September 3, 2015

Common Mistakes in Estate Planning

The following are typical mistakes people make when planning their estates:

• They have an outdated plan
• They have no will or an outdated will
• They rely on joint tenancy as a tool, especially children as joint tenants
• They incorrectly title an asset so an unintended beneficiary receives the asset
• They designate an inappropriate beneficiary for IRA accounts, insurance policies
and retirement benefits
• They fail to provide for a successor in interest if a primary beneficiary dies first or
disclaims the gift
• They rely on outdated or stale powers of attorney
• They do not properly coordinate their will and their trust or have no trust at all
• They fail to consider Medicaid planning

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August 29, 2015

Keeping Things Even

When a parent prepares a will, keeping distributions even among the children has advantages.

It is impossible to determine what one’s children will be doing in the future and what their incomes will be. The child who is a successful computer analyst today might be out of work in five years, and the actor now bussing tables may get his big break next year.

Gifts can be made as needed to children while you are alive and can afford it. For example, a child with children can be helped with college expenses by contributing to the grandchild’s 529 college savings plan. The IRS allows the equivalent of five years’ worth of gifts to be made all at once. Accordingly, one grandparent can give $70,000 per grandchild. Both grandparents can give $140,000 per grandchild.

On the other hand, a disabled child who is not independent will likely require a bigger share of the parent’s assets. A special needs trust can be utilized to get the maximum advantage from a gift by a parent or grandparent by keeping the gift from affecting eligibility of the disabled child for government programs and payments.

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August 22, 2015

Nothing Crummy About "Crummey" Trusts

In a recent article in the Wall Street Journal titled: A Ruling Eases Tax-Free Gifts, Laura Saunders points out a recent U.S. Tax Court ruling which affirmed allowing a couple the use of Crummey trusts to make tax-free transfers of $1.6 million without using any of their lifetime gift-tax exemptions.

A Crummey trust works by allowing people who want to put assets in trusts for heirs, including minors like grandchildren, a way to do it using their annual exclusions. These exclusions currently allow each person to give $14,000 per year to as many people as they would like without dipping into their life-time exemption (currently $5.43 million) or triggering gift tax.

For example, a couple with two married children and four grandchildren could shield $224,000 from tax to make gifts to Crummey trusts for the children, children's spouses and grandchildren (two times eight exemptions at $14,000 per exemption). If the couple made gifts in December of 2014 and January of 2015, two different tax years, they could shield almost $450,000 from taxes in very little time.

There is an important thing to remember with Crummey trusts. To satisfy the legal requirements, the heirs (or their guardians) must have the right to withdraw funds for a certain period each year, usually 30 or 60 days. But most heirs do not take money out because most know that their parents or grandparents will not make future gifts if they do.

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August 15, 2015

Mini-fridge and Powers of Attorney: A College Kid’s Must Haves

In her article Advisers Should Address These Legal Issues Before Clients’ Kids Head to College, Liz Skinner outlines the need for college students to have particular legal documents in place when they leave for school.

Power of Attorney for Property. This document allows the parent to pay a bill, secure an apartment lease for the summer or straighten out a lost credit card on the college student’s behalf while he is away.

Power of Attorney for Health Care. This document gives the parent authority to make a health care decision for the college student if the student is unconscious. It allows the parent to discuss the situation with the attending doctor.

HIPAA (Health Insurance Portability Act Authorization). This document allows medical professionals to share information about their patient (the student) with the parents.

Living Will. This document states the wishes of the student concerning the extent of life-extending medical treatment he wants to receive if he is incapacitated as well as his interest in donating organs.

Will. Having a Will in place is especially important for a student whose family has invested in estate planning techniques aimed at passing wealth down through the generations because the student’s assets will go back up to the parent if nothing is in writing stipulating otherwise.

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August 8, 2015

Hazards to Avoid when Inheriting an IRA – Part 3

In a recent issue of Kipplinger’s Retirement Report several problems are pointed out which can arise when someone who is not the spouse of the IRA owner inherits an IRA.

Another problem is not addressing the issues raised when there is a non-person beneficiary of an IRA.

If an IRA has several beneficiaries and one is a charity, the IRA must pay out the charity’s share by September 30 of the year following the owner’s death. If that share isn’t paid out and the IRA has not been split up among the beneficiaries, the remaining beneficiaries cannot take their withdrawals over their life expectancies. Instead, the remaining beneficiaries will be required to withdraw over the next five years everything that is in the IRA if the owner died before taking any distributions. If the owner died after distributions had begun, the beneficiaries must take their distributions based on the owner’s life expectancy, not their own life expectancies.

