3 Ways A Will Is Not Cake (de Gateaux)
One primary reason many individuals in Illinois use a revocable living trust is to avoid the court process known as probate. Why do people want to avoid probate here? Well, probate is: Time consuming, requiring at least 7 months, typically 13 – 14 months, and sometimes longer to complete; Costly, at least $2,500 if there is no litigation, i.e., a claim made against the estate; and Public and so anyone in the public domain can view for himself or herself what a cheapskate the testator was or who got disinherited. However, even if your beneficiaries can wait a year, no claims will be lodged, $2500 is un morceau de gateaux, and no one gets disinherited, a few additional reasons make trusts more attractive than wills, especially with respect to gifting: You want to ensure your children or grandchildren have an opportunity to attend all 4 years of college and a good graduate program without financial aid angst. Trusts provisions known as “staggered mentoring” provisions and a separate educational subtrust help in this situation. If you and your spouse want to leave the family residence to your children, but you still want to maintain control of the residence during your lifetime, a QPRT (“qualified personal residence trust”) may do the trick. If you live in a state that does not match the federal estate tax regime, such as Illinois, and you want to leave more to the children by minimizing the amount of estate taxes your beneficiaries will have to pay both Uncles – Sam and Quinn, instead of the normal two-pot trust, a three-pot trust may work. As with most estate planning vehicles, trusts also have disadvantages in gifting, such as trust fees and administrative costs if the estate is very large. Additionally, unless the gift is given completely away, or you opt for an asset protection trust, it will be more difficult to use federal and state lifetime estate tax exemptions. Still, the advantages of having a trust, for many Illinois families, outweigh the disadvantages irrespective of the income bracket because every family is unique and minimizing taxes isn’t the only type of protection afforded by trusts. Disclaimer Woman Caveat: The materials provided in this blog, The Shark Free Zone, and throughout the website for The Law Offices of Max Elliott, Ltd. are for educational purposes only. By reading these materials, no attorney client relationship has been established. Additionally, because of the very complex nature of estate planning, one should not attempt to create or draft a trust on your own but seek the counsel of an estate planner. Finally, IRS Circular 230 Notice: \”To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code of 1986, as amended, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.\”
Preventing Family Feuds for the Smallbiz Owner
At a Chicago Bar Association’s Solo/Small Firm Committee Meeting, I gave remarks on why estate planning is not a “basic” endeavor. A favorite example was a about Ms. Small Biz (Ms. SMB) who was married to Mr. Manager and had College-Age Children. It’s a favorite example because it identifies the issues contemporary families comprised of smallbiz owners may confront with respect to business planning, disability, death, and succession planning: Ms. SMB is the sole proprietor of a small, lucrative, and growing graphic design firm. She has 3 employees in addition to herself, and her son works part time during the school-year and full-time during the summer. Her daughter, however, has no interest in the business. But Ms. SMB has great vision for the business with a Pinterest page, a blog, and even a design auction website. Her husband is satisfied with his position as a midlevel manager with a software company. So the family is happy and enjoying its status. For several years now, Ms. SMB has been consistently reaping the fruits of 10 years of hard work and wants to ensure that in the event of her disability or death, her family and business are safe and wrapped up in a neat little package. So how should the estate planning attorney assist? First, we should assess the following: her stand-alone net worth; when the last time, if ever, was her business valued; what is the best legal entity for her business (at this point it should not be a sole proprietorship); who will run the business – digital assets and all – if she suffers a long-term illness; upon her death does she want the business sold or transferred to her son or her son and employees, or family and employees; who will wind the business up if she wants it sold; and if it is sold who gets what and in what form? Undoubtedly, Ms. SMB will need a will or a trust. She will also need to consider the tax implications of the business entity, e.g., LLC, S-Corp, FLP, she decides on. And what about those digital assets; do we need to consult with an IP colleague? However, what is equally important is her decision about what to do with the business at her death. This decision will weigh heavily on her attorney’s counsel about choosing fiduciaries. For example, will that person understand her business, can he or she successfully execute a buy/sell agreement, and can he or she manage winding up the business? Additionally, she wants to provide for both children equally. But giving half of the business’ financial interests to the daughter when the daughter has shown no interest may start a family feud between the siblings. Perhaps life insurance may help and may help in two ways. Once, the attorney ascertains the value of her business and, subsequently, her estate, life insurance can help lower the value of the estate for estate tax purposes and equalize the gifting between her two children. This example shows that smallbiz owners have a several critical decisions and options to make and consider at the start and near the end of their involvement with their businesses. Also, because the decisions made in the beginning can significantly affect the options with respect to succession planning, new smallbiz owners should seek to create a business plan that isn’t a stand-alone plan, but one that also encompasses estate planning. Ms. or Mr. Smallbiz & Family is just one of the faces of today’s family and the multiple faces and overlaps of today’s family shows why estate planning isn’t a “basic” area.
