Illinois Law
Illinois Trusts & Estate Planning Law
- Trusts & Estate Planning Law
Trusts & Estate Planning Law
Wills
Requirements for a Valid Will
Each state sets different formal requirements for the creation of a legal will. In Illinois, a person must be at least 18 years old and must be of sound mind and memory in order to make a legal will. Sound mind and memory means that the individual has no disability that prevents him or her from understanding the full nature of the will document. In Illinois, a will must be in writing and must be signed by the testator. The will must also be witnessed, in the special manner provided by law, by at least two other people. A handwritten will, often called a "holographic" will, is valid in Illinois provided that it is witnessed and signed by two people. Individuals must sign their own wills, but if they are illiterate or otherwise incapacitated, they may direct another person, in the presence of witnesses, to sign for them. A will is valid until it is revoked or superseded by a new will. Individual provisions can be changed by a codicil, which is described below.
It is not necessary to hire an attorney to create a will. Anyone can create a will, as long as he or she pays close attention to the details outlined above. Making a will to disperse a small estate is particularly straightforward. The simplest will in history ever to be declared valid by a court contained only three words: "All to wife." However, a lawyer's guidance is very helpful to deal with complicated property holdings or an estate with many assets, especially if they are located in several different places. Business owners, too, need the advice of an experienced attorney to transfer their assets. An attorney's help can ensure that the transfer of property described in the will is done in a way that minimizes the survivor's tax liability. In addition, a complicated estate may require documents other than a will, such as a trust agreement, to ensure that all of a person's wishes are carried out.
Personal Representative
A will typically appoints someone called a personal representative to carry out the specific wishes of the decedent. The personal representative should be a trusted friend or family member who should be made fully aware of his or her duties before the decedent dies. Under Illinois law, a personal representative appointed by a testator must be a resident of the United States, but need not be a resident of Illinois. A personal representative must do many things, including collect and manage the decedent's assets, collect any money owed at the time of death, sell any assets, if necessary, to pay estate taxes or expenses, and file all required tax returns. Because a personal representative is allowed to charge a fee for doing this work, choosing a friend or family member who is also a beneficiary to fill this role may be a good choice, since he or she may not charge the full amount allowed by law. To ensure that the personal representative is someone chosen by the decedent, it is wise to name one or more contingent personal representatives who can take over the responsibilities of the primary personal representative if the primary personal representative is unable to assume the responsibilities of the position.
If a person does not name a personal representative in his or her will, state law establishes the order in which a probate court appoints relatives to act as personal representative. If none of these family members agrees to be the personal representative, the circuit court may appoint a professional administrator to do the job.
Appointing a Guardian for Children
A person with minor or dependent children may name in a will a guardian to care for those children should there be no surviving parent. If a person fails to name someone to assume the role of guardian, the probate court appoints someone. The person chosen by the court will usually be a close relative or friend, but it may not be the person the parent would have chosen. As with the selection of a personal representative, it is important that the potential guardian understands the provisions of the will and is willing to accept the responsibilities of being a guardian. Also, it is wise to name an alternate guardian should the primary guardian be unable to accept the responsibility. Of course, the selection of a guardian for children is likely to influence how the parent wants to distribute his or her property. The parent may want to give property to someone only if the recipient accepts guardianship of a child. In this way, the guardian is given the financial resources to care for the child.
Planning for Incapacity
People drafting wills often use the opportunity to plan for the possibility of their own incapacity. By preparing a document called a durable power of attorney, they can give another person of their choosing full legal authority to act on their behalf should they become unable to handle their personal and financial affairs. Without a durable power of attorney, a person's family might need to go to court to have someone appointed to handle the person's legal affairs. If a power of attorney is made part of the will, it is essential that the will be made known to family members before the testator becomes incapacitated. If a will is kept secret, locked away in a safe deposit box until a person dies, it will be too late for the power of attorney provisions to be useful.
Some people also use a document called a durable power of attorney for health care to make health care decisions in advance should they subsequently become incapacitated.