If a trust is a beneficiary, a copy of the trust should be sent to the IRA custodian by October 31 of the year following the owner’s death. If it is not, the trust is considered a non-designated beneficiary like the charity in the previous example and the same payout rules apply.

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August 1, 2015

Fund That Trust

In her article, Practical Tips and Tricks on What You Should Do With Your Estate Plan, Julie Garber advises completely funding your revocable living trust so that all of your assets can be managed by the trustee.

Ms. Garber states, " Many people fail to realize that funding their trust is just as important as creating it. If an asset isn't titled in the name of the trust, then the trust agreement won't control what happens to that particular asset . . . . "

To title an asset in a trust the title of the asset needs to be changed to the trust.

Example: Title to the summer home is currently in "John Smith". By changing the title to "John Smith and Jane Smith, Trustees, or their successors in trust, under the John Smith Living Trust, dated January 1, 2009, and any amendments thereto" the summer home is titled in the trust.

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July 25, 2015

Hazards to Avoid when Inheriting an IRA - Part 2

In a recent issue of Kipplinger’s Retirement Report several problems are pointed out which can arise when someone who is not the spouse of the IRA owner inherits an IRA.

Another problem is the fact that nonspouse beneficiaries cannot roll an inherited IRA into their own IRA. A new account must be established and its titling must indicate that is an account for a beneficiary. For example, the new account would be retitled as “John Smith (deceased January 1, 2015) IRA for the benefit of Susan Jones”.

Another problem is if there are several beneficiaries with wide ranging ages. These beneficiaries should split the IRA so that each beneficiary benefits from the IRA being stretched over his life expectancy. Otherwise, the life expectancy of the oldest beneficiary will be used to calculate the required minimum distribution which will decrease the number years that the money can grow tax deferred.

For example, if the beneficiaries are an 80-year-old brother, a 55-year-old-son and a 25-year-old grandchild and the account is not split, all of the beneficiaries will be required to calculate their required minimum distributions based on the 80-year-old’s life expectancy. But if the account is split by December 31 of the year following the year the owner dies, each beneficiary can use his own life expectancy to take required minimum distributions and can decide how the money is invested. The younger the beneficiary is, the smaller his required minimum distribution and the longer the money can grow tax deferred.

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July 18, 2015

Hazards to Avoid when Inheriting an IRA

In a recent issue of Kipplinger’s Retirement Report several problems are pointed out which can arise when someone who is not the spouse of the IRA owner inherits an IRA.

One problem is failing to take required minimum distributions. Required minimum distributions must be taken by owners of traditional IRAs when they turn 70 ½ . Nonspouse beneficiaries must start taking required minimum distributions the year following the year the owner died if they want to stretch the IRA over their own life expectancies. These beneficiaries will owe tax on distributions of deductible contributions and earnings from the traditional IRA.

Nonspouse beneficiaries of Roth IRAs must take required minimum distributions. However, withdrawals from an inherited Roth IRA are tax free.

There is a 50% penalty for a nonspouse beneficiary of a traditional IRA who misses a withdrawal for that year. The penalty can be avoided if the account is completely depleted within five years of the owner’s death provided the owner died before he had to start required minimum distributions.

As is pointed out by Twila Slesnick in her book titled IRAs, 401(k)s & Other Retirement Plans, “However, depending on the size of the IRA and the age of the beneficiary, it might be smarter to pay the penalty than to liquidate the account simply to avoid the penalty.”

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July 9, 2015

Steps to Take When a Loved One Dies

The first three steps which should be taken after the death of a loved one are to make the funeral arrangements, secure the house and find the important papers. In her article in The Wall Street Journal titled "Steps for Heirs to Take After a Death", Jilian Mincer discusses why these three steps are so important.

After the funeral has taken place, family members should secure the home if it is now empty. Changing the locks and adding a buglar alarm should be considered. Valuables such as jewelry should be moved to a safe deposit box or some other secure place. If items are moved, however, a list should be kept of where things were. This might be needed if the deceased's will identifies objects by location. For example, the will may say that gold jewelry in the top dresser drawer goes to a specific person.

