Setting up a trust can be a pretty effective way of avoiding expensive and public court proceedings (which are necessary in a probate situation). But sometimes problems arise with a trust, problems where a court proceeding may be needed. Settlements are always a possibility, but there's been some confusion in the past about how you work out a settlement, especially when not all parties are of age (or even born).
Due to an amendment to the Illinois Trusts and Trustees Act, there may be a new solution. Lyman Welch and Susan Bart describe the amendment in this Illinois Bar Journal article (it's from November of '09, but I just read it, so it's new to me!). The amendment adds section (d) to 760 ILCS 5/16.1. Some situations in which you may be able to use 16.1(d) to enter into a "nonjudicial settlement agreement":
-interpretation or construction of trust terms;
-resignation or appointment of a trustee; and
-exercise or nonexercise of a power by the trustee.
There are other situations outlined in the article, which I highly recommend.
An effective estate plan should be flexible enough to accommodate changes in circumstances -- maybe not every change, but many of them. For instance, instead of specifically referencing the estate tax exemption amount when drafted, most well-drafted documents contain a formula based on the exemption amount in effect when the decedent dies. But does your estate plan account for the possibility that there will be NO federal estate tax when you die?
A lot of married couples have what's known as an A-B plan. If one spouse dies, two trusts are created for the survivor:
(A) Family Trust: usually containing an amount equal to the federal estate tax exemption amount at the death of the first to die
(B) Marital Trust: containing everything else owned by the first to die
The goal is no federal estate tax at the death of the first to die. The Family Trust is by definition exempt from federal estate tax, and the Marital Trust qualifies for the marital deduction (so is not subject to federal estate tax). The surviving spouse is the only beneficiary of the Marital Trust; the Family Trust's beneficiaries might be just the surviving spouse, the surviving spouse and kids of first to die, or just the kids of the first to die.
But what happens if there's no estate tax whatsoever? If the above language is used, the Family Trust isn't created (no exemption = no federal estate tax = no Family Trust). So there's just a Marital Trust.
Alternatively, you could draft a trust whereby the Marital Trust contains the "smallest amount that will result in no federal estate tax," and the Family Trust contains everything else. Under that scenario, no Marital Trust is created (the "smallest amount" would be $0). So there's just a Family Trust.
So what's the problem? There may not be one, if we're talking about a traditional nuclear family where the spouse is also the sole beneficiary of the Family Trust. But what if both spouses have children from a prior marriage? In that case, we may have a Family Trust of which the surviving spouse isn't the sole beneficiary (or not a beneficiary at all). And we run the risk, under the above scenarios, of either shortchanging the surviving spouse (no Marital Trust created) or shortchanging the kids (no Family Trust created).
