Wills

Even persons with Living Trusts will normally have a Will. The "pourover" will usually provides for all the Probate assets to be transferred into the trust created during his or her life, and distributed according to its provisions. In this way, assets that were not titled to the trust, or which have been removed from the trust inadvertently or purposefully, will still be covered by the trust's provisions. Your Will is the proper place to provide for the selection of a guardian and/or conservator for the decedent's minor children or incapacitated spouse or children. Many people also choose to declare their preferences for burial arrangements, organ donations and other post death concerns in the Will.

Of course, a Will is the instrument used to create a Testamentary Trust, where that is the appropriate arrangement. It may be advisable (for the reasons described above) for even the Grantor of a Living Trust to arrange to have some assets taken through the Probate process to cut off potential creditor's claims. Finally, the preparation of a Will is normally much less expensive than the preparation of a Living Trust, and may be all that is necessary for persons with modest estates and ordinary wishes for distribution of assets after death.

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Trusts

One of the most popular and enduring options for sophisticated estate planning is the Living Trust. Sometimes referred to as a "Revocable" or "Inter Vivos" Trust, this instrument creates a separate entity with specific and very individualized rules for its operation. Normally, it is completely revocable or amendable by its creator (referred to as the "Grantor") during his or her lifetime (though that may not always be advisable), and the trustee may be virtually any person, entity or combination of persons and entities. Some of the principal advantages of the Living Trust are:

1. Flexibility and Control.
The Living Trust offers the Grantor the maximum control over his or her assets in the present and in the predictable future. It provides the opportunity for directing the general uses of the trust assets after the death of the Grantor, and can be designed around the specific needs of theGrantor's family. A trust can be a way to ensure that money is available for the education of children or grandchildren, or for extraordinary care required for a disabled child or spouse.

2. Management of Assets.
One option for a Living Trust is to select a corporate trustee. Many banks maintain trust departments which can be selected to manage the trust estate. The Grantor may choose to act as Trustee himself, but the availability of professional asset management is attractive to many individuals.

3. Protection during Illness or Incapacity.
The Living Trust can be constructed to provide for management of assets during any period of illness or incapacity of the Grantor. This flexibility will normally avoid the necessity of guardianship proceedings in the future, and will provide for the smooth transition of control from the Grantor to a trusted, selected individual or entity.

4. Continuity.
If the Grantor dies, the Living Trust continues to function as planned, with no break for the Probate process. Assets in the Living Trust normally are handled exactly as they were prior to the Grantor's death, and the trustee may be directed to either make the income available to a specific person or persons, or to distribute the assets outright and end the trust.

5. Avoiding Probate.
Assets that belonged to the Living Trust before the death of the Grantor do not need to be taken through the Probate process. In addition to the saving of time (even a simple Probate will normally take six months or longer), this may save considerable expense to the successors. A Living Trust is particularly advantageous where the Grantors own real property in more than one state, since a separate ancillary probate proceeding may be required in each state where real property is located.

6. Privacy.
Only persons with an interest in the Living Trust need be notified of the proceedings, the assets held in trust, or their values or ultimate disposition. No publication of notices, Court filings or public hearings are normally required.

7. Tax savings.
Under Federal Estate Tax law (and Illinois state estate tax law as well) estate taxes are assessed on any estate exceeding $1,500,000.00. Once this $1,500,000.00 level is reached an effective tax rate of 45% is assessed and the rate gradually increases to a maximum of 48%. A Living Trust for a married couple can easily be structured to avoid estate taxes on a combined total of $3,000,000.00 (2004).

Under federal tax law that was passed in 2001, the estate tax credit increases and if no further legislation is passed, the estate tax is repealed in 2010, but reverts back to a lower credit in 2011. There are dramatic changes in the capital gains tax basis rules as of 2010, which also expire unless further federal legislation is passed. This uncertainty makes long term planning very difficult.
This simplified chart shows the key rates that will change between 2004 and 2010.

8. Security Against Challenges.
Since the Living Trust usually will have been in place for a considerable period of time before the death of the Grantor, and since there is no Court proceeding initiated to determine the validity of the trust document, it is normally much more difficult for disinherited relatives to challenge the estate plan.

A Living Trust is usually "funded" by transferring most or all the Grantor's assets into the name of the trust. The trustee is then directed to utilize the income from those assets exclusively for the benefit of the Grantor during the Grantor's life, but even these common provisions may be altered to provide for each Grantor's unique circumstances.

Testamentary Trusts

A trust may be created by a Will, rather than during the lifetime of the Grantor. Such a trust is normally called a Testamentary Trust, and has no vitality or effect until the Probate of the decedent's Will. While a Testamentary Trust will not be useful in avoiding Probate (since the Will must be admitted to Probate in order to set up the trust), it may nonetheless be a valuable estate planning tool. Testamentary Trusts are especially useful for providing for the continuing care of disabled children, spouses or other relatives, where there is some reason not to establish a Living Trust. For some individuals (especially professionals with potential lingering malpractice exposure) it may actually be desirable to go through the Probate process so that potential creditor's claims may be cut off; for such a person, the Testamentary Trust may be a viable option.

With the obvious exception of the avoidance of Probate, most of what has been said about Living Trusts applies as well to Testamentary Trusts. Whether Living or Testamentary, a trust is a marvelously flexible way to provide for control over the use of assets, even after the death of the original owner.

Durable Powers of Attorney

In order to obtain the legal authority to make medical and financial decisions for an incapacitated family member, it may be necessary to seek Court appointment as a Guardian and/or Conservator. The Court process will almost certainly seem unduly invasive, expensive and slow.

Advance planning for possible future incapacity should include consideration of a durable power of attorney. Such a power can be either general (permitting the surrogate "attorney in fact" to handle all financial and medical matters) or may be limited in any way the grantor wishes. A durable power of attorney expressly survives the future incapacity of the grantor, and may be structured to only take effect in the event of such incapacity.

If properly drafted, a durable power of attorney should prevent the possibility of any future Court proceedings to declare the grantor incapacitated and appoint a surrogate to act in his or her behalf. In addition to saving time and money in the long run, this assures that the grantor's choice of persons is able to act, rather than relying on the attorneys and judges to select a person at a later date.

Several cautionary notes need to be sounded about durable powers of attorney. The power granted to the attorney in fact is extremely broad, and the opportunity for misuse or abuse correspondingly high. The person selected as attorney in fact must be completely and unequivocally trustworthy. Second, due consideration should be given to selecting an alternate attorney in fact, in case something might happen to the first choice of surrogate. It should be obvious that the alternate attorney in fact must also be completely trustworthy.

The durable power of attorney, alone or coupled with a Living Trust, is an extraordinarily powerful planning tool. The importance of specific language, the danger of abuse and the need for some oversight and review make it important that an attorney be consulted in preparing and executing a durable power of attorney.

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