Estate Planning Tools to Keep Lex-the-Ex Away
Outside of food and clothing, 2 of the most critical matters parents manage for their children are education and housing. Single parents are typically even more concerned with managing these issues because ultimately the responsibility falls on the primary custodial parent. Divorcees may breathe a little easier because of settlement and child custody agreements, but not necessarily. Family courts around the country are filled with defendants and plaintiffs arguing over alleged breaches of such agreements. Consequently, as a single parent, the burden is heavier. Managing housing and educational issues can be made easier with proper estate planning tools. An earlier blog post addresses basic estate planning instruments parents should have in place. This post discusses some of those instruments in more detail. Property Power of Attorney. As mentioned here, this authority, which you to give to another person, allows that person to make and carry out financial decisions for you when you are physically incapacitated. Thus, if you’re ill for a long time and need someone to pay the rent, mortgage or any other expenses associated with your family’s home, you should designate a trusted agent under a property power of attorney. Guardian of the Estate. A will allows parents to designate who should care for their children in the event of a parent’s death – a guardian. This is critical to single parents. However, in Illinois, there are 2 types of guardians: a “guardian of the estate” and a “guardian of the person.” A guardian of the estate status allows the guardian to manage the financial affairs of the minor, e.g., gifts received under a will or trust. This makes sense because sometimes the person you would trust to raise your children may not be as financially well informed as needed to manage large sums of money. So I typically advise clients to consider guardianship from both “personal values” and “financial expertise” perspectives. Trustee. In a vein similar to a guardian of the estate, a trustee is the person, or entity, you authorize to administer, preserve, protect, and grow trust assets. Note: Many people think they’re not personally wealthy enough to require a trust; many are mistaken in this thinking. Example: Sharon is the single mom of a 14 year-old daughter and has a home valued at $150,000 with a mortgage balance of $30,000. She has about $100,000 in a retirement account, and $500,000 in life insurance. Additionally, Sharon keeps approximately $1,000 in her checking account and $2,000 in her savings. She doesn’t feel like she’s wealthy, but if Sharon were to pass away today, her estate would be valued at $723,000. She would have died almost a millionaire! An important and related consideration is that unless other designations are made, life insurance and retirement account proceeds may be paid out to a very young adult, e.g., an 18 year old. How many 18 year olds do you know who are mature enough to manage receiving a lump sum of $600,000? Returning to Sharon’s scenario, where her daughter is a minor: If Sharon didn’t designate a guardian or trustee, but Sharon’s ex-husband, Lex, is lurking around, guess who would likely obtain control over the $600,000 – yep, Lex the ex. Life Insurance. Typically, life insurance is a death benefit and can be used to pay off mortgages and for other housing expenses. An Irrevocable Life Insurance Trust (“ILIT”) is a time-honored estate planning tool and excellent for providing for education and housing costs, especially if one does not intend to benefit from a policy otherwise. Transfer the policy in a trust where someone other than yourself is trustee and your child’s education is relatively secure. Securing the hearth and educational future of children is critical, so review your policies and plans today and get a good night’s sleep going into the New Year. Well…after midnight anyway. Your comments are welcomed as always!
