Putting your children’s names on your assets, can cost you more than you think.

Part III of a three part series.

In the prior issues of Senior Advice, we discussed many of the potential pit-falls that face widows and widowers who seek to avoid the probate process by adding their children’s names as joint owners of their assets. These problems included: the creation of gift and capital gains tax consequences for your loved ones, exposing your assets to your children’s liabilities and the potential for losing control of your assets all together.

Although the practice of placing your children’s names as joint owners of your assets, can work well for small estates. With larger estates, the practice is neither practical nor recommended.

However, there is a simple method by which you can avoid the probate process, side-step potential gift tax consequences, provide your heirs with a “step-up” basis for your assets (i.e. eliminate much of the capital gain consequences), insure that your property is passed to your children quickly and easily, and not lose control of your assets during your lifetime!

The use of Living Trusts

A Living or “Inter vivos” Trust is a document that once properly drafted and funded allows you to exercise total control over your assets during your lifetime, provides for the management and allocation of your assets for your benefit during any period of legal disability that you may suffer, and provides a means of transferring those assets to your named beneficiaries following your death, at such times and in such amounts as you determine, without the need for probate.

Generally, a Living Trust is a document that outlines how the property you transfer to the Trustee is to be managed and allocated both during your lifetime as well as upon your death. Typically in a revocable trust, you would nominate yourself as the Trustee (thus retaining control of all your assets during your lifetime) to manage and allocate the funds held in trust. A well drafted trust should also provide for a successor trustee who can act in your place in the event that you should ever become legally incompetent. This “successor” trustee can either be another person of your choosing; a child or close family friend for example; or a financial institution that professionally manages trust assets for a fee such as a bank.

Probate Can be Avoided.

Upon your death, your trust continues to function as a separate legal entity until your assets have been completely distributed to those individuals you have directed. Since, the trust continues to function after your death, those assets that were transferred to the trustee are not considered part of your probate estate. As such, it is not necessary to utilize the probate process in order to complete the transfer of these assets to your beneficiaries.

In addition to avoiding probate, trusts are an immensely useful tool for protecting your loved ones once you are gone and seeing that your goals or wishes are carried out.

That is, with a trust you can see that your assets are not distributed to your children until certain pre-conditions are met. Thus, moneys can be withheld from being distributed until the beneficiary obtains a college education or reaches a desired age such as 25 or 30 (without a trust, assets are distributed to beneficiaries who have reached legal age, i.e. 18). In fact the restrictions you may place on how your money is actually distributed are almost unlimited. Trust are private documents so your wishes are not made public, whereas, by law you will must be filed clerk of the court and made a part of the public records.

Down Side

Like everything else there are some down sides to a living trust that must also be considered.

First, there are the up front costs. When your assets are probated, the expenses of administrating the estate are paid from the estate itself. Thus you don’t see or feel their effect. However, when you create a trust you must pay for the services up front; depending on the type and complexity of the trust instrument these fees can be $1,500.00 or more.

Even once created, a trust is no good unless you transfer you assets into it. Too often I see a client who paid good money to have a trust drafted for their benefit but never had any assets transferred into it. Without assets the trust is worthless.

Finally, trusts can be written either too broadly or too narrowly, creating unanticipated consequences and or hardships for your beneficiaries.

All in all, the use of a Living Trust is a powerful, easy and convent estate planning tool which should be considered by anyone with larger estates, or where there is a need to protect love ones with special needs.

The information contained in this column is intended to supply general information to the public regarding Illinois law and is not intended to constitute legal advice.

This column is intended to encourage the reader to seek competent legal advice for their legal needs and as such is intended to be advertising, and is not solicitation, nor the offering of legal advice.

Philip J. Vacco, Attorney at Law ©

(815) 254-3460