Estate Planning
© 2002 Linscott R. Hanson

When we speak of estate planning, we think first and foremost about planning for disposition of assets at death. One focus of estate planning is tax planning. We should also keep in mind, however, asset protection and asset management for individuals unable to manage for themselves including clients who become disabled.

A principal objective of estate planning clients, particularly in the last decade, has been avoiding probate. Probate may be avoided in a number of ways. Joint ownership of property avoids probate until the death of the last surviving owner. Beneficiary designations, such as those used with life insurance contracts and pension and profit-sharing plans avoid probate if the beneficiary designated survives the insured or owner. Certain forms of bank accounts called "Totten trusts" permit the owner of the account to designate a beneficiary or payee on death. In recent years, the Illinois legislature has enacted the "Uniform Transfers on Death Act" which permits registration of stocks, bonds, memberships in LLC's and the like in one name with a beneficiary at death.

An alternative means of avoiding probate is the living trust. Many of our clients are creating trusts, acting as their own trustees, and naming someone else to act as trustee at the time of their death or disability. Such trusts often deal with three consecutive time periods: the time during the client's own life, the time after the client's death while the client's spouse is alive, and the time after both spouses are gone. These trusts are known as "self-declared living trusts". Self-declared because the client declares himself or herself to be the trustee of the trust. Living trusts because they come into existence during the clients lifetime. Since property is placed in the living trust during the clients lifetime, and the trust has beneficiaries named to receive the property after the client's death, these trusts avoid probate.

VERY Important Note: trust. In the case of real estate, this means a deed to the land must be prepared, and recorded with a Recorder of Deeds, transferring title from the client or clients to the trust. In the case of stocks, bonds, mutual funds, and bank accounts, the institution involved should be contacted and requested to re-register in the name of the trust. In the case of tangible personal property such as jewelry, gem stones, works of art, silver and crystal, precious metals, stamp and coin collections, recreational vehicles, and the like, a bill of sale should be prepared documenting the transfer of ownership from the client to the trust. In the case of automobiles, trucks, boats and aircraft, where certificates of title issued by the state exist, the appropriate state agency should be contacted, and a new title certificate issued in the name of the trust.

Special Note: Under the Illinois "Small Estate Act" a person may have up to $50,000 in his or her name alone and still avoid probate. Thus many clients choose not to register their automobiles and family bank accounts in the name of their living trust.

The principal benefit of the living trusts, during the clients life, is that it acts as a vehicle for asset management in the event the client becomes disabled. Without a living trust, in the event of disability, ordinarily it will be necessary to have a guardian appointed by the probate court to manage the client's affairs. The guardianship is somewhat inflexible and expensive. Many decisions made by a guardian need to be reviewed by the appointing probate court meaning an attorney must prepare a petition, present it to the judge, produce what ever evidenced the judge feels is necessary in support of the petition, and secure a court order. Often the court order must be certified by the clerk and delivered to a third party before action can be taken. This is both time-consuming and costly. The guardian needs to post a bond with the probate court, which means the payment of an annual premium for the bond so long as the estate remains open. The living trust, on the other hand, does not have court supervision and the trustee need not post a bond. Of course, the trustee needs to conduct himself or herself in a careful manner in the management of the client's estate, and is subject to court review in the event the client or another interested party files a suit questioning the administration in the trust.

Under current Internal Revenue Service regulations, a self-declared living trust is the "alter ego" of the client. It does not need a separate taxpayer identification number, and it is not required to file an annual income tax return. All the income and expenses of the trust are reflected on the personal income tax return of the client. The State of Illinois, Department of Revenue follows the lead of the Internal Revenue Service, and also does not require self-declared living trusts to file a separate income tax return.

At the clients death, the nominated successor trustee of the trust takes over the office. Provisions of the trust are carried out by the successor trustee. Sometimes the trust terminates at the client's death, and the successor trustee distributes the trust assets to whomever is designated. On the other hand, sometimes the trust goes on for many years after the client's death with the successor trustee, or perhaps even a succession of successor trustees administering the assets for the benefit of the beneficiaries according to the terms of the trust. Choice of trustee is more critical in the case of the trust which will be ongoing for a period of time than one where the trust distributes immediately. In either case the loyalty and honesty of the trustee must be unquestioned. In the case of an ongoing trust, the ability of the trustee to manage money (invest wisely) must also be considered.

Sometimes a co-trustee relationship is best. A family member can be chosen as trustee because of his or her knowledge of the family, and the wishes of the client. A corporate fiduciary (usually a bank) can be chosen as co-trustee for its money management ability, administrative and bookkeeping skills, and the fact that, unlike an individual, the bank will not die, go on vacation, or be distracted by its other activities. Often the corporate fiduciary can earn enough through its additional management skills to pay the extra costs of its fees.

In the case of larger taxable estates ($1 million and more) tax planning features can be built right into the living trust. Each individual spouse in a marriage relationship has a separate exemption from the estate tax. Currently the exemption amount is $1,000,000. Through careful drafting of the living trust, the children or other beneficiaries of a married couple can enjoy not one but two exemptions of $1,000,000 each ($2,000,000).

A carefully drafted trust will contain a "spendthrift clause". An example of the spendthrift clause is as follows:

All payments may be made to the respective beneficiaries or, at their direction, may be deposited in any bank in any account carried in his or her name alone or with others. Such payments shall not be transferable by the voluntary or involuntary acts of any beneficiaries or by operation of law and shall not be subject to any obligation of any beneficiary.

The effect of the spendthrift clause is to prevent the creditors of a beneficiary of the trust from levying on the beneficiary's share, or filing a garnishment against the trust. Under current Illinois law, a client is not able to protect his own assets from the claims of his own creditors through the use of the spendthrift clause. Some states, including Alaska and Delaware, have amended their statutory law to permit clients to create trusts for their own benefit and secure the asset protection benefit of the spendthrift clause. Clients who wish this additional degree of protection should discuss the creation of an Alaska trust, or some other alternative asset protection vehicle with us.

CONCLUSION. Living Trusts can benefit almost everyone. Both large and small estates can benefit. Young and old alike will find benefits to fit their particular needs. As much flexibility as can be desired can be built into the individual documents. Tax planning, asset protection and probate avoidance are all available through the Living Trust.