Law Office of
Michael J. Fleck, P.C.
-Illinois Legal Topics-
by Michael J. Fleck, Esq.
WARNING: THIS IS NOT LEGAL ADVICE. CONSULT YOUR ATTORNEY FOR INFORMATION CONCERNING YOUR PERSONAL SITUATION.
This is a series of discussions on legal issues in Illinois. Topics covered include Real Estate, Estate Planning and Administration (wills, trusts, probate and guardianship), Business Law, Employment and Civil Litigation.
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Law Office of Michael J. Fleck, P.C.
Huntley, Illinois
www.flecklawoffice.com
If you have taken the time and expense to prepare a trust agreement as a means to avoid probate and effectively transfer assets to your intended beneficiaries, do not forget or fail to make sure that your trust is properly funded during your lifetime. Failure to take these steps could lead to the very thing that you were hoping to avoid - formal Probate.
Note: This post is a very general overview of funding a simple revocable living trust or a joint revocable trust. It is not intended to cover all possible trust creation/initial funding scenarios, nor is it intended to be specific to a particular person's trust. There are many different types of assets - too many to list all here and the implications or steps of funding a trust with such assets. Consult your attorney/accountant/financial adviser for specific information.
The trust agreement is just that - an agreement. It can be considered the governing document, or the terms under which the trustee is to preserve, protect and maintain the assets held under trust, and the directions by which the trustee is to settle the trust and dispose of assets. Without assets to manage, the trust is essentially pointless.
How to avoid formal probate in Illinois
These are the general requirements for assets to be probated in Illinois. (Again, there are exceptions and nuances to these rules, but by and large, these are the thresholds)
- Real Estate - If you own real estate in your own name or as tenants in common with others (i.e. not in joint tenancy or tenants by the entirety when the joint tenant survives you) then formal probate will likely be required. (Exceptions are if Summary Administration, which is a streamlined form of probate, is available or a bond in lieu of probate through a Title Company). Transferring the real estate into a trust is a way to avoid the formal probate process on this asset. Creating a Transfer on Death Instrument (TODI) is another method.
- Small Estate - If you do not have real estate in your own name and all other assets that are subject to probate total less than $100,000. Then a Small Estate Affidavit can be used to collect and transfer assets. However, this does not avoid creditor rights, tax obligations, challenges to heirship or validity of a will as if formal probate took place. Note that Illinois is much more generous about small estates than other states. The limit of $100,000 is among the highest, and some states still require some sort of formal proceeding, even for small estates.
- Beneficiaries - If you name beneficiaries on assets. Life insurance, retirement plans, bank accounts and even some real estate through a Transfer on Death Instrument (TODI) can transfer the assets upon death. The asset is transferred by providing a death certificate and filling out the appropriate claim forms to receive the asset. Of course, if you name a beneficiary who receives the asset and lacks the maturity to properly manage the asset, it could be gone too soon. Placing it in trust for such a beneficiary can protect the asset until the beneficiary possesses the skill and maturity to manage the asset.
- Joint Tenants - If you have joint tenants on an asset. If you own real estate in joint tenancy or tenants by the entirety, the asset immediately goes to the survivor upon death. Under the Illinois Vehicle Code, joint tenancy is presumed if there are more than one owner on title. Note that this works for first to die, but not for second to die or if there is a simultaneous death. And, there can be terrible consequences for simply adding the children on as joint tenants. The asset can lose its step up in basis for capital gains purposes, the asset could be subject to the claims of the children's creditors during your lifetime, and the asset can be disposed of by a joint tenant (such as emptying mom's bank account). See our blog on the "joint tenancy problem" for more details on this issue.
Funding
Often, as soon as trusts are executed, the funding process begins. Failure to fund could lead to the probate process or could lead to the trust not governing the terms and conditions under which an asset will be disposed. Here are some general points about funding:
- Real Estate - Real Estate interests can be transferred via a Deed in Trust. Care should be taken to assess the proper title, so that the correct grantor conveys the described real estate to the trustee of the trust and to all successor trustees. The specifics of a Deed in Trust can be complex and it is strongly advised that this should be done by a qualified attorney who can confirm that the transfer is proper, valid and appropriate for the trust beneficiaries.
- Existing Mortgages - You normally can transfer property into trust that is encumbered by a mortgage, despite the "Due on Sale" clause in the mortgage instrument. Federal law exempts this type of transfer specifically: "With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—...(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property." 12 U.S.C. § 1701j–3 (d) (8)
- Insurance - It is also advisable to contact your homeowner's insurance and let them know that your property is now transferred into trust. This may involve changes to the policy and/or ensuring that the trust is an additional insured.
- Other owners - Care should be taken to not disturb the rights of co-owners when transferring your interest into trust. Again, consult a qualified attorney to discuss the specifics.
- Investment Accounts - Investment accounts that are not considered Qualified Retirement Plans are often transferred to trust. This is accomplished by contacting the financial institution, advising them of the creation of the trust (perhaps bringing a copy of the trust agreement or a certification of trust), and having the institution re-title the asset into your trust. Note that with most revocable living trusts where you created the trust and you are the beneficiary, funding the trust with your investment accounts does not require a new tax identification number. The IRS essentially ignores the trust and treats the account as being held by you under your social security number. However, when the beneficiary dies, that is when the trust can become irrevocable and a new separate tax identification number is obtained.
- Personal Property - Tangible personal property, such as clothing, artwork, jewelry, collectibles, automobiles and the like can be transferred to trust. Many will do a simple memorandum of transfer or Bill of Sale indicating that all tangible personal property now owned or acquired in the future are made an asset of the trust. Certain assets such as vehicles, boats or any property that requires a registration may require re-registration or re-titling. Because this can be a bit of an aggravation, a lot of people will wait until they buy a new vehicle to title it then. Bear in mind the Small Estate Affidavit limits in Illinois when considering whether to transfer such assets to trust.
- Business Interests - Ownership in a business, whether stock, LLC Membership, or other interests may be transferable into a trust. However, there may be restrictions on such transfers that either preclude the transfer altogether or place extra steps on the transfer in order for it to be valid.
- CAUTION - CAUTION - CAUTION Concerning Qualified Retirement Accounts. Because of the rules regarding qualified retirement plans and what are called designated beneficiaries, extreme caution should be taken in naming a trust as a beneficiary of an IRA, 401 (k) or a 403 (b) and other qualified retirement accounts. The general rule is to name a spouse (spousal rollover) or naming actual persons as beneficiaries for an inherited or "stretch" IRA. If a trust or an estate is named, the transfer of the funds to the trust or estate could result in income tax on the entire amount. These rules are highly complex and proper drafting is required to qualify a trust as a conduit or look though trust. This is done when the beneficiaries may be young or disabled, or if a trust is used to fund a tax credit shelter and retirement funds are necessary to do so. It is best to not name a trust as a beneficiary of a retirement plan without the guidance of a qualified estate planning attorney to assure that it is essential and then done properly.
Funding is an essential step in the trust creation process that should not be ignored or delayed. Care should be taken to understand the consequences of funding or not funding a trust, so that your intended goals are met and carried out as planned.
-Michael J. Fleck is an attorney in Huntley, Illinois with the Law Office of Michael J. Fleck, P.C.
WARNING: THIS IS NOT TO BE CONSTRUED AS LEGAL ADVICE.
CONSULT YOUR ATTORNEY FOR INFORMATION
CONCERNING YOUR PERSONAL SITUATION.
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