One of the most common questions, and an area of much misunderstanding, involves the difference between a Trust and a Will. I have not addressed the subject in some time, so doing so again seems appropriate.
I will begin with an explanation of Wills since people seem to have a better idea of the concept of a Will. Trusts (for estate planning purposes) are probably best understood in comparison with Wills.
What is a Will?
A Will is a testamentary document, meaning that it will take effect upon the death of the person who executed it. A Will is designed to identify how the testator (the one who creates a Will) desires for his/her estate to be handled, who will handle it, how the estate will be distributed and to whom. An “estate” in this sense is everything that a person owns.
The instructions in a Will are carried out through “probate”. Probate is the default process for handling the administration of an estate for someone who is deceased, and process and default rules are established by the Probate Act in Illinois (or similar legislation in other states). The term “probate” refers to the process and to the court system that oversees the process.
Without a Will, the probate process is governed by the default rules of the state’s probate provisions. With a Will, certain aspects of the probate process are governed by the Will.
A Will identifies who will handle the administration of the estate and, ultimately, who will receive the assets of the estate (among other things). All of this is orchestrated through the court process that we call “probate”.
What is Probate?
Probate is basically a platform created by law for the orderly handling of the estate of a deceased person. The Probate is designed to handle all potential claims and issues and to resolve them so that the obligations of a deceased person can be satisfied, and the assets can be passed on to the rightful beneficiaries without claims attached to them.
Because probate is a court process, it requires an attorney and is governed by the Rules of Civil Procedure and of state Probate Act. It begins with a petition to the court for approval of the executor or administrator of the estate, sending mailed notices to all heirs, people named in the will and creditors, publishing notice in a newspaper for three successive weeks, a six-month claims window, the filing of an inventory and accounting and fee petitions for the attorney and executor.
In the state of Illinois, the probate process takes approximately nine months at a minimum. Six months of that time is simply waiting for the claims period to pass.
The probate process obviously involves a great deal of time, and it also involves the expense of court filings, publication costs and attorney fees. Probate is also a public process that creates a public platform and invites people to make claims, if they think they have one.
The cost, administrative burden, delay and public nature of the process are reasons many people seek to avoid probate. The most effective way to avoid probate and retain the maximum control of the handling of an estate is through the use of a Trust.
What is a Trust?
A Trust, generally, is a way of owning property. Property owned in trust is controlled by the trust provisions that apply. There are land trusts, constructive trusts, trust accounts, testamentary trusts, revocable trusts and irrevocable trusts, among others.
One main principle of a Trust is the ownership, possession, and/or control of property for the benefit of another. The person who owns, possesses, and/or controls the property is called a trustee, and the person for whose benefit the property is owned, possessed, and/or controlled is called a beneficiary.
When doing a Trust for estate planning purpose, the creator of the trust (the settlor or grantor) is usually both the trustee and the beneficiary during life (as long as he/she has legal capacity). The Trust document identifies successor trustees who can take over when the settlor is unable to act or dies, and it identifies successor beneficiaries who will receive the benefit of the assets in the Trust when the settlor dies.
How is a Trust Used for Estate Planning?
The kind of Trust we talk about primarily in the context of estate planning is a revocable trust (also known as a “living trust”). A revocable or living trust is usually created with the intention of it being the primary vehicle of the estate planning, instead of a Will.
As the name implies, a living trust is a Trust created during a person’s life. When a living trust is first created, it is like a moving van with nothing in it. The intention is to “fill it up” with the assets that will (without the Trust) default to probate and be subject to the probate process.
Thus, people do a living trusts, usually, as a way to avoid the probate process. Any assets moved into the vehicle of the Trust will reach the destination you set for them without having to go through the probate process. Its kind of like getting a fast pass through the tollway system without having to pay the tolls.
A Trust is more work than a Will because you have to transfer property into it. After creating a Trust, you have to transfer title of property to the Trust that you want to be governed by the Trust. At a minimum, this would include property that is going to default to probate if you don’t put it in the Trust.
Some assets already have a mechanism for passing on death. Those mechanisms usually come in the form of joint tenancy (with a right of survivorship), beneficiary designations and payable on death (POD) designations. Any property owned in joint tenancy with a right of survivorship, or which has beneficiary or payable on death designation, will transfer by law to a surviving joint tenant, surviving beneficiary or a surviving POD designee.
Because the future is uncertain, and things may happen that we do not expect, people use their living trusts as a backup plan for those assets that already have a built-in mechanism to pass on death. The backup plan means naming the trust as beneficiary (either primary or contingent).
People may die, but the Trust will live on. Therefore, the Trust will always be there even if joint tenants, beneficiaries or payable on death designees are gone. Naming a Trust as beneficiary or POD designee insures that property will not default to probate.
Through the combination of transferring assets into trust during life or adding a Trust as primary or contingent beneficiary or POD designee for assets that allow beneficiary or POD designations, you can set your estate up to avoid the probate process completely.
Wills and Trusts are not concepts that people generally think about. We tend to put off anything that does not seem immediate and, especially, anything that reminds us of our own mortality.
Of course, death is inevitable. If you have loved ones, and you want to bless them, and not curse them with your demise, setting up your estate plan with well drafted documents is a gift they will appreciate.
The primary documents in any estate plan are either a Will or a Trust. Those are the vehicles by which a person exercises control over the process, determines who will handle it and who will be the ultimate beneficiaries of the estate. Wills are simpler and less expensive, but Trusts provide maximum control, including avoidance of the cost, burden and delay of probate.Kevin G. Drendel Drendel & Jansons Law Group 111 Flinn Street Batavia, IL 60510 (630) 406-5440 (630) 406-6179 fax [email protected] foxvalleyestateplanning.com