Most of us share the same objectives for our estate plan: 1) provide for our spouse or dependent children; 2) distribute our property; 3) plan for our disability; and 4) reduce our estate taxes. Unfortunately, most of us fail to put together a plan that achieves these goals. There are many approaches that can be used; some are relatively simple, while others are quite complex. The choice of the right plan for your situation requires careful consideration after receiving qualified professional advice.

A living trust (also called a “revocable trust” or “inter vivos trust”) is a legal document created during your lifetime designating a person or corporation to step forward upon your death or incapacity to act as a trustee to receive and hold legal title to property and administer the property in accordance with the instructions in the trust document. It is revocable (i.e., capable of being changed, amended, or terminated). You can act as trustee and have broad powers to invest and use the trust fund assets. If you become incapacitated, the trust provides for a successor trustee to manage the trust assets. Upon your death the living trust contains instructions for the distribution of your assets, just as a will would. The primary difference between a living trust and a will is that assets held in trust do not have to go through the probate process. When you set up a living trust, you transfer your assets to the trust, and the trust is considered the owner of your assets. When you die, there is no probate because the trust is considered the owner of the assets and not you. The assets are then distributed according to the instructions in the trust.

Probate is a legal process for managing estates of decedents and disabled persons. A court appoints and supervises a responsible individual or trust company, usually as designated by you in your will, who administers and distributes assets. Probate has the advantage of involving a judge to help sort out disputes and supervise unsophisticated executors but because a court is involved, probate can be somewhat cumbersome, with the need for preparation of special court documents and attorney appearances in court. With a sophisticated trustee or when all the beneficiaries are in agreement, avoiding probate may be desirable. A rule of thumb used by many estate planners is 5 % of your total estate for probate costs.

Probate is a legal process for managing estates of decedents and disabled persons. A court appoints and supervises a responsible individual or trust company, usually as designated by you in your will, who administers and distributes assets. Probate has the advantage of involving a judge to help sort out disputes and supervise unsophisticated executors but because a court is involved, probate can be somewhat cumbersome, with the need for preparation of special court documents and attorney appearances in court. With a sophisticated trustee or when all the beneficiaries are in agreement, avoiding probate may be desirable. A rule of thumb used by many estate planners is 5 % of your total estate for probate costs.

Probate can be avoided by holding property in joint tenancy with another person, BUT there are several disadvantages to this. To sell real estate, stocks and many other types of assets held in joint tenancy during your lifetime, you must have the signature of both joint tenants. Thus, if your joint tenant is uncooperative or becomes incapacitated, you cannot readily sell or transfer your assets. Bank accounts can be more of a problem because your joint tenant has the right to withdraw funds at any time without your consent. In addition, if your joint tenant has creditor problems, the creditor of the other joint tenant can garnish the jointly held asset to satisfy the debt. This could ultimately cause you to lose the asset. Finally, adding someone as a joint tenant may be considered a gift to that person and a gift tax may be imposed. In summary, although there are advantages to using joint tenancy, they are usually outweighed by the disadvantages.

Often people use joint tenancy titling of assets as a way to avoid probate. However, this has proved to be a tax disaster for many people because they chose to focus on avoiding probate instead of avoiding capital gains taxes. With joint tenancy, as a spouse passes away, the surviving spouse only receives a partial, and not full, “stepped-up” basis on the particular investment. Thus if properties are sold, there could be significant capital gains taxes due – all of which could have been avoided with proper planning. The short answer is that if you own appreciated assets, such as real estate, it is essential to do educated estate planning rather than just a knee jerk retiling of the property in joint tenancy.

The trustee named under the trust controls the assets of the trust. In a living trust, the individual who creates the trust typically acts as trustee, thus you can act as your own trustee. When this is the case, you retain broad powers to control and use the assets of the trust. When someone other than you is the trustee, the trust sets forth specific instructions for the investment and use of the trust assets. Typically you will also be the beneficiary of the trust during your lifetime. That means that you have the right to receive all the income of the trust. This is true whether you or someone else is acting as trustee. So long as you are acting as trustee, no income tax returns nor accountings are required. You may appoint someone other than yourself to act as trustee if you feel you want your assets professionally managed, or if you want them in the hands of an independent party.

