The living trust is one of the most useful estate planning tools. It allows the grantor to take advantage of estate tax benefits and avoid probate for those assets owned by the trust. Under appropriate circumstances, the living trust may also serve as a form of marital agreement to ensure a surviving spouse does not frustrate a grantor’s estate plan by electing to take the statutory share of the decedent’s probate estate. Under Illinois law, a surviving spouse has the right to elect to take a share of the deceased spouse’s estate even if the deceased spouse provided that his or her surviving spouse will receive nothing. This elective share is one-half of the decedent’s estate if the decedent left no children surviving and one-third of the estate if the decedent left surviving children. The statute is intended to protect a surviving spouse from being disinherited.
What happens, however, in the event the deceased spouse created a living trust and then transferred all of his or her assets to the trust prior to death? While Illinois courts have stated a living trust cannot be used to defraud a surviving spouse of the right to receive a spouse’s elective share of the deceased spouse’s estate, courts have generally not found that transfers made by spouses to living trusts are fraudulent. Illinois courts have noted that an owner of property has an absolute right to make lifetime transfers of that property at any time and to anyone, including transfers intended to reduce or totally defeat the statutory rights of a spouse. Indeed, a law enacted in 1977 in Illinois provides, “a transfer of property, in trust or otherwise, by decedent during his or her lifetime will not, in the absence of an intent to defraud, be invalid . . . on the ground that it is illusory, because the decedent retained any power or right with respect to the property.”
Subsequent Illinois cases have held that the present donative intent of the grantor in transferring property to a living trust will defeat a claim by a surviving spouse that a transfer was fraudulent. Courts have also determined that the fact the deceased spouse was the trustee and could have withdrawn principal from the trust does not indicate an intent on the part of the decedent to defraud the surviving spouse. Thus, unless the Illinois legislature enacts a law which provides that lifetime transfers to trust are subject to the spouse’s right to elect to take a statutory share, one may use a living trust to defeat his or her spouse’s rights to take a surviving spouse’s share of the estate.
The most appropriate use of the living trust for this purpose is when the husband and wife have signed a pre-marital agreement that provides for separate distribution of their estates. In this case, the living trust is used to prevent the surviving spouse from attempting to elect to take the statutory share, thus frustrating the decedent’s estate plan and violating their agreement.
Please do not hesitate to telephone us if you have any questions about the use of living trusts in your estate plan or elective share rights.