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
Which Trust to Trust the House to?
Continuing with the series on tools to transfer property outside of probate and without using a trust, this piece discusses the land trust. In Illinois, a land trust is commonly referred to as an “Illinois land trust” or a “land title trust.” A person may transfer title of his or her property into a land trust so the trustee, typically a bank and/or a title company, becomes the owner of the property and of the property title. The former property owner becomes the “beneficial owner” and the interest in the property changes to interest in personal property not real property. However, the beneficial owner is also the person holding the “power of direction” over the trustee, which means that the trustee will act with respect to the property as directed by the beneficial owner. The difference between a land trust and a revocable living trust is that generally the trustee of a revocable living trust is responsible for the management and maintenance of the trust assets. With land trusts, the beneficial owner has the more active role. Because a land trust is created by a private transaction between the beneficial owner and the trustee, and the beneficial owner no longer holds title, it may provide a certain amount of asset protection. However, a simple title search will allow a creditor to deduce who the beneficial owner is and, using the appropriate court action, attach a lien to the beneficial interest. Also, although the land trust removes the property out of the probate estate, it is still considered a part of the estate for estate tax purposes. Furthermore, a co-beneficiary cannot force the sale of the property. Nevertheless, a land trust will allow a person to transfer property to a loved one without requiring them to go through probate. Individuals who are interested in using this tool should take care to ensure that they name a successor beneficiary or probate will, in fact, be required. Beneficiaries who want to remove the property from trust typically have to pay the trustee fees, but these fees are not as high as the fees that accompany probate.
JD, CPA, CFP – What\’s with the Estate Planning Alphabet Soup
When designing an estate plan for a new client, I usually ask if the client has a financial “team.” “A team?” you may wonder or say to yourself, “I don’t need a team because I don’t even have an estate! I just need a will, if that.” On the contrary, as mentioned in a previous post, you probably do have an estate and it’s likely larger than you think. So yes, you probably need a team. Consider this analogy: To maintain overall good physical health, you need a primary doctor, a dentist, and, if you’re female, a gynecologist. Now these providers may only consult with each other once, if then, but they are certainly aware of the other\’s existence because your good health requires it. An estate planning team works in a similar way, albeit a little closer, and is essential, especially if you have loved ones you want to protect. So here\’s the line-up: Estate planning attorney: Does more than draw up a will or a trust, and while online DIY services offer estate planning, if you use one, be sure there\’s a review by an attorney who understands the probate, trust, and tax laws in your state. In addition to the many laws, an estate planning attorney must also have a good command of the various, related documents needed to protect you and your family now and in the future. He or she should also possess, at least, a basic understanding of the federal and state tax implications of the distributions and powers designated within the documents, near-term financial planning, and retirement planning. Certified Public Accountant (CPA): Must take a licensing exam, work for as an accountant for about 5 years, and take continuing education courses to retain certification. Accordingly, a CPA’s knowledge base is deeper than a non-certified accountant. A CPA whose specialty is estate and income taxation typically consults with your estate planning attorney to ensure that the tax implications for you and your beneficiaries are minimized. Certified Financial Planner (CFP): While not required for CFAs, a CFP must take extensive exams in financial planning, taxes, insurance, estate planning, and retirement. He or she must also take continual financial planning courses to maintain their certification. A CFP performs the research needed to help determine how best to allocate funds to reach your personal goals and the goals of your family and consults with the estate planning attorney to ensure beneficiary designations are accurate and that allocations and distributions are aligned with your goals and unique investment style. In a nutshell, your estate planning team is a group of capable and highly qualified individuals who, together, help to ensure that: The intentions underlying your financial and personal interests are legal and accomplished during and after your lifetime; The tax implications of those interests are minimized; and The financial interests are secured and grown if possible. *Note: Different states have different rules on fee-splitting arrangements, but typically attorneys cannot accept fees from non-attorneys, at least in Illinois, which is a healthy check-and-balance on your team.
Saving Parents\’ Precious Resources
Occasionally, I’m stunned by how little current clients\’ or customers\’ needs are considered by service providers. As an estate planning attorney for “non-traditional families,” one of my key concerns for my clients is providing them with services that are not only excellent, but also efficient. Nontraditional families include women who are heads of households with children and, as the primary wage earner, they have 3 issues to continually manage: Financial resources Time Parenting While The Law Offices of Max Elliott may not be able to assist in quality parenting, we do provide services and use tools that bring efficiency to the first 2 issues. In plain English, we help our clients by saving them money and time. Estate planning, as is said so often now, is not just for the very wealthy. So our services allow you to determine the scope of estate planning protection that fits within your financial framework. Are you a median wage earner who rents with a teenager living at home but working his or her way through college? If so, then an estate plan that encompasses education planning and a Qualified Personal Residence Trust, or “QPRT,” may be unnecessary AND we won’t turn you away. We will simply recognize that more than likely, to protect your family and yourself, you will and should want to start with simpler vehicles, which is what you can obtain for probably less than 1-2 months’ rent. BUT… “It’s not money, but time,” you say. Well let’s look at Joan: Joan is an HR executive at a Fortune 500 company and earns more than the median. Plus, she’s up by 5 AM to workout, get the kids off to school and daycare, is working her smartphone by 7:30 at the office by train by 9ish, eats lunch at her desk, is on the 5:15 and cooking or ordering in by 6:30 but answers her email until 10:00 PM. Weekends are for catching up on the latest SHRM reports she missed while taking the train during the week. Joan came up along the ranks in HR, so it would be unwise for us to waste her time talking about 401(k) planning and HSAs. She’s a tech wizard who lives in the ‘burbs and works downtown, so I’d also never think to ask her to commit to only in-person meetings when a teleconference or an exchange on our secure client directory will suffice. Speaking of that directory, if you are the mom, renting, and with the teenager or a parent with kids and no time like Joan, or someone who just wants to save time and money, our secure online portal that is available for clients makes it easy to engage in substantive, secure conversations, exchange documents, and pay fees all in one place. It’s not an open e-mail or even e-mail on our website. It’s a secure, designed specifically for lawyers and used strictly by us and our clients. So, in concluding this shameless “use our service” self-promotional piece, I’ll just say that whoever you choose as your legal services team, make sure that your precious resources are considered and used wisely.