The third step is to find the important papers. These are the most recent will, stock certificates, investment account information and insurance policies. It is sometimes helpful to look at the most recent tax return for references to assets of the estate. In addition, if the deceased was working, check with the employer regarding benefits like life insurance policies and 401(k) plans. Also, ask the funeral director for 10 certified copies of the death certificate which will be needed when transferring stocks and other assets and when filing for life insurance proceeds.

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June 27, 2015

Asset Protection for Illinois Homes and Life Insurance

Illinois laws provide asset protection for homes and life insurance policies.

The protection provided to a home, whether it is a house, a condominium or other form of primary residence, is $15,000 per individual.

The protection provided for life insurance policies equals the value of the policy as long as the proceeds payable because of death go to the wife or husband of the insured, a child, parent or other person dependent upon the insured.

These laws apply to everyone and no action is needed to take advantage of their protection.

Additional steps can be taken to protect other assets from the claims of creditors. These steps include establishing trusts and other entities which hold title to the assets. When properly created, the owner of the property can enjoy the benefits of the property without the worry that the property may be attached by a creditor.

Another step to protect assets from creditors is to retitle the asset. By doing this, the retitled asset is now in the name of a different individual and a creditor cannot reach the asset. Often an individual who uses this method already had the intent to pass the property to the other party, usually a family member, at some time in the future.


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June 20, 2015

Illinois Asset Protection Planning

In his article, When is it Too Late for Asset Protection?, Attorney Robert Mintz discusses the pitfalls of asset protection planning.

He points out that states, including Illinois, have fraudulent transfer laws. These laws prohibit an individual from transferring property to another entity to “hinder, delay or defraud” someone owed a debt in order to avoid paying that debt. As a result of these laws, there is little one can do to protect assets against a claim that has already been made, sometimes referred to as an “existing claim”.

Where asset protection planning is allowable and is effective is in the situation where an individual seeks to protect himself from unseen future risks. Mr. Mintz gives the following example in his article: “ . . . say you set up an asset protection plan and a negligent act involving a patient occurs several months later. Fraudulent transfer is not an issue in this case because the property transfer was unrelated to the claim subsequently developed by this patient. Presumably, at the time you implemented your asset protection plan, you did not know or intend that the patient would be injured. Similarly, loans and contracts entered into after establishing a plan, as long as the creditor is not misled, are also outside the scope of the fraudulent transfer rules.”.

Illinois law is clear that the fraudulent transfer laws can overturn an asset protection plan where the intent of the plan was to avoid paying an existing claim. It is also clear that in Illinois asset protection planning to protect against unforeseen future risks is allowed and is effective. The tricky part comes in when one is confronted with the situation where one must prove to a court that the transfers involved fall into this second, acceptable area of planning.

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June 12, 2015

Illinois Tenancy by the Entirety

If you live in Illinois, you are married and you own your home, it is worth becoming familiar with the meaning of holding title to your home in the form of a tenancy by the entirety.

A tenancy by the entirety differs in several important ways from the other two ways title to real estate may be held by two or more people (tenancy in common and joint tenancy with rights of survivorship).

First, only married couples may hold title as tenants by the entirety. There is no marriage requirement to hold title as tenants in common or as joint tenants with rights of survivorship.

Second, the property must be a primary personal residence. No restriction exists regarding the type of property which can be held by tenants in common or joint tenants with rights of survivorship.

Third, there must be agreement between the tenants by the entirety if the tenancy is to be broken by them. No such agreement is required if fewer than all tenants in common or all joint tenants want to change how they hold title.

Fourth, only joint creditors (creditors of both the husband and the wife) may reach the home of the husband and wife where the home is held in tenancy by the entirety. If a creditor has a claim against only the husband or only the wife, the home held in tenancy by the entirety cannot be partitioned, sold or encumbered without the permission of both spouses.

Fifth, specific terminology must be used to create a tenancy by the entirety. In Illinois, the deed language must indicate that the parties are married and must use specific words creating the tenancy by the entirety. The following language is commonly used to create a tenancy by the entirety between Sam and Sally Smith: "to Sam Smith and Sally Smith, husband and wife, not as tenants in common nor as joint tenants with rights of survivorship but at tenants by the entirety".

As stated earlier, a tenancy by the entirety may be terminated by agreement of the tenants. It may also be terminated by a court ordered sale to satisfy a joint debt of the husband and the wife, by a divorce or by the death of either the husband or the wife.

One last point, in many states, a husband and wife who take title jointly will automatically take title to their home as tenants by the entirety. Illinois is not one of those states. The specific language referenced earlier must be used for a tenancy by the entirety to be created in Illinois.

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