The Revocable Living Trust allows you to control your assets and their distribution and avoid or minimize the probate. It is also the most efficient way to maximize the Estate Tax exemption. The Revocable Living Trust is the heart of your Estate Plan.
The creator of the Revocable Living Trust is referred to as the Grantor. Assets that are transferred (see “Funding” below) to the Revocable Living Trust continue to be controlled solely by the Grantor, who is the initial Trustee as well, during his or her life. Upon the Grantor’s death, the successor Trustee will control the trust assets to be distributed in accordance with the terms of the trust document.
Funding – The transferring or re-titling of assets to the Revocable Living Trust is referred to as Funding the trust. Assets that are transferred to the trust during the Grantor’s life avoid probate. Probate is the process by which the state courts distribute the property of the deceased individual. Probate is a lengthy, costly process which requires a six-month window in which creditors may file their claims against the estate. Probate Assets are those which do not provide for a beneficiary designation, and thus must be distributed according the deceased individual’s Will, or if there is no Will, then the law of the state.
The Pourover Will is a catch-all instrument that transfers all of the deceased individual’s Probate Assets to his or her Revocable Living Trust. Thus, if the trust is not properly funded during his or her life, the assets remaining outside of the trust will be transferred into the trust at death.
Control – The Revocable Living Trust allows the Grantor to determine the terms and conditions of distribution for his assets the beneficiaries. For example, a Grantor with young children is unlikely to want his children to receive large checks upon his death. To remedy this, his trust might provide that each child may withdraw half of his or her share at age 40, and the balance at age 50. Until the child reaches such ages, the Trustee shall make distributions for the child’s health, education and support only. The ages and standards of distribution can be determined by the Grantor at the time of drafting.
The Exemption – Under Illinois law, unless the individual provides otherwise through planning, his assets will pass as follows:
- If he has a spouse but no children, then all to his spouse.
- If he has children, but no spouse, then all to his children, in equal shares, with the share of any deceased child passing to his or her descendants.
- If he has a spouse and children, ½ to his spouse and ½ to his children, in equal shares, with the share of any deceased child passing to his or her descendants.
By utilizing proper estate planning techniques, such as dual Revocable Living Trusts, a husband and wife can greatly reduce their estate tax liability by utilizing both individuals’ estate tax exemptions to the fullest extent. In 2014, the Federal estate tax exemption is $5.34 million and the Illinois estate tax exemption is $4 million.
*No Planning – Suppose that a couple with children has an estate of $10 million ($5 million each—best case scenario). At the husband’s death, ½ of his assets ($2.5 million) will pass to the wife. No tax is due because transfers between spouses are exempt. The other ½ will pass to his descendants. No tax is due because the $2.5 million passing to his children is below the exemption amount. At the wife’s death, her estate ($7.5 million) will pass to the children in equal shares.
Calculation (simplified for example purposes):
$7.5 million – $5.34 million = $2.16 million
$2.16 million x 40% = $864,000
Federal tax due: approximately $864,000 (8.64% of the total estate), due 9 months after death, plus Illinois estate tax due
Assets passing to children: $9.136 million
*Proper Planning – Suppose the same facts as above, but the couple has utilized the estate planning opportunities available to them. At the husband’s death, his exemption is applied to the assets of his Revocable Living Trust ($5 million). No Federal tax is incurred and the assets are retained in Trust for the benefit of the wife for her life, and then for the children. At the wife’s death, her exemption is applied to the assets of her Revocable Living Trust ($5 million). No tax is incurred and the assets are retained in Trust for the benefit of the Children.
Tax due: Zero
Assets passing to children: $10 million
*These general examples assume many facts, but provide a simple example of how proper estate planning can provide a significant reduction in Federal estate tax liability.