Frequently Asked Questions

What is a Revocable Trust?

A Revocable Trust is a popular vehicle for titling and management of one’s assets during lifetime, in the event of disability and upon death. The primary purpose of this type of trust is to establish a structure to manage assets for its intended beneficiaries. It typically contains provisions for who should manage one’s financial affairs in the event of disability; who should administer the trust estate upon death; and how the trust estate should be divided and distributed after death.

A Revocable Trust (also known as a “Living Trust” or “Inter Vivos Trust”) as the name suggests, is revocable or amendable during lifetime. The parties that are involved in the trust are:

  • Grantor (also known as “Trustor” or “Settlor”): The individual(s) that creates trust. The Grantor must transfer title of ownership for each asset that will be placed in the trust from his or her name to that of the trust. This is often referred to as “funding” the trust.
  • Trustee: The individual(s) or corporation(s) that manage the trust assets in accordance with the provisions set forth in the trust agreement for the benefit of the beneficiary(s) of the trust. The Trustee acts in a “fiduciary” capacity which requires a high standard of conduct and responsibility for both the Grantor and the beneficiary(s).
  • Successor Trustee(s): In the event the initial Trustee is unable or unwilling to act, then these named individuals will take over the role of managing the trust assets.
  • Beneficiary(s): Those individuals or charities that the Grantor intends to benefit from the trust

In most instances, the Grantor, initial Trustee, and initial Beneficiary of a Revocable Trust are the same person. As both the Grantor and the Trustee, an individual can maintain full control of the trust until his or her death or incapacity.

In order to determine whether or not a Revocable Trust is an appropriate vehicle for your estate plan, consider some of its advantages and disadvantages:

Advantages

Continuity of Management During Disability or Death

By properly funding the Revocable Trust, it can continue to manage trust assets regardless of the Grantor’s mental or physical incapacity or upon the Grantor’s death. Although a Power of Attorney for Property might also be effective in managing assets in the event of a disability, financial institutions often find a power of attorney less authoritative than a Revocable Trust. Furthermore, a Power of Attorney for Property becomes ineffective upon the principal’s death, thereby requiring the initiation of probate proceedings, to obtain letters of office authorizing the management of the assets. A properly funded Revocable Trust avoids the necessity of a court declaration of incompetence and the management of assets by a court-appointed guardian or conservator. That process can involve large legal and bond fees, severe restrictions on investment, and continued court supervision over the management and distribution of assets.If the Grantor becomes competent again to act, he or she then can take up active management of the trust. Upon the Grantor’s death, there are named successor trustees to continue management of the trust assets without the need of a court order.

Flexibility

The terms of a Revocable Trust can be modified as one’s goals change. It can be designed as a unique vehicle in that it is a reflection of one’s desires and circumstances. As life continues to evolve, the trust document may also evolve to reflect these changes. The flexibility of a Revocable Trust allows, for example, choosing whether to terminate the trust and distribute assets immediately following death or have it continue and control the distribution of assets for named beneficiaries.

Avoidance of Probate

The probate process can be burdensome both financially and emotionally to family and friends following death. One of the primary reasons often cited for creating a Revocable Trust is to avoid the probate process. The critical requirement is to make sure that the trust is properly funded during one’s lifetime.In addition, if one owns real estate that is physically located in other states, then you can avoid having to incur ancillary probate administration in each such state by conveying title to the real estate to the Revocable Trust.Finally, the probate process in Illinois takes no less than 6 months and typically 1 year to 18 months to complete. During the first 6 months, distributions are generally not made unless approved by court order. Assets in a Revocable Trust, on the other hand, can be available immediately without waiting for the issuance of letters of administration from a probate court, authorizing an executor to act.

Lost or Destroyed Originals

Unlike a Will, which typically has only one signed original, it is acceptable to sign multiple original copies of a Revocable Trust. Therefore if one is lost or destroyed, then you can produce another original which will have the same authority. If a signed Will is lost or otherwise destroyed, there is a rebuttable presumption that it was purposefully revoked.

