As people in Illinois and elsewhere start mapping out how to protect their assets, they are thinking not only of their retirement years, but also for what lies ahead once they are no longer there. Working hard and saving over a lifetime has benefits, but only if a person knows how to preserve their accumulated wealth.
Along with creating a will and a power of attorney, setting up a trust can provide many advantages for minimizing estate taxes, planning out long-term care, providing for family members, or distributing assets and paying off debt. When considering all avenues of estate planning, it is important to find the one that best suits your circumstances and wishes.
What is a trust?
A trust is a legal instrument that allows an individual to place assets under a trusteeship that will administer them according to the wishes of the creator of the trust, or trustor. A trust establishes a fiduciary relationship between the designated trustee and one or more named beneficiaries.
The trustor may set up the trust in their lifetime, or they may set up provisions in a will for a trust that will form after death. The three basic types of trusts are:
- Revocable or living trust, formed and funded during the trustor’s lifetime that the trustor may alter or revoke.
- Irrevocable trust, which the trustor creates during their lifetime but cannot change or revoke.
- Testamentary trust, which begins and receives funds upon the death of the trustor, according to provisions set out in the will.
Why set up a trust?
There are many reasons why people set up trusts. Property or funds that go into a trust will not go through probate, which will reduce the amount of taxable estate assets and also avoid a lengthy probate process. It is legal to transfer funds that are exempt from estate taxes to beneficiaries at death.
In Illinois, the estate tax exemption limit that is transferrable at death without tax liability is $4 million. The federal exemption is currently $11.58 million, with a sunset clause at the end of 2025.
Many people set up a trust to provide for a beneficiary with special needs. As an adult child with a disability may receive state or federal assistance, it is possible to provide for them through a special needs trust (SNT) so that they can maintain eligibility for government aid.
The trustor can also set up a trust for an adult child who does not manage money well, or for a minor who cannot legally handle finances, by giving instructions of when and how the funds will transfer. A gifting trust can also hold life insurance or pour-over transfers from other sources, and provide for a minor by specifically directing funds for education or medical expenses, for example.
One of the most important features of a trust for many people is that it is private. In Illinois, although the provisions of a will become public record at death, a trust and its directives remain private unless it is a testamentary trust.