Confusing Terms in Estate Planning and Probate
Twice in one day last week I encountered documents titled "Declaration of Trust Agreement." Let me explain why that title makes no sense, and then discuss a few more confusing sets of terms in estate planning and probate.
When you sign a document establishing a trust, you are doing it in one of two ways:
1. With a third party (a bank or trust company, or a friend or relative of yours) as the trustee. Basically, the document you are signing is an "agreement" between you (as grantor or creator of the trust) and the trustee. You agree to contribute property to the trust; the trustee agrees to handle the property as set forth in the agreement.
2. With yourself as the trustee as well as the grantor. In this case, we don't use the word "agreement" -- instead, we say you are making a "declaration of trust." You are declaring that you as trustee will hold certain property as set forth in the declaration.
Some other sets of terms that are confusing:
Living Trust vs. Declaration of Trust vs. Revocable Trust. These are really just different names for the same thing. You set up a trust with yourself as trustee. It applies during your lifetime (it's "living"). It's a declaration, as I described above (although you can do a living trust agreement, where a third party is the trustee during your lifetime -- but it's rare). And it's revocable (you can revoke it - or amend it - during your lifetime). Note that there are some types of trusts that you can't revoke (irrevocable trusts) -- these are set up for tax reasons, and are always trust agreements (the grantor is not the trustee).
Living Will vs. Will. A "Will" is where you give away property upon your death. A "living will" is a health care-related document -- it sets forth circumstances in which you want to be taken off life support.
Power of Attorney vs. Power of Appointment. A "power of attorney" is similar to a living will -- it's a document meant to apply if you become disabled and can't make decisions for yourself. In Illinois, there are two types of powers of attorney: for health care decisions, and for property decisions. In each case, you name an agent to make decisions on your behalf. A "power of appointment" is a power given to a beneficiary of a trust, enabling the beneficiary to give away (or appoint) his or her interest in the trust to someone else (sometimes a charity or another person).
Probate vs. Non-Probate. "Probate" is a court proceeding, to transfer certain property from a deceased person to his or her beneficiaries. What type of property is subject to probate? Property owned by a deceased person in his or her own name at death. That means "non-probate" property is everything else: property owned jointly with another person, property with a beneficiary designation, and property held in trust. Non-probate property passes outside of the probate process.
Heirs vs. Legatees. "Heirs" are a deceased person's closest relatives -- they are set forth in a long portion of the Illinois Probate Act. For instance, if I am married and have two kids, then my wife and kids are my heirs. If I'm unmarried and have no kids, my heirs would be my parents and siblings. "Legatees" are the beneficiaries I name under my Will. Note that heirs and legatees may not be the same thing, but they may have similar rights (like the right to contest your Will, and the right to get notice of probate proceedings) under Illinois law. If I am married and have two kids, and leave all of my property to my wife and kids, then they are my heirs and legatees. If I am married and have two kids, and leave all of my property to my mistress, then (a) I'm a very bad man, (b) my mistress is my legatee (but not my heir), and (c) my wife and kids are my heirs (but not my legatees).