Restrictions on Wills
In order to protect spouses and dependent children, Illinois law prevents a person from entirely disinheriting a spouse or child without the consent of the one who is disinherited. Under Illinois law, a spouse is entitled to at least $10,000, plus $5,000 for each dependent child. This amount is intended to support the decedent's family for the first nine months following the death of the decedent. A spouse receives this amount of money even if there is no will. This spousal award is considered a preferred claim and a debt of the estate.
The provisions of this law may be overcome, however, in two ways. First, if a will specifically states that its provisions are meant to stand in the place of the spousal award, and the spouse does not renounce the will, the terms of the will would govern distribution. Second, the spouse may renounce the will, and take an elective share of the estate. In this case, distribution of the estate would be governed by statute. However, that renunciation is not available to a spouse who signed an agreement during the life of the decedent in which the spouse agreed to abide by the terms of the will. Occasionally this happens through a prenuptial agreement. For example, a second spouse may agree that an entire estate will go to children from a first marriage. A person may legally disinherit an independent child by clearly specifying in a will that the child not receive any of the estate.
There are other restrictions on wills. Anything owned in joint tenancy with another person will go to the surviving joint tenant. Arrangements must be made to end the joint tenancy before death if one joint tenant does not want the other to inherit the jointly held property. Because there may be significant tax consequences in doing so, these changes should be made only after consulting an attorney. Other possessions are not considered part of the estate because they are already promised to someone else. For example, a testator cannot specify in a will that someone other than the beneficiary of a life insurance policy gets the benefits described in that policy. However, a person can designate his or her estate as the beneficiary of a life insurance policy. In this case, the money from the policy will be added to other estate assets and will be distributed according to the will. Similarly, the money from a retirement plan goes to the persons named on the plan, regardless of whether they are beneficiaries in a will. Laws designed to uphold public policy also limit what can be done with a person's assets after death. For example, conditions in a will encouraging someone to do something illegal or immoral in order to inherit money or property would not be enforceable.
Changing and Updating Wills
The provisions of a will are valid until they are changed, revoked, destroyed, or invalidated by the writing of a new will. Changes or additions to a will may be included in a document called a codicil. Codicils must be written, signed, and witnessed in the same way as a will. Wills cannot be changed simply by crossing out existing language or writing in new provisions. In order to avoid making a new will or codicil each time a person's possessions change, a will can specify that personal property is to be distributed according to instructions outlined in a separate document. A person can then revise the separate document as often as necessary, without observing all of the formalities required to change the will itself.
If someone dies with a will that is not up-to-date, people may not be provided for adequately. For example, a person chosen to be a personal representative or guardian may have died or fallen out of favor with the author of the will, or a favorite charity may no longer be in existence. A significant amount of case law has dealt with how a probate court is to proceed with a will that has become unenforceable because of changed circumstances. These headaches can be avoided if a will is reviewed at least every two years and revised for major changes in tax laws, for personal events such as births, deaths, marriages, divorces, or for significant changes in the size of the estate. It is also a good idea to review a will if its author moves to another state, because the new state of residency may have different inheritance and tax laws.
The Right of Election
As discussed previously, Illinois' probate code protects surviving spouses from being entirely disinherited by a decedent spouse. A surviving spouse who is unsatisfied with his or her portion under an otherwise valid will is allowed to exercise the right of election and take a statutory share of the estate. If the decedent left no descendants, the spouse's statutory share is half of the decedent's estate. If the decedent left descendants, the spouse's statutory share is one-third of the decedent's estate. The one-third portion is the minimum amount a surviving spouse may receive. A will can give more to the surviving spouse, but if it gives less, the surviving spouse can simply elect to forego his or her share under the will in favor of this statutorily guaranteed one-half or one-third share. Note, however, that the statutory share is not available to a spouse who has entered a contract during the life of the decedent to accept the provisions of the will.
Dying Without a Will
When a decedent leaves no will or fails to dispose of all property through a will or some other comparable estate planning tool, he or she is said to have died intestate. When a person dies intestate, the circuit court steps in to divide the decedent's estate, according to a formula provided by state inheritance laws. Under the state inheritance laws, the circuit court uses formulas set by the legislature to divide a deceased person's possessions among any surviving relatives.