Consider the Sushi: 3 Critical Plans for Small Business Owners
One of the most critical tools a small business owner should use is a business plan. Having drafted an untold number of these for businesses over the course of many years, I know how time-consuming and arduous creating a solid, comprehensive business plan is. However, small business owners who don’t undertake and complete such an effort are playing a dangerous game. Most business plans involve a forecast of at least 3-5 years, anticipating profit, loss, and resource growth. However, what if the business owner falls temporarily ill at the end of year 2 or year 4 or wants to retire? Who will see the business succeed and what financial interests will the original owner be able to sustain for herself and her family? Small family-owned businesses typically operate under the assumption that “someone” in the family will take over. But that “someone” isn’t always the best person or even a competent person with respect to business management. Granted, who is best to manage the business other than the original business owner may not be the person in the forecast, either. This is why a business plan is a “working” document. Another critical step that should be discussed in your business plan is the reason underlying your business entity selection or lack thereof. If you’re a small business owner, it’s unlikely that you will have selected a c-corporation and more likely that you decided to operate as a sole proprietor or partnership. Hopefully, your reasons included liability protection, asset protection, and minimizing taxes. Let’s look at an example: Craig and Andre established a catering business as equal partners. Craig was the creative genius and Andre was the financial guru. In Illinois, they will be taxed individually and the partnership may be subject to unlimited liability for any debts or claims, e.g., if someone was poisoned by blowfish. If the partnership cannot pay the claim, then the liability will flow to Craig and Andre together and separately. Now, let’s say that Andre quit the partnership as an owner before the blowfish incident but retained a financial interest in the business, which he bequeathed to his son who was a great beneficiary but a lousy business manager. That interest, because Craig and Andre established a plain partnership entity, may become worthless. However, let’s say that after Andre quit but before the blowfish incident, Craig hired a competent accountant. He structured the hiring according to the business succession plan, and then converted the partnership into a Limited Liability Company (LLC) because he didn’t want the business to be subject to unlimited liability. Now, the business and the bequest to Andre’s son are probably safe. An LLC is a very popular tool among small business owners right now because of the safety nets it provides for owners and for their interests. So if you’re a small business owner, revisit your plan to ensure you’ve selected the right entity. You should also determine who should succeed you as manager and at least how and when to replace other critical functions if and when they become vacant. Finally, be sure to place information regarding family successors and financial business interests in your estate plan – the third critical plan. If you choose the right entity and the right successors, you don’t have to risk your business, your financial interests, or your non-business-minded progeny’s esteem.
Christmas in August & Legacy Planning for Families
My mom is one of the amazing sort who finishes holiday shopping in August. It always fascinated me, so of course I tried emulating her. The closest I got was finishing in October. So what does this have to do with wills, trusts, and estate planning? Well, 2 parallels exist between holiday shopping in August and legacy planning. The first is obvious – planning ahead for yourself and your family is fiscally prudent. The second parallel is a little less obvious because it’s less about shopping and more about August, the summer vacation season, and family harmony in particular. Many families go on holiday in the summer and while doing so often select a favorite family get-away spot. This spot ultimately becomes either a retirement or vacation property loved by all. As such, parents decide to keep the cherished corner of the universe in the family for the benefit of future generations. Typically, if there is more than one child, parents will leave the property to siblings to “share and share alike.” But what if the siblings can’t share alike? What if they are geographically spread out over the 4 corners and the property is closer to one than the others? What if they don’t want to share and share alike, i.e., they don’t want to perform the same responsibilities, such as property maintenance and financial maintenance? One answer would be to place the property in trust and draft terms delegating certain duties to the respective siblings. However, times change and people change, so what we might think our sons and daughters are good at today may not be what they become expert in tomorrow. Consequently, it might be more harmonious and advantageous if parents let their children decide how to manage the property and place the property in an entity with a structured agreement that supplements the trust. Instead of supplementing a trust, parents may also create a trust that owns such an entity, such as a Limited Liability Company (LLC), which in turn would own the property. As their lives and circumstances dictate, various family members could hold and move into member positions of the LLC, performing the duties directed by the LLC’s operating agreement, which is similar to a corporation’s by-laws. Forming an LLC and placing it inside of a trust requires legal assistance. Additionally, estate and income tax considerations should be addressed. However, by placing the property in an entity similar to an LLC, generations can continue to enjoy the favorite family getaway without the fear of an ensuing feud. Well…there may be a feud brewing, but at least it won\’t be about the one family member who always has to clean the pool, shovel the snow, or rake the leaves. Plan ahead and consider the abilities and desires unique to each kid – it\’s a great way to shop and a great way to create a legacy. *Author’s note: Yes, I know “plan ahead” is redundant, but it just sounds so darn good!
