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This chapter discusses the most common estate planning tools -- wills and trusts. Living wills, guardianship, and conservatorship are discussed in the Elder Law Chapter.
Requirements for a Valid Will
Each state sets slightly 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 person has no disability that prevents the person 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 can 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 A will is valid until it is revoked or superseded by a new will. An individual provision can be changed by a codicil, which is described in the section, Changing and Updating Wills.
It is not necessary to hire an attorney to create a will. A non-attorney can create a will, but he or she must pay close attention to the details outlined above. Smaller estates can be described simply, and making a will to disperse a smaller estate can be done by almost anyone. 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 if the testator has complicated property holdings or an estate with many assets, especially if they are located in several different places. In these cases, 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. Also, a complicated estate may require documents in addition to the will, such as trust agreements, to ensure that all of the 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 person who has died -- 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 state 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 collecting and managing the decedent's assets; collecting any money owed at the time of death; selling assets, if necessary, to pay estate taxes or expenses; and filing 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, as he or she may not charge the full amount allowed by law. It is wise for a testator 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 agree 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 can 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 understand the provisions of the will and is willing to accept the responsibilities of being a guardian. Also, the testator should name an alternate guardian in case the primary guardian is 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. Otherwise, a decedent's money might go to one person while his or her children go to another person. 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 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 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 power of attorney for health care to make health care decisions in advance in case they subsequently become incapacitated. Creating a power of attorney for health care is discussed in the Elder Law Chapter.
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 dependant 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 whether or not there is a will. This spousal award is considered a preferred claim and a debt of the estate.
The provisions of this law may be overcome in two ways. First, a will may specifically state that its provisions are meant to stand in the place of the spousal award, and the spouse does not renounce the will. In this case, 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. Note, however, that renunciation would not be available to a spouse who had 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, in which a second spouse agrees 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 not considered part of an estate are those 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 enforced.
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 can 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 or for personal events such as births, deaths, marriages, divorces, or 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 a 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. Thus, 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 descendent to accept the provisions of the will.
Dying Without a Will
If a person does not have a will or has not adequately planned for the distribution of the person's estate at death, survivors can face a complicated, time-consuming, and costly process. Often survivors wind up having to pay more taxes on their inheritance than they would have paid had there been a will or other estate planning tool. To provide for surviving friends and relatives, or to support favorite causes or charities, a person can plan for the distribution of his or her estate after death. With planning, an estate can be distributed as fairly as possible with as little tax burden as legally allowed.
When a decedent leaves no will or fails to dispose of all property through a will, the decedent is said to have died intestate. When a person dies intestate, the circuit court steps in to divide the decedent's estate among the decedent's surviving relatives decedents, according to a formula set out in the state inheritance laws.
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 debt 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 decedents grandparents, aunts, uncles and cousins. If none of these relatives exist, investigation continues down the line of inheritance 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.
One 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.
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 and trusts must be carefully structured if they are to take advantage of beneficial tax treatment. An experienced attorney should always assist a person 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 Trusts
Trusts have many advantages over wills. 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 unable to handle money responsibly, or if a beneficiary is disabled, creating a trust can be a better way of passing on assets. Both living and testamentary trusts are popular ways 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 circuit court 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 an irrevocable trust cannot be changed or revoked. A revocable trust is 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.
An irrevocable trust is 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 federal and state Medical Assistance.
Regardless of the type of administration, the first duty of the circuit court is to determine whether the decedent left a valid will. The person in possession of a decedent's will must file it with the clerk of the circuit court within 30 days of the decedent's death. If the decedent left a valid will, the court oversees the process of settling the estate according to the terms of the will. If the decedent did not leave a will or if the circuit court determines the will is invalid, the court applies the state inheritance laws, described earlier, to the estate.
Summary administration is available if the estate is $50,000 or less, all claims against the estate are known, there are no taxes due, and all the heirs and legatees consent to the process. In a 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 no inventory or accounting is usually 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 file specific documents with the court, such as an estate inventory and periodic accountings. The personal representative must also obtain court approval to perform such duties as selling or leasing estate property.
Regardless of whether the recipient pays state or federal estate taxes, there may be income tax consequences for the recipients under a will.
Chicago Bar Association, 321 South Plymouth Court, Chicago, IL 60604, phone: (312) 554-2000. The Chicago Bar Association provides the free pamphlet, The Senior Citizens Will Program
National Senior Citizens Law Center, 2025 M Street, NW, #400, Washington, D.C. 20036, phone: (202) 887-5280.
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