Estate planning is both crucial and complicated. Having an estate plan in place is crucial for a variety of reasons that go beyond the need to know what will happen to your estate assets when you are gone. In fact, in the grand scheme of things, the distribution of your assets is often the least important goal of a comprehensive estate plan. The numerous interrelated goals that are frequently part of estate planning are what make the process complicated. To achieve all of those goals you will likely need to utilize a variety of estate planning strategies and tools, such as a trust agreement. If you do plan to include a trust in your estate plan, you will need to decide what type of trust you need. That, in turn, requires at least a basic understanding of the different types of trusts. For example, do you know the most common uses for irrevocable living trusts within an estate plan? To know if an irrevocable living trust is right for your estate plan you need to know when and why they are used.
Trust Basics – The Elements
There was a time, not all that long ago, when trusts were used almost exclusively by wealthy families. The reason for this was that trusts were once able to shelter assets and even effectuate the transfer of assets from one generation to the next without incurring taxes. Trusts also provided (and still do) an excellent way for a Settlor to continue to maintain a certain degree of control over the assets held in the trust, even after the Settlor was gone. Trusts have evolved considerably over the last few decades; however, all trusts remain the same at heart because all trust require the same basic elements to form, including:
- Settlor – the Settlor, also referred to as the “Grantor,” or the “Trustor,” is the individual who creates the trust.
- Trustee – the Trustee is the person who manages and invests the trust assets and the administration of the trust in general.
- Beneficiary – every trust must have at least one beneficiary, but may have many. The beneficiary receives the benefit from the trust assets and may be a person, and organization (such as a church), a company, or even a family pet.
- Terms – the terms of a trust dictate how the trust is to be administered, how the trusts funds are to be invested, and how and when assets are to be distributed to beneficiaries.
- Funding – just about any type of assets can be used to fund a trust, including cash and securities, real property, or even the proceeds from a life insurance policy.
Testamentary vs. Living Trusts
All trusts are broadly divided into two categories – testamentary and living trusts. A testamentary trust is one that does not activate until the death of the Settlor, usually triggered by a term in the Settlor’s Last Will and Testament. A living trust, as the name implies, is a trust that activates as soon as all the formalities of creation are in place.
Revocable vs. Irrevocable Trusts
Living trusts can be further sub-divided into revocable and irrevocable living trusts. A revocable living trust is one that can be modified, amended, terminated, or revoked at any time, and for any reason, by the Settlor whereas an irrevocable living trust cannot be modified or revoked for any reason by the Settlor once the trust is active. Because a testamentary trust does not activate until the death of the Settlor it is always revocable up to the point of the Settlor’s death.
Irrevocable Living Trusts
Knowing which type of trust you need is the key to benefiting from the addition of a trust to your estate plan. The most common use of an irrevocable living trust is asset protection. Once assets are transferred into an irrevocable living trust they become the property of the trust, meaning the Settlor no longer has any legal interest or authority in the assets. Moreover, once transferred into the trust, the assets cannot be transferred back out by the Settlor. The law, therefore, considers those assets to be out of the reach of the Settlor and out of the reach of creditors or anyone else trying to reach the Settlor’s assets. Furthermore, assets held in an irrevocable living trust may possibly not be considered part of the Settlor’s “countable assets” for the purpose of determining Medicaid eligibility or eligibility for other needs based assistance programs.
If you have questions or concerns regarding irrevocable living trusts in the State of Illinois, contact the experienced Illinois estate planning attorneys at Nash Bean Ford & Brown, LLP by calling 309-944-2188 to schedule your appointment today.