A living trust is often seen as the ultimate solution for protecting your assets, but only if it’s set up and managed correctly. Too often, people assume that simply creating a trust is enough, or they forget the crucial step of funding it.
In this post, we’ll break down the most common mistakes people make with a living trust and what you can do to make sure yours actually works the way it should.
More and more people are choosing a Revocable Living Trust over a Will and joint ownership. And with good reason. A Living Trust meets the needs of today's families better than any other plan-and has far fewer risks.
Like a Will, A Living Trust is a legal document that lets you specify who you want to receive your assets after you die. But it does much more.
It avoids the costs, delays, and publicity of probate.
It prevents the court from taking control of your assets if you become incapacitated, allowing a spouse or family member to retain control.
It prevents the court from controlling assets you leave to minor children.
It can control all your assets - so that you can be sure each person receives exactly what you want them to receive, with no risk of unintentional disinheriting.
It can reduce, and even eliminate, estate taxes.
Why is it that a Living Trust can do all this? When you set up a Revocable Trust, you change the titles of your assets and your name to the name of your Trust. Since you no longer own anything in your name, there is nothing for the courts to control when you die or if you become incapacitated. You do not lose control of your assets because you control the Trust. You can buy, sell, and enjoy your assets just as you do now. And because the Trust is revocable, you can take your assets out of the Trust at any time.
Living Trusts are not new, and they are not gimmicks. They have been used successfully for hundreds of years. Even so, some people are reluctant to use a Living Trust because they have heard for so long that they should have a Will. But when they compare the costs and benefits of a Living Trust to a Will - and to the risks of joint ownership - most people prefer a Living Trust.
Takeaway: Setting up a Revocable Living Trust delivers seamless asset transfer, incapacity planning, and tax efficiency so you can plan with confidence.
Some people set up a Living Trust but don't re-title their assets to the name of the Trust. This is called funding the Trust.
Sometimes the fault lies with the attorney - some attorneys don't tell their clients that the Trust needs to be funded, or they tell them they don't have to put the assets in now.
But usually people just procrastinate - they don’t finish changing titles when they set up the Trust. Sometimes they forget an asset. Or they acquire additional assets and forget to title them in the name of the Trust.
Changing titles is probably the most important step in setting up a Living Trust. Not funding your Living Trust is the same as having no Trust at all. You've simply wasted your time and money because a Living Trust can only control the assets you put into it. You may have a terrific document that contains all the instructions you want, but until you transfer your assets into your Trust, it doesn't control anything.
If you become incapacitated, the court can take control of them. And when you die, the assets will probably have to go through probate.
Illinois has a generous exemption from probate that allows up to $100,000.00 held in your name to avoid Probate. This is known as the "Small Estate" amount. However, if you own $101,000.00 in your name at your death, probate will be required. That's why it is so important that you fund your trust.
Takeaway: After creating a Living Trust, re-title every asset and keep it funded as you acquire new property to ensure seamless probate avoidance, incapacity protection, and precise control over your legacy.
A Living Trust is the perfect foundation for most estate plans. When properly prepared and funded, it prevents the court from controlling your assets if you become incapacitated, and it avoids probate after you die. It can also reduce your estate taxes.
However, it is not the only document you need. You should also prepare the following documents.
Pour Over Will - Sends a "forgotten" asset back into your Trust after you die so it can be distributed as part of your overall plan. If you have "forgotten assets' totaling less than $100,000 (in Illinois), the Pour Over Will puts them into your trust without Probate.
Durable Power of Attorney for Property (Asset Management) - Can allow a forgotten asset to be transferred to your Living Trust while you are incapacitated, so it will avoid probate when you die. It can also give your Successor Trustee powers that your Living Trust cannot, like the ability to conduct business on assets left out of your Trust, like IRAs, annuities, insurance, and to sign your tax returns.
Living Will - Lets your physician know the kind of life support treatment you would want in case of terminal illness or injury.
Durable Power of Attorney for Health Care - Lets you give legal authority to another person to make any health care decisions for you, like surgery, procedures, and tests (including the use of or termination of life support) if you are unable to.
Memorandum of Trust - A short summary of your Trust that you can give to banks, brokers, and others who may request a copy of your Trust. It confirms your Trust's existence, names of the Trustee and your Successor Trustee(s), and their powers, but does not reveal any confidential information about your Trust assets or beneficiaries.
Medical record authorizations so that your physician can provide the documents regarding your incapacity, without violating the HIPAA privacy laws. These are medical records and opinions of physicians that are crucial in permitting your successors to operate your trust or Power of Attorney in the event of disability.
A Living Trust portfolio that contains these "support" documents will be all that many families need. However, depending on the size of your estate, your family situation, the amount of your income, and your goals, you may need some additional strategies to save you and your family as much as possible in taxes, give you even more control, and create and preserve your wealth.
Takeaway: Pair your Living Trust with these core documents: Pour-Over Will, Powers of Attorney, Living Will, Memorandum of Trust, and Medical Record Authorizations for a fully comprehensive estate plan.
When used properly, a trust can give your family clarity and protection for years to come. But without the right structure, funding, and maintenance, it can leave behind more questions than answers.
If you want to ensure your living trust truly secures your legacy, we’ll help you get it right from the start. Please call us at (847) 670-8200 or email info@kf-lawgroup.com if you have any questions.