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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March 21, 2015

QTIP Trusts

Generally, to qualify for the marital deduction and avoid estate tax (imposed on estates with assets over $5.43 million in 2015) when you die, your property must pass to your spouse directly or in a trust where he has complete control over the principal. A Qualified Terminable Interest Property Trust (QTIP Trust) is an exception to this rule.

A QTIP Trust allows you to separate your property into two parts. One part is the interest or income the principal generates. The other part is the principal itself. An example is stocks and bonds (the principal) and dividends and interest (income).

By separating your property this way, you can direct that each piece benefits a different person. So long as the QTIP Trust directs that your spouse receives all of the income from the trust during his lifetime, the QTIP Trust will qualify for the marital deduction and no estate tax will be due.

QTIP Trusts are commonly used in the situation where there is a second marriage. The spouse who has children from a first marriage wants to ensure that his children receive the principal and also wants to ensure that his surviving second spouse will benefit from the interest generated. The QTIP Trust allows for both.

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March 13, 2015

Special Needs Trusts

A Special Needs Trust (a/k/a Supplemental Needs Trust) is set up to ensure that a disabled individual receives benefits, such as Supplemental Security Income and Medicaid, while also enjoying extras that provide for a good quality of life.

A Third Party Special Needs Trust is funded by a friend or family member's assets. A Self-Settled Special Needs Trust is funded by the disabled person's assets.

The disabled person is always the beneficiary and is never the trustee of the Special Needs Trust (SNT). In practice, the way a SNT works is the beneficiary asks the Trustee to make a distribution. If the Trustee feels the distribution is allowed under the terms of the SNT and it is in the best interest of the beneficiary, the trustee pays for the goods or services directly from the trust account. The Trustee can also determine on his own that the beneficiary is in need of or would enjoy an allowed good or service. The money never passes through the beneficiary’s hands. This is important because any money the beneficiary controls may reduce his Supplemental Security Income or may cause a loss of Medicaid benefits.

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February 25, 2015

Illinois Living Revocable Trusts

It is often best to avoid probate, the court supervised process which makes sure that a deceased person’s assets are properly distributed. The probate process is costly and time consuming (usually 12 -14 months depending on the county). It also is a matter of public record, so your financial affairs become public information.

A Living Revocable Trust is a basic estate planning tool used to avoid probate. A living trust is drafted and assets such as real estate, accounts at financial institutions and other investments are titled in the trust. A trustee (relative, close friend, lawyer or financial institution) is given authority to distribute your assets when you die.

Because the trust is revocable, you can change its terms or get rid of it completely if you like.

For income tax purposes, the living trust has no effect. The income from the assets in the trust is reported on your Form 1040 as are any deductions related to those assets.

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November 22, 2014

Funding an Illinois Revocable Living Trust

For a Revocable Living Trust to function property, it is not enough for the Grantor (the individual who made the trust) to simply sign the trust agreement. He must fund his assets in the name of the trust.

Funding refers to taking assets that are titled in the individual Grantor’s name or in joint names with others and retitling them into the name of the Grantor’s Revocable Living Trust, or taking assets that require a beneficiary designation and renaming the Grantor’s Revocable Living Trust as the primary beneficiary of those assets.

The goal of funding a Revocable Living Trust is to insure that the Grantor’s property is governed by the terms of the trust agreement. This allows the Disability Trustee to manage accounts held in the name of the Grantor’s trust in the event the Grantor becomes mentally incapacitated and allows the Death Trustee to easily manage and then transfer accounts held in the name of the Grantor’s trust to the ultimate beneficiaries named in the trust agreement after the Grantor’s death.

The Trustee of a Revocable Living Trust has no power over the Grantor’s property that has not been retitled in the name of the Grantor’s trust. If the Grantor becomes mentally incapacitated, the Grantor’s loved ones will need to establish a court supervised guardianship to manage the Grantor’s assets that are not held in the name of the Grantor’s trust.

This means the Grantor’s property which has not been retitled into the name of the Grantor’s Revocable Living Trust will have to be probated after the Grantor’s death. This defeats one of the main benefits of a Revocable Living Trust which is avoiding probate.