A circuit court applying the state inheritance laws first deducts from the estate the funeral expenses and administration costs, the surviving spouse and child's award, any money owed to the federal government, any money due to employees of the decedent, any unpaid medical bills or other expenses of the decedent's last illness, any money owing to state or local government, and any other debts owed (in that order of preference).
After all the claims against the estate are paid, and if the decedent has a surviving spouse and no children, the entire estate goes to the spouse. If there are children and no surviving spouse, the entire estate is divided equally among the children. If there is both a surviving spouse and children, half of the estate goes to the spouse, and the remaining half is divided equally among the children. If the decedent leaves neither a spouse nor children, the estate goes to the decedent's parents, brothers, sisters, nieces, and nephews. If the decedent leaves none of these relatives, the estate goes to the decedent's grandparents, aunts, uncles, and cousins. The line of inheritance continues in an attempt to locate the decedent's nearest kin. Illinois law does not distinguish between kin of whole or half blood. If, however, the decedent leaves no kin, the estate goes to the county where the decedent lived or in which the estate property is located.
The biggest problem with relying on a circuit court applying state inheritance laws to distribute one's estate is that it may not distribute the estate in the manner the decedent would have wanted. State inheritance laws only recognize relatives. The inheritance laws never permit the circuit court to support a decedent's close friend, lover, or favorite charities. Clearly, for most people writing a will or creating a trust is advisable.
Trusts
Mechanics of a Trust
To create a trust, the owner of property (grantor) transfers the property to a person or institution (trustee) who holds legal title to the property and manages it for the benefit of a third party (beneficiary). The grantor can name himself or herself or another person as the trustee. A trust can be either a testamentary trust or a living trust. A testamentary trust transfers the property to the trust only after the death of the grantor. A living trust, sometimes called an inter vivos trust, is created during the life of the grantor and can be set up to continue after the grantor's death or to terminate and be distributed upon the grantor's death.
Unlike a will, which in some cases can be drafted without the help of an attorney, a person should never draft a trust without the aid of a lawyer. Many complex laws regulate trusts depending on the size and composition of the estate. Trusts must be carefully structured if they are to take advantage of beneficial tax treatment. An experienced attorney should always assist in drafting a trust so that it is valid, meets the needs of the estate, and does not conflict with any previously drafted will.
Advantages and Disadvantages of a Trust
Trusts have many advantages over wills. The advantages depend on whether a living trust or testamentary trust is chosen. All trusts have the advantage of allowing the grantor to determine who receives the benefit of the money, when they receive it, and what conditions must be met. If a spouse is unable or unwilling to manage assets, if children are minors or are unable to handle money responsibly, or if a beneficiary is disabled, creating a trust may be a better way of passing on assets. Living and testamentary trusts are an especially popular way of providing for beneficiaries' future educational or medical costs.
Some advantages are particular to living trusts. First, a living trust can give its grantor substantial tax advantages. Second, possessions held in a living trust are not subject to estate administration by the probate division after the grantor dies. Survivors do not have to reveal the details of any possessions held in trust through the public filing process that takes place during probate. In addition, if the grantor owns real estate in another state, establishing a living trust for the title to that property may allow survivors to avoid probate in the other state. A living trust can free the grantor from the burden of overseeing his or her financial affairs because a trustee manages all the assets of a living trust. More importantly, a living trust allows a trustee to manage the trust funds in the event that its creator becomes incapacitated or mentally or physically unable to oversee his or her possessions. If a living trust contains all of a person's assets, then he or she may not need a will, and his or her survivors may be able to avoid probate. If only part of a person's possessions are held in living trust, then a will is necessary to distribute those items in the estate not placed into a trust. However, a "pour-over provision" in a will can place any possessions remaining upon death into a pre-existing living trust.
The primary disadvantage of a living trust is that it involves the loss of some flexibility and control over one's assets. Unlike wills, which become effective only at death, a living trust becomes effective immediately upon its creation. For the person who wants to retain unrestricted control over his or her estate, a will or a testamentary trust is a better estate planning tool because it can be changed at any time prior to death.