Thanks for the Flux*
In a recent newsletter, I gave thanks to what means most to me personally – my relationships. Having given thanks on a personal level, I now turn to what I am thankful for professionally. I am ever so grateful that the legal profession is in a state of flux and, what many of us think, is a period of dramatic transition. Liking “change” may sound odd coming from one whose profession is based on the cardinal rule of “precedent.” Still, I like good ole flux, especially when it’s followed by progress. Dating back to the early 17th century, the word, “flux,” meant a sense of “continuous succession of changes.” Works for me. I have witnessed on numerous occasions non-stop, sequential, flips and flops that have brought about positive and progressive steps for humanity. Often, while in the moment, we don’t recognize turmoil as the benefit it is because the moment is painful. However, here is where hindsight is acceptable and we can nod, \”Yes, that was tumultuous and painful, but worth it.\” So I am optimistically thankful of the continuous succession of changes occurring within our profession, most of which, like other professions, have been brought on by technology. It started with computers, then e-mail, next the Internet, and now this “cloud” thing. Computers made writing and editing a faster process, whereby time saved could have been money saved by clients. Hmmm… E-mail, especially within firms, made communication between colleagues collaborating on cases easier and faster. Still, occasionally something would get lost in the translation, especially since the business world frowned upon emoticons. Plus, sometimes, instead of getting lost, something would be set free, to everyone, e.g., when a poor associate accidentally hit “reply all” and client confidentiality was no more. 😮 Moving on, we entered the age of the Internet, where “surfing” became more than something LA lawyers did when they finally took a vacation. It was also the age where an occasional law clerk wished they were in the ocean when, instead of performing online research, they were surfing without permission and blasted by a pornado. Today, a few daring legal eagles are embracing “the cloud,” online storage and project management systems that allow for not just storage but client and team collaboration. Technology dramatically streamlined many of the processes lawyers depend on, decreasing the need for all that file cabinet space – and exorbitant client fees to pay for it, allowing for the sharing of legal information online, and helping potential clients better and more completely understand what we do. Some think that technology has brought us too far. Clients are scrutinizing bills and, heaven forbid, asking us to explain to them, in plain English, the fundamentals of their cases or matters. Whereas before clients would just listen, get the bill, shrug their shoulders, pay the bill, and be thankful. Yes, Mr. Mason, those were the good ole days…Not. I like these days better. I like clients who care about their finances – being fiscally prudent is the world we live in and I like clients who live in reality. I relish clients wanting to understand their options and the legal parameters of their matters because, ultimately, while I may know what’s best for them from a legal perspective, they know what’s best for them from a human perspective. If the 2 perspectives form the frame in which I work, there is an opportunity to build a lasting bridge that benefits us both. Yes, I like these days better because today’s changes are bringing transparency, accountability, client collaboration, and more flexible fee arrangements. All of that combines in a formula providing more people access to the legal system and the protections and justice it brings. Of course, there will unfortunately still be “dream teams” but there will be more “Cinderellas,” too. Of course, there will be growing pains, more oopses, and battles between the old and new guards. However, if the changes we’re experiencing in the legal field mean more of our society will receive the legal services they need, I am very thankful for these changes, indeed. Now, let’s eat! Send me an e-mail or comment below and I\’ll tell YOU what the asterisk (*) after the \”Flux,\” means.
Caution: Fund-Raising Spoiler
Tis the season to be giving … and we all have our favorite causes. Yet, many of us would likely become impoverished if we tried to contribute financially to each one. But those tax deductions are so darned attractive. So, if you want your deduction, then get out the checkbook or, better yet, \”go green\” and donate online. Still, you might want to recall that old axiom, “charity begins at home.” Then, before you start writing in those zeroes or clicking the bright green “Donate” button, consider whether you’ve been sufficiently charitable to yourself and your family: Has \”life happened\” to or around you? Has a significant event occurred in your life that you should consider, and, accordingly, recalculate your retirement projections? If a life event hasn’t happened to you, has it happened to a member of your immediate family? Perhaps your son or daughter married or became civil union partners. If that’s the case, might a trip to whatever popular children\’s fantasy world developed in Florida 10 years from now be on your retirement travel list? Has the likelihood of these little people been considered in your estate plan? Were your investments negatively affected by the Great Recession? If so, have you recovered your losses and is there enough room for you to take aggressive steps, if you can tolerate the risk, to place you back on track? Or do you need to revise your retirement and estate plan? If your retirement planning is on track and in sound shape, have you ensured that the education of your children and their descendants is reasonably secure? Are you relying on 529 plans and, if so, are you confident about the state’s (such as Illinois’) fiscal outlook in 10 or 20 years? My late grandmother’s words always ring true for me and may make sense to you, “Home and family come first.” Keeping that in mind, I have advised clients, “Before you write the check to the institution that will educate the next generation of alumni, be sure that your estate and retirement plan is solid so that you can help educate the next generation of your descendants.” They may not want to attend your alma mater. Money-Saving Tip: When travelling to children\’s destinations, stay away from nearby golf resorts for accommodations, unless you or a travel companion is a golf enthusiast, because the amenities, e.g., greens maintenance, that you will not use will be added to the price of your stay. Now, other than family, what is your favorite cause? Send me your responses and comments below.
