EVERYTHING you need to know about family trusts [2022]

Funding a Revocable Living Trust Now

Deeds

You may or may not incur fees and taxes with the transfer of real estate into a living trust. It depends upon the laws in your state. Some states charge a nominal fee, while some states consider the transfer of a property into a living trust to be the same as a sale at full market value and assess significant taxes. Consult a tax advisor before you begin the process of transferring real estate so you understand the financial consequences.

Transferring property typically requires that the grantor file a quitclaim deed with their county clerk, giving up the individual’s claim to the property and transferring it to the trust. You may need to file a copy of the trust document or a Memorandum of Trust or a Certificate of Trust with the quitclaim deed.

If the property is part of an HOA, you may need permission from the association. If there is a mortgage on the property, you may need the permission of the lender.

Title Transfer or Retitling

Vehicle ownership is held with a title document. There may be two options for transferring title (depending on the laws of your state):

  • You may be able to retitle the vehicle to the living trust, listing it as the owner.
  • You may be able to designate the trust as a beneficiary of the title after death.

Transferring vehicle title could result in substantial taxes and fees. It could raise your insurance premiums. It could require the approval of a lender if there is a lien on the vehicle. You may wish to talk to your insurer, your lender, and a tax advisor before you begin the process.

A brokerage account, investment account, or nonqualified annuity can be retitled. Ask your broker for advice on how to do this. Stocks and bond certificates can be reissued in the name of the trust, though this is complex.

Business partnership interests or limited liability company (LLC), and shares in a corporation can be retitled in the name of the trust. Check the partnership agreement or operating agreement or articles of incorporation for instructions on how to do so and any transfer restrictions.

Assignment of Property Interest

Most property does not come with proof of ownership. In some instances, you can transfer ownership of personal property like art, collectibles, antiques, jewelry, etc., with an Assignment of Property Interest document.

There is no standard form. You will need to create the form stating exactly what you are transferring to the (named) trustee of the (named) trust. Sign and date the form. You will need to sign it once as the person assigning the properties to the living trust and once as the trustee of the trust. Include the word “trustee" after that signature. You may wish to have the form notarized.

In addition to listing property on an Assignment of Property Interest form, you should also list all of this property on a page of the trust document called a Schedule A or Exhibit A. Describe property in sufficient detail that it will be clearly understood by the successor trustee upon the death of the grantor.

In addition to personal property, royalties, copyrights, patents, and trademarks can be assigned to a living trust in this manner. You may want to include identification numbers where relevant. Notify the royalty company of the transfer of ownership.

Transfer of Ownership

A living trust can be named as the owner of a life insurance policy, or as a beneficiary. However, in some states, the cash value of a life insurance policy is only protected from creditors if the policy is owned by a person. Transferring ownership of the policy to the trust could cause that protection to be lost. Ask your insurance agent.

Open New Accounts

For bank accounts — savings accounts, checking accounts, money market accounts, CDs — ask your bank how to proceed. You may be told to close the account and reopen a new account in the name of the trust. It may be advisable to wait for any CDs to mature. Then the cash in the CD can be used to open a new CD in the trust’s account.

Assignment of Rights

An Assignment of Rights is a legal document that can be used to make your trust the recipient of payments from oil, gas, and mineral rights you have for a property you do not own. If you own the property, it may be easier to change the deed. An Assignment of Rights document can also direct payments for outstanding loans owed to the grantor into the trust fund.

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Is a Revocable Living Trust a disregarded entity?

Yes, Revocable Living Trusts are disregarded entities. This means that the IRS does not recognize them as entities separate from their owners. Although your Revocable Living Trust may have taxable income or property in its name, you do not need to file a separate tax return for it. Instead, you include the revocable trust’s earnings within your personal tax return.

