Debunking Estate Planning Myths & Developing Wealth, Pt 4
To navigate around and through some of the disadvantages to basic estate planning I talked about previously and to provide a client and his or her family with more protection, estate planners typically use intermediate tools and techniques. The most basic intermediate tool is a trust, but before getting too far ahead, let me point out the difference between a land trust and a living trust. Illinois is one of a handful of states that allows a party to place primary residential property in a land trust. An Illinois Land Trust is an agreement entered into by the owner of a property and an institutional trustee. The trustee becomes the legal and equitable owner of the property and the former owner, becomes the owner of a beneficial interest in the property. The property essence also changes from real property to personal property for the sake of this agreement, which means the property is easier to dispose of. So, if a person is aging and has relatively few assets, say less than $50,000, a land trust may be a viable option for avoiding probate. However, if the person has other significant assets or is younger and will be accumulating more assets, it is probably more advisable for that person to gift the property to their spouse or other beneficiaries using a revocable living trust. The reason for this is that a land trust can only hold primary residential property; while a revocable living trust can hold almost anything that is allocated to it. Therefore, if a person owns a home, has retirement proceeds, and investment accounts, those can be assembled under one umbrella revocable living trust, but not so for a land trust. Often, the creator (aka \”grantor\” or \”settlor\”) of the trust is also the trustee and trust beneficiary and can, like a land trust, make changes to the trust during his or her lifetime, ergo, \”revocable.\” All revocable trusts become irrevocable on the creator\’s death. Individuals typically place property in a land trust to avoid creditors or probate. Avoiding probate is a valid reason; however, MYTH BUSTER: creditors can typically reach into a land trust with the appropriate court order and have a judgment lien placed on the property. As mentioned, revocable living trusts allow individuals to place more than land into a trust for their beneficiaries. Placing assets in a valid revocable or irrevocable trust, also similar to a land trust, prevents beneficiaries from going to probate court and keeps the terms of the estate distribution private. However, unlike a land trust, real property in a revocable or irrevocable trust retains its essence as real property and the owner, as trustee, retains legal and equitable ownership. Not only do revocable and irrevocable trusts save beneficiaries the time and money required to open a probate estate, but trusts may also provides estate tax and income tax minimization for beneficiaries and sometimes for grantors, which isn\’t the case with land trusts. Part 1 | 2 | 3 | 4 | 5
Debunking Estate Planning Myths & Developing Wealth, Pt 3
In Part 2 of this series, I continued discussing the basic estate planning tools, and addressed life insurance. Another basic tool and necessity that should be in place for loved ones upon your transition is a will. The Shark Free Zone talked about this topic before, but it is so critical that it bears repeating. Having a will in place if you are an unmarried parent or a guardian of a disabled individual – minor or adult – is vital. If you do not have a will in place that designates a guardian for your child and you die, the state, not your brother or your cousin who you told to take care of your child, will decide on the custody of your dependent. The judge will not care about what you said to your brother, all that will matter is what was in the will. If a will is nonexistent, then what will matter is biological parentage. By having a valid will in place with a guardianship provision, you can make a bona fide argument to the court about who should care for your child or dependent when you pass, not the other way around. Let’s look at an example: Bobbi Tina is the minor child of Wilma Dallas and Bobby Black who have been divorced let’s say since before Bobbi Tina’s first birthday. For the sake of this example, let’s say that Bobby Black has substance abuse problems and hasn’t developed any type of relationship, father-daughter bond with Bobbi Tina. Let’s also say that Wilma lived in Illinois and did not designate a guardian for Bobbi Tina.Wilma dies in a swimming pool accident, leaving her fortune to Bobbi, who is only 16 years old. Guess who the courts will likely deem appropriate as a guardian for Bobbi Tina, as long as he’s not a felon? Yep, the hypothetical, substance-abusing, absent father, Bobby Black will be designated guardian and have liberal access to Bobbi Tina’s million dollar money jar. It’s happened before where a mother died intestate and she and the child had been estranged for years from the biological father, but just because there was no will and then no guidance in the will, the child was given to the estranged biological father. Consequently, a will is critical for parents or individuals taking care of the disabled. So answer this question: Who will take care of my child/children/disabled sibling/ if something happened to me tomorrow? A will is also important for individuals in high-risk professions who are more likely to become parties to law suits than other professionals. Why? Because the creditor claim period is only 6 months. Therefore, after the probate estate is open, individuals or entities with a claim against the estate only have 6 months to make that claim. Once the 6 months is over, creditors cannot bring a claim against the estate, despite how large or how valid the claim may be. Their hands just won’t fit the money jar. Finally, like life insurance, another advantage of a will is the peace of mind it brings knowing your loved ones are protected. Part 1 | 2 | 3 | 4 | 5
Straight Couples & Civil Unions: Cutting Off Your Nose Off to Spite Your Face?
