Planning your estate in Illinois often involves deciding whether trusts should be part of your plan. Trusts are a powerful estate planning tool that can help you manage and distribute your assets, avoid probate, and even save on taxes. In this primer, I’ll explain when you should consider a trust and break down common types of trusts – including testamentary trusts, revocable trusts, marital trusts, QTIP trusts, credit shelter trusts, generation-skipping trusts, and irrevocable trusts – in clear, everyday language. The goal of this article is to give Illinois residents an overview of how trusts work and when they might be useful. As with all content on this website, this post is educational in nature, and is not to be relied upon as legal advice. Want to know how these concepts apply to your own estate? Contact the Palley Law Office for advice tailored to your life and legacy.
When Should You Consider a Trust?
Not everyone needs a trust, but certain situations make trusts especially useful. You might consider incorporating trusts into your Illinois estate plan if any of the following apply:
- Avoiding Probate: If you want to avoid the time and expense of Illinois probate, a trust can help. Assets held in a properly funded living trust bypass probate, allowing your beneficiaries to receive assets without court proceedings . This can save your family time, legal costs, and keep your affairs private.
- Minor Children or Special Heirs: If you have minor children or beneficiaries who shouldn’t receive a large inheritance all at once, a trust allows you to manage when and how they receive assets. For example, you could direct that funds be used for a child’s education and only distribute the rest when the child reaches a certain age.
- Incapacity Planning: If you worry about becoming incapacitated, a revocable living trust lets your chosen successor trustee step in to manage your assets without a court-appointed guardian. This ensures continuous management of your affairs if you’re unable to do so yourself.
- Estate Tax Planning: If your estate is large enough to potentially owe estate taxes, trusts can help minimize tax exposure. Illinois has its own estate tax with a $4 million exemption and no portability between spouses (meaning each spouse’s exemption is “use-it or lose-it”) . Married couples with combined estates over that amount often use trusts to fully utilize both spouses’ exemptions and reduce or delay estate taxes.
- Second Marriages or Blended Families: If you’re in a second marriage or have a blended family, a trust can ensure your current spouse is taken care of while ultimately protecting inheritances for children from a prior relationship. Trusts provide control from the grave – you can set rules on who gets what and when, even after you’re gone.
- Generation Planning: Those who wish to provide for grandchildren or future generations may use trusts to skip a generation for tax purposes and preserve family wealth. Trusts can stretch the benefit of your assets over a longer time and offer protection from beneficiaries’ creditors or spending habits.
Common Types of Trusts in Estate Planning
Illinois law recognizes many kinds of trusts, each suited for different goals. Below is a primer on several common trust types and how they might fit into your estate plan.
Testamentary Trusts (Trusts in Your Will)
A testamentary trust is a trust that you create within your will, and it only takes effect upon your death. In other words, the trust is written into your will and gets established when the will is probated. For example, your will might say that if both parents pass away, assets should be held in trust for any minor children until they reach adulthood. Testamentary trusts are useful when you don’t need a separate trust during your lifetime, but you want to provide structured management of assets for beneficiaries after you’re gone. Important to know: because a testamentary trust comes from a will, it does not avoid probate – the will still must go through the Illinois probate process before the trust begins.
Revocable Living Trusts
A revocable trust (often called a living trust) is one of the most popular estate planning tools in Illinois. “Revocable” means you, as the grantor (creator of the trust), can change the trust terms or even cancel the trust at any time during your life. You typically name yourself as the initial trustee, so you retain full control of your assets while you’re alive. Upon your death (or if you become unable to manage your affairs), a successor trustee takes over management.
Key benefits of a revocable living trust include probate avoidance and continuity. Assets you transfer into the trust are not subject to probate in Illinois – your successor trustee can distribute them directly to your beneficiaries according to your instructions. This makes the settlement of your estate faster and more private. Additionally, if you become incapacitated, the trustee can manage the trust assets for your benefit without a court intervention. Keep in mind that a revocable trust does not provide tax savings during your life (the assets are still considered yours for tax purposes) and it becomes irrevocable at your death (meaning it can no longer be changed at that point).
