 What is a
trust?
A trust is an estate of property
in which title to property is held by
one person or institution, but the
benefit or use of the property is for
other designated people. The
person establishing the trust is
called the Grantor. The person
holding title to the property and
overseeing the proper disposition of
the property is called the
Trustee. The person who has the
use of the property, which can be
current or in the future, is called
the Beneficiary. The property
held by the trust is often called the
res. In many cases,
especially a living trust, the same
person can be Grantor, Trustee, and
Beneficiary at the same time.
The trustee is under the highest
standard of legal duty, called
fiduciary duty, to operate the trust
solely for the benefit of the
beneficiaries as directed by the
written terms of the trust
document. In complicated cases,
sometimes we use a Trust Protector.
What
is a living trust?
A “living” or “inter vivos”
trust is one that is set up and
funded while the grantor (the person
funding or establishing the trust)
is still alive. In most cases, the
grantor names his or her self as
both trustee and beneficiary. In a
joint trust scenario, both husband
and wife are co-trustees as well as
co-beneficiaries while both remain
living. A living trust can be
modified or revoked as long as the
settlor (or settlors in the case of
a joint trust) are living. Another
kind of trust is the “testamentary
trust,” which is established by a
will, typically for the care of a
minor child, and it operates only
after the grantor’s death.
What
is a joint living trust?
A joint trust is made between
spouses. They act as co-settlors and
co-trustees, and all of their assets
are pooled together in the trust.
While this can make for easier
administration, it is important to
know that all property held in this
manner becomes marital property, and
that the trust becomes irrevocable
upon the death of the first spouse.
Living trusts set up by spouses may
also take advantage of the Federal
tax marital deduction.
These are important distinctions
that must be taken into
consideration by a couple thinking
about utilizing a joint trust.
What
is the “funding” of a living
trust?
Funding is the process of
transferring your assets from your
individual ownership to the
trust. The trustee becomes the
title holder, while you or the
others you specify in the
declaration of trust, become the
beneficiaries having the use of the
property.
How
do I fund my trust?
How a property is transferred to
the trust depends on the type of
property
- Property that has written a
title (e.g., real estate)
is transferred to the trust by
changing the title.
- Personal property is
transferred to the trust using a
written document commemorating the
transfer.
- Assets held in accounts (e.g.,
bank accounts, brokerage accounts
etc.) are transferred by changing
beneficiary designation with the
institution managing the account,
such as the bank.Often this means
opening new accounts at banks in
the name of the trust.
These types of property are
described below.
Can
you still control the property
while it is in the trust?
Yes. The person you name as
trustee has the full power over the
assets in the trust. Since you
can name yourself trustee, you have
control. In the most common
type of trust, a living or inter
vivos trust, you or your spouse
still have complete control.
Why
do I need to fund the trust?
You will not avoid probate if
you fail to properly fund the trust.
If you do not transfer your assets
into the trust you will not get any
of the benefits of it. Your
assets will go through the probate
process you were trying to avoid.
Who
is responsible for funding the
trust?
Your attorney will help with the
major assets, but you are
ultimately responsible for ensuring
all of your assets are transferred
and all your accounts with
institutions are transferred.
Is
the funding process difficult?
No, but it does take effort
which should not be skipped. Much of
the work can be done online or
through the mail. Living trusts are
now so widely used that institutions
are familiar with them and have
streamlined procedures in place to
facilitate the funding process.
There is some work to accomplish the
transfer, but it is necessary for
the trust to work as intended.
If
someone sees my trust, will he see
my assets?
Your attorney can draft the
trust describing the terms and
conditions directing how the trust
will operate. Since you will
convey the trust property, or res,
separately, disclosure of the trust
will not ordinarily disclose the
assets. That is not to say
that the IRS or a court order cannot
demand disclosure, but ordinarily
there is no disclosure to the
public.
What
assets should I put into my trust?
You should try to get as much of
your estate into the trust as
possible. In the case of dual
trusts for spouses, it is also
desirable to maintain as close to a
50-50 distribution of assets as
possible between the two trusts.
How
is real estate placed into my
trust?
The process of transferring real
estate into your trust must comply
with legal process. The steps
are as follows:
- Your lawyer prepares a Deed
in Trust, in which you convey a
specific parcel to the Trustee.
- A form is prepared confirming
that the transfer is exempt from
State of Illinois and County
transfer taxes.
- You verify whether your town
or village requires a transfer
stamp tax.
- The Deed in Trust is recorded
in the County where the land
sits. This places the world
on notice that the property is in
trust.
- You should notify your
property insurance agent that the
property is in trust so the policy
can be conformed to the new
ownership.