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October 17, 2014

Third Party and Self-Settled Special Needs Trusts

When parents set up a Third Party Special Needs Trust, it is created by and funded with the assets of the parents. The parents are considered to be the “third party”. The trust is not set up with the assets of the special needs child and the transfer may not be created to make the parents eligible for Medicaid paid nursing home care.

The Trustee has wide discretion in making distributions to or for the benefit of the special needs child. For this reason, the Trustee should be familiar with and responsive to the particular needs of the special needs child, should have knowledge of the government benefit programs and the effect the trust may have on eligibility for these programs, and should be in good health, reliable and financially astute.

If a special needs child has received an inheritance, gift, bequest, lawsuit award or settlement, child support, alimony or divorce property settlement, the receipt of these assets can disqualify a child for means tested benefits such as Medicaid and Supplemental Security Income. In cases like these, a Self-Settled Special Needs Trust should be established to preserve the child’s eligibility for the government benefits. Better practice is to have a Third Party Special Needs Trust already in place so that the inheritance, gift, bequest, lawsuit award or settlement, child support, alimony or divorce property settlement can be made payable to the Third Party Special Needs Trust thereby allowing any Special Needs Trust funds remaining after the death of the special needs child to be distributed to remaining family members.

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August 28, 2014

Illinois Children's Trusts

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

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August 9, 2014

Chicago Estate Planning and Trustee Issues

An individual takes on legal responsibilities when he agrees to be a trustee. If the trustee does not perform his duties properly, he could be personally liable.

A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), referred to as a trustee, holds legal title to the property of another person.

A trustee’s duties include locating and protecting trust assets, investing assets prudently, distributing assets to beneficiaries, keeping track of income and expenditures and filing tax returns. A trustee has a fiduciary duty to the beneficiaries of the trust, meaning that the trustee has an obligation to act in the best interest of the beneficiaries at all times. It also means the trustee will be held to a higher standard than if the trustee were dealing with his personal finances.

A trustee is entitled to hire an attorney and other professionals like an accountant to assist in the trust administration. The attorney, accountant and other professional fees are considered an expense of trust administration and are paid from the trust funds.

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April 3, 2014

Illinois Estate Planning & Trustee's Duties

A trust is a legal arrangement where one person (or an institution, such as a bank or law firm), called a “trustee”, holds legal title to property for another person, called a “beneficiary”. If you have been appointed the trustee of a trust, this is a strong vote of confidence in your judgment. It is also a major responsibility.

As a trustee, you stand in a fiduciary role with respect to the beneficiaries of the trust, both the current beneficiaries and any remaindermen named to receive trust assets upon the death of those entitled to income and principal now. As a fiduciary, you will be held to a very high standard, meaning that you must pay even more attention to the trust investments and disbursements than you would for your own accounts.

Your investments must be prudent, meaning that you cannot place money in speculative or risky investments. In addition, your investments must take into account the interests of both current and future beneficiaries. For instance, you may have a current beneficiary who is entitled to income from the trust. He would be best off in most cases if you invested the funds to generate as much income as possible. However, this may be detrimental to the interest of later beneficiaries who would be happiest if you invested for growth. In addition to balancing the interests of the various beneficiaries, you must consider their future financial needs. Does a trust beneficiary anticipate buying a house or going to school? Will he be depending on the trust income for retirement in 15 years? All of these questions need to be considered in determining an investment plan for the trust.

One of your jobs as trustee is to keep track of all income to the trust and expenditures by the trust. You must give a periodic account of this information to the beneficiaries.

Depending on whether the trust is revocable or irrevocable and whether it is considered a grantor trust for tax purposes, the trustee will have to file an annual tax return and may have to pay taxes. In many cases the trust will act as a pass through with the income being taxed to the beneficiary.

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October 24, 2013

Illinois Estate Planning and Decanting Statutes

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 and allows 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.

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September 26, 2013

Special Needs Child and Estate Planning

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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July 13, 2013

Illinois Estate Planning and Trusts

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 regarding 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.