Privacy

Unlike a Will, assets placed in a Revocable Trust are not automatically a matter of public record. This avoids having public exposure to the disposition of your assets, its value and the disclosure of your beneficiary(s). If your Revocable Trust is ever contested, then the privacy of your trust document may be lost since court records are generally available to the public.

Segregation of Assets

By creating a Revocable Trust, you can ensure that property that you wish to remain segregated is not commingled with other property. In the event of a divorce, for example, you can provide adequate records showing that certain property placed in the trust is inherited property and therefore not subject to a divorce proceeding.If a spouse dies during a pending divorce, the surviving spouse may seek to inherit property from the decedent's estate. A spouse can renounce the Will for a statutory spousal share of the decedent's estate (even if the spouse is not named in the Will).In accordance with Illinois law, a spouse has no such rights under a trust. Therefore, it may be advantageous to transfer property to a trust and limit property transferred through the decedent's probate estate.

Tax Treatment

At the election of the Trustee of a Revocable Trust and the executor of the estate, a combined income tax return can be filed providing additional benefits for the trust such as:

  • Increased charitable deductions
  • Increased passive-loss deductions for active rental real estate activities
  • A trust can choose a fiscal year-end, thereby allowing income-deferral techniques
  • Estimated tax payments are not required for the first two years after the date of death

Disadvantages

Trust Preparation and Funding

The costs of preparing a Revocable Trust and transferring property may be more than that of preparing a Will. The actual re-titling of assets in the name of the trust can be a time consuming process. Furthermore, trust funding requires some on-going maintenance to ensure that any new property acquired is properly titled in the name of the trust. Upon the death of the Grantor, if assets remain in his or her individual name without a beneficiary designation, then a probate proceeding may be required. Please note, however, a Pour-Over Will in addition to a Revocable Trust, will ensure that any missed assets ultimately become part of the trust.

May Not Automatically Adapt to Changed Circumstances

Changes to your Revocable Trust require active steps to be taken. In the event of a death, divorce, disability, birth of a child, marriage, or other circumstance, inform us immediately to ensure that any necessary amendments to the Revocable Trust are made.

Myths

In addition to some of the advantages and disadvantages, lets examine a few ideas about Revocable Trusts:

Myth 1 - Revocable Trusts Eliminate Estate Taxes

Estate taxes are generally the same for a well-drafted Will. For estate and income tax purposes, the property in a revocable trust is treated as if it were the Grantor’s own property.

Myth 2 - Revocable Trusts Always Avoid Probate

Only if the Revocable Trust is fully funded does it avoid probate. Many times assets are found that were never transferred to the trust and some form of probate is necessary.

Myth 3 - Revocable Trusts Eliminate Professional Fees

Although a Revocable Trust eliminates the expense of a probate proceeding, there may still be administrative expenses. This is particularly true in an estate which exceeds the applicable exclusion (estate tax exemption) amount. If an estate tax return is required, then additional expenses will be incurred.

Myth 4 - Revocable Trusts Provide Creditor Protection

During the Grantor’s lifetime, creditors can file liens or claims against the trust assets.

Myth 5 - Revocable Trusts Eliminate the Need for a Will

A Will (called a Pour-Over Will) is still necessary to ensure that any assets not properly funded into the Revocable Trust during your lifetime are ultimately transferred to the trust. In addition, a Will allows you to nominate the guardian of any minor children.

Finally, opening probate with a Will that has few assets may still be beneficial to start the creditor claims period of 6 months without a probate proceeding, there is generally a 2 year statute of limitations.

Conclusion

It is clear that there are a number of advantages to preparing a Revocable Trust, including, but not limited to, the management of your property during lifetime, and upon disability or death. It is, however, not an estate planning tool for everyone. You should look to your particular circumstances to determine whether a Revocable Trust is appropriate for you. We welcome the opportunity to discuss the use of a Revocable Trust or other estate planning vehicle with you. Please contact any of our estate planning attorneys.