Planning for a Surviving Spouse
A marital trust is a trust set up to benefit your surviving spouse when you pass away, while also ultimately benefiting other heirs (like your children) after your spouse’s death. Often called an “A Trust” in classic estate planning, a marital trust takes advantage of the unlimited marital deduction in the estate tax law – assets left to a spouse are not subject to estate tax at the first death. In practical terms, when the first spouse dies, assets are placed into the marital trust instead of being given outright. The surviving spouse typically receives all income from the trust (and can often use the principal under certain conditions) for the rest of their life . When the surviving spouse later dies, any remaining trust assets go to the final beneficiaries named (for example, the couple’s children).
Marital trusts are especially useful in Illinois for married couples with sizable estates or blended families. They ensure the surviving spouse is financially supported while also preserving the remainder for chosen heirs (which can be very important in a second marriage situation) . However, note that assets in a marital trust will be included in the surviving spouse’s estate for tax purposes when they die. For this reason, marital trusts are often paired with credit shelter trusts as part of an overall plan to minimize taxes.
QTIP Planning for Blended Families
A Qualified Terminable Interest Property trust, or QTIP trust, is a specific type of marital trust with special rules that qualify it for the estate tax marital deduction while still giving the first spouse to die a lot of control over the assets. In a QTIP trust, the surviving spouse must receive all the trust’s income for life, and typically the trust can only benefit that spouse during their lifetime. The term “terminable interest property” refers to the fact that the surviving spouse’s interest in the trust ends (“terminates”) at their death, at which point the remaining assets go to the beneficiaries the first spouse designated (often the children). The key benefit is that you (the first spouse) get to control the ultimate disposition of the trust assets, yet for tax purposes those assets are treated as passing to your spouse and qualify for the marital deduction.
QTIP trusts are frequently used in Illinois estate plans for two main reasons. First, they are great for blended families: you ensure your spouse is taken care of, but you also ensure that, say, your kids from a prior marriage will inherit what’s left, rather than any new spouse or other beneficiaries your spouse might choose. Second, Illinois estate tax planning can involve QTIP trusts. Illinois allows a state-level QTIP election, which means if your estate exceeds the $4 million Illinois exemption, you can put the excess into a QTIP trust for your spouse to defer Illinois estate tax at the first death. In short, a QTIP trust lets you delay taxes and dictate where the assets go after your spouse, combining financial security for the spouse with control for the grantor.
Using a Credit Shelter in Your Estate Plan
A credit shelter trust (also known as a bypass trust or family trust) is typically used by married couples to maximize estate tax savings. The idea is to “shelter” one spouse’s estate tax exemption by placing up to that amount in a trust when they die, instead of leaving everything to the surviving spouse outright. Assets in a credit shelter trust benefit the surviving spouse (and often children) during the spouse’s lifetime, but those assets won’t be counted in the surviving spouse’s estate when they die. This way, that portion of the estate bypasses the second estate tax event.
Here’s how it works in practice: suppose an Illinois couple has a combined estate large enough to face estate tax. Because Illinois’ estate tax exemption is $4 million per person with no portability, if the first spouse leaves everything outright to the survivor, the first $4 million exemption is wasted. A credit shelter trust fixes this by funding a trust (up to $4 million in Illinois, or up to the federal exemption amount federally) upon the first spouse’s death for the benefit of the surviving spouse. The surviving spouse can often receive income and limited principal from this trust, but since they don’t own the assets outright, those assets won’t incur estate tax when the survivor dies. The trust assets then pass to the final beneficiaries (e.g. children) free of any additional estate tax. In essence, the credit shelter trust uses the first decedent’s tax exemption to “lock in” a tax-free amount for the heirs, while still providing for the spouse. This type of trust is usually irrevocable at the death of the first spouse and is a cornerstone of “A/B trust” planning (where the credit shelter is the “B” trust). If you and your spouse have a large estate, your attorney may well recommend a credit shelter trust to save potentially significant Illinois and federal estate taxes.
Generation-Skipping Trusts (GST Trusts)
A generation-skipping trust is designed to transfer assets to your grandchildren or beyond, essentially skipping over the immediate next generation (your children). The primary motivation for a GST trust is to avoid double taxation and preserve wealth for later generations. Normally, if you left assets to your children outright and they later left those assets to their children, the assets could be subject to estate tax at each generational transfer. With a generation-skipping trust, the assets are held for the grandchildren (or any beneficiaries at least 37½ years younger than you, per tax law definitions) and skip being included in your children’s estates. Your children might still benefit from the trust in some way (for example, they could receive income or have it available for their needs), but they typically do not have direct ownership that would trigger estate tax when they die. Instead, when the grandchildren eventually receive the assets, that transfer can use your Generation-Skipping Transfer (GST) tax exemption to avoid or minimize taxes.
