Illinois Estate Planning & Elder Law Blog

Chicago Estate Planning and the $5 Million Gift Tax Exemption

Sat, 12 May 2012 10:35:36 -0600

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.

Making a Will in Illinois

Fri, 04 May 2012 14:36:57 -0600

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.

Illinois Long-Term-Care Estate Planning

Sat, 14 Apr 2012 16:12:05 -0600

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 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.

The Role of Representative in Illinois Probate

Sat, 07 Apr 2012 09:51:47 -0600

A personal representative is the individual who handles the matters of an estate as it makes its way through the probate process. If there is a will, the personal representative is the executor. If there is no will, the personal representative is the administrator.

The personal representative has specific powers even before the Probate Court issues his Letters of Office. He can carry out any gift the decedent has made of his body, arrange the burial of the decedent, make payment of funeral charges and take acts necessary to preserve the estate.

After his Letters of Office are issued, the representative can exercise all powers given to him in the will. In addition, the representative can lease, sell or mortgage the estate’s property, borrow money with or without security, continue the decedent’s unincorporated business, perform any contract of the decedent and take possession, administer and grant possession of the decedent’s real estate.

For a complete list of powers of a representative, check out 755 ILCS 5/, which is the Illinois Probate Act.

Illinois Children's Trusts

Sat, 31 Mar 2012 09:35:06 -0600

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.

Probate Law Regarding Beneficiaries

Sat, 24 Mar 2012 11:09:28 -0600

A 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.

No Contest Clauses in Illinois Wills

Mon, 19 Mar 2012 15:39:40 -0600

A No Contest Clause (a/k/a in terrorem clause) is used in wills to prevent a beneficiary from challenging provisions in a will. A beneficiary may seek to increase the amount he is to be given under a will by challenging the will’s validity. If a will is declared invalid, the property in the estate will pass under the rules of intestacy. The beneficiary may receive a greater amount under these rules.

In Illinois, No Contest Clauses are allowed, but the courts construe them strictly.

One strategy is to leave the person who is to be disinherited enough so that he will be too afraid to risk losing it.

Chicago Estate Planning and Copies of the Will

Sat, 10 Mar 2012 11:15:11 -0600

When an individual dies with a Will, once it is located, it should be given to the estate’s attorney. The attorney will send copies of the Will to anyone who may have an interest in it.
The executor is entitled to a copy. He is in charge of opening probate, managing the decedent’s property and making sure the provisions of the Will are carried out.

All beneficiaries are entitled to a copy. If any minor children or incapacitated individuals are named as beneficiaries, their guardians receive a copy of the Will.

If the Will funds a revocable trust, the successor trustee of the trust is entitled to receive a copy of the Will.

Once a Will is probated, it is available to the public, and anyone can read it.

Chicago Estate Planning and Individual Retirement Accounts

Sat, 03 Mar 2012 11:38:09 -0600

Individual Retirement Accounts (IRAs) need to be taken into account when doing estate planning.

The most important thing to remember with an IRA for estate planning purposes is to name a beneficiary. While a spouse is usually the logical choice for a beneficiary, you should be sure to name contingent beneficiaries as well. If you and your spouse die at the same time and there was no contingent beneficiary, then the IRA would go to your estate and be subject to probate (the legal process of administering the estate of a deceased person). When a spouse inherits an IRA, he can roll it over into his own IRA. When a non-spouse inherits an IRA, the beneficiary will need to start taking distributions within a year after the IRA owner dies.

If you don’t need the funds in your IRA for retirement and you want to use them to provide for your beneficiaries instead, you may be interested in “stretching out” your IRA. To do this, when you reach 70 ½, take only the required minimum distributions, leaving more assets in your IRA. When you die, your beneficiary can also stretch distributions out over his lifetime and then designate a second-generation beneficiary. It makes sense to name a young beneficiary because the younger the beneficiary, the smaller each distribution must be, which gives the funds in the IRA extra tax-deferred years to grow.

In some cases, it may make sense to name a trust as a beneficiary. This is particularly true if you have minor children, children with special needs or a beneficiary with poor spending habits. But the trust must be properly drafted to avoid negative tax consequences. If the trust is a “see-through” trust or a “conduit” trust, then the distributions from the IRA to the trust after the participant’s death can be stretched over the life expectancy of the oldest trust beneficiary.

Federal Appeals Court Rules Retirees Cannot Dodge Medicare Eligibility

Sat, 18 Feb 2012 11:19:04 -0600

A federal appeals court has ruled that those over age 65 and eligible for Social Security cannot escape their automatic entitlement to Medicare Part A benefits unless they repay all the Social Security funds paid to them.

Three retired federal workers who have reached age 65 and are receiving Social Security sued because they want to disclaim their legal entitlement to Medicare Part A coverage, which pays for care in institutions like hospitals. They want to disclaim the entitlement because their private insurance plans limit coverage for those who can get coverage from Medicare. The retirees claim they would get superior coverage from their private insurers.

A U.S. district court judge ruled against the federal workers, and they appealed. The U.S. Court of Appeals for the District of Columbia Circuit ruled that while the retirees have the right to refuse Medicare payment for services, they remain legally entitled to them because they signed up for Social Security. The judges in the majority pointed out that while entitlement to Social Security is optional because an application must be filed in order to receive the program’s benefit, no such application is required for Medicare Part A.

Chicago Estate Planning and Trustee Issues

Sat, 11 Feb 2012 13:34:45 -0600

Serving as trustee requires responsibility. 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), called a trustee, holds legal title to property for another person, called a beneficiary.

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 he has an obligation to act in the best interest of the beneficiaries at all times. It also means he 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 will be paid from the trust funds.

Chicago Estate Planning and Claiming a Parent as a Dependent

Sat, 04 Feb 2012 11:03:55 -0600

If you are caring for your mother or father, you may be able to claim your parent as a dependent on your income taxes. This would allow you to get an exemption for her or him.

There are five tests to determine if you can claim a parent as a dependent:

1) The person you are claiming as a dependent must be related to you. This should not be a problem if you are claiming a parent (in-laws are also allowed). Keep in mind that foster parents do not count at a relative. To claim a foster parent, he must live with you for a year as a member of your household.

2) Your parent must be a citizen or resident of the United States or a resident of Canada or Mexico.

3) Your parent must not file a joint return. If your parent is married, he must file separately. There is an exception if your parent is filing jointly, but has no tax liability. If your parent files a joint tax return solely to get a refund, you can claim him as a dependent.

4) Your parent must not have a gross income exceeding the allowable exemption amount for that year. Gross income does not include Social Security payments or other tax-exempt income.

5) You must provide more than half of the support for your parent during the year. Support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation and similar necessities. Even if you do not pay more than half of your parent’s support for the year, you may be able to claim your parent as a dependent if you pay more than 10 percent of your parent’s support for the year, and, with others, collectively contribute to more than half of your parent’s support. To receive the exemption, all those supporting your parent must agree on and sign the applicable Multiple Support Declaration (Form 2021).

If you cannot claim your parent as a dependent because he filed a joint tax return or has a gross income above the limit for that year but you have been paying for your parent’s medical expenses, you may still be able to deduct those expenses from your own taxes.

Illinois Law & Giving Assets to Children

Sat, 28 Jan 2012 10:47:42 -0600

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.

Chicago Law & Components of a Good Estate Plan

Wed, 18 Jan 2012 12:23:12 -0600

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.

Chicago Law & Updating Your Estate Plan

Sat, 14 Jan 2012 11:17:42 -0600

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.