August 28, 2014

Illinois Children's Trusts

Children under the age of 18 cannot directly inherit more than a small amount of money. If you make no provisions in your Will, a court will appoint a property guardian to manage your child’s assets until he reaches 18.

That property guardian may be a stranger who will add another layer of bureaucracy to the situation. When your child needs money, formal requests will need to be made through the court system.

One solution is to set up a custodial account for your child. You are allowed to choose the custodian, and the custodian makes decisions regarding how the money is spent. Once your child turns 18, the money is your child’s to spend as he pleases.

As Stacy L. Bradford points out in her Wall Street Journal piece titled, “Deciding if Your Kid is Trust-Worthy”, a better alternative may be to set up a trust. A trust allows more control over how money is spent once the parents are gone. The parents can specify how the trust money is to be spent, for example on college tuition, and a trust can delay the age at which the child has access to the money, for example the child gets half at age 30 and the other half at 35.

The trustee makes all of the decisions, so it is important to pick a person who is trustworthy, financially astute and diligent.

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August 23, 2014

Probate Law Regarding Beneficiaries

A holding by the U.S. Supreme Court in Kennedy, executrix of the estate of Kennedy, deceased v. Plan Administrator for DuPont Savings and Investment Plan, et al. makes clear the importance of keeping on top of estate planning matters.

In that case, a divorced father did not take all of the steps necessary to change with his pension plan the name of the beneficiary of his plan. When he died, the pension plan paid all of the benefits to the person named as the beneficiary. That person was his ex-wife. The father's estate sued, claiming that it should have received the benefit because the ex-wife had waived her right to receive the benefit.

The law in that state held that a divorce ends the right of a spouse to an interest in the other spouse's pension benefits.

The trial court ruled that the estate should receive the benefit. The 5th U.S. Circuit Court of Appeals reversed and ruled that the ex-wife should receive the benefit. The U.S. Supreme Court confirmed.

When naming beneficiaries, it is good to keep the following in mind:

1) It is easy to change beneficiaries. Most financial firms make copies available online or you can call and ask for them. The forms are simple. Once completed, it is good to make a copy of the form after submitting it and include the form with other estate planning documents;

2) Name an alternate beneficiary. This addresses the situation where the primary beneficiary dies before you do. It also provides for the instance where the primary beneficiary disclaims the interest.

3) Your will has no effect regarding who receives accounts with beneficiary designations like IRAs, 401(k)s, insurance policies and annuities. You must designate a beneficiary on the account's forms. If you do not designate a beneficiary, the account will be distributed according to state rules on distribution.

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August 16, 2014

Chicago Estate Planning and Individual Retirement Accounts

Individual Retirement Accounts (IRAs) need to be taken into account when doing estate planning.

The most important thing to remember with an IRA for estate planning purposes is to name a beneficiary. While a spouse is usually the logical choice for a beneficiary, you should be sure to name contingent beneficiaries as well. If you and your spouse die at the same time and there was no contingent beneficiary, then the IRA would go to your estate and may require the opening of Probate (the legal process of administering the estate of a deceased person before a judge). When a spouse inherits an IRA, he can roll it over into his own IRA. When a non-spouse inherits an IRA, the beneficiary will need to start taking distributions within a year after the IRA owner dies.

If you don’t need the funds in your IRA for retirement and you want to use them to provide for your beneficiaries instead, you may be interested in “stretching out” your IRA. To do this, when you reach 70 ½, take only the required minimum distributions, leaving more assets in your IRA. When you die, your beneficiary can also stretch distributions out over his lifetime and then designate a second-generation beneficiary. It makes sense to name a young beneficiary because the younger the beneficiary, the smaller each distribution must be, which gives the funds in the IRA extra tax-deferred years to grow.

In some cases, it may make sense to name a trust as a beneficiary. This is particularly true if you have minor children, children with special needs or a beneficiary with poor spending habits. But the trust must be properly drafted to avoid negative tax consequences. If the trust is a “see-through” trust or a “conduit” trust, then the distributions from the IRA to the trust after the participant’s death can be stretched over the life expectancy of the oldest trust beneficiary.

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August 9, 2014

Chicago Estate Planning and Trustee Issues

An individual takes on legal responsibilities when he agrees to be a trustee. If the trustee does not perform his duties properly, he could be personally liable.

A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), referred to as a trustee, holds legal title to the property of another person.

A trustee’s duties include locating and protecting trust assets, investing assets prudently, distributing assets to beneficiaries, keeping track of income and expenditures and filing tax returns. A trustee has a fiduciary duty to the beneficiaries of the trust, meaning that the trustee has an obligation to act in the best interest of the beneficiaries at all times. It also means the trustee will be held to a higher standard than if the trustee were dealing with his personal finances.

A trustee is entitled to hire an attorney and other professionals like an accountant to assist in the trust administration. The attorney, accountant and other professional fees are considered an expense of trust administration and are paid from the trust funds.

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August 2, 2014

Estate Planning and Claiming a Parent as a Dependent

If you are caring for your mother or father, you may be able to claim your parent as a dependent on your income taxes. This would allow you to get an exemption for her or him.

