In this article we will answer the question “what is a trust?” and explain how trusts are used in Illinois estate planning. We will answer the questions, “what are trusts used for?”, “how do trusts work?” and “what is the difference between a revocable living trust and an irrevocable trust?”
A trust is both a document and a legal entity that can own property separate from its creator. A trust is created by an individual or entity known as a “grantor” or “settlor” (for more, check out: What is the Definition of a Settlor of a Trust?). Once the trust is drafted and executed by the grantor, the grantor or third parties can transfer ownership of property to the trust. The trust is therefore a separate legal entity from the grantor that can own property, much like a corporation.
Trusts can be used to:
In the trust document, the grantor will set forth an individual or entity to serve as the initial trustee as well as individuals who will be the initial beneficiaries of the trust. The beneficiaries are the people who the property owned by the trust is intended to benefit. The trustee is the person who is responsible for managing and disbursing the property owned by the trust for the benefit of the beneficiaries.
The grantor may name himself or herself as both the initial trustee and beneficiary. In these situations, the grantor’s only responsibility as trustee is to manage the trust assets for his or her own benefit.
However, the grantor will also use the trust document to name successor trustees who will act in order if the current trustee becomes unable or unwilling to act. The trust document can also lay out contingent beneficiaries to whom the benefits of the trust will pass under certain circumstances, such as the death of the original beneficiaries.
Revocable living trusts are used like a will to provide for the distribution of the grantor’s assets when he or she passes. Unlike a will, transferring your assets to a revocable living trust can ensure that your estate will avoid a costly and time-consuming probate case when you pass. To learn more about probate, check out our article: The Illinois Probate Process Explained.
The grantor can modify or revoke a revocable living trust at any time. For this reason, the grantor typically retains full control over the assets in a revocable living trust during his or her lifetime. The grantor will typically not notice the difference between owning the assets through a revocable living trust and owning the assets in his or her own name. The probate avoidance and asset distribution benefits of a revocable living trust kick in at the death of the grantor.
An irrevocable trust on the other hand cannot be modified or revoked by the grantor once it is executed. Once an asset is transferred to a revocable living trust, the grantor loses at least some rights with respect to the asset. Sometimes the terms of the trust will provide that a grantor retains the right to possess an asset, such as a home, during his or her lifetime, but cannot dispose of the asset.
Because a irrevocable trusts cause the grantor to sacrifice some property rights in the assets owned by the trust, irrevocable trusts can help grantors minimize estate tax and protect assets from creditors in ways that revocable trusts cannot.
For more on this, check out our article: What is the Difference Between a Revocable Living Trust and an Irrevocable Trust?