Choosing a Trust: Pros & Cons by Trust Type

Trusts are versatile estate planning tools that offer various benefits, including asset protection, tax efficiency, and control over the distribution of assets. In Illinois, individuals have several options when it comes to choosing the type of trust that best suits their needs and objectives. Let’s explore some common types of trusts available in Illinois and their key features.

Revocable Living Trust

A revocable living trust, also known as a living trust, is a flexible estate planning tool that allows individuals to retain control over their assets during their lifetime while specifying how those assets will be managed and distributed upon their death. One of the primary benefits of a revocable living trust is that it allows assets to bypass probate, potentially saving time and costs for beneficiaries. Additionally, because the trust is revocable, individuals can make changes to the trust or revoke it entirely if their circumstances change.

Irrevocable Trust

An irrevocable trust is a type of trust that cannot be modified or revoked once it’s been established, except under limited circumstances with the consent of the beneficiaries or a court order. Irrevocable trusts offer advantages such as asset protection from creditors, estate tax reduction, and Medicaid planning. Common types of irrevocable trusts include irrevocable life insurance trusts (ILITs), charitable remainder trusts (CRTs), and special needs trusts.

Testamentary Trust

A testamentary trust is a trust that is created within a will and only becomes effective upon the death of the individual (the testator). Unlike revocable living trusts, which take effect immediately, testamentary trusts are subject to probate and the supervision of the court. However, testamentary trusts allow individuals to specify how their assets will be managed and distributed after their death, providing control and protection for beneficiaries, especially minor children or individuals with special needs.

Pros & Cons by Type of Trust

Type	Description	Pros	Cons
Revocable Living Trust	Allows an individual to retain control over assets during your lifetime. Assets in the trust bypass probate, potentially saving time and costs for beneficiaries.	Avoids probate, providing privacy and potentially reducing costs.	No asset protection from creditors and more complex to establish compared to a simple will. Assets in the trust are still subject to estate taxes upon the grantor’s death.
Irrevocable Trust	Cannot be modified or revoked once established. Offers asset protection, estate tax reduction, and Medicaid planning benefits.	Provides asset protection from creditors. May reduce estate taxes by removing assets from the grantor’s taxable estate. Allows for Medicaid planning by transferring assets out of the grantor’s name.	Lack of control once the trust is established and much less flexible to change in circumstances.
Testamentary Trust	Created within a will and becomes effective upon the testator’s death.	Provides control over asset distribution, particularly useful for minors and individuals with special needs. Can be used to specify how assets are managed and distributed over time.	Subject to probate, potentially resulting in delays and increased cost. Lack of privacy as wills are public documents once filed with the court. Does not provide creditor protection during the testator’s lifetime.
Special Needs Trust	Designed to provided financial support to individuals with disabilities without affecting eligibility for government benefits.	Protects assets while allowing individuals with disabilities to maintain eligibility for government benefits such as Medicaid or SSI. Provides for supplemental expenses not covered by government benefits. Allows management of assets by a trustee that understands the beneficiaries needs.	Must comply with complex rules and regulations for eligibility for government benefits. Requires careful drafting to ensure compliance with government regulations. Assets in the trust may not be sufficient to cover all expenses, necessitating additional financial planning.
Charitable Trust	Established for one or more charitable organizations or purposes.	Provides income tax deductions for charitable contributions. Allows for philanthropic giving while providing potential income to beneficiaries. May reduce estate taxes by removing assets from the taxable estate.	May require significant assets to be worthwhile due to administrative costs. Complex rules and regulations that govern charitable giving must be followed. Less flexibility in terms of beneficiaries compared to other types of trusts.

Conclusion