On March 29, 2012, I was given the honor to speak at the Black Women Lawyers’ Association of Greater Chicago (BWLA) CLE program on LGBT Employment and Relationship Rights Discrimination. My commentary addressed the challenges DOMA creates for members of the LGBT community and those providing them with needed services. If you\’re unfamiliar with the so-called Defense of Marriage Act, or DOMA, the statute’s language states that “the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is husband or wife.” DOMA also states that this definition of marriage is the legally recognized definition for any federal or congressional law, “ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States.” Accordingly, if a federal law or regulation concerns married persons, the definition of ‘marriage’ used to determine the applicability of the law or regulation will be DOMA’s definition, despite what state law says. DOMA is the first time since Loving v. Virginia that a branch of our government defined what a marriage can look like, and, although the court in Loving got it right, Congress and President Clinton with DOMA got it wrong. Consequently, because of DOMA, gay or lesbian couples cannot take advantage of the more than 1,000 benefits afforded straight married couples by the federal government, even if the couple resides in a state that recognizes same-sex marriages. This unfair result is the basis of current court challenges: Gill v. OPM, Windsor v. U.S., and Golinski v. OPM. Each case involves the denial of federal benefits, such as retirement, social security, and estate tax refunds, to LGBT couples. Consequently, it should be easy to see how this discriminatory law has caused significant and unnecessary implications for American citizens and the estate planning community. One BWLA program attendee asked if straight couples could benefit from the Illinois Civil Union Act that affords LGBT Civil Union partners all the obligations, benefits, responsibilities, and protections of Illinois married couples. Ironically, a recent article in the Illinois Bar Journal espoused the benefits straight couples could glean from entering into a Civil Union instead of getting married. My colleague used the Alternative Minimum Tax calculation to support her argument, dismissing the marital deduction and portability “issues” because these techniques are applicable to the very wealthy and impliedly are outliers. This is a reasonable argument for lower-income families; however, repeating the response I gave at the program, suggesting heterosexual couples enter into Civil Unions is questionable guidance because of the more than 1,000 federal benefits attached to marriage. Thus, if a heterosexual couple is considering a Civil Union and is not approaching or is not in retirement, a careful balancing of income tax liabilities and other assets and future income should probably be performed before considering a Civil Union. What may be gained in an income tax refund may be lost several times over in employee, health, and other benefits.
