Most people choose to execute a Last Will and Testament as the foundation for their estate plan. As they build on that plan they add additional estate planning tools and strategies to the plan. One of the most common additions to a comprehensive estate plan is a trust agreement. If you are the parent of a minor child, for example, you may wish to add a testamentary trust to your plan as a way to protect your minor child’s inheritance in the event something happens to you before your child reaches adulthood. If you do decide to include a testamentary trust in your estate plan you will need to appoint a Trustee who will be responsible for the trust administration process after you are gone. Given the importance of this position, it is important to choose your Trustee wisely.
Understanding Trusts – The Basics
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also called a Maker or a Grantor, who transfers property to a Trustee. The Trustee holds that property for the trust beneficiaries. The beneficiary of a trust can be an individual, an entity (such as a charity or political organization), or even the family pet. A trust must have at least one beneficiary but may have an unlimited number of beneficiaries. A trust may have both current and future beneficiaries.
All trusts fit into one of two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust, activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason once active. Because a testamentary trust is activated by a provision in a Will, it is always revocable just like the Will that serves to activate the trust.
Once a testamentary trust activates it must be administered. The Trustee, appointed by you when you create the trust, is responsible for protecting trust assets and overseeing the administration of the trust. Among the many duties and responsibilities of the Trustee are:
- Managing and protecting trust assets
- Abiding by the trust terms unless they are impossible, illegal, or unconscionable
- Investing trust funds using the “Prudent Investor Standard”
- Monitoring trust investments
- Communicating with trust beneficiaries
- Resolving conflicts among beneficiaries
- Making discretionary decisions
- Distributing trust funds to beneficiaries
- Approving or denying distributions if given discretionary authority
- Keeping detailed trust records
- Preparing and paying trust taxes
A common mistake people make when appointing a Trustee to administer a trust is to appoint a spouse, close friend, or family member based solely on the fact that they “trust” that person. Clearly, you should trust the person you appoint as your Trustee; however, given the numerous and varied duties and responsibilities of a Trustee you should not base your decision only on the trustworthiness of the individual. In fact, you may wish to consider appointing a professional Trustee to handle the administration of your trust. A professional Trustee has both the knowledge and experience to successfully administer your trust. In addition, you avoid potential problems such as a conflict of interest with a beneficiary or discord in the family by appointing a neutral person as your Trustee. Before you decide who to appoint as your Trustee, sit down and discuss your options with your trust administration attorney.
Contact a Trust Administration Attorney
Please download our FREE estate planning worksheet. If you have questions or concerns regarding trust administration in the State of Illinois, contact the experienced trust administration lawyers at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.