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Preparing estate planning documents is a key step in ensuring that a person’s final wishes are respected throughout the probate process, and a recent survey shows that the majority of Americans understand this fact. However, when setting up a trust, preparing the documents does not finish the process. If the person who sets up the trust fails to properly transfer their assets into it, it can become an underfunded or unfunded trust. This lack of proper funding can lead to a failure of a person’s estate plan, and also increases the potential for disputes throughout the process of probating the estate.

What an Unfunded Trust Is

A trust is a legal construction that involves a settlor, a trustee, and a beneficiary. The settlor creates the trust and transfers assets into it. The trustee manages the assets in the trust and they do so with the best interests of the beneficiary in mind. The drafting of the trust instrument is a key part of this process. That document will outline many of the legal rights and responsibilities of the trustee and the beneficiary, and it can provide instructions for the trustee to follow.

Many people think that once they draft the trust document, the process is complete and the trustee will be able to carry out their desires. This is not the case. The person will also need to legally transfer the assets to the trust. Without doing so, the trustee may not actually be able to control the assets and distribute them in accordance with the settlor’s instructions.

The Consequences of Improper Trust Funding

Improper trust funding can lead to disputes between heirs throughout the probate process. This is because if the settlor does not properly fund the trust the trustee has no legal authority to carry out the wishes of the settlor. Instead, the assets would pass through any will that the settlor left behind, or they may pass through right of survivorship, the default way that courts distribute assets. This means that the beneficiaries of the trust may end up in a legal battle with the heirs listed in the will over their rights to the assets.

Additionally, even if the settlor did not leave a will and there are no disputes, the assets will still need to go through the state probate process to be distributed. This can lengthen the amount of time it takes to wind down a person’s affairs and tends to be a less convenient process than if the trust had been properly funded.

If you are thinking about how best to carry out your final wishes, seek out an Illinois estate planning attorney for help. Our skilled team of lawyers helps clients in northwest suburban towns like Mount Prospect, Arlington Heights, and Schaumburg understand their estate planning options and create the best plan for themselves.

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.

When a trust is created, many different people may have an interest in how it is administered. For example, it is common for the trust documents to allow one person to benefit immediately (i.e. a spouse), with others to receive the assets upon that beneficiary’s death (i.e. the children). Those who are set to inherit later obviously have a stake in how the trust is managed. Mismanagement may affect their interests.

But what happens if those future beneficiaries are children, disabled, or otherwise unable to effectively advocate for their interests? One solution is to go to court and have a judge appoint a guardian to act in their interest. But that process often takes significant time, is costly, and may be ineffective if the future beneficiaries are unknown, like unborn children.

Reaching an Agreement

Is there a way to settle disagreements involving a trust without going to court? Fortunately, there is.

Illinois has a “virtual representation” statute which allows select individuals to represent the interests of others to craft agreements, often dealing with disputes regarding a trust. Essentially, this law allows different parties to create agreements which avoid litigation and are binding on some future beneficiaries.

When used properly, these settlement agreements can solve ambiguities in the trust document, delineate duties of the trustee, and account for many other administrative issues. As a result, these agreements can be incredibly efficient, eliminating the risk of prolonged legal battles down the road.

Many Illinois residents are well served by exploring use of virtual representation to reach a nonjudicial agreement. However, it is important to proceed cautiously, usually with the aid of an attorney. When not created properly, the agreement may not hold up. Under the law, to be valid the primary beneficiaries must all be adults and legally competent. The trustee must also be a party to the agreement. Notably, the agreement cannot change the terms of the trust. In addition, the primary beneficiary must not have a conflict of interest with those who are being bound. To qualify as a primary beneficiary the individual must currently receive income or principal from the trust. Alternatively, the individual must be eligible to receive a distribution of principal at a certain date.

Learn More

Do you want to learn more about using virtual representation effectively? These issues are quite complex, and so it is helpful to contact a Palatine estate planning attorney to make sure you are doing everything in your power to protect your long-term interests. The law office of Drost, Gilbert, Andrew & Apicella, LLC serves clients in Palatine, Arlington Heights, Crystal Lake and other suburban Chicago areas.