Debunking Estate Planning Myths & Developing Wealth, Pt 2
As mentioned in Part 1 of this series, powers of attorney last until death, so they protect you and your loved ones now. The other tool that can protect your loved ones immediately upon death is life insurance. From a very basic perspective, life insurance is used to replace the income of a loved one. If you’re a single parent, I need not tell you how absolutely critical it is to have life insurance, because for single parents, life insurance can provide a lot more, which involves the intermediate techniques I will discuss in Part 3. However, before I continue, another myth needs debunking: Life insurance IS considered part of your estate for estate tax purposes. Most people think it is not but that is because typically life insurance proceeds aren’t considered taxable for income tax purposes. However, income taxes and estate taxes are two separate issues. So what does this mean? If you currently have or are close to having a taxable estate when considering the value of your home, retirement accounts, investment accounts, and other assets, then if you include a sizable life insurance policy with those assets, you will likely pass the taxable estate threshold. Right now, few individuals come close to having a taxable estate because the federal tax exemption is high right now – $5.12M, and the marginal tax rate is relatively low – 35%.* Additionally, Illinois, which is not linked (or “coupled”) with the federal tax system is also relatively high – $3.5M and our marginal tax rate is 16%.* Now, I’m going to save the bulk of what this means in terms of planning for the next blog entry, but know that if Congress doesn’t do anything by December 31 of this year, the federal exemption is going to be reduced to $1M and the tax rate increased to 55%. That means that if someone dies in 2013 with $1.8M or more in assets, their beneficiaries may likely face a federal tax bill on the $800,000 excess! Let’s look at this example: Single Parent Sheila owns a 6 flat that’s worth about $700,000, has about $250,000 in retirement benefits, and then has $500,000 worth of life insurance and, unfortunately dies next year, those life insurance proceeds and part of those retirement benefits will be needed to pay taxes if Congress or Sheila doesn’t do anything. Lesson: Parents should be careful when purchasing life insurance because life insurance is necessary but it is not always ignored by Uncle Sam. * 2013 update: The federal estate tax exemption is $5.25M indexed for inflation with a marginal rate of 40%; and the Illinois estate tax exemption is $4M. Part 1 | 2 | 3 | 4 | 5
Debunking Estate Planning Myths & Developing Wealth, Pt 1
Recently, I spoke at Chicago State University and this is the first of 3 key points I made during our lively and enjoyable discussion. Let\’s start with some MYTH BUSTING! Estate planning isn\’t just about planning for death; it is also about planning for today and retirement. Estate planning isn’t just for the uber rich; it’s about protecting your personal and financial interests, whatever it is you value personally above money and however much money you have. So how exactly does basic estate planning protect you and your loved ones today and in the future? Basic estate planning tools are powers of attorney, wills, and life insurance. A power of attorney is a legal document that authorizes you (the \”agent\”) to step into the shoes of someone else (the \”principal\”) and make decisions on their behalf. These authorizations typically last until the principal\’s death, but can be used temporarily, for example, if the principal is going on a lengthy sabbatical. Illinois provides two types of statutory powers of attorney: property power of attorney and healthcare power of attorney. A property power of attorney provides the agent with the necessary authority to make financial decisions on the principal\’s behalf and, similarly, a healthcare power of attorney provides the agent with the necessary authority to make healthcare decisions on the principal\’s behalf. You should also know that the principal can design these powers to be as broad or as narrow as possible. For example, an agent with a property power of attorney may have authority to pay the mortgage but not to sell the house. Powers of attorney are critical documents for single and retiring individuals, especially healthcare powers of attorney because normally doctors assume the spouse has a power of attorney. However, if you have no spouse and you have not delegated anyone with the authority to make healthcare decisions for you whether the decisions involve the need for life-threatening or routine procedures, you will have to make the decision while in the medical treatment facility or hospital or, if you are incapacitated, a family member or hospital staff member will make the decision for you, and that’s not the time for one to be making such decisions! We’ve all heard the stories about fights between family members at the bank or in the intensive care unit when their loved one hasn’t made arrangements for illnesses and hospital stays, however temporary or long-term. By simply by taking the time to think of a few trusted people, you can create a sense of family accord in your family and allow you and them to focus on well-being and not who’s in charge of what. And remember, powers of attorney only last until death, which means they protect you and yours today. Question: My wife and I are legally separated. Should I wait until the divorce is finalized before I change my healthcare power of attorney? Answer: Do you want your soon to be ex-spouse making healthcare decisions on your behalf before your divorce is final? Part 1 | 2 | 3 | 4 | 5