Don\’t Let JT Defeat Your Purpose
A piece I wrote a little while ago described the 3 tenancies of property ownership: Tenants in Common, Joint Tenancy with Right of Survivorship, and Tenancy by the Entirety. Occasionally, individuals of modest means will ask me about adding a non-spouse family member as a joint tenant to a bank account or to the title of their home. Typically, the individual is elderly, recognizing his or her mortality, or failing health. I applaud their queries because ensuring your financial affairs and making sure that funds are available to address illness or incapacity are in order as the golden years approach is critical. Yet, I caution against using joint tenancy with non-spouses* for the following reasons: Creditors. While the original owner’s credit may be stellar, the son, daughter, or niece may have outstanding debts. Joint tenancy allows creditors to attach liens to the property, thus defeating the purpose of having one’s financial affairs in order or being able to at least financially provide for one’s self in the event of illness or infirmity. Potential Probate. Just because property is in joint tenancy, at least in Illinois, doesn’t mean that probate is automatically avoided. If a gift wasn’t the rationale but a matter of convenience, as mentioned above was the premise and a will is in place, then per Illinois law, the property could have to pass through probate. Taxes. Unless the joint tenancy is between spouses, estate gift taxes may be triggered. Upon one tenant’s death, the estate tax is determined by the amount of contribution by the surviving tenant. If the surviving non-spouse tenant didn’t contribute to paying for the property, then the entire amount of the property is included in the decedent’s gross estate for estate tax purposes. So, we should think again about entering into joint tenancy agreements with non-spouse members, especially if any of the 3 reasons above may loom overhead. *If the surviving tenant is a spouse, then only half of the value of the property is included in the deceased spouse’s estate, reducing potential estate taxes by 50%.
Windsor: An Update on the Same-Sex Marriage March
I wrote about this case in the \”Love & the Law\” series. It has huge estate planning implications for the LGBT community and recently, the Obama Administration has recommended it instead of other same-sex marriage cases that the U.S. Supreme Court is deciding whether to hear. Factual synopsis: When Thea died, the federal government refused to recognize her marriage to Edie (they were legally married in Toronto, Canada) and taxed Edie\’s inheritance from Thea as though they were strangers. Under federal tax law, a spouse who dies can leave her assets, including the family home, to the other spouse without incurring estate taxes. Traditionally, whether a couple is married for federal purposes depends on whether they are considered married in their state. New York recognized Edie and Thea\’s marriage, but because of a federal law called the \”Defense of Marriage Act,\” or DOMA, the federal government refuses to treat married same-sex couples, like Edie and Thea, the same way as other married couples. Edie challenged the constitutionality of DOMA and sought a refund of the estate tax she was unfairly forced to pay. The Southern District Court of New York (“SDNY”) agreed with Edie and granted summary judgment, stating that it could find no rational basis for Section 3 of DOMA and therefore, Section 3 violated the Equal Protection Clause of the U.S. Constitution. The Bipartisan Legal Advisory Group (“BLAG”), hired by the House of Representatives to defend the government, appealed to the Second Circuit setting forth 3 basic legal arguments and additional non-legal arguments. The legal arguments were as follows: Federal estate tax law provides that the state of domicile determines marital status and because at the time of Thea’s death, New York didn’t perform same-sex marriages, the lower court’s decision should be overturned. The Second Circuit stated that it could predict that New York would have recognized the marriage at the time of Thea’s death, so that argument was defeated. Congress can prohibit same-sex marriages like states can per Baker v. Nelson. The Second Circuit reminded BLAG that state regulation and federal regulation are different. So Baker wasn’t applicable in this case. Section 3 of DOMA should be analyzed using the rational basis or “rational basis plus.” The Second Circuit stated there is no such thing as \”rational basis plus\” yet and set out a four-prong test for heightened scrutiny per Bowen v. Gilliard and City of Cleburne v. Cleburne Living Center and established that the LGBT community passed this test and should be considered a quasi-suspect class. After reviewing the non-legal arguments to provide rhetorical dicta, the Second Circuit affirmed SDNY’s decision, holding that “Section 3 of DOMA violates equal protection and is therefore unconstitutional.” The thorny part of this case is that the Second Circuit’s decision reads like a roadmap for the Supreme Court to punt the cases on DOMA back to the states. However, the argument against the proposition that state and federal regulations are different and, therefore, this should be an issue left for the states to decide, is that many regulations may be different but many state and federal regulations also overlap, if not in substance, in application. Hence, parsing the overlap of the rules and regulations that DOMA implicates may be more burdensome with respect to costs for both the states and the federal government than simply ruling that DOMA is unconstitutional.
Be Sure to Consider the Coin\’s Third Side
I wrote this piece before “the election” after reading an article on the “what if” of an election tie. Each party’s camp, of course, believed their candidate was going to win with a considerable margin. Yet, each party’s camp also had a team of lawyers already prepared for the “what if” of a tie. The article reminded me of a lesson I learned long ago from a very wise woman. And that lesson is that every coin has 3 sides, not 2 but 3. Moreover, irrespective of how unlikely it may be that the coin will land on its third side, that likelihood should never be ