Illinois Estate Planning and Elder Law Blog

Your 401(k) may not be the best place to put your money. In a recent article in the Wall Street Journal, Anne Tergesen points out that Health Savings Accounts (HSAs) come with more tax advantages than 401(k)s and individual retirement accounts (IRAs) when used to cover medical costs, a large expense for retirees.

Money in HSAs grows tax-free and, if used for medical expenses, also can be withdrawn tax-free. And if you fund your HSA with a pretax payroll deduction, you also save 7.65% in FICA tax (which finances Social Security and Medicare).

For individuals with a high deductible health plan (at least $1300 for individuals and $2600 for a family), an HSA should be the place to save. Individuals can contribute up to $3350 annually and families up to $6750 with those over 55 years old allowed an additional $1000. The biggest payoff with an HSA comes when the funds in the HSA are not used for current medical bills but are invested and allowed to compound over time, before being used for medical expenses.

It may be the best strategy to contribute enough to your 401(k) to get the company match and then direct the next dollars of savings to your HSA. Continue reading

If you die without a Will or Trust, your assets will be divided up based on the intestacy laws of the state where you live at the time of your death and the intestacy laws of any other state where you own assets.

Many times the intestacy laws will give different results from what you would have wanted had you taken the time to make a Will or Trust. If you own assets located outside of your home state, you could have two different sets of beneficiaries of your assets.

For example, in Florida and in Virginia, if you are survived by a spouse and children from the marriage, your spouse will inherit 100% and your children will receive nothing.

Use the same set of facts, except that your children are from a different spouse. In Florida, your current spouse will inherit one-half and your children will share equally in the remaining one-half, while in Virginia your current spouse will inherit one-third and you children will share equally in the remaining two-thirds.

Take that same set of facts in Illinois, and if you are survived by a spouse and children, no matter which spouse (current or former) the children are from, your current spouse will inherit one-half of your assets and your child (or children) will inherit the other half.

The examples illustrate what a difference state intestacy laws can make. The only way to insure that after your death your assets will go to the beneficiaries of your choice and will be distributed by the person you want making the distributions at the time you want your beneficiaries to receive them is to make an estate plan which includes a Will or a Trust.

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Gifting assets to your grandchildren can reduce the size of your estate and the tax that will be due upon your death.

You may give each grandchild up to $14,000 a year without having to report the gift. If you are married, both you and your spouse can make such gifts. For example, a married couple with four grandchildren may give away up to $112,000 a year to their grandchildren with no gift tax implications. In addition, the gifts will not count as taxable income to your grandchildren (although the earnings on the gifts if they are invested will be taxed).

You can pay for educational and medical costs for your grandchildren. You must be sure to pay the school or medical provider directly.

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In Illinois, estates can be administered under an Independent Administration or a Supervised Administration.

Unless an interested party requests a supervised administration, an estate is opened as an independent administration. Unlike a supervised administration, an independent administration does not require filing an inventory and accounting with the Court for the Judge to review. This keeps the inventory and accounting from becoming public record. However, the inventory and accounting are sent to the beneficiaries for approval.

No Court authority is needed to sell real estate when there is an independent administration. An independent administration may be converted to a supervised administration at any time by any interested party upon request to the Court. If the will specifies that the administration is to be independent, the party requesting the change to supervised administration must provide the Court with good cause for changing to supervised.

With a supervised administration, the inventory and accounting are filed with the court and become public record available for anyone to see. The accounting is subject to approval by the judge, including the attorney and executor/administrator fees. Also with a supervised administration, the executor/administrator needs court approval to sell real estate. Continue reading

As outlined in U.S. News and World Report, Roth IRAs have many appealing characteristics. They grow income tax free. Owners are not required to take minimum distributions at age 70 1/2 so long as the account has been in place for five years. The income limit has been removed on Roth conversions, so anyone can convert a regular IRA to a Roth IRA. If tax rates increase, the benefit to converting now will be even greater.

It is important to remember that it is not your will or trust that determines who will inherit your Roth IRA. Roth IRAs, like all IRAs, include their own beneficiary designation. The owner of the Roth stipulates the beneficiaries of the account. In some cases, it will be the most advantageous to stipulate individual beneficiaries so that those beneficiaries can create their own Roth IRAs and stretch the tax savings over their lifetimes. Continue reading

Authority to appoint the property of an original trust to a second trust is commonly referred to as decanting authority. This gives authority to a trustee allowing him to adapt and revise the terms of a trust due to unforeseen circumstances or drafting errors.