One Man\’s Treasure…May Need a Trust
The rumour mill in estate planning circles has me and my colleagues wondering, worrying, and scurrying like little fuzzy hamsters on a wheel or those guinea pigs in that commercial, “Row! Row! Row!” Why? Because this is probably the last year where the federal lifetime estate tax exemption, which is currently at $5.12M with a marginal tax rate of 35%, will be available for gifting. If Congress doesn’t act by December 31 of this year, the exemption will fall to $1M with a marginal tax rate of 55%. That means that the $5.12M you might be able to leave to children and grandchildren free of estate taxes today will be reduced to $2.26M on January 1 of next year. And the rumour that has us planners running and rowing is that Congress isn’t going to do anything until after the election, not until perhaps the beginning of next year. Now I’ve written (and tweeted) at length about how one’s estate can reach the $1M mark quickly, even if you don’t think you’re rich. So I’m going to talk about another aspect related to waiting until it’s too late: your trash or treasure. Many parents and grandparents and maybe even you collect “stuff.” Some of this “stuff” is truly items only they or you could love. However, some of this stuff is truly treasure that Christie’s, Sotheby’s, or your friendly neighborhood estate sale groupie who knows her Mikimotos or who has followed the first edition market since his childhood could love. So if you receive something from dearly departed Grandpa that isn’t warming your heart, before putting a “For Sale” sign on it, get it appraised first; a quick Google search might do the trick. Equally and maybe more importantly, if you have or a loved one is considering giving you something from a collection that is near and dear, such as vintage cameras from the 40s and 50s, sterling filigree jewelry from the 30s, an English buffet server from the 19th century, or a bar stool from Studio 54, you might consider having it appraised and placing in a trust or suggesting that they place it in trust this year. Otherwise, if that Erte design collection from the roaring twenties isn’t placed in trust and your grandma passes away, those beautiful designs may be on the lawn to pay the estate tax bill “Nana” left you along with the rest of her stuff.
5 Tips for Parents Young, Old, or Otherwise
One thing I love about my practice is serving new parents who GET IT. They understand how critical it is to ensure their children are provided for if something happens to one or both of them. They realize that children are vulnerable and depend on Mom & Dad, Mom & Mom, Dad & Dad, Mom, Dad, or Nana to keep them safe, healthy, sheltered, and learned. New parents know that just because they don’t have a lot of material wealth doesn’t mean that they can’t protect their young ones somehow. So hats off to all you parents out there who GET IT. For those of you who are contemplating parenthood, or who just started the voyage of sleepless nights and stinky diapers, or just witnessed the most glorious sparkle that can only be found in your child’s eye when he or she “DID IT!” whatever “IT!” was, I offer 5 tips, particularly from the Land of Lincoln: If you have minor child you need a will. Someone is going to have to step into your shoes and take care of your child if you and/or your spouse or partner dies. With a will, you can designate a person who will be recognized by the State of Illinois as a legal guardian, as long as they meet the criteria. Illinois has 2 types of guardianship because the state recognizes that caring for children requires more than one skill set (validating what mothers have been trying to point out for decades). A guardian of the person makes the value-driven decisions that affect the child, e.g., education, healthcare, and shelter. A guardian of the estate makes the financial decisions for the child and is critical when a minor inherits a rather large sum of money, such as life insurance. Speaking of life insurance, let’s separate fact from fiction. The notion that life insurance isn’t taxed isn’t accurate. Life insurance isn’t typically taxed as income. BUT life insurance is included within your estate for estate tax purposes. So make sure you have good counsel