GST trusts are irrevocable and often longer-term trusts. They are mainly used by people with significant assets who wish to provide for multiple generations and reduce the overall tax burden on the family’s wealth. If you have a large estate and legacy planning is important to you (say you want to set up a fund for your grandchildren’s education or other needs far into the future), a generation-skipping trust could be worth discussing with your estate planner.
Irrevocable Trusts
An irrevocable trust is any trust that cannot be easily changed or revoked once it’s been created and funded. Unlike a revocable trust, where you retain control, an irrevocable trust involves giving up some control and ownership of the assets – which sounds scary, but it comes with certain benefits. Because the assets in an irrevocable trust are no longer considered yours, they are generally not counted as part of your estate for estate tax purposes. This can help larger estates save on estate taxes. Additionally, assets in an irrevocable trust may be better protected from creditors or lawsuits, since they’re held outside your personal ownership.
There are many types of irrevocable trusts, each for specific goals. For example, an irrevocable life insurance trust (ILIT) can own a life insurance policy on your life so that the insurance payout isn’t taxed in your estate. Charitable trusts (like a charitable remainder trust) are also usually irrevocable. Some people create irrevocable gifting trusts to gradually gift assets to children or grandchildren in a controlled way. In Illinois, as elsewhere, once you create an irrevocable trust, you are generally stuck with the terms, so it’s crucial to set it up correctly with professional guidance. While you lose direct control, you gain potential tax savings, asset protection, and peace of mind that the assets will be used as you intended for the beneficiaries.
Illinois-Specific Considerations for Trusts
Every state has its own laws and nuances when it comes to estate planning, and Illinois is no exception. Here are a few Illinois-specific points to keep in mind regarding trusts:
- Illinois Estate Tax Planning: As noted, Illinois imposes a state estate tax on estates above $4 million. Trust strategies (like credit shelter and QTIP trusts) are commonly used here to ensure each spouse’s $4M exemption is used and to defer or reduce taxes for larger estates. Even if federal estate tax isn’t a concern for you (given the much higher federal exemption), Illinois tax might be – so trusts can be especially important for Illinois families with moderately high net worth.
- Probate Avoidance: Illinois probate can be time-consuming, often taking many months to a year or more to conclude. By using a living trust to avoid probate, your family can gain a smoother transition. (Illinois does allow simplified procedures for very small estates under $100,000 with no real estate, but most homeowners or those with substantial assets won’t qualify for that shortcut.) In short, trusts can spare your Illinois loved ones the hassle of court supervision in settling your estate.
- Trust Law in Illinois: Illinois has adopted a version of the Illinois Trust Code (effective since 2020) which modernized trust law in the state. This means Illinois trusts follow many common-sense rules like those in other states, and the courts here are quite familiar with administering trusts. For you, the practical effect is that well-drafted trusts should operate smoothly, and Illinois law will govern trust matters like trustee duties, beneficiaries’ rights, and modification of trusts if needed. Always ensure your trust documents are drafted or reviewed by an Illinois estate planning attorney so they comply with state requirements.
Conclusion
Trusts can seem complex, but they are simply tools to help you shape your estate plan to fit your needs. Whether your goal is to avoid probate, provide for a loved one, save on Illinois estate taxes, or protect assets for future generations, there’s likely a trust (or combination of trusts) that can achieve your aims. Illinois residents should consider trusts particularly when they have minor children, significant assets, or unique family situations. Always consult with a qualified estate planning attorney in Illinois to decide which trusts make sense for you and to ensure your trusts are set up correctly under Illinois law. With the right planning, trusts offer flexibility and peace of mind, allowing you to leave your legacy on your own terms.
Let’s Make a Plan That Fits Your Life
Every family and estate is unique. Reach out to the Palley Law Office for thoughtful, personalized guidance on trusts and estate planning in Illinois.
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If you’re just starting to explore estate planning, the Illinois State Bar Association has an excellent resource and overview of estate planning here.
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