2. Probate avoidance. At the death of the person who created the trust, the trust property passes to whomever is named in the trust. It does not come under the jurisdiction of the probate court and its distribution need not be held up by the probate process. However, the property of a revocable trust will be included in the donor’s estate for tax purposes.
  3. Tax planning. While the assets of a revocable trust will be included in the donor’s taxable estate, the trust can be drafted so that the assets will not be included in the estates of the beneficiaries, thus avoiding taxes when they die.
  4. Disability planning. Wills only provide for death. Trusts can help a person have a plan in place in the event of their own illness.

Irrevocable Trusts:
An irrevocable trust cannot be changed or amended by the donor. Any property placed into the trust may only be distributed by the trustee as provided for in the trust document itself. For instance, the donor may set up a trust under which he or she will receive income earned on the trust property, but the trust bars access to the trust principal. This type of irrevocable trust is a popular tool for Medicaid planning. In addition, irrevocable trusts are often used with life insurance policies as an estate tax planning device.

Testamentary Trusts:
A testamentary trust is a trust created by a will. Such a trust has no power or effect until the will of the donor is probated. Although a testamentary trust will not avoid the need for probate and will become a public document as it is a part of the will, it can be useful in accomplishing other estate planning goals. For example, the testamentary trust can be used to provide funds for a surviving spouse who would be protected if they required Medicaid-covered facility care, an option that is not available through the use of a revocable or “living” trust.

Special Needs Trusts:
The purpose of a special needs trust is to enable the donor to provide for the continuing care of a disabled spouse, child, relative or friend. The beneficiary of a well-drafted special needs trust will have access to the trust assets and still be eligible for benefits such as Supplemental Security Income, Medicaid and low-income housing. A special needs trust can be created by the donor during life or be part of a will.

Living Trust
One of the most popular and enduring options for sophisticated estate planning is the Living Trust. Sometimes referred to as a "Revocable" or "Inter Vivos" Trust, this instrument creates a separate entity with specific and very individualized rules for its operation. Normally, it is completely revocable or amendable by its creator (referred to as the "Grantor") during his or her lifetime (though that may not always be advisable), and the trustee may be virtually any person, entity or combination of persons and entities. Some of the principal advantages of the Living Trust are:

  1. Flexibility and Control. The Living Trust offers the Grantor the maximum control over his or her assets in the present and in the predictable future. It provides the opportunity for directing the general uses of the trust assets after the death of the Grantor, and can be designed around the specific needs of the Grantor's family. A trust can be a way to ensure that money is available for the education of children or grandchildren, or for extraordinary care required for a disabled child or spouse.
  2. Management of Assets. One option for a Living Trust is to select a corporate trustee. Many banks maintain trust departments, which can be selected to manage the trust estate. The Grantor may choose to act as Trustee himself, but the availability of professional asset management is attractive to many individuals.
  3. Protection During Illness or Incapacity.The Living Trust can be constructed to provide for management of assets during any period of illness or incapacity of the Grantor. This flexibility will normally avoid the necessity of guardianship proceedings in the future, and will provide for the smooth transition of control from the Grantor to a trusted, selected individual or entity.
  4. Continuity.If the Grantor dies, the Living Trust continues to function as planned, with no break for the Probate process. Assets in the Living Trust normally are handled exactly as they were prior to the Grantor's death, and the trustee may be directed to either make the income available to a specific person or persons, or to distribute the assets outright and end the trust.
  5. Avoiding Probate. Assets that belonged to the Living Trust before the death of the Grantor do not need to be taken through the Probate process. In addition to the saving of time (even a simple Probate will normally take six months or longer), this may save considerable expense to the successors. A Living Trust is particularly advantageous where the Grantors own real property in more than one state, since a separate ancillary probate proceeding may be required in each state where real property is located.
  6. Privacy. Only persons with an interest in the Living Trust need be notified of the proceedings, the assets held in trust, or their values or ultimate disposition. No publication of notices, Court filings or public hearings are normally required.
  7. Estate Taxes. After much debate, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act ("TRUIRJCA" or "TRA 2010" for short) was signed into law by President Obama on December 17, 2010. This law provided sweeping changes to the rules governing federal estate taxes, gift taxes and generation-skipping transfer taxes, but only for the 2010, 2011 and 2012 tax years. However, it expires in 2012 and again the estate tax law may change.
  8. 2012 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws.Here is a summary of what TRA 2010 provides for gifts made in 2012 and the estates of decedents who die in 2011 or 2012, as well as some problems created with regard to state estate taxes:
    • Set new and unified estate tax, gift tax and generation-skipping transfer tax exemptions and rates. For 2012, the federal estate tax exemption is $5.12 million and the estate tax rate for estates valued over this amount is 35%. The estate tax has also become unified with federal gift and generation-skipping transfer taxes such that in 2012 the lifetime gift tax exemption and generation-skipping transfer tax exemption will be $5.12 million each and the tax rate for both of these taxes will also be 35%.
    • Indexed estate tax, gift tax and generation-skipping transfer tax exemptions for inflation in 2012. The estate tax, gift tax and generation-skipping transfer tax exemptions have been indexed for inflation for the 2012 tax year such that each will be increased from $5 million to $5.12 million beginning on January 1, 2012.
    • Provides "portability" of the federal estate tax exemption between married couples. In 2009 and prior years, married couples could pass on up to two times the federal estate tax exemption by including "AB Trusts" or "ABC Trusts" in their estate plan. TRA 2010 eliminates the need for AB Trust planning or ABC Trust planning for federal estate taxes by allowing married couples to add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse's estate tax exemption. This will effectively allow married couples to pass $10.24 million on to their heirs free from federal estate taxes with absolutely no planning at all. As it now stands portability is only available for deaths that occur during the 2011 and 2012 tax years. In addition, without AB Trust or ABC Trust planning, Illinois Estate Tax may be due. Illinois assesses estate taxes on estates, which exceed 3.5 million in 2012, and 4 million in 2013 and thereafter. There is no portability between spouses, so planning to minimize Illinois estate taxes requires creating a Trust.
  9. Tax savings. Estate taxes are assessed on estates exceeding 5.12 million dollars (unless the decedent is married). Once this 5.12 million dollar level is reached an effective tax rate of 35% is assessed. Illinois taxes estates greater than 3.5 million dollars in 2012 and 4 million dollars in 2013 and thereafter. A Living Trust can insure that a couple protects a total of 7 million in 2012 and 8 million in 2013 from taxation.
  10. Security Against Challenges. Since the Living Trust usually will have been in place for a considerable period of time before the death of the Grantor, and since there is no Court proceeding initiated to determine the validity of the trust document, it is normally much more difficult for disinherited relatives to challenge the estate plan.
  11. A Living Trust is usually "funded" by transferring most or all the Grantor's assets into the name of the trust. The trustee is then directed to utilize the income from those assets exclusively for the benefit of the Grantor during the Grantor's life, but even these common provisions may be altered to provide for each Grantor's unique circumstances.  Read information from the National Academy of Elder Law Attorneys