when staring at the twinkle in the broker’s eye as you think about buying that million-dollar policy. Also, while we’re on the topic of life, you don’t have to die to begin protecting your family. I wrote about this in an earlier piece and I speak about it often. Powers of attorney allow individuals you trust to step into your shoes and manage your financial affairs and make healthcare decisions for you when you are temporarily unable to. These powers are typically shared between spouses and understood to be held by each spouse in a reciprocal manner, but what if you are Civil Union partners or a single parent? What if your spouse is on sabbatical at Machu Picchu? Special needs requires special considerations. If you have a child who is disabled or requires special assistance, you must take care to ensure that the income you provide via your will or trust doesn’t result in your child becoming ineligible for needed government benefits. So, again, seek prudent and experienced counsel. As I said earlier, I adore new parents who GET IT. However, whether you’re a new parent, old parent, grandparent, aunt, uncle, or you just love kids, be sure the ones you care about are protected. For LSSG
Estate Planning that Keeps the Caregiver Out of Jail
Recent news stories abound about individuals who were caregivers for aging loved ones, and found themselves in court because they cared too much…about the loved ones’ bank accounts. But we really don’t need to go online or read the papers to hear about Aunt Abby’s favorite nephew, Jonathan, who changed the beneficiary designations on all of his aunt\’s retirement accounts and life insurance policies, naming Jonathan as the single beneficiary. Sometimes family members who spend significant time as the sole or primary caregiver are resentful and feel entitled to the funds because they sacrificed their careers or lifestyles to ensure the dearly departed’s final years or months were comfortable. On other occasions, family members are just plain old everyday crooks. Then on rare occasions, we have the family murderer. To prevent family members who were or will be primary caregivers from feeling resentful and taking nefarious steps toward their “fair share,” perhaps a family meeting should be held once the loved one at issue passes a golden or silver milestone. The meeting should cover 3 primary stages: (1) current living, (2) future living, and (3) postmortem needs. The agenda should also review needed resources and arrangements and pre-existing arrangements: money, physical assistance, companionship, time, estate planning documents, government benefits, and insurance, for example. Once the family determines the relevant needs for the appropriate stages, family could decide together who among its members is willing, able, and competent to manage the tasks and which resources could make tasks more manageable. Furthermore, if one person becomes a primary caregiver, the family should also determine how much that person should expect as compensation from the family and/or the loved one for his or her efforts. Maybe the loved one is disabled too, requiring even more assistance from the family caregiver. Individuals hear this and often say, “But this is family. You shouldn’t have to be paid to take care of your elders. After all…” Well, that is typically said before those individuals have helped elders out of bed, into the bathtub, driven them to and from, prepared their meals, and cleaned their homes. Example: Uncle Teddy is 78 years old. He lives in a 2 bedroom apartment he adores. The building has all of the amenities one really needs – cleaners, laundry, small supermarket, parking, doorman, and even a “wellness checker.” Uncle Frank has 2 children: a daughter who is a single parent with a high school teenager and another child in college, and a son who’s married, without children, and lives in a nearby state. Uncle Teddy’s siblings and parents are dead. However, he has a favorite niece, Martha, who visits him monthly and phones weekly. Uncle Teddy is fiercely independent but his health is declining. Currently, he performs most of his errands, cooks, and drives himself to the doctor. A cleaning person comes in once weekly. He also has life insurance, a will, and Martha as an authorized user on his primary checking account. In a year or 2, Uncle Frank’s mobility will dramatically decrease. However, will still need bills paid, meals prepared, personal grooming, and doctor visits. When he passes away, memorial services will need planning and implementing, his estate will need administering, and before that, his apartment will need cleaning and inventorying. There’s something for every family member to do to help Uncle Teddy now and then. Powers of attorney could also help currently and in the near future. Now, for family members who want to skip stage 2 and help the loved one to the post-mortem stage, like many states, Illinois has a “slayer statute” where family murderers can’t inherit the family home.
