A living trust is a very popular addition to the average estate plan. In fact, you may be considering the addition of a living trust to your estate plan after listening to friends and/or family tout the benefits of including a trust in your estate plan. A trust certainly can be a beneficial estate planning tool that may help you achieve a wide range of goals. Before deciding if you should incorporate a living trust into your estate plan, however, you should be certain that you understand the advantages and disadvantages of a living trust.
What Is a Trust?
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. The beneficiaries of a trust may be individuals, entities (such as a church or charity), or even your family pet. A trust may also include both current and future beneficiaries.
Trusts are broadly divided into two categories. A testamentary trust is one that activates upon the death of the Settlor, typically via a provision in the Settlor’s Last Will and Testament. A living trust, on the other hand, activates as soon as all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts, whereas a testamentary trust is always revocable.
Advantages of a Living Trust
The advantages to a living trust are numerous, which is why living trusts are so commonly included in a comprehensive estate plan. To some extent, the specific advantages of a living trust will depend on whether the trust is a revocable or irrevocable living trust; however, some advantages apply to both. Among the advantages of a living trust are:
- Probate avoidance – assets gifted in your Will must first go through the probate process before being distributed to the beneficiaries. Assets held in a living trust, however, bypass the probate process altogether and may, therefore, be distributed at any time according to the terms of the trust agreement.
- Control over gifts – gifts made outright, either during your lifetime or in your Will, become the property of the beneficiary to do with as he/she sees fit. A living trust, however, allows you to gift assets while still maintaining a certain degree of control over how they are used.
- Ability to protect a minor’s inheritance – your minor children cannot inherit directly from your estate. A living trust, however, can protect a child’s inheritance until he/she is old enough to receive and manage the assets.
- Protects against incapacity – a revocable living trust can also be used for incapacity planning. You appoint yourself as the Trustee and someone you want to take over control of your assets during your own incapacity as the successor Trustee. Major assets are then transferred into the trust. If incapacity does strike, your named successor takes over management of the trust assets automatically until you are able to retake control.
- Asset protection – an irrevocable living trust can function as an asset protection tool. Once assets are transferred into the trust they are no longer considered part of your estate and are, therefore, out of the reach of creditors and other potential threats.
- Special needs planning – gifting assets directly to a loved one with special needs can jeopardize your loved one’s eligibility for much needed assistance programs such as Medicaid and SSI. A special type of irrevocable living trust allows you to provide for your loved one without putting those benefits at risk.
Disadvantages of a Living Trust
The two primary disadvantages to a living trust are cost and complexity. It typically requires more time and expense to establish a trust than it does to create a Will. In addition, because a trust must be administered by a Trustee for the life of the trust, the ongoing costs of a trust are something that must be taken into consideration. A trust can also be fairly complex, depending on the type of trust created and the trust purpose. To create a trust you must draft a trust agreement, something that should only be accomplished with the assistance of an experienced trust attorney. A trust is also a separate legal entity, meaning the trust must file a tax return every year and the Trustee must keep very detailed records of all trust business.
Contact Illinois Trust Attorneys
Please join us for a FREE upcoming seminar. If you have questions or concerns regarding the advantages and disadvantages of a living trust, contact the experienced Illinois trust attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.