Illinois Estate Planning & Elder Law Blog

A Bypass Trust, also known as a Credit Shelter Trust, lets a married couple double the estate tax exemption.

If the husband dies first, his assets fund an irrevocable trust for the children up to the estate tax exemption amount which is currently $3.5 million. All remaining assets go to the widow in a second, separate trust. The first trust (the children's trust) is drafted to allow the widow access to the principal for medical costs and other needs. This safeguards against the funds in the widow's second, separate trust from being completely depleted and the widow running out of money without access to the husband's $3.5 million trust.

The advantage is that when the widow dies, she can pass on $3.5 million in assets tax free to the children. Also, the Bypass trust allows for another $3.5 million in assets to be passed on tax free to the children.

Another benefit to the first spouse to die is that this arrangement ensures that the assets will go to the children and not a second spouse of the widow.

Continue reading "Illinois Estate Planning Bypass Trusts" »

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Couples can give up to $26,000 per year without incurring any gift taxes. Singles are allowed up to $13,000 per year.

Because the federal estate tax exclusion is $3.5 million this year, taxes are not a concern for many people. A bigger concern is if your assets will be enough to last for the rest of your life. If you are a 65-year-old retiree and estimate you will need to draw $60,000 (adjusted for inflation) from your investments to maintain your standard of living, you will need about $1.5 set aside for yourself.

To hedge against the likely possibility that Congress will lower the federal estate tax exclusion, possibly as low as $1 million, gifting now will achieve that result. Now is an ideal time to give gifts of depreciated stock. For example, if you own American Express stock which sold for over $60 in June of 2007 and today sells for $25, you can give more than twice as much American Express stock today without triggering a gift tax as you could two years ago.

Continue reading "Timing Your Estate Planning" »

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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’s important to pick a person who is trustworthy, financially astute and diligent.

Continue reading "Illinois Children's Trusts" »

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

• They have an outdated plan
• They have no will or an outdate 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 retire benefits
• They fail to provide for a successor in interest if a primary beneficiary dies first or disclaims the gift
• They fail to provide for a guardian for themselves in the event of disability
• 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

Continue reading "Common Mistakes in Estate Planning" »

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Here's another reason to convert your traditional IRA to a Roth IRA:

When you convert to a Roth IRA, you can pay the conversion fee out of other assets. That is, you can pay the conversion fee from funds not in the traditional IRA. This will maximize the amount that you are converting to a Roth.

Because portfilios have been beaten down and values are currently likely to be far below their amounts in the past, you will have assets with depressed values in an account likely to increase significantly in value. All of this increase will be tax free when withdrawals are made from the Roth account.

Continue reading "Illinois Estate Asset Protection Planning" »

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The ability to make a will involves the issue of mental capacity.

In Illinois, there is a presumption that every man is sane until the contrary is proven and the burden is upon him who asserts the lack of testamentary capacity. In other words, everyone is presumed to have the mental capacity to make a valid will. It is up to the person challenging the validity of the will to prove otherwise.

Illinois courts also recognize that someone who suffers from some mental impairment can still have testamentary capacity. There is a case where a 74 year old woman executed a will after she was diagnosed with senile dementia and had the intelligence level of a 12 year old child. Despite these short comings, she read newspapers, was aware of and interested in current events, knew her relatives and asked about their well being and could transact business. The court ruled that she had the capacity to execute a valid will.

In summary, Illinois law requires three things for someone to have the mental capacity to make a valid will:

1) He must know who his spouse, children, grandchildren and other relatives are;
2) He must generally understand what assets he owns; and
3) He must be able to form a plan in his head regarding how he wants his property distributed.

Continue reading "Making a Will in Illinois" »

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What is a Trust?

Example: You are visiting your sister in Australia for six months and your son needs $5000 for living expenses while you are gone.

You could deposit $5000 in his checking account. But what if you are concerned that he might spend it on a wall size plasma television and have nothing left for food?

Instead of giving him the money outright, you could give it to your best friend with instructions on how the money is to be spent for your son’s benefit.

By giving the money to your best friend for your son’s benefit, you have established a Trust. You are the Grantor because you gave the money to your friend. Your friend is the Trustee because she is the one responsible for the management and distribution of the money according to your instructions. Your son is the Beneficiary because he will receive the benefit of the money you have put in the Trust. The list of instructions you gave your friend is the Trust Agreement. It tells your friend (Trustee) what to do. The $5000 is the Principal of the trust.

There are many types of trusts: revocable, irrevocable, living, testamentary and other distinctions. Illinois law sets forth requirements for all of them.

Continue reading "Illinois Estate Planning and Trusts" »

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When considering how to minimize or avoid the time and expense of going to court and becoming involved in the probate process, it is important to be familiar with the distinction between probate and non-probate property.