Can a TODI Keep You Out of Probate…Good Question
I’ve been asked a few times recently about the simplest way a person can transfer property, when they pass away, to loved ones. Undoubtedly, the probate horror stories reached a few ears. My response has generally been, “Glad you asked and good timing!” Then I start sharing the following information. On January 1, 2012, the Illinois Transfer on Death Instrument Act became public law. Under this law, the Illinois Transfer on Death Instrument (TODI) became available for Illinois residents who want to transfer property in a relatively efficient and inexpensive manner. The TODI only applies to residential property, primarily defined as 1-4 units or 40 acres or less of a single tract of land on which a family home was built. The TODI cannot be cast in stone, meaning, its creator can change it; and it is only effective when the owner dies. Furthermore, only a natural person, not a corporation or similar entity, may create a TODI. However, a corporation, trust, or other legal entity may be a designated beneficiary of a TODI. Another important point is although the TODI owner must have the same mental faculties to create a TODI that are required to create a will and a TODI allows for beneficiary designations, it is not a will. A valid TODI must Contain the identical aspects of a recordable deed; Expressly state that the property will transfer to the designated beneficiary when the owner dies; Be recorded before the owner’s death in the appropriate county; and Be prepared by a lawyer. Admittedly, I like that part. A few other items should also be noted about the TODI: It’s not a deed, even though it must be recorded. Beneficiaries have no legal interests in the TODI until death. A TODI beneficiary will not lose his or her needs assistance eligibility just because he or she is a beneficiary. Finally, because this instrument is based on new law, it hasn’t been tested. And no, I don’t like that part. As a result, the outcome of the “right to challenge,” which is provided by the law and the ineffective acceptance of beneficiaries is unknown. Thus, a TODI may be very beneficial for individuals of modest means with a small piece of property they want to keep in the family. However, the unanswered questions about challenges and invalid acceptance might create a Pandora\’s box for some. Do you have questions or comments? Feel free to drop me a line here or by e-mail.
A Living Will? Think Again…
In a recent newsletter, I briefly tried to take readers through the legalese maze used to discuss documents that give a person authority to make healthcare decisions for someone else. Because these documents are typically – and should be – signed before the need to make the decision arises, they’re often called, “advanced directives,” “healthcare directives,” or “healthcare proxies.” No such terms are used to identify these documents in Illinois. Confused yet? Here in the Land of Lincoln, the 2 main “healthcare directives” are a “Living Will,” which is based on the Illinois Living Will Act, and the Healthcare Power of Attorney (“HCPOA”), which falls under the Illinois power of Attorney Act. 755 ILCS 35 et seq., 45/4 et seq. (2011). People often confuse a Living Will with a Living Trust because we hear the term “will” and automatically assume the term has something to do with property. However, a Living Will has nothing to do with property, unless you consider your life property. Then again, our organs, tissues, blood, and so forth are defined as property under certain legal circumstances, but that’s not relevant here. A Living Will is a document that can authorize one person to make the decision for another person to prohibit or stop death-delaying procedures when the decision involves terminal illness. 755 ILCS 35/3(d). A Living Will requires the principal (person providing the authority) to be of “sound mind” and “willfully and voluntarily” execute the document. This means they have to know what they’re signing and be doing it of their own accord. Additionally, the document only applies where the principal has an “incurable and irreversible injury, disease, or illness judged to be a terminal condition … by an attending physician.” 35/3. A Living Will is primarily a “do not resuscitate” or “don’t keep alive by artificial means” declaration and requires not only the principal’s signature but also the signature of 2 witnesses. The other primary healthcare directive is the Illinois Healthcare Power of Attorney,which gives much broader authority than a Living Will and, ironically, only requires one witness. The HCPOA, like a Living Will, allows a person to delegate decision making about healthcare matters to another person (an “agent”). Those decisions can be not only about basic healthcare treatments, but also can “include, without limitation, all powers … to consent to or refuse or withdraw [from] any type of healthcare.” 755 ILCS 45/4-3. The law defines healthcare as including “any care, treatment, service, or procedure” used to sustain or cease a death-delaying measure. 45/4-10. Therefore, the HCPOA provides the same powers – and more – as a Living Will. So why have a Living Will? Good question. Often, the legislature passes a law that gives more authority and flexibility to those who will use it but doesn’t repeal the old law. This happens to be one of those cases: the Living Will as written in the law did not have a space for the name of the authorized agent or successor agent. It’s also why, if you reside in Illinois, you might want to execute an HCPOA instead of a Living Will.