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Trust Basics for Attorneys
Transcript of Trust Basics for Attorneys
Trust Basics for Attorneys
Patrick D. Owens
DIMONTE & LIZAK, LLC
216 W. Higgins Rd
Park Ridge, Illinois 60068
Disability Planning / Avoidance of Guardianship
Estate Tax Planning
Protection from Renunciation
Ease of Amendment
Trust Funding / Forced Review and Consolidation of Assets
Property placed into a trust becomes a non-probate asset. This usually allows for more efficient administration after death and potentially less attorney's fees since no Court appearances will be required, although trust estate administration involves much of the same administration work.
A funded revocable trust avoids a potentially costly and time consuming adult guardianship in the event of a client's disability during life. A durable power of attorney should also be prepared for the client, however, if all assets are in trust the trust controls. The trust also holds the advantages of substantial case law dealing with the duties of trustees and the Ilinois statute allows the appointment of a successor trustee even if one is not named in the trust.
The trust is not filed with the Probate Court after death so the plan is not disclosed to the public.
Under 755 ILCS 5/2-8(a), a surviving spouse may renounce a decedent's will and elect to take one-third of the estate (or one-half if no descendants). Under
Johnson v. LaGrange State Bank
, 73 Ill.2d 342, 383 N.E.2d 185, 22 Ill.Dec.709 (1978), assets held in a living trust are not subject to the elective share.
Although the living trust provides no creditor protection during life, the trusts set up after the client's death may provide substantial protection.
Although the same planning can be accomplished under a will with testamentary trusts, the more common practice in Illinois is with a living trust and the creation of various types of sub trusts (discussed later).
Trusts can be very easily amended with the signature of the client and usually a notary, whereas a codicil to a will must comply with the formalities of the execution of a will.
AKA: Self-declaration trust or inter-vivos trust or living trust.
Often structured with settlor as trustee
2503(c) Minor's Trusts
First Party Special Needs Trusts
Third Party Special Needs Trusts
A living trust can be more complex in its structure and can cause additional confusion to clients with the retitling of assets necessary to fund the trust during life.
A living trust can be more costly to set up due to increased complexity, however the long term costs of trusts can be far less expensive in our experience.
Longer Statute of Limitations
Probate shortens the claims period from two years to six months under 755 ILCS 5/18-12, therefore in certain cases a Probate estate is desired, e.g. estate of a doctor or an attorney
Many attorneys hold a bias either in favor of will planning only vs. planning with living trusts and pour-over wills. In my experience as an Illinois practitioner, trust planning is far superior to planning with wills only and benefits both the clients and the attorneys.
Estate Tax Basics
Revocable Living Trusts
2013 federal estate tax exemption is $5.25M, and is indexed for inflation.
Projected 2014 exemption is $5.34 million
Illinois exemption is $4M, and is not indexed for inflation
Therefore, $1.25M discrepancy between Illinois and federal exemptions
Generation Skipping Tax
Tax in addition to Estate Taxes.
Exemption amount is same as estate tax exemption
Drafting for the $4 million Illinois exemption vs. the $5.25 million federal exemption
Draft a QTIPable Family Trust
The Illinois QTIP must first qualify for the federal QTIP.
To qualify for federal QTIP:
surviving spouse must be entitled to all of the income for life and
no person can appoint any part of the property to anyone other than the surviving spouse during his/her life. IRC § 2056(b)(7)
Surviving spouse should have power to make nonproductive property in the trust productive. Treas. Reg. 20.2056(b)-7(d)(2)
Income Tax Planning
Portability and a high exemption has made income tax planning more important.
Taxable Income > $11,950 at 39.6% + IL income tax (+ 3.8% net investment income tax)
Family Trust Estate Inclusion Issues / Step up in Basis for the Family Trust
Optimal Basis Increase Trust (OBIT); LISI Estate Planning Newsletter # 2080 (March 20, 2013)
Estate Trust Combined with IRC § 2038; LISI Estate Planning Newsletter # 2094 (April 30, 2013)
Joint Exempt Step-Up Trust (JEST); LISI Estate Planning Newsletter # 2086 (April 3, 2013)
Intentional Trigger of the Delaware Tax Trap. See IRC § 2041(a)(3) and Using “Delaware Tax Trap” to Avoid Generation-Skipping Taxes, 68 J. Tax’n 242 (1988).
Use of the Trust Protector to Grant a GPOA. See 760 ILCS 5/16.3(d)
Appointing a Trust Protector
Under the Illinois Directed Trusts Act, 760 ILCS 5/16.3(d) provides for the powers of the trust protector. More specifically, the Act provides:
“the powers of a trust protector may be exercised or not exercised in the sole and absolute discretion of the trust protector, and are binding on all other persons, including but not limited to each beneficiary, investment trust advisor, distribution trust advisor, fiduciary, excluded fiduciary, and any other party having an interest in the trust… The powers granted to a trust protector by the governing instrument may include but are not limited to authority to do any one or more of the following… (3) modify the terms of any power of appointment granted by the trust; provided, however, such modification or amendment may not grant a beneficial interest to any individual, class of individuals, or other parties not specifically provided for under the trust instrument;… and (5) terminate the trust, including determination of how the trustee shall distribute the trust property to be consistent with the purposes of the trust.”
Portability v. Family Trust
Previously, if the estate plan lacked a family trust and one spouse died, their exemption could be lost.
Portability allows the surviving spouse to protect assets up to the amount of the portable exclusion.
Must file a federal estate tax return or exemption is lost.
IRS may review first deceased spouse’s return years later to determine proper exclusion amount.
If multiple marriages, credit shelter trusts don’t have a limit, whereas portability only applies to the last spouse to die.
Illinois exemption is not portable.
Estate planning and more particularly funding the living trust forces clients to consider all of their assets and is a very good time to consolidate unnecessary accounts, old accounts and rid themselves of problem assets or assets that will cause trust estate administration problems.
GPOA Marital Trust