One of the great advantages to a living trust is that it provides for comprehensive disability planning. If you become incapacitated, a living trust provides for a successor trustee to take over the control and maintenance of the trust. The successor trustee invests the trust funds and uses them for your benefit, according to the instructions in the trust. The successor trustee cannot use the assets for his or her own benefit, although he or she may receive compensation (if allowed under the terms of the trust). Additionally, the trust avoids the necessity of having a family member or other person named as a guardian by the probate court to manage your assets.

A living trust can be used to reduce or eliminate death taxes under certain circumstances, and especially for married couples. In addition to potential tax savings derived from a comprehensive estate plan, a living trust can also assist in organizing your finances.

Gifts between spouses are generally non-taxable regardless of the amount. If all of your property passes to your spouse upon your death, no estate tax is paid. Upon the death of your surviving spouse, however, estate taxes may be due. Both you and your spouse are allowed an exemption on your estate taxes. The amount of the exemption is currently $5,000,000 per person for the year 2011.

The applicable exemption is determined in the year the individual dies. If your surviving spouse leaves an estate of less than the applicable exemption, no estate taxes will be due. However, without proper planning, an estate tax may be due if the surviving spouse’s estate exceeds the applicable exemption amount – and estate taxes are very steep. The goal, therefore, of estate tax planning for married couples is to take advantage of the applicable exemption of both spouses, thus doubling the amount that can be left estate tax-free.

In order to take advantage of both exemptions, the first spouse to die must leave assets which are not included in the estate of the surviving spouse. This can be done by leaving up to the applicable exemption amount in a trust from which the surviving spouse receives income, but does not have direct control of the assets. Upon the death of the surviving spouse, the trust assets pass to the couple’s heirs or other beneficiaries. The assets in this exempt trust, including appreciation in value, are not included in the estate of the surviving spouse and not subject to the estate tax. Thus, when the surviving spouse passes away, his or her own applicable exemption will be applied to his or her estate.

Single persons cannot shelter twice the applicable exemption from estate taxes in the same way as married couples, but there are other methods of reducing estate taxes. These methods are centered around making gifts during your lifetime to reduce the size of your estate. Normally the gifts are made to the persons who would receive your property at the time of your death. The tax rules regarding gifts are very complex, and, therefore, a competent estate planning attorney should be consulted for a full explanation of the alternatives.

Probate estates usually remain undistributed for at least six months after the probate process has started to allow creditors an opportunity to present claims. The trustee of a living trust has the same responsibilities as an executor in a probate administration: identify and transfer assets, render an accounting, pay creditors, file and pay death and income taxes, and resolve any pending litigation. Usually this will take roughly the same amount of time as administering a probate estate. If a Federal Estate Tax return is due, the trustee or executor may elect not to distribute all of the probate or trust assets until the return is audited and the tax paid. Probate can be delayed by disputes in court.

Contrary to what some may believe, your assets cannot be “hidden” from your creditors by putting them into a revocable living trust. At the time of your death your trustee will pay off any final expenses and debts that may be outstanding. Moreover, while you are living, you retain complete control over the trust assets and therefore, they will, for example, be included in any calculation to determine if nursing home care is to be paid for by public aid.

Like most court records, probate files are open to the public. Anyone can go to the courthouse and review your probate file; however, as a practical matter, this rarely happens. In Illinois, under modern probate procedures (called “independent administration”) an inventory and accounting do not have to be filed with the court, and therefore the key documents showing the assets of the decedent are not made public. A living trust provides the ultimate in privacy because it does not pass through probate at all.

It is always important to have appropriate professional advice in tackling something as complicated as a living trust. We offer our current as well as prospective clients a complimentary consultation to discuss the living trust process in greater detail.