Illinois Estate Planning & Elder Law Blog

When you give anyone property valued at more than $13,000 in any one year, you have to file a gift tax form. Also, under current law you can gift a total of $5 million over your lifetime without incurring a gift tax. If your residence is worth less than $5 million, you likely will not have to pay any gift taxes, but you will still need to file a gift tax form. Keep in mind Congress may change the gift tax exemption, which is currently scheduled to revert to $1 million at the end of 2012 unless Congress acts.

While you may not have to pay gift taxes on the gift, if your children sell the house right away, they may be facing steep taxes. The reason is that when you give away your property, the tax basis (original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If your give your house to your children, the tax basis will be $150,000. If the children sell the house, they will have to pay capital gains taxes of the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.

Inherited property does not fact the same taxes as gifted property. If the children were to inherit the property, the property’s tax basis would be “stepped up”, which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.

Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them.

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Many people believe that if they have a Will, their estate planning is complete, but there is much more to a solid estate plan. A good plan should be designed to avoid probate, save on estate taxes, protect assets if you move into a nursing home and appoint someone to act if you become disabled.

All estate plans should include a durable power of attorney for property and a Will. A trust can also be useful to avoid probate and to manage your estate both during your life and after you are gone. In addition, medical directives allow you to appoint someone to make medical decisions on your behalf.

A Will is a legally binding statement directing who will receive your property at your death. If you do not have a Will, the state determines how your property is distributed. A Will also appoints a legal representative (called an executor or a personal representative) to carry out your wishes. A Will is important if you have minor children because it allows you to name a guardian for the children. However, a Will covers only probate property. Many types of property or forms of ownership pass outside of probate. Jointly owned property, property in trust, life insurance proceeds and property with a named beneficiary, such as IRAs or 401(k) plans, all pass outside of probate and are not covered under a Will.

A trust is a legal arrangement through which one person (or an institution, such as a bank or a law firm), called a “trustee”, holds legal title to property for another person, called a “beneficiary”. There are several reasons for setting up a trust. The most common reason is to avoid probate.

Certain trusts can result in tax advantages for the beneficiary. These are referred to as credit shelter trusts. Other trusts can be used to protect property from creditors or to help the donor qualify for Medicaid.

A power of attorney for property allows the person you appoint to act in your place for financial purposes if you become incapacitated. In that case, the person you choose will be able to step in and take care of your financial affairs. Without a durable power of attorney for property, no one can represent you unless a court appoints a guardian. That court process takes time and money, and the judge may not choose the person you would prefer. In addition, under a guardianship, your representative may have to seek court permission to take planning steps that he could implement immediately under a durable power of attorney.

A durable power of attorney for health care allows you to designate someone to make health care decisions if you are unable to do so yourself. A living will instructs your health care provider to withdraw artificial life support if you are terminally ill or in a vegetative state.

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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 2012, only estates with more than $3.5 million are subject to Illinois estate tax and estates with more than $5 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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There is a lot of information your heirs should know that does not necessarily fit into a Will, Trust or other components of an estate plan. The solution is a letter of instruction, which can provide your heirs with guidance if you die or become incapacitated.

A letter of instruction is a legally non-binding document that gives your heirs information crucial to helping them tie up your affairs. Without such a letter, heirs can miss important items.

The following are some items that can be included in a letter:

• A list of people to contact when you die and a list of beneficiaries of your estate plan
• The location of important documents such as your Will, insurance policies, financial statements, deeds and birth certificate
• A list of assets such as bank accounts, investment accounts, insurance policies, real estate holdings and military benefits
• Passwords and PIN numbers for online accounts
• The location of safe deposit boxes
• A list of contact information for lawyers, financial planners, brokers, tax preparers and insurance agents
• A list of credit card accounts and other debts
• Instructions for funeral or memorial service
• Instructions for distribution of sentimental personal items

Once the letter is written, store it in an easily accessible place and tell trusted family members about it.

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