In general, IRAs, 401(k)s and pensions are exempt from the account owner’s creditors under Illinois law. They cannot be seized or garnished by creditors. In an article by Bruce E. Bell, Protecting Retirement Plan Assets from Creditors, he points out that assets passing to beneficiaries of the deceased plan owner are also in many cases exempt from claims of creditors. Exceptions include divorcing spouses, child support obligations and some Federal tax obligations.

Regarding bankruptcy, IRAs are exempt subject to a statutory cap which is currently $1,283,025. IRA owners can avoid this cap by creating a trust to hold the owner’s retirement assets at the owner’s death. With this trust in place, the beneficiaries of the IRA owner are protected in the event a beneficiary declares bankruptcy.

It is important not to comingle conventional IRA assets with funds rolled over from qualified retirement plans. The qualified retirement plan funds should be rolled into a separate IRA containing only funds which originated from qualified retirement plans. This segregating will allow all qualified retirement plan funds to be exempt from bankruptcy. Continue reading

When planning for a special needs child, sometimes traditional planning ideas which work well for a family that is not addressing these issues do not work well for a family which is. In a recent article in Kiplinger’s magazine titled “Making a Plan for a Special-Needs Child”, it is pointed out that a Will should be in place which designates a guardian. This guardian should be clear about the guardian’s responsibilities and the parents’ expectations.

The parents should write a list stating the names of the child’s doctors, what the parents want for the child in the long term and the child’s likes and dislikes even as specific as the type of music the child likes.

Life insurance on both parents should be considered even if one parent does not work outside of the home but is the child’s caregiver.

A Third Party Special Needs Trust can be put in place to hold money for the child without counting as an asset for qualifying for Supplemental Security Income and Medicaid. The money in the Special Needs Trust can be used for services not covered by government programs or for extra things to improve the child’s quality of life like vacations, home furnishings and almost anything else except for food and rent. The Special Needs Trust can be the beneficiary of the parents’ life insurance policies and retirement plans. Friends and relatives can make gifts to the Special Needs Trust for the child’s birthday and other holidays. Continue reading

A decision by the Supreme Court of Montana, In the Matter of the Estate of Marilyn Hendrick, overturned a lower court running concerning a joint will.

The facts of the case are as follows: Marilyn and Stanley Hendrick executed a joint will. Each had three children from a previous marriages. Stanley died in 1995. In 1996, Marilyn transferred much of her property to her trust. Marilyn’s three daughters and one of Stanley’s children were the beneficiaries of the trust.

Marilyn died in 2012. Under the terms of the joint will, the residue of Marilyn’s estate was to be divided equally among the six children. The residue consisted of assets totaling about $235,000. Those same assets comprising the residue were transferred in 1996 by Marilyn to her trust.

One of the children from Stanley’s marriage who was not a beneficiary under Marilyn’s trust filed a petition objecting to the distribution of the trust assets according to the terms of the trust which did not include her as a beneficiary.

The lower court ruled in favor of the child and ordered that the trust assets were to be distributed equally among the six children.

On appeal, the Supreme Court of Montana reversed the lower court’s decision holding that because the joint will left to the surviving spouse (Marilyn) the “entire residue” of the property owned by the deceased spouse (Stanley) at the time of his death, the will plainly left the entire residue of Stanley’s estate to Marilyn. The only explicit restriction on this devise was that Marilyn was not allowed to alter, amend or revoke the will.

The Supreme Court went on to state that it may not construe the general purpose of the will in a way that alters its specific provisions by imposing further restrictions on Marilyn’s inheritance or granting additional rights to the children.

Joint wills are an invitation to litigation. It is almost always best for each spouse to have his own will. The same applies to joint trusts. The cost of putting in place a second will or trust for the other spouse is miniscule compared to the cost of litigation. Pennywise and pound foolish is the appropriate analogy.

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A trust is a legal arrangement where one person (or institution such as a bank or law firm), called a trustee, holds legal title to property for another person, called a beneficiary.

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 taxes. A trustee has a fiduciary duty to the beneficiaries of the trust to act in their best interest. This fiduciary duty holds the trustee to a higher standard than if the trustee were dealing with his own personal finances.

A trustee may hire an attorney and an accountant to assist in trust administration. The attorney and accountant fees are paid from the trust assets.
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In a recent article in US News and World Reports, Scott Holsopple sets out questions which everyone should ask when planning for what happens when they are no longer alive and handling their financial affairs.

One important question is: Does my spouse know about all of our accounts and how to access them? Make a list of all of your accounts. For on line accounts, include passwords. Include on the list all of your estate planning documents (Wills, Trusts, Powers of Attorney) and their location. Do not make the mistake of putting these documents in your safe deposit box. In a safe deposit box, the documents can be accessed only by someone on the bank’s signature card. If the Power of Attorney for Health Care is needed immediately, the bank may not be open.