There are five tests to determine if you can claim a parent as a dependent:

1) The person you are claiming as a dependent must be related to you. This should not be a problem if you are claiming a parent (in-laws are also allowed). Keep in mind that foster parents do not count at a relative. To claim a foster parent, he must live with you for a year as a member of your household.

2) Your parent must be a citizen or resident of the United States or a resident of Canada or Mexico.

3) Your parent must not file a joint return. If your parent is married, he must file separately. There is an exception if your parent is filing jointly, but has no tax liability. If your parent files a joint tax return solely to get a refund, you can claim him as a dependent.

4) Your parent must not have a gross income exceeding the allowable exemption amount for that year. Gross income does not include Social Security payments or other tax-exempt income.

5) You must provide more than half of the support for your parent during the year. Support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation and similar necessities. Even if you do not pay more than half of your parent’s support for the year, you may be able to claim your parent as a dependent if you pay more than 10 percent of your parent’s support for the year, and, with others, collectively contribute to more than half of your parent’s support. To receive the exemption, all those supporting your parent must agree on and sign the applicable Multiple Support Declaration (Form 2021).

If you cannot claim your parent as a dependent because he filed a joint tax return or has a gross income above the limit for that year but you have been paying for your parent’s medical expenses, you may still be able to deduct those expenses from your own taxes.

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July 26, 2014

Illinois Law & Giving Assets to Children

When you give anyone a gift valued at more than $14,000 in any one year, you have to file a gift tax form. This is so that the government can keep track of gifts you make during your lifetime. You can give a total of $5,340,000 over your lifetime without incurring a gift tax.

Keep in mind that if you decide to give your children your home, while you may not have to pay gift taxes on the gift, if your children sell the house right away, they may be facing steep taxes. The reason is that when you give away your property, the tax basis (original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If your give your house to your children, the tax basis will be $150,000. If the children sell the house, they will have to pay capital gains taxes of the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.

Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property’s tax basis would be “stepped up”, which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.

Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them.

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July 19, 2014

Components of a Good Estate Plan in Illinois

Many people believe that if they have a Will, their estate planning is complete, but there is much more to a solid estate plan. A good plan should be designed to avoid probate, save on estate taxes, protect assets if you move into a nursing home and appoint someone to act if you become disabled.

All estate plans should include a durable power of attorney for property and a Will. A trust can also be useful to avoid probate and to manage your estate both during your life and after you are gone. In addition, medical directives allow you to appoint someone to make medical decisions on your behalf.

A Will is a legally binding statement directing who will receive your property at your death. If you do not have a Will, state law determines how your property is distributed. A Will also appoints a legal representative (called an executor) to carry out your wishes. A Will is important if you have minor children because it allows you to name a guardian for the children. However, a Will covers only probate property. Many types of property or forms of ownership pass outside of probate. Jointly owned property, property in trust, life insurance proceeds and property with a named beneficiary, such as IRAs or 401(k) plans, all pass outside of probate and are not covered under a Will.

A trust is a legal arrangement through which one person (or an institution, such as a bank or a law firm), called a “trustee”, holds legal title to property for another person, called a “beneficiary”. There are several reasons for setting up a trust. The most common reason is to avoid probate.

Certain trusts can result in tax advantages for the beneficiary. These are referred to as credit shelter trusts. Other trusts can be used to protect property from creditors or to help the donor qualify for Medicaid.

A durable power of attorney for property allows the person you appoint to act in your place for financial purposes if you become incapacitated. In that case, the person you choose will be able to step in and take care of your financial affairs. Without a durable power of attorney for property, no one can represent you unless a court appoints a guardian. That court process takes time and money, and the judge may not choose the person you would prefer. In addition, under a guardianship, your representative may have to seek court permission to take planning steps that he could implement immediately under a durable power of attorney.

A power of attorney for health care allows you to designate someone to make health care decisions if you are unable to do so yourself. A living will instructs your health care provider to withdraw artificial life support if you are terminally ill or in a vegetative state.


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July 12, 2014

Illinois Estate Planning & Letters of Instruction

There is a lot of information your heirs should know that does not necessarily fit into a Will, Trust or other components of an estate plan. The solution is a letter of instruction, which can provide your heirs with guidance if you die or become incapacitated.

A letter of instruction is a legally non-binding document that gives your heirs information crucial to helping them tie up your affairs. Without such a letter, heirs can miss important items.

The following are some items that can be included in a letter:

• A list of people to contact when you die and a list of beneficiaries of your estate plan

• The location of important documents such as your Will, insurance policies, financial statements, deeds and birth certificate

• A list of assets such as bank accounts, investment accounts, insurance policies, real estate holdings and military benefits

• Passwords and PIN numbers for online accounts

• The location of safe deposit boxes

• A list of contact information for lawyers, financial planners, brokers, tax preparers and insurance agents

• A list of credit card accounts and other debts

• Instructions for funeral or memorial service

• Instructions for distribution of sentimental personal items

Once the letter is written, store it in an easily accessible place and tell trusted family members about it.