2 Lessons for Families on a Tight Budget
The Great Recession was enough to make most people try to pinch pennies where they can. However, the fact is that planning for the protection of your family costs money; it may not cost tens of thousands of dollars, but it still costs. Basic instruments that help protect the family are generally available for little or no charge at the courthouse – or on most state governments\’ websites. Still, to ensure that your instruments are correct, which means your family is appropriately protected, a legal consultation, even if brief, may be worth it. And for goodness sake don\’t try to prepare the instruments yourself. Document preparation services and low-cost collectives are in what is referred to as a \”race to the bottom.\” Allow me to illustrate this point: Once, I was in court for a hearing, so I decided to make it a 2-fer and get another client’s instruments filed with the court after my appearance. Waiting for the clerk, I overheard another clerk speaking with a woman who was trying to decide how to handle a guardianship matter in the least expensive, most efficient way she could. The woman told the clerk that she had the appropriate Power of Attorney (“POA”) and had possessed this document for a long time. The clerk then responded that the woman was “fine.” As a lawyer and, more importantly, as a human being, I find it necessary to step in when someone may be unwittingly jumping off a cliff. So I gently injected myself in the conversation just to inform these ladies that Illinois had changed both its powers of attorney a few months earlier. Eyes became saucers … oops. Lesson #1: Good advice isn’t typically free, BUT bad advice is typically very, very expensive. Even if an individual believes that they can’t afford a lawyer, instruments and the requisite advice for basic family protection is available for much less than the cost of really bad advice: Healthcare Power of Attorney, authorizes another individual to make decisions regarding your medical care and treatment while you are incapacitated. This POA is available in many places and is relatively self-explanatory. However, if you seek to have an attorney review your form, depending on your health, it should not take an unreasonable amount of time amounting to an unreasonable fee. Caution: If the form is driven by an online document preparation service, be sure an attorney licensed to practice in your state with a focus on estate planning performs the review. Laws change and automated document preparation services can’t modify their forms as quickly as an independent lawyer. HIPAA release forms, instruct medical institutions to release your medical records to the individual you designate on the form. The forms are universal because they’re governed by federal law and are available almost everywhere. They should supplement your Healthcare Power of Attorney. Property Power of Attorney, like a healthcare POA, authorizes an individual to step into your shoes and make decisions about your financial affairs. Also, like the healthcare POA, the document is readily available and should be reviewed by an appropriate attorney. Lesson #2: VIP documents, providing basic family protection, before death, cost a lot less than bad advice, even with proper attorney review. Today, most families are on tight budgets, but that shouldn\’t prevent you from being able to protect your family like families whose budgets are more flexible. However, to not protect properly…well…see Lesson #1.