Another important question is: Are our wills and beneficiary designations up to date? If there has been a significant change such as marriage, divorce, death of an executor or birth of a child, the will may need to be updated. You may decide to avoid Probate with the Court and put a revocable trust in place. Also, assets which allow you to name a beneficiary (and avoid Probate) such as 401(k)s, IRAs, Life insurance, Annuities and accounts with a transfer on death (TOD) designation may need to be updated.
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A Power of Attorney allows someone you designate (your agent or attorney in fact) to make decisions for you if you become incapacitated. For this document to be effective, your agent may need to be able to access your medical information. Medical information is private. The Health Insurance Portability and Accountability Act (HIPAA) protects health care privacy and prevents disclosure of health care information to unauthorized people. HIPAA authorizes the release of medical information only to a patient’s personal representative.

HIPAA can be a problem if you have a springing power of attorney. A springing power of attorney does not go into effect until you become incapacitated. This means your agent does not have any authority until you are declared incompetent. Under HIPAA, the agent will not be able to get the medical information necessary to determine incompetence until the agent has authority.

To eliminate this problem, your Power of Attorney should contain a HIPAA clause that indicates that the agent is also the personal representative for purposes of health care disclosures under HIPAA. A HIPAA authorization form should also be signed which explains what medical information can be disclosed, who can make the disclosure and to whom the disclosure can be made.
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Individual Retirement Accounts (IRAs) are an investment tool and need to be taken into account when doing estate planning.

It is important to name a beneficiary of an IRA. A spouse is often a beneficiary. A contingent beneficiary should also be named so that the IRA does not pass to your estate and require the opening of a probate administration with the Court in the event that your spouse dies before you.

When a spouse inherits an IRA, he can roll it over into his own IRA. When a non-spouse inherits an IRA, the heir will need to start taking distributions within a year after the IRA owner dies.

In her article in the Wall Street Journal, Jennifer Hoyt Cummings gives tips regarding setting up a trust so that parents can protect their assets from free-spending or other problem children/ beneficiaries. She advises that a trust should be put in place so that a spendthrift child cannot get title to a home. A trustee can buy real estate on behalf of the child.

She also advises setting up the trust so that the child’s creditors cannot access the inheritance. This is commonly referred to as an asset protection trust.

Ms. Cummings cautions that a trust could go on for a hundred years or more, so language should not be too specific or too narrow. In addition, legal jargon in the trust and the reasons for the trust provisions should be explained with a letter attached to the trust.

And she suggests considering trust distributions for children who want to take on special projects like studying abroad.

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Long-term care can be very expensive, but many long-term care expenses can be deducted from your taxes.

In a decision by the U.S. Tax Court, it ruled that payments to non-medical caregivers are still deductible as medical expenses. In Estate of Lillian Baral (U.S. Tax Ct., No. 3618-10, July 5, 2011), Lillian Baral suffered from dementia, and her doctor recommended that she get 24 hour care. Her brother hired caregivers to assist Ms. Baral with daily activities. On her tax return, Ms. Baral included a deduction for medical expenses for the payments of the caregivers. The IRS said the expenses were not deductible and asked for more money. Following Ms. Baral’s death, her estate appealed the matter to the U.S. Tax Court.

Under tax law, expenses for medical care may be claimed as an itemized deduction if they exceed ten percent of adjusted gross income. The definition of medical expenses includes the cost of long-term care if a doctor has determined you are chronically ill. Chronically ill means you need help with activities like eating, using the bathroom and dressing, or you require substantial supervision due to a severe cognitive impairment.

The Tax Court agreed with Ms. Baral that the payments to the caregivers for assisting and supervising Ms. Baral are deductible medical expenses. The expenses qualified as long-term care services even though the caregivers were not medical personal because a doctor had found that the services provided to Ms. Baral were necessary due to her dementia.

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A tremendous breakthrough in Special Needs Planning is the ABLE (Achieving a Better Life Experience) account. In a recent article in Kiplinger’s magazine, Kimberly Lankford points out that a 2014 federal law allows states to create these accounts. Illinois adopted ABLE legislation in 2015.

The law allows individuals of any age who developed a qualifying disability before age 26 to open an ABLE account. Anyone can add to the account, but the total contributions cannot be more than $14,000 each year, and the beneficiary can have only one ABLE account at a time but is allowed to switch plans.

The money may be used for most expenses to benefit the disabled person. It is tax free, and accounts up to $100,000 do not count toward the $2000 limit for Supplemental Security Income benefits.

The ABLE National Resource Center may be contacted at and the Illinois State Treasurer’s office which administers the program may be contacted at 312-814-2677. Continue reading