- If there is a mortgage, you
should notify the mortgage
company.
- Have your attorney contact
your title insurer to transfer the
benefits.
You may be aware that a
mortgage includes a clause which
accelerates or terminates a
mortgage with a "due on sale"
clause. The Garn St. Germain
Act is Federal law which prevents
this clause from taking effect
when a property is placed in
trust.
Are there some
assets which should not be placed
in the trust?
One example could be an
automobile. While you could
make your car trust property,
because cars depreciate so rapidly
and are bought and sold frequently,
most grantors do not transfer them
to the trust. The placement of the
trust on the car's certificate of
title complicates the sale of the
car. On the other hand,
antique or other valuable
automobiles may increase in value or
hold a great deal of value, and are
thus more appropriate trust assets.
If you do choose to transfer title,
you should contact the
Illinois the Secretary of State.
Cyberassets, your assets on
internet sites, are still too new
for the law to adapt. Most web
sites have terms of use or User
agreements which dictate the terms
of use, and these are not well
adapted to a trust. The value
of such assets are also not well
established.
Should
I transfer my IRA or 401(k) assets
to the trust?
The ownership of a retirement
account such as an IRA or other
tax-deferred plan should not be
transferred to a trust because that
so can result in serious tax
penalties and loss of flexibility in
the future. Ordinarily the
beneficiary of a retirement account,
which itself may be a trust, is
designated in the that account's
paperwork. You may want to
name the trust as a contingent
beneficiary of such plans. Spouses
are treated as a special class under
the law for these assets, and they
should be kept as the primary
beneficiary in order to ensure that
they are able to exercise all of
their rights. For example, a spouse
can roll-over an account into their
own IRA or tax-deferred account.
Naming the trust as a contingent
beneficiary gives you some control
over the distribution of these
assets should something happen to
you and your spouse, while
preserving your spouse’s
rights.
While you do not transfer the
account to the trust, thinking of
your Trust and Will as part of
estate plan gives a good reminder to
check the account paperwork
designating your choice of
beneficiaries in your retirement
accounts. Often these accounts
are opened as much as 50 years in
the past, and you may have forgotten
who you chose to be your
beneficiary, or the choice is no
longer appropriate with your current
estate plans and needs. Now
you have the opportunity to review
your choices and make them
consistent with your total estate
plan.
How
do I transfer personal property,
heirlooms and the like to my
trust?
Your lawyer can prepare a form
for you conveying your personal
property to the trust.
Should
I put my life insurance into the
trust?
Life insurance may be owned by a
specialized type of trust called an
irrevocable life insurance trust.
Living trusts do not typically own
policies, but they can be named as
the beneficiary in some plans.
First, you notify the insurance
company and their specific change in
beneficiary designation form
executed. Then, the insurance policy
information should be added to the
schedule of assets kept with the
living trust.
Can I avoid
using a Will?
No. You should still
execute a will because some assets
may not be covered by the
trust. You may later acquire
assets by inheritance or
otherwise. The will can make
sure these assets be transferred as
you intend. However, a living
trust will reduce the costs and time
of the remaining assets in
probate. Also, the balance of
these assets may be transferred
using the Small Estate procedure of
the Illinois Probate Code.
For more information on Wills, see
the Wills
FAQ.
How will a
living trust affect my taxes?
In most cases a living trust
qualifies as a "Grantor Trust," in
which case, any income will pass
through to your personal estate and
be taxed at your own tax
rates. Living trusts
established between spouses can also
take advantage of the spousal
exemption of the estate tax or
"death tax." Using this
exemption can preserve much more of
your estate for your children.
Who
should prepare a living trust for
me?
A lawyer. In
the hands of a competent attorney, a
custom-drafted living trust can be
an indispensable estate-planning
tool, helping save an older person's
survivors the costs, delays and
complications of the probate process
after his or her death.
Unfortunately, many of the
living trusts purchased in this
country in recent years have been
sold not by attorneys, but by
fly-by-night companies using scare
tactics and high-pressure sales
pitches to peddle one-size-fits-all
products. Many of the people
purchasing these living trusts don't
even have assets substantial enough
to make living trusts beneficial.
For some of these unscrupulous
companies, the marketing of
boilerplate living trusts is simply a
means to obtain detailed financial
information about senior citizens.
That information is later used to sell
the older people costly and
unnecessary insurance products.
This information comes from a Chicago
Tribune article. To see the
article, click this link:
http://articles.chicagotribune.com/2000-09-13/business/0009130037_1_probate-trusts-smaller-estates
A trusted attorney should guide you
through the analysis whether a living
trust is appropriate for you.
|