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June 2, 2012

Chicago Estate Planning and Grantor Retained Annuity Trusts (GRATs)

In a recent article, Laura Saunders points out the advantages to a Grantor Retained Annuity Trust (GRAT).

GRATs transfer asset appreciation from one taxpayer to others, virtually tax free, and the benefit can be huge.

A taxpayer can set up a GRAT with a set term of two years or longer and transfer assets to the trust before the assets’ values surge (such as shares of stock). Over the life of the trust, the person who put the trust in place receives annual payments adding up to the asset’s original value plus a return based on a fixed interest rate determined by the Internal Revenue Service. That rate is currently 1.6%.

If that asset increases in value, the growth is outside of the grantor’s estate. When the GRAT’s term ends, the asset goes to the beneficiary. The result is no gift or estate tax on the appreciation. And if the asset decreases in value by the end of the term, it is simply returned to the taxpayer.
Beneficiaries can be unborn children as well as future spouses and current friends and relatives.

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May 12, 2012

Chicago Estate Planning and the $5 Million Gift Tax Exemption

As Kelly Greene points out in her recent article in the Wall Street Journal, families are looking to take advantage of the $5 million gift tax exemption which will expire at the end of the year, but at the same time they are worried that they will change their minds down the road or will need to get the money back from the irrevocable trust they are creating to take advantage of the gift tax exemption.

One way to make a trust more flexible is to designate a Trust Protector. This is an individual, often a relative, who oversees the Trustee of the Trust. The Trust Protector can remove a beneficiary, veto a distribution, move the trust to another state with more favorable tax laws or amend the Trust’s terms.

Ms. Greene goes on to point out the importance of designating the Trust as a Grantor Trust so the donor pays any income tax or capital-gains tax owed on the assets each year so those payments are not considered additional gifts. The payment of the tax is not considered a gift there is a legal obligation to pay it.

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September 17, 2010

Illinois Charitable Remainder Trusts

Many people like the idea of leaving bequests to favorite charities in their wills. But instead of leaving money to a charity in your will, you can put that money into a charitable remainder trust and collect income while you are still alive. Charitable remainder trusts have many other advantages, including reducing your income and estate taxes and diversifying your assets.

A charitable remainder trust is an irrevocable trust that provides you (and possibly your spouse) with income for life. You place assets into the trust and during your lifetime you receive a set percentage from the trust. When you die, the remainder in the trust goes to the charity (or charities) of your choice.

A charitable remainder trust has many benefits. At the time you create the trust, you will receive an income tax deduction for charitable giving. Also, any profit from the sale of the investments within the trust are not subject to capital gains, which means the trustee may have more freedom in managing the assets. In addition, when you die, the assets in the trust will pass outside your estate and be eligible for the estate tax charitable deduction.

The downside of a charitable remainder trust is that it is irrevocable, meaning once you create the trust, you cannot cancel it. While you cannot revoke the trust, you may have the ability to change the beneficiary if you decide to give to a different charity. You may also serve as trustee, giving you control over how the trust assets are invested. In addition, note that any income you receive from the trust will be subject to income taxes.

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August 1, 2009

Proposed Changes to Grantor Retained Annuity Trusts (GRATs)

The White House recently proposed changes to the rules governing Grantor Retained Annuity Trusts. These trusts pay an annuity to the grantor over the life of the trust that equals the initial value of the assets plus an interest rate established by the IRS (currently 2.4 %). The annuity is not taxed since it flows back to the creator of the trust.

If the investment produces a greater return than the IRS established rate, there is a remainder in the trust which can be transferred to the beneficiaries of the trust without any gift tax being assessed.

But if the trust grantor dies during the term of the trust, the assets in the trust revert back to the grantor’s estate and are subject to estate taxes. To minimize the risk of the grantor passing away before the end of the trust term, Grantor Retained Annuity Trusts have been established which have short terms, some as short as two years.

Without the GRAT setup, any gifts by an individual in excess of $1 million over the individual’s lifetime would be subject to the current 45% tax.

The White House has proposed setting a minimum term of 10 years for GRATs. This minimum term might encourage individuals over 75 years of age to reconsider establishing a GRAT.