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Advantages of Revocable Living Trusts

Revocable Living Trusts have numerous benefits, including the following:

1. You can revoke or amend it

Revocable Living Trusts are flexible in nature. Unlike irrevocable ones, revocable trusts allow you to amend them as needed and adapt to life’s changes. For example, if you go through a divorce or acquire new assets, you can update the terms of the trust to reflect your new circumstances.

2. Your beneficiaries can avoid probate

By placing assets into a Revocable Living Trust, they can bypass the probate process after your passing. Revocable Living Trusts can ensure a seamless transfer of ownership to your beneficiaries and prevent delays. You do not have to place your entire estate into a trust to avoid the probate process. Instead, you may only consider certain assets, such as a family home.

3. You can plan for incapacity

With a Revocable Living Trust, you can plan for incapacity. If you appoint yourself as the trustee of your trust and name someone else as your successor trustee, you can ensure that they can control the trust’s assets if you are incapacitated without having to seek out the approval of a court.

4. You can ensure your privacy

Probate court records are public records. Therefore, when your estate is distributed according to your Last Will, anyone can access the records that detail the distribution of your estate. In contrast, Revocable Living Trusts are not public. Therefore, you can ensure privacy for yourself and your beneficiaries.

How to Set Up Family Trusts

There are two basic steps involved with setting up a family trust. First, you must create and execute the trust agreement document. Your trust agreement document will:

  • List beneficiaries
  • Name a trustee or trustees
  • Detail instructions for managing the assets covered by the trust

Second, you must transfer your assets into the trust. This includes executing deeds and other title documents in order to formally transfer the assets involved from the grantor to the trustee(s). The trust document is ineffective unless the assets are transferred to the trust.

Benefits of a Family Trust

A family trust is a clear way to pass assets on to family members. It allows you to add all of your money, property, and assets to the trust. You can also clearly state what each member of the family gets. This is a benefit in and of itself. The division of your assets is clear and final.

Revocable trusts generally allow you to avoid probate. This means your family members cannot challenge the terms of the trust. It also means the assets are accessible to your family members immediately. This can save you time and money. 

Irrevocable trusts have some tax advantages. You can avoid estate or gift tax. Placing assets in a trust can also decrease the countable assets of your family members, which allows them to still receive government benefits like Medicaid.

4. Revocable trusts can help during illness or disability – not just death

Wills only go into effect when a person passes away, but a revocable trust established during your lifetime can also help your family if you become ill or unable to manage your assets. If that happens, your trustee can make distributions on your behalf, pay bills and even file tax returns for you. You can choose ahead of time who to appoint (through the trust) to manage the assets.

Though no one likes to think about these scenarios, building in provisions like these can safeguard your family from having to make decisions without knowing your wishes during difficult times.

7. Sign the trust document and get your signature notarized

After making your trust document, you (and your spouse, if you made a trust together) must sign it in front of a notary public. Nolo’s Living Trust and Quicken WillMaker provide instructions on how to get your trust notarized.

What Does a Family Trust Do?

A family trust has only family members as the beneficiaries. This means that your children, grandchildren, siblings, cousin, etc. can benefit from the trust. Family trusts can also include spouses.

A family trust ensures that your assets are managed according to your wishes on behalf of your family. You can use a family trust to specify when family members can access their share of your assets and under what terms. For example, you can include a stipulation in the trust agreement that your children cannot access the trust money until they complete college, or after they turn a certain age.

Depending on how you set up your trust document, a family trust can have many benefits to a testament.

You can use a family trust to avoid probate, decrease tax, insulate your assets from creditors, or protect a family member who requires specialized medical care.

Types of Family Trusts

There are many different types of trusts. The main differences between them include who the trust benefits, how the proceeds are taxed and when the beneficiaries receive the assets.

