When the topic of estate planning comes up, there are some terms that you are likely to hear discussed. The purpose of a Last Will and Testament, for example, is sure to come up at some point. Another common estate planning tool is a living trust. What are living trusts used for though? Before you can decide if a living trust should be added to your estate plan, you need to know the answer to that question.
A trust is a separate legal entity that owns and holds property for the benefit of one or more beneficiaries. All trusts require the following five elements for creation:
- Settlor – the person who creates the trust. A Settlor may also be referred to as the Grantor or Maker of the trust.
- Trustee – an individual or entity that administers the trust terms as well as manages and invests the trust assets.
- Beneficiary – a beneficiary is the person, entity, or even family pet that receives the benefit of the trust assets.
- Terms – created by the Settlor and may be anything that is not illegal or unconscionable.
- Funding – almost anything of value can be used to a fund a trust, including cash, securities, and real property.
Testamentary vs. Living Trusts
Trusts can be divided into two broad categories – testamentary and living trusts. A testamentary trust is a trust that only activates after the death of the Settlor. As the name implies, a living trust activates while the Settlor is still alive. Living trusts can be revocable or irrevocable whereas a testamentary trust is always revocable because it is typically triggered by a provision in the Settlor’s Last Will and Testament which can always be revoked up until the time of death.
Uses for a Living Trust
Trusts have evolved over the years to the point where there is now a specialized trust for almost any estate planning goal, making trusts a common addition to any estate plan. Some of the most common uses for a living trust include:
- Probate avoidance – probate serves several important functions, including ensuring that your estate assets are identified and distributed, notifying creditors and allowing them to file claims against your estate, and paying any taxes due from your estate. Because formal probate can take a very long time to complete and is often expensive, probate avoidance is a popular estate planning goal. A living trust can help further that goal because assets held by a trust are non-probate assets, meaning they do not have to go through the probate process before being distributed.
- Incapacity planning — a revocable living trust is a good way to plan for the possibility of your own incapacity. It works by allowing you to name yourself as the Trustee of the trust, allowing you to control trust assets as long as you are able to do so. You name the person you wish to take over control of those assets as the successor Trustee. If you become incapacitated, control shifts to the successor Trustee automatically.
- Medicaid planning — for many seniors faced with the high cost of long-term care, Medicaid is their only hope for help covering those costs. Qualifying for Medicaid, however, can put a retirement nest egg in jeopardy if you failed to plan ahead because of the Medicaid asset limits used to determine eligibility. Creating an irrevocable living trust as part of a larger Medicaid planning component within your estate plan can protect those assets while ensuring your eligibility for Medicaid if you need it in the future.
- Asset protection — assets transferred into an irrevocable living trust become trust assets. As such, you no longer have an ownership interest in those assets, meaning they cannot be reached by creditors or other threats.
- Special needs planning – if you are the parent of a child with special needs, care must be taken when planning for the future financial support of your child because of the rigid income and asset eligibility guidelines of assistance programs such as Medicaid and Supplemental Security Income (SSI). Creating a special needs trust allows you to provide supplemental financial support to your child without jeopardizing eligibility for assistance.
Contact Illinois Living Trust Attorneys
For additional information, please download our FREE estate planning worksheet. If you have additional questions or concerns regarding the use of a living trust in the State of Illinois, contact the experienced Illinois living trust lawyers at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.