Life Insurance and 90210 Accessories
Most of us know that life insurance is the most basic and essential of estate planning tools. It serves 2 fundamental purposes we face with end of life issues: (1) not leaving our loved ones with hefty funeral or memorial service bills and (2) replacing income if we were the primary wage earner or part of an even wage-earning team. So, most individuals who are employed have some type of life insurance. As discussed in a former blog post, it is further understood that life insurance can not only afford relatives a certain solace during their grieving period, but it also affords benefits before the end of life, i.e., during retirement. However, when using life insurance for its additional benefits, individuals should be careful not to overdo it or you might end up losing money instead of earning a return on your investment. Let’s visit the Petry’s, a small family of 3. Robbie is in her mid-30s and works as a middle manager for a high end office furniture sales company. Jerri is in her early 30s and works at a lucrative nail salon. Robbie and Jerri have one son, Ritchie, who is in his terrible twos. Robbie and Jerri each bought life insurance policies providing $500,000 of death benefits in the event one dies. That would provide about 7 years of replacement income. They also bought another $500,000 as retirement income, which will begin to earn value in about 10 years. Ritchie is so cute they thought he might one day be in movies, perhaps another McCaulay Culkin. So Robbie and Jerri also took out a $200,000 policy on Ritchie. Other investments include their home, which was left to Jerri by Aunt Sally, and is now paid for and valued at $200,000; and about $400,000 in other retirement planning instruments. By now you have probably identified a number of issues involving Robbie and Jerri’s insurance decisions but I’ll point out a few basic points: If your family can move to 90210 or 60043 after you’ve departed, when before they lived in an area that didn\’t consider dogs as purse accessories, that’s not a good sign. If you’re empty nesters, plan to stay that way. If the kid hasn’t been discovered by e-Trade yet, don’t put your money on it. Millions of really cute kids never make it to either screen – the big one or the little one. BUT what you need to do is talk to your team – your estate planner, your financial planner, and your CPA. Talking shouldn’t cost, initially, and this discussion should give you a good idea of how much insurance you need to purchase in the event of premature loss. You’ll also know how much will be needed to keep the nest strong, sans the birdies in the event your retirement years are lengthy. Money saver tip: Bundle your insurance like your family cell phone plans.
Pumpkinheads Afoot in Estate Planning
Wills, trusts and estate planning is a great subject for Halloween because of the trick or treat nature of the area. The treats are significant: peace of mind, retirement, healthcare, education, and family harmony. However, the tricks can quickly eliminate all or almost all of the treats for most parties involved. Because so many people know someone who has a will and have at least heard of trusts and estate planning, many people know just enough to sound knowledgeable. Yet, many individuals also lack just enough knowledge to cause schisms if their advice is actually heeded. So how can we be tricked? Let me count the ways: A living will is just as good as a healthcare power of attorney. Trick: A living will is subordinate to a healthcare power of attorney, unless the person holding the living will has a terminal illness or is in a basically vegetative state. My dad’s house is only worth $50,000, so I can file a small estate affidavit and skip probate. Trick: Sure. You can skip probate, if the house is in an Illinois land trust and let’s hope that Dad didn’t take out a second mortgage that the house is still subject to. If the house is still subject to a mortgage, you may have problems trying to sell it. Estate planning is only for the rich. Trick: I\’m not sure who invented this one…maybe the Boyz on Wall Street. Nevertheless, please read this. After 7 years of living with my man, I can finally be put into his will as his wife and our child can inherit, too. Trick: Someone has put something in your water. Illinois hasn’t recognized common law marriages for decades, and your child…the inheritance issue is an even bigger trick in this regard. A trust will keep my creditors and the repo man away from my door. Trick: Not really. The repo man is coming and a trust will generally keep creditors away only if you don\’t own anything, i.e., you are not the trustee nor are you the beneficiary of the trust assets. I won’t have to pay taxes if I put my assets in a trust. Trick or treat: If your assets are instruments that appreciate in a tax-deferred manner, then you may not have to pay estate taxes but you may have to pay income taxes. Trick: Depending on how the trust is structured and the relationships of the beneficiaries to you and each other, your beneficiaries may have to pay estate taxes. A will is less expensive than a trust. Trick or treat: If litigation is involved because of a will contest or claims are placed on the estate that need to be answered, that statement could be the costliest trick of all of the above, except maybe number 4. Money saver tip: Be patient; your debt wasn’t created in a day so unless you win the lottery, it’s not going to go away in a day either.