The primary advantage of a testamentary trust is that it allows the grantor to retain unrestricted control over his or her estate. A testamentary trust becomes effective only upon the death of its grantor. Like a will, a testamentary trust can be changed at any time prior to death. The primary disadvantage to testamentary trusts is that they do not take advantage of the beneficial tax treatment given to living trusts. Because a testamentary trust only takes effect when the grantor dies, the grantor cannot enjoy any tax advantage during his or her life. Also, most testamentary trusts must go through probate.
Revocable and Irrevocable Trusts
A living trust can be either revocable or irrevocable. As implied by their names, a revocable trust can be changed or revoked after its creation, while a person signing an irrevocable trust gives up the right to change or revoke the trust. Revocable trusts are quite often devised to supplement a will and/or to name someone to handle the grantor's affairs should the grantor become incapacitated. A trust usually must be made irrevocable if the grantor wants to avoid income or estate taxes. Tax authorities consider the grantor of a revocable trust to be the owner of the property because he or she still controls the property. For this reason, income from assets held in a revocable trust must be reported as income to the grantor for income tax purposes. At the death of the grantor, property in a revocable trust is included in the estate for calculating estate taxes.
Irrevocable trusts are often designed to be the beneficiary of a life insurance policy. Such a life insurance trust can also spell out how the policy's money is distributed to survivors. In addition, irrevocable trusts are often set up to manage money given to minors and to charities. Finally, an irrevocable trust can be used to transfer assets to another person in the event that the grantor requires expensive medical care. Although doing so may protect the grantor's family by ensuring that the cost of medical care does not wipe out the family fortune, it may also make the grantor ineligible to receive government medical assistance.
Probate
Summary administration is available when the estate is $50,000 or less, when all claims against the estate are known, when there are no taxes due, and if all the heirs and legatees consent to the process. With summary administration, the circuit court determines the rights of the claimants, directs payments, and distributes the estate at a single hearing.
Independent administration permits the personal representative to administer the estate without court orders or filings. Unless disputes arise between the beneficiaries or with third parties, or unless requested to intervene by the personal representative or an interested party, the court is involved only to open and close the estate. Independent administration increases family privacy, because usually no inventory or accounting is filed. The process also reduces the time involved in probate. If an interested person objects to independent administration, the court must supervise the administration. Supervised administration requires the personal representative to make required filings with the court, such as an estate inventory and periodic accountings. The personal representative also must obtain court approval to perform such duties as selling or leasing estate property.
Avoiding Death Taxes
Concerns for Owners of Small Businesses
Only an attorney experienced in estate planning for owners of small businesses can adequately advise on all aspects of treating small business assets. Before an attorney prepares a will or trust, however, the person with an interest in a small business must consider his or her own need for income until death, the likelihood that someone in the family will want to continue playing an active role in the business, and the ability of a recipient to pay death taxes and administration costs if the business is going to continue after the owner's death.
Some common options chosen by small business owners include partner buyout agreements, gift-leaseback arrangements, life insurance policies, incorporation, or selling the business. In a partner buyout agreement, partners can agree that a surviving partner will buy the interest of a decedent at a price agreed upon in advance. Partner buyout agreements are common but they need to be updated periodically as the value of the business changes. Under a gift-leaseback arrangement, substantial assets are put in trust for the benefit of one or more beneficiaries, then leased back to the business. The primary benefit of a gift-leaseback arrangement is that the beneficiary receives financial support but business operations are not disrupted. Life insurance policies provide a recipient with sufficient cash to pay taxes and administration costs without having to sell the business. Incorporating often makes it easier to value the business.
Selling the business may seem drastic, but it may mean the recipient receives more money. Many small business owners feel strong emotional attachment to businesses they have grown from scratch. Often emotional attachments lead an owner to refuse to sell a business and the family has to sell it later in order to pay off bills or because no one is capable of managing the business. Accepting the need to sell a business while its owner is still alive and has time to find a suitable buyer may be wise. In addition, the business is likely to fetch a higher price because its current owner may be able to oversee the transition to new ownership.
Resources
National Senior Citizens Law Center, 1815 H Street NW, Suite 700, Washington, D.C. 20006, phone: (202) 887-5280.
Illinois State Bar Association, Illinois Bar Center, 424 South Second Street, Springfield, IL 62701, phone: (217) 525-1760. Contact the ISBA to receive the free booklet, Estate Planning & Living Wills.