Upon death, an individual’s assets are divided into two categories: probate property and non-probate property. Those assets which are non-probate property bypass the probate process. Examples are real estate held in joint tenancy, insurance policies payable to a named beneficiary (other than the estate), IRA accounts, Keogh plans, 401(k) plans and pension and profit sharing plans.

Another asset which is non-probate in Illinois is real estate held by a land trust. A separate agreement is entered into which provides that the trustee holds title to the property and the beneficiary has a power of direction over the trustee and the right to receive the earnings, avails and proceeds of the property. It can be provided in the agreement, that upon the death of the beneficiary, his interest passes to a particular person thereby avoiding probate.

In addition, bank accounts can be set up in a way that avoids probate. These accounts are P.O. D. (payable on death) accounts to which a named beneficiary has the right to the balance in the account upon the death of the account holder. The beneficiary presents a certified copy of the death certificate of the account holder to receive the balance in the account.

Continue reading "Illinois Estate Planning – Avoiding Probate" »

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Like all insurance policies, Long-Term-Care insurance policies require a good deal of research before they are entered into. Often different insurance companies offer coverages that at first glance appear similar, but upon closer examination are very different.

A recent Wall Street Journal article titled, Insurer Casts Off Long-Term-Care Policies written by M.P. McQueen references seven ways to protect yourself before signing up for a long term care policy.

First, look into the stability of the premium payments. Long-term-care policy premiums are not like life insurance policy premiums which remain constant. Long-term-care policies can rise unexpectedly. It is often the case that large insurers which are financially stable and have high credit and financial strength ratings initially charge a higher premium but the premiums increase very little over the years.

Second, know how much the policy will cover in daily costs. Because the daily cost of nursing home expenses varies widely from state to state, it is important to know if the policy will cover the costs in your state.

Third, be aware that the length of coverage is limited. Coverage for a lifetime is difficult to obtain and very expensive. Policies covering two to four years are typical. It is unlikely that a nursing home stay will exceed four years.

Fourth, be aware that many policies require you to pay for the first three months of care before the policy takes over. If you want to shorten or eliminate paying for the first three months, the cost of the premium will increase.

Fifth, seek built-in inflation protection which increases at a rate approximating the increase in care costs. This rate should be well above the current rate of inflation.

Sixth, look into expense-incurred benefits. This is additional money paid directly to you or the care provider to reimburse for eligible costs up to a daily benefit maximum.

Finally, look into indemnity benefits. Although this coverage is more expensive, it is often worth the cost as it provides cash to you to cover costs which are not always eligible expenses.

Continue reading "Illinois Long-Term-Care Estate Planning" »

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A recent 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's good to keep the following in mind:

1) It's 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 don't designate a beneficiary, the account will be distributed according to state rules on distribution.

Continue reading "Probate Law Regarding Beneficiaries" »

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When most of us talk about asset protection, we usually think of protecting assets from the claims of creditors. But what about protecting assets from failure of the institution in which the assets are placed?

For example, what happens if a mutual fund fails? The answer is two-fold. First, no mutual fund company has failed. Second, even if a mutual fund family were to go bankrupt, the money in the funds would be safe. That is to say, an IRA, a 401(k) or any other account would be safe.

As Walter Updegrave points out in his piece in the February issue of Money magazine, unlike when you buy a CD at a bank, the money you invest in a mutual fund remains separate from the assets of the parent firm. It goes to the particular mutual fund you buy. Each mutual fund is a separate entity. The fund company doesn’t own the funds under the firm’s name. It only has an agreement to manage the assets and sell the shares. If the parent company went bankrupt, the assets of the individual funds would not be available to the firm’s creditors. In addition, federal law requires funds to have insurance that covers embezzlement, fraud and other similar matters.

Continue reading "Asset Protection and Mutual Funds" »

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The Wall Street Journal had a piece this week about the Gramm-Leach-Bliley (GLB) Act of 1999. This is the first time I have read a detailed explanation of why GLB was not a contributing cause of the current financial crisis.

GLB repealed part of the Glass-Steagall Act (from Great Depression times) and allowed banks, securities companies and insurance companies to affiliate under a financial services holding company.

The WSJ article points out:
1) If GLB were the problem, the crisis would have originated in Europe where they never had Glass-Steagall;
2) The financial firms that failed, like Lehman, were the least diversified while those that survived, like JP Morgan, were the most diversified; and
3) GLB did not deregulate anything but established the Federal Reserve as a super-regulator overseeing all Financial Services Holding Companies. All activities of financial institutions continue to be regulated on a functional basis by the regulators that had regulated those activities prior to GLB.

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