Money-Saving Tips with Estate Planning
This may sound counterintuitive coming from a lawyer, but my practice is purposely designed around protecting families and loving interests and saving my clients money. Yes, and I am a lawyer and said, “I want to save folks money.” So for the next few months, the focal point of my blog posts will be how you can save money through estate planning. Of course, I’ll digress occasionally, but I’ll return to the course in due time. Sometimes the discussion will be about how certain estate planning processes clients experience may be costly or inexpensive depending on the approach. Other times, the discussion will address decisions that may be costly or may save you a bundle depending on various considerations and scenarios. So let’s get started and today’s piece will cover very basic ways to save with wills or, more accurately, the lack of one or keeping the cost of probate down if the estate requires one. Money Saver Tips: In Illinois, if the estate is less than or equal to $100,000.00, probate and its accompanying court costs may not be necessary. If at any time your estate grows to more than $100,000.00, a valid will that is kept current may save your heirs thousands in having to open a significant estate where there is no will or the will is invalid. A valid will has 2 witnesses and is not handwritten. Save some money and don’t get it notarized. Wills in Illinois do not require notarization. When calculating the size of your estate for probate purposes, do not include life insurance; life insurance and retirement plans are not part of the probate estate. So if all you have is a $50,000 home and no creditors, see Money Saver Tip #1. If your estate is more than $100,000.00 and you aren’t completely sure about how to distribute your assets, don’t use a DIY program or a Big Box Store will-in-a-box. Refer to Money Saver Tip #2 for the possible consequences. Tune in next week for money-saving tips with estate planning.
Take 5: Planning for Parents with Jazz
Today, I was listening to one of my mother’s favorite tunes, “Lake Shore Drive,” by the late Art Porter, Jr. Enjoying the fact that she so loves this great sax melody reminded me of a client who recently came into my office. As we talked I was struck again by the fact that if it were not for the sacrifices made by parents, many of us would not have the good fortunes that we have today. Occasionally, individuals who understand this honour the sentiment by taking it to the next level with action. So listening today, I decided I’d pay it forward by providing 5 pieces of information you should have as you plan for your parents. The difficult conversation should, of course, have taken place. After that, you should determine the following: What the estimated amount of need-based government benefits your parents will receive by the time your plan is scheduled to start providing for you or them. This amount will determine how much you can provide for them if their assets plus their benefits is insufficient. Who are their primary physician(s), life insurance agents, and other key contact persons. If you don’t know them already, schedule time to have a small chat with each of these persons and put them on notice that your loved ones are protected not only by their services and products but also by you. Where your parents want to live in the event one or both become infirm and unable to tend to each others\’ basic needs, e.g., proper hygiene, nutritional maintenance, and medical treatments. Most folks say “my home,” unlike my mother, who sent me a link to her favourite cruise line. What their retirement and estate plans entail and if these plans reflect their current family and financial statuses. CAUTION! Sometimes parents don’t provide equally for siblings. This isn’t a smart parental move irrespective of the motivation, but it happens. So if you’re getting pushback, this may be the reason and may be a good time to try to avert a potential family feud. The nuances of how they handle finances. This may change over time but generally people are consistent in the way they manage their personal finances. For example, some folks are uncomfortable with less than $200 in their wallet; some withdraw cash from the bank at the beginning of the week that’s to last them until the next week; and some older individuals go a few times a week just because it gets them moving and, if it’s a local community branch, they get to see familiar faces. If you plan to provide for your parents and discuss these matters now, all parties will be more comfortable and less stressed-out when the time comes for you to supplement or provide them with income. Even if you aren’t sure that you’ll be able to assist your parents, this information is still valuable in case they just need your help.* Just like us, our elders generally relish their independence, so to lose some or all of that freedom can be kinda earth-shattering. If a loved one could make a possibly traumatizing situation for you less stressful, wouldn’t you want them to take the necessary steps to do so? I would. So take 5, play a little Art Porter – or The Stones – and sit down and listen, so you can pay it forward in the right key, when the time comes. As always, your thoughts and comments are welcome… *As seen in Crain\’s Chicago Business.