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July 8, 2014

Estate Planning and Spousal Social Security Benefits

Social Security also provides benefits to a worker’s spouse or ex-spouse and to a deceased worker’s surviving spouse.

Spouses are entitled to benefits if the marriage lasted at least 10 years. A spouse is entitled to an amount equal to one-half of the worker’s full retirement benefit. To receive this benefit, the spouse must be at his full retirement age or caring for a child who is under 16 years of age. In addition, the spouse must file for Social Security benefits even if he is not receiving them.

If you could receive more from Social Security based on your own earnings record than through the spousal benefit, the Social Security Administration will automatically provide you with the larger benefit. If you have reached your full retirement age, you may also elect to receive spousal benefits and delay taking your benefits, allowing your own delayed retirement credits to accrue, and switch to your own benefits at a later date. You cannot elect to receive spousal benefits below your retirement age and later switch to your own benefits.

An ex-spouse is also entitled to receive one half of the worker’s full retirement benefit so long as the marriage lasted at least 10 years. Unlike a current spouse, a divorced spouse can begin receiving benefits even before the worker has applied for benefits. The worker must be at least 62 years old and the divorce must have been final for at least two years.

If you are a surviving spouse at full retirement age, you are entitled to the worker’s full retirement benefits. If the worker delayed retirement, the survivor’s benefit will be higher. Survivors are entitled to benefits even if they are divorced as long as they had been married for at least 10 years. If you file for benefits after you are over age 60 but below full retirement age, you will receive a reduced percentage of the worker’s benefits. Surviving spouses who are younger than 60 receive benefits only in limited circumstances, such as cases of disability or caring for a disabled child.

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June 26, 2014

Estate Planning for your Eighteen Year Old

As she points out in her article titled, Estate Planning For Your Eighteen Year Old: What You Need To Do Now May Surprise You, Lauren Keenan Rote points out that becoming an adult comes with certain privacy rights and independence under the law.

An eighteen year old has rights under HIPAA (Health Insurance Portability and Accountability Act) and medical professionals will require a release to be signed by your child before sharing his health care information or records with you.

In the event your child is incapacitated, even temporarily, he will be unable to consent to you accessing his vital health records or authorize you to make decisions on his behalf. Without Medical and General Durable Powers of Attorney, you will likely find that you are unable to act on your child’s behalf and that court intervention is required for you to do so.

There are two critical documents any individual over the age of eighteen should have:

1. Medical Power of Attorney – This document appoints an agent to make health care decisions, including end-of-life care decisions, on your child’s behalf. This document should include a HIPAA release authorizing the agent to access important health records.

2. General Durable Power of Attorney – This document appoints an agent to handle financial transactions on your child’s behalf. This includes transactions involving bank accounts, scholarship funds from school and rental agreements.

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June 21, 2014

Estate Planning and Digital Assets

In his recent article, Estate Planning 101: Don’t forget digital assets, Eric McWhinnie points out the need to consider intangible property when creating your estate plan.

The internet is increasingly becoming the main storage of an individual’s financial life. A survey from Pew Research shows that 51% of American adults bank online and 32% bank using their mobile phones. Nine out of 10 Americans use the Internet.

“Digital assets hold both financial and sentimental value to family and friends that should be addressed in the estate planning process”, said James Lamm, an estate planning and tax attorney. “The first challenges are finding that person’s digital property and identifying which digital property is valuable or significant. Additional obstacles with digital property are passwords, encryption, computer crime laws, and data privacy laws. Any one of them can make it practically impossible to do anything with the digital property unless you’ve planned ahead.”

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June 13, 2014

Common Estate Planning Objectives

In his article in Forbes magazine, Lewis Saret lists eight of the most common estate planning objectives that influence a couple’s estate plan.

1. Provide for Loved Ones
The most important estate planning objective for most married couples is to ensure that their loved ones are provided for if one or both spouses become incapacitated or die.The loved ones are the surviving spouse, children (especially minor children), relatives and pets.

2. Minimize Taxes
Another important objective is to minimize taxes. This includes federal estate taxes and state estate taxes.

3. Protect Assets Passing to Surviving Spouses and Heirs
Married couples want to protect their assets which should pass to their surviving spouses and their children from going to creditors and future spouses in the case of divorce.

4. Simple and Inexpensive plans
Couples want their plans to be as straight forward and of the lowest cost possible.

5. Privacy
Couples prefer their finances remain private to protect the surviving spouse from being targeted by fraudulent schemes and solicitations.

6. Control over Assets
Many couples prefer to retain control over their assets so the assets are not subject to the claims of their children’s creditors. Couples with significant amounts of wealth they have created themselves rather than inherited express concern about the impact of the wealth on their children.

7. Incapacity
Couples take steps to deal with incapacity by putting in place durable powers of attorney for property and powers of attorney for health care.

8. Asset Management
Couples want in place a system which manages their assets when they are no longer able to do so.

All of these objectives can be attained by consulting with an estate planning attorney.

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