Statutory decanting authority allows for modification of undesirable terms of an irrevocable trust when doing so would be in the best interests of the beneficiaries. Some examples of these modifications including changing the situs of a trust to a state with more favorable law; relocating trust assets to a state with no income tax imposed; combining multiple trusts to reduce administrative costs and dividing trusts to resolve conflicts among beneficiaries; correcting errors in drafting; and conforming the distribution provisions of a trust to the requirements of a special needs trust. Continue reading

Congress put in place the kiddie tax to prevent individuals from putting assets in the names of their children who typically have far lower tax rates than their parents. As Laura Saunders points out in a recent article in the Wall Street Journal, this tax needs to be kept in mind when making gifts to children and grandchildren.

Under this tax, a child’s unearned investment income (interest, dividends and capital gains) which exceeds $2100 (in 2015) is taxed at the parents’ top rate. The tax applies to all children under age 18 and up age 24 if they can be claimed as dependents on the parents’ return.

The first $1050 of a child’s investment income is exempt from tax. The next $1050 of investment income is taxed at the child’s rate, which is usually very low or zero.

The tax does not apply to earned income such as wages from a job.

The kiddie tax does apply to taxable investment income so investing in growth stocks which do not pay dividends can help avoid the tax.

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You execute your Durable Power of Attorney for Property while you are competent. Your agent is given power to act on your behalf. Because it is durable, the Power of Attorney document can still be used if you become incompetent.

A Power of Attorney for Property includes many speficially referenced powers.

1) Real Estate Transactions – allowing the agent to buy, sell, exchange, rent and lease real estate

2) Financial Institution Transactions – allowing the agent to open, close, continue and control all accounts and deposits in any type of financial institution including banks, trust companies, saving and loan associations, credit unions and brokerage firms

3) Stock and Bond Transactions – allowing the agent to buy and sell all types of securities including stocks, bonds, mutual funds and all other types of investment securities and financial instruments

4) Tangible Personal Property Transactions – allowing the agent to buy and sell, lease, exchange, collect, possess and take title to all tangible personal property

5) Safe Deposit Transactions – allowing the agent to open, continue and have access to all safe deposit boxes

6) Insurance and Annuity Transactions – allowing the agent to procure, acquire, continue, renew, terminate or deal with any type of insurance or annuity contract

7) Retirement Plan Transactions – allowing the agent to continue to withdraw from and deposit funds in any type of retirement plan

8) Social Security, Unemployment and Military Service Benefits – allowing the agent to prepare, sign and file a claim or application for Social Security, unemployment or military service benefits

9) Tax Matters – allowing the agent to sign, verify and file all of the principal’s federal, state and local income, gift, estate, property and other tax returns

10) Claims and Litigation – allowing the agent to institute, prosecute, defend, abandon, compromise, arbitrate, settle and dispose of any claim in favor of or against the principal or any property interest of the principal

11) Commodity and Option Transactions – allowing the agent to buy, sell, exchange, assign, convey, settle and exercise commodities futures contracts and call and put options

12) Business Operations – allowing the agent to organize or continue and conduct any business in any form

13) Borrowing Transactions – allowing the agent to borrow money, mortgage or pledge any real estate or tangible or intangible personal property

14) Estate Transactions – allowing the agent to accept, receipt for, exercise, release, reject, renounce, assign, disclaim, demand, sue for, claim and recover any legacy, bequest, devise, give or other property interest.

15) All Other Property Powers and Transactions – allowing the agent to exercise any powers of the principal regarding any types of property and interests in property except to the extent limited by the principal by striking out a category on the power of attorney document or including a specific limitation in the power of attorney document

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In his article titled Estate Planning for a Family with a Special Needs Child, Sebastian V. Grassi, Jr. lists five estate planning options for parents of a special needs child

1. Distributing assets directly to the special needs child;

2. Disinheriting the special needs child;

3. Leaving property to another family member;

4. Establishing a third-party discretionary support trust for the special needs child; and

5. Establishing a third-party created and funded Special Needs Trust for the child.

Only number 5, establishing a third-party created and funded special needs trust, is recommended because it will not disqualify the child from receiving means-tested government benefits, it is legally enforceable and it does not subject the assets to creditors of family members.

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You can withdraw your original contributions to a Roth at any time. But you must wait five years to avoid paying the tax on earnings on regular contributions and you must be 59 1/2 years old.

If you inherit a Roth from your spouse, the taxable period ends either five years after the account was opened by your spouse or five years after the surviving spouse opened his own Roth, whichever is earlier.

A surviving suppose can name his children as equal beneficiaries of the same Roth. It is in the children’s interest to do so. Any heir other than a spouse who treats the Roth account as his own must take the required distributions from the Roth beginning by December 31st of the year after the year of the previous owner’s death. If the children keep the account intact and they want to stretch the withdrawals as long as possible, they are restricted to using the oldest child’s age. However, if they split the account, each sibling can stretch the distributions across his own lifetime. This means younger siblings can spread withdrawals over more years, leaving more assets in the account for a longer time and most likely realizing more tax-free earnings.

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