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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June 6, 2015

Estate Planning for Fido

Few dogs are lucky enough to be left $12 million by their owners like Leona Hemsley’s Maltese named Trouble. But this doesn’t mean that your pet can’t be provided for when you consider how you want your possessions to be handled in your will.

In Heirs to the Bone – Estate Planning for Pets written by Attorney Frances Carlisle, Ms. Carlisle gives several options to individuals drafting wills and looking to have their pet cared for when they, the pet owners, are no longer around.

Number 1: Make a gift of your pet to someone who will be its caretaker after you die and then have your attorney include a provision in your will leaving the animal to that person. Leave money for expenses the new owner will incur caring for the pet.

Number 2: In your will, give your executor discretion to choose from several people to take your pet. Also give your executor discretion to find a suitable adoptive home in the event there is no one who is willing and able to care for the pet.

Number 3: Make arrangements with a local animal rescue and placement charity to take your pet after you die and find a home for the pet. Name the charity in your will and leave money to the charity.

It is important to include a statement in your will that you are bequeathing all of the animals owned by you at your death. If you name a specific animal in your will, other animals you own will not be covered.

Creating a trust for your pet is another option available to pet owners.The applicable Illinois statute, Ill. Comp. Stat. 760 ILCS5/15.2 which became effective on January 1, 2005, specifically states, “A trust for the care of one or more designated domestic or pet animals is valid”.

You can create a trust which is in existence while you are alive or you can create a trust that comes into existence upon your death. The advantage of creating a trust while you are alive, an inter vivos trust, is that you will have arrangements ready should you be incapacitated or have to go into a nursing home.

Estate planning by pet owners insures that their pets will continue to enjoy a happy life after the owner is no longer around.

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May 29, 2015

Unrelated Administrator of an Estate

An Illinois decision makes it clear that an individual unrelated to the person who died (the decedent), may be appointed by the court to serve as administrator of the estate.

In re Estate of Gage involves a man with three children, whose mother he never married, who died without a will. The man’s sister petitioned the court to serve as administrator of his estate. The mother of the man’s three children also petitioned the court to serve as administrator.

The court appointed the mother as administrator based on the language of Article IX, Section 9-3 of the Probate Act which specifically gives the children of the decedent priority over the sister of the decedent as far as entitlement to obtain issuance of letters of administration. The court pointed to the language of the Probate Act which states:

“Only a person qualified to act as administrator under this Act may nominate, except that the guardian of the estate, if any, otherwise the guardian of the person, of a person who is not qualified to act as administrator solely because of minority or legal disability may nominate on behalf of the minor or disabled person in accordance with the order of preference set forth in this Section.”

In this case, the mother was the guardian of the three children and as such, the court ruled, had authority to nominate herself as administrator. The court further ruled that because the mother made her nomination on behalf of the decedent’s children, her nomination had priority over that of the sister of the decedent.

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May 22, 2015

Illinois Joint Tenancy Law Liberalized

The creation of and the termination of rights of parties who hold title to property as joint tenants have been liberalized in Illinois.

In the case of Sathoff v. Sutter, 373 Ill. 3d App. 795, 869 N.E.2d 354 (Fifth District, 2007), the parties involved were an individual and a couple. The three acquired title in 1981 as joint tenants with rights of survivorship. After fifteen years, the couple sought to hold title as joint tenants only as between themselves. In 1996, they executed a deed conveying title to themselves as joint tenants.

The husband died first. Then the wife died. The third joint tenant claimed that he was now the owner of the entire interest in the property. His argument was that the 1996 conveyance failed to create a joint tenancy because the Joint Tenancy Act does not allow an existing owner to be a sole grantee in a conveyance. The executor of the wife’s estate took exception. The executor claimed that by virtue of the deed executed in 1996, the third joint tenant owned only an undivided one-third interest as a tenant in common and that the estate owned the other two-thirds interest.

The Fifth Circuit affirmed the trial court which held in favor of the executor. The reasoning was based on a view that the Joint Tenancy Act calls for courts to adopt a more liberal view regarding transactions of this nature. The court ruled that the deed the couple executed in 1996 conveying title to themselves effectively severed the joint tenancy created between them and the third person. It also ruled that the 1996 deed created a valid joint tenancy as between the couple regarding their two-thirds interest in the property. Accordingly, the estate held title to the two-thirds interest. The single individual owned his one-third share as a tenant in common.

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May 15, 2015

Wills vs. Trusts

Wills and Trusts are useful estate planning devices which serve different purposes. Both work together to create a complete estate plan.

One main difference between a Will and a Trust is that a Will goes into effect only after you die, while a Revocable Living Trust goes into effect as soon as it is created and funded. A Will directs who will receive your property at your death, and it appoints a legal representative to carry out your wishes. A Revocable Living Trust can be used to distribute property before your death, at your death and afterwards.

A Will covers any property that is titled in your name when you die. It does not cover property which has been titled in a Trust. A Trust covers only property that has been transferred to the Trust. In order for property to be included in a Trust, it must be titled in the name of the Trust.

Another difference between a Will and a Trust is that a Will is sometimes required under Illinois law to be administered through the probate process with the Courts. If the person who died owned real estate titled solely in his name or owned assets valued at over $100,000, probate is required. That means a court oversees the administration of the Will and ensures the Will is valid and the property gets distributed the way the deceased person directed. A Trust passes outside of probate, so a court does not oversee the process. Unlike a Will which becomes part of the public record and can be accessed by anyone, a Trust can remain private.

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May 9, 2015

Chicago Law & Updating Your Estate Plan

Once you have created an estate plan, it is important to keep it up to date. The following is a list of events which may trigger an estate plan update.

Whether it is your first marriage or a later marriage, you may need to update your estate plan after you get married. In Illinois if you die without a Will, a spouse gets one-half of your estate, and the rest will go to other relatives. You need a Will to spell out how much you would like your spouse to get.

Your estate plan may get more complicated if your marriage is not your first. You and your new spouse need to figure out where each of you wants your assets to go when you die. If you have children from a previous marriage, this can be complicated. There are a number of options to ensure your children are provided for including creating a trust for your children, making your children beneficiaries of life insurance policies and giving your children joint ownership of property.

It is important to name a guardian for your children in your Will. You may also want to set up a trust for your children so that your assets are set aside for your children when they get older.

When your children get older, you may want to update your plan to reflect the changes. They will no longer need a guardian, and they may not need a trust. You may want your children to act as executors or hold a power of attorney.

If you get divorced or your spouse dies, you will need to revisit your entire estate plan. It is likely that your spouse is named in some capacity in your estate plan such as beneficiary, executor or agent under power of attorney. If you have a trust, you will need to make sure your spouse is no longer a trustee or beneficiary of the trust. You will also need to change the beneficiary on your retirement plans and insurance policies.

One part of estate planning is estate tax planning. When your estate is small, you usually do not have to worry about estate taxes. In Illinois in 2015, only estates with more than $4 million are subject to Illinois estate tax and estates with more than $5.43 million are subject to federal estate tax. As your estate approaches these levels, a plan that takes tax planning into account needs to be considered.

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