Some common types of family trusts include:

  • Living trust. This type of trust holds your assets while you are still alive, as well as provides a plan for what happens to those assets after you pass away.
  • Marital trust. A marital trust is an irrevocable trust that benefits the grantor’s spouse. This trust avoids incurring federal taxes when it’s transferred from the grantor to the beneficiary.
  • Charitable trust. If a grantor wants to leave assets to a specific charity, they can do so through a charitable trust.
  • Generation-skipping trust. These trusts are created to make large gifts to younger generations without having them incur heavy estate and gift taxes.
  • Special needs trust. An important tool for recipients of Supplemental Security Income (SSI) or Medicare, income from this trust doesn’t count toward income caps for these programs and can be used for a variety of certain related expenses, like medication.
  • Spendthrift trust. A spendthrift trust limits how beneficiaries can access their assets. For example, a beneficiary to these trusts cannot sell or give away their equitable interest in the trust property.
  • Testamentary trust. These trusts are created in a will and are irrevocable once the owner dies. Beneficiaries can only access their share of assets at a predetermined time.

Is There a Difference Between a Trust and a Trust Fund?

The term “trust” refers to the legal arrangement evidenced in a written agreement transferring property from a “grantor” to a “trustee” for specified purposes. A term “trust fund” refers to the property transferred by the grantor to the trustee.

2. Trusts may provide tax benefits

Trusts can either be revocable or irrevocable, essentially meaning that they can either be amended after they’re created – or not. A revocable trust gives you the option to make changes to it after it’s signed, but, depending on its terms, it may or may not lead to tax advantages further down the line.

An irrevocable trust, however, is one that you cannot usually change after the agreement is signed. Because you’ve transferred assets out of your estate, there may be transfer tax benefits with an irrevocable trust. Contributions to the trust are generally subject to gift tax requirements during your lifetime. However, if certain conditions are met, assets placed in this type of trust (and appreciation on those assets over time) will be sheltered from estate tax after your death.

In addition to initial funding, you can make an annual exclusion gift to an irrevocable trust each year without having to pay additional gift tax on that contribution. The current gift tax exemption rate is up to $15,000 for individuals or $30,000 for married couples filing a joint return. Speak with your trust administrator and attorney about whether a revocable trust and/or an irrevocable trust might be a good estate planning option for you and your family.

Purpose

There are a variety of reasons that you might wish to use a trust as part of your estate plan, such  as: (a) privacy; (b) avoiding probate; (c) providing for an individual with a disability; (d) providing for an individual who cannot be trusted with a lump sum inheritance (e) providing for minor children; and (f) avoiding or reducing estate taxes.

Privacy 

Under Illinois law, your last will and testament must be filed with the circuit clerk in the county where you resided at the time of your death. Meaning, any provisions that you make in your last will and testament will become public record at your death. Trusts, on the other hand, are not generally part of the public record. Certain information must be provided to the beneficiaries of a trust, but the general public would generally not be privy to the terms of the trust. If this is your primary concern, various provisions can be added to the trust to ensure that no beneficiary files a lawsuit regarding the trust (filing a lawsuit would make the terms of the trust part of the public record) and even to limit the information that beneficiaries are entitled to receive.

Note that a testamentary trust set forth in your last will and testament would not serve this purpose. The entire terms of the trust, as set forth in your will, would be of public record.

Avoiding Probate

Under Illinois law, if you have less than $100,000 in assets (and no real estate) in your name individually, then your executor (or if you do not have a will, then a close relative) can prepare and use a “small estate affidavit” to administer your estate. (See Your Guide to Estate Planning for more information.) Otherwise, your estate will need to be probated. This means that a petition is filed with the court, an order is entered directing that a particular individual (or corporate entity) serve as the representative of the estate, and that person (or company) must report to the beneficiaries and to the court regarding the collection of assets, the payment of debts, and the ultimate distribution to the appropriate beneficiaries. As part of this process, the representative is required to publish notice in the local paper and to contact known creditors. The representative must then wait six months (from the date that notice is first published in the paper) before they can wrap up the estate. Given the numerous requirements in the probate process, it is advisable that the estate representative have legal counsel assist them throughout the process. Generally speaking, even a relatively straight-forward estate will take at least nine months and several thousand dollars to administer.