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!
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!
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.
Eyebrow Raising ILITs
I’ve mentioned before in this blog that many people who are employed are wealthier than they believe themselves to be. One reason for this is because certain assets are unused during the purchaser\’s lifetime and are subsequently overlooked when that individual creates his or her estate plan. The most popular of these instruments is life insurance. If you’ve something other than term life insurance, your life insurance policy, in addition to other benefits, if placed inside a trust may be used to even the distribution between your beneficiaries if your assets are difficult to divide. For example, let’s say you own a home valued at $300,000 and about $50,000 in cash. Let’s also say you have 2 daughters, Ivory and Jade. Ivory loves the house, lives there with you now, and wants to remain in it, whereas Jade doesn’t want to have anything to do with it. Well, if you sell the house and split the proceeds, that’s not being very nice to Ivory. On the other hand, if you give the house to Ivory and only leave the $50,000 to Jade, that’s not being very nice to Ivory. Moreover, leaving the decision to your two gems to battle out after you’ve passed away is just plain mean. This is where life insurance may be beneficial. If, using the above example, you’ve a policy that’s worth at least $250,000, you could use that to even the distribution. Of course, to keep the example simple, we’ve not accounted for real estate taxes, mortgage payments, and so forth. However, a good estate planning team should be able to assist you in dividing the assets so that everyone is relatively satisfied. Furthermore, if additional nuances are involved, a trust can also be the owner of a life insurance policy known as an Irrevocable Life Insurance Trust (ILIT). However, the trust must be drafted properly, taking into account how the premiums are paid, and how the beneficiaries are notified of the funding of the trust for premium payments by way of “Crummey Letters.” Other components of your estate plan must also be considered, such as retirement and public benefit plans. Still, using life insurance and a trust generally provides a number of benefits if properly implemented. The proceeds are removed from your estate, which may reduce your gift and lifetime estate taxes, the distributions to your beneficiaries are generally income tax free. Also, these types of trust may act as a credit shelter. Finally, because a trust is involved, typically probate is avoided. So if your spouse jokes around like mine does, about being worth more dead than alive, just do what I do: grin and raise an eyebrow.
With This Estate Plan, You May Take My Coat
Individuals sometimes ask me, why, if they are not millionaires, do they need an estate plan, ending with something akin to, “I’m not rich; I don’t have anything.” My response is usually the typical T&E (Trusts and Estates) mantra, “You don’t need to be ‘rich” to need an estate plan.” Furthermore, the converse is generally true – the smaller estates need equal, if not more, protection. Moreover, non-millionaire employees are “richer” than they think. Like an IRS person once said, “Stop thinking it’s your money.” So, if you\’ve been steadily employed, don’t think that the federal government sees you as a pauper, irrespective of your current financial woes. Acknowledging that these are horrendous economic times citizens worldwide, I must say that millions are also fortunate. They are employed; have retirement or profit-sharing plans; have life insurance; and they have a house, which may be worth less than what they paid for but they still own a home. My “Who Killed Kenny” winter down coat is worth less than what was paid for it but, considering January in Chicago, it would take a permanent move to my favorite desert oasis to get me to sell that coat. Pardon my slight digression, though I think you got the point: It may feel like you’re managing paycheck-to-paycheck, but even so, you may find solace in the midst of this economic maelstrom. Consider your retirement plan. It may have taken a beating over the summer, like most of our financial accounts. However, you may still be able to use your plan to your advantage in the long-term and/or to your loved ones advantage. The 2 most popular retirement accounts are 401(k)s and Individual Retirement Accounts (IRAs). A 401(k) is typically a qualified plan where your employer matches your contributions. Teachers often have 403(b) accounts that operate in basically the same way as a 401(k). While 401(k) contributions are tax deductible, generally any income earned is taxed on withdrawal. Additionally, once you reach 70 ½, you must make a required minimum distribution (RMD). With a 401(k), your spouse is presumed to be the beneficiary, so if you designate other beneficiaries in your will, your spouse must waive their right to the distribution in order for the other beneficiaries to take. Also, because 401(k) plans are governed by federal law, civil union partners cannot be designated spousal beneficiaries of 401(k) plans. IRAs provide a little more flexibility than 401(k)s, because there is no RMD at any age and withdrawals from Roth IRAs are not taxed. However, the maximum contribution is significantly lower than that of a 401(k) and an IRA account may not even be available if you also have a 401(k). Still, unlike a 401(k), with an IRA, there is no presumption of a spousal beneficiary, so who you names as beneficiary, even if it is your civil union partner or same-gender spouse, is the beneficiary. If that person passes away, then the beneficiary will be the person named next or if there’s no contingent, the distribution will follow the state’s testamentary code. Equally important, you can provide for your grandchildren by creating IRAs for them, so that the distribution that would be made to your children is instead rolled over into accounts for your grandchildren. So before you think you’re “not rich,” consider your retirement plan. Basic it may be, but if properly implemented, it could provide you with comfort like my \”Who Killed Kenny\” coat on those cold, January, Chicago days.