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July 25, 2009

Illinois Grantor Retained Annuity Trusts (GRAT)

A Grantor Retained Annuity Trust (GRAT) is comparable to an annuity. You place funds in the annuity and receive an annual payout based on the IRS stated interest rate at the time you establish the trust. This rate is currently 2.4%

When the annuity matures, any appreciation above the current rate goes tax free to your designated beneficiaries, who most likely will be your children.

Currently, interest rates and asset values are low so there is a very good chance that the assets in the trust will grow at a rate above 2.4%. Any growth above 2.4% passes tax free to the beneficiaries.

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June 24, 2009

Illinois Estate Planning Bypass Trusts

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

For example, if the husband dies first, his assets fund a trust for the children up to the estate tax exemption amount (currently $5 million Federal and $4 million for Illinois). 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 funds in the first trust.

The advantage is that when the widow dies, she can pass on $5 million in assets Federal tax free ($4 million Illinois tax free) to the children. Also, the Bypass trust allows for another $5 million Federal ($4 million Illinois) 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.

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January 8, 2009

Illinois Estate Planning with Grantor Retained Annuity Trusts

In a recent article in the Wall Street Journal titled, How to Fix Your Life in 2009, Eleanor Laise provides advice for individuals whose stock portfolios have been beaten down.

She suggests taking advantage of the $13,000 exemption from gift taxes that one can use to give up to $13,000 in stocks to as many recipients as one wants without incurring any gift tax liability. This has the advantage of reducing the size of one's estate and, accordingly, one's estate tax liability. It also allows the recipients of the gift to benefit from an increase in stock prices over the long term.

Another suggestion is to consider a Grantor Retained Annuity Trust or GRAT. Ms. Laise points out, "You can put your beaten-down stock in the GRAT, name your children as beneficiaries, and receive an annuity from the trust based on a percentage of what you contributed. As long as you survive the trust term, often just a couple of years, any stock appreciation beyond a 'hurdle rate' set by the government passes to the beneficiaries tax-free. That hurdle rate, currently 3.4 %, is at historically low levels, and it's set to move even lower".

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October 20, 2008

Illinois Special Needs Trusts

Special Needs Trusts allow a disabled individual to receive lawsuit settlements, gifts and other funds while retaining eligibility for government programs. They are designed not to provide basic support, but to pay for things like education, recreation, counseling and medical attention.

Special needs can include medical and dental expenses, special equipment (such as vans for the disabled), training and education, insurance, transportation, special dietary needs, spending money, electronic equipment, computers, vacations, movies and payments for a companion.

In her article, Meeting Special Needs and the Need for Peace of Mind, New York Times writer Hillary Chura points out the many advantages to establishing special needs trusts. Ms. Chura writes,

"Most services for the disabled are provided through state-administered Medicaid programs, with Federal Supplemental Security Income providing a monthly stipend for adults. To be eligible for Supplemental Security Income, however, potential recipients cannot have more than $2000 in assets. Because that amount is inadequate for a lifetime of haircuts, hobby supplies, vacations and DVDs – expenses not covered by the government – a supplemental-needs trust can enhance quality of life. Without a trust, a lifetime of care for a disabled person could eat through even a sizable inheritance. . . .

While the term trust tends to imply great wealth, many special-needs trusts contain less than $100,000. Because the trust does not belong to the disabled person but is used to supplement a lifestyle, it does not compromise government benefits. . . .

Still, many parents are reluctant to start a trust because they fear making the wrong decision, do not want to face the idea that one day they will be unable to care for their child, or do not know how to establish one or whom to ask. In addition, they may not like the notion of putting their child on what is perceived to be welfare.

Some may believe they can avoid drawing up a trust by leaving the money to a trusted relative or friend. Specialists universally discourage that. Even people who intend to follow up on a moral obligation to care for the disabled child could lose the money in a divorce, bankruptcy, lawsuit, premature death or other unforeseen calamity, the specialists say."

For more answers to questions about Special Needs Trusts, contact a law firm that concentrates its practice in the area of Estate Planning Law.

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