Wills, Trusts and TODI, Oh My Round 3 (Avoiding Probate, Tools and Thoughts)

A frequent opening statement that I hear is “I'd like to avoid probate.” Probate is a tool to pass wealth from one generation to another. However, it is rarely an efficient tool to do so and the costs can be substantial. Illinois offers a number of tools to pass wealth outside of probate including Trusts, Transfer on Death Instruments, Corporate Ownership, Beneficiary Designations, and Life Insurance policies to name a few. While this list is not exhaustive it provides a starting point for a conversation.

Trusts are the most robust tool available. They allow the person left in charge of the trust to pass the assets outside of the probate process largely untouched by anyone outside of the beneficiaries. Some special trusts in Illinois, creditor protection trusts, may allow the settlor (the person who sets the trust up) to prevent collections on the assets inside of the trust from all external parties from business creditors to government entities, including Medicaid. Trusts have the advantage of allowing a single point of contact to change all distribution preferences and timelines. Trusts offer flexibility for those wanting to prevent a loved one from squandering assets or being duped into giving away what should instead be theirs. They represent possibly the most flexible tool to pass wealth from one generation to another and when properly created, amended, and managed can offer huge advantages for the beneficiaries and the settlors.

Transfer on Death Instruments and Beneficiary Designations are tools that allow a person to set up an automatic transfer of property from themselves to their loved ones at death. They may or may not contain provisions addressing what happens if the proposed beneficiary dies prior to the death of the transferor. It is imperative that when executing these instruments each instrument is reviewed and fully understood. Some bank beneficiary designations my lapse should the original beneficiary die or if too much time has passed since the execution of the instrument. Typically, property that one can transfer via Transfer on Death Instrument includes residential real estate within limits and stock. Beneficiary designations are typically used on bank and brokerage accounts. You should consult your estate planner prior to using these tools as they may be the best method to transfer relatively small estates but certain pitfalls may exist in specific situations.

Life insurance is one of the most important tools for many. Life insurance comes in a variety of types including whole life, term life, and universal life. Within these categories there are hundreds of variations, riders, and options. You should consult with your estate planner and insurance agent to evaluate the best options for you and ensure that you review your life insurance needs at least annually as they will change. One major item that comes up is the failure to redirect life insurance after the death or divorce from a spouse or partner. If a life insurance company's records still indicate that your ex is the beneficiary of the policy they will pay the funds from the policy to that ex. Your heirs may have to go to court to get the money back (if that option is even available which it may or may not be).

Avoiding probate is frequently a good goal. How you get there is important. Most importantly you should keep careful records and ensure that you use the services of an estate planner who understands the risks and rewards of various estate planning strategies.

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