Let me share with you an all-too-common real-world scenario:
Kevin and Mary were 35 years old and have two children, ages 9 and 3, the older one from Mary’s previous marriage. They haven’t gotten around to doing any planning for their estate. They’ll get to it later. But if either spouse dies, all the assets go to the surviving spouse, right?
That’s what Kevin and Mary assumed.
They were wrong.
When Kevin died unexpectedly in a hit-and-run accident, all of Kevin’s assets had to go through probate. And that’s when Mary got another piece of devastating news: Because of a quirk in Illinois law, she would only receive half of Kevin’s estate.
The other half of the estate went to Kevin’s son. Since Kevin had not formally adopted Mary’s child from a previous marriage, the older child got nothing.
This was not Kevin’s or Mary’s intent. And the younger child could not transfer the assets back to his mother’s name until he turned 18.
In this case, the lack of estate planning caused significant financial hardship for Mary and both her children – especially the one accidentally disinherited because they waited too long to take care of things.
Trusts keep your assets out of probate.
By shifting your personally-owned assets into a living trust, you can avoid the lengthy and expensive probate process. See, when you die, assets held in your name, personally, don’t go right to your heirs (other than your spouse). Instead, everything you owned in your own name falls under the control of court probate officials.
The first thing these court officials do is pay themselves – typically about $4,000 to $6,000 in a typical Illinois probate case with a simple and modest estate. If there are complications, such as someone contesting the will, the cost will be even higher.
Next, they will contact the IRS, state and local revenue agencies, mortgage holders, lienholders and everyone else they can find to whom you owe money. These creditors will get paid, even if the probate courts have to sell property to raise the cash to pay them.
If there are transaction costs – such as real estate commissions – in selling that property, probate court officials will take them out of your estate.
In probate, your loved ones get paid last.
The good news: Assets in a living trust don’t go through probate. It’s the trust that owns them – not you. And the trust doesn’t die. If the trust is properly constructed, it’s also not liable if you are personally sued for some reason. It’s a separate entity.
If you die, assets in the trust remain in the trust.
Trusts vs. Wills
Yes, you should have a will to distribute property held in your name. If you die without a will – what lawyers call intestate, then the courts will decide to distribute your assets according to the state’s default settings. Which may not be what you want.
But if you want to protect your property against the time and expense of the probate process, you should consider establishing a living trust, naming your loved ones as beneficiaries, and transferring assets to it.
Pass on wealth to children – with strings attached
Let’s face it, not everyone should suddenly inherit a large sum of money. If your child has a drug or gambling addiction problem, or is a compulsive spender, you may not want him or her to directly inherit a lump sum.
Many people leave their assets instead to a trust. The language in the trust controls who gets the money and when. You can elect to have it generate an income over a number of years or over the expected lifetime of your child or children. You can have it disburse money based on achieving certain milestones, such as graduation from college, 10 years without a criminal conviction, etc.
You have tremendous flexibility in designing the trust to meet your family’s unique needs.
Protect your family against your incapacity
A trust can provide direction for handling your affairs in the event you are incapacitated and cannot make financial decisions. If you are in a coma or a nursing home and unable to pay your bills for yourself, your trustee can take care of things on your behalf, using assets within the trust.
Without a trust, your family might have to petition a court to appoint a conservator. A trust ensures that you can appoint the individual yourself.
Special considerations for real estate
Sometimes real estate is a probatable asset, and sometimes it isn’t. It depends how the property is titled.
If the property is held as a tenancy by the entirety – then the home bypasses probate and goes directly to a surviving spouse.
If it’s held in joint tenancy, then in Illinois, the asset goes directly to the joint owner, if still living, again bypassing probate.
Update your beneficiaries – and review them periodically.
Not everything you own goes through probate. Only probatable assets do. life insurance and retirement accounts generally go directly to any named beneficiaries, bypassing probate. Unlike probate, there’s generally little or no expense to these transfers. And your beneficiaries will have access to this money in days, not months. The same is true for assets held in living trust.
But that’s only true if you have named beneficiaries – and these beneficiaries or your secondary beneficiaries are still alive. If you have not named beneficiaries, these assets will wind up stuck in your estate, and needlessly subject to probate.
So periodically review and update your beneficiaries on these types of assets:
- Life insurance
- Payable-on-death bank accounts
- Retirement/investment accounts
- Real estate under an Illinois Transfer on Death Instrument
Does everyone need a trust?
Not necessarily. If your estate is under $100,000, contains no real estate, and unlikely to be contested, Illinois has created a Small Estate Affidavit that helps avoid some of the disadvantages of probate. But if you own real estate, you don’t qualify. Any property you own in your own name may be subject to probate.
Beware of “trust mills.”
You may have seen ads on the Internet or in the paper selling a ‘trust-in-a-box’ program for a ridiculously low price: A normal living trust may cause you thousands of dollars. But you can buy this canned trust for a low, low price of $39.99!
However, in practice, these trusts rarely function quite as advertised. They aren’t personalized to your family. You may accidentally disinherit a stepchild, for example – or leave assets exposed to the claims of creditors.
Their real aim is not to protect your loved ones with a living trust, but to sell you insurance or investment products.
The sad thing is, your family may not realize there’s a problem with the trust documents… until it’s too late!
Don’t confuse a professionally-drafted, customized trust document designed specifically to meet your family’s individual needs.
If you have questions about real estate and its nexus with family law, or you are buying or selling property in the midst of a divorce, contact me today. As a Certified Divorce Real Estate professional, I’m one of just a handful of real estate agents in the country who is specially-trained in the complicated legal considerations that arise when doing real estate transactions related to a divorce.