One benefit to the probate process is that after the six months claims period has expired, presuming that the representative followed the appropriate notice rules, no further claims may ever be filed against your estate. The probate process also provides clear rules for how to handle creditors when the claims are greater than the value of the estate.

If creditors are not an issue, having your assets held in trust would avoid the entire probate process. This means that the trustee can begin making distributions shortly after your death. Note that this only works if your assets were already held in trust at the time of your death (see Section 3 that reviews transferring assets to your trust). Creating a testamentary trust still requires that your will be probated and then the assets are distributed to your testamentary trust.

Please note that, in general, creating a trust does not avoid creditors. Speak with an attorney regarding any concerns you may have about this. By de fault, your trustee will pay off any final debts that may be outstanding before making any distributions.

Providing for an Individual With a Disability

If your intended beneficiary has a disability, you may wish to leave their inheritance in trust to help them with their money management. Moreover, if that disabled individual is (or is likely to be) receiving state or federal aid, you may wish to leave their inheritance in a trust for their benefit, so as to not disqualify them from that state and/or federal aid. The latter is called a “special needs trust” or a “supplemental needs trust.”

Depending on the amount of money at issue, there are additional options for leaving assets for the benefit of a disabled individual, including the use of an ABLE account. So, you should speak with an estate planning attorney if you wish to leave any assets for the benefit of a disabled individual.

Providing for an Individual Who Cannot Be Trusted With a Lump Sum Inheritance and/or  a Minor Child

By leaving assets to a trustee for the benefit of another individual, you can address a handful of potential problems. For example, if you would like to provide for a loved one who is irresponsible with money (e.g., they have substance abuse problems), then leaving their inheritance in trust ensures that the money is spent for their benefit over time, rather than immediately squandered.

Similarly, if your intended beneficiary is a minor, they cannot legally manage their own financial affairs. So, you may wish to leave their inheritance in trust to provide instructions as to whether and how their inheritance can be used before they reach adulthood. If you do not create a trust, there are default provisions of law (e.g., the Uniform Transfers to Minors Act) that allow for the distribution to someone on the minor child’ s behalf. However, money held pursuant to the Uniform Transfers to Minors Act is distributable to the minor as soon as they reach age 18. If you leave the inheritance in trust for the minor’s benefit, then you can control when (or if) a lump sum distribution is made.

Avoiding or Reducing Federal and/or State Estate Taxes

You are legally able to transfer a certain amount of assets to beneficiaries of your choosing without any estate tax consequences. That amount is called the “estate tax exemption” amount, as it is exempt from either/both federal and state estate taxes. Any assets transferred at your death that are over and above the exemption amount will be taxed.

In Illinois in 2020, the current estate tax exemption amount is $4 million. This means that between your various life insurance policies, investment/retirement accounts with named beneficiaries, and other assets, up to $4 million may be transferred at your death without any tax liability. In 2020, the federal exemption amount is $11.58 million, and is indexed for inflation through the end of 2025. The federal exemption amount for 2026 is currently unknown. Also, there is an unlimited marital exemption on both the state (of Illinois) and federal level, meaning that you can leave your entire estate to your spouse if you so choose, without tax consequences.

If your estate is likely to face federal or state estate taxes, you should speak with an attorney about preparing a trust. If properly drafted, a trust can be used to reduce or eliminate those estate taxes. The type of trust that will result in the most estate tax savings for you depends on a variety of   factors including but not limited to the amount of your assets, who you would like to inherit, and who you are comfortable trusting to be in control of various assets.

9. Store your trust document safely

You don’t need to file your trust document with a court or any government agency. Just keep it in a safe place–for example, a small fireproof home safe–and tell your successor trustee where the trust document is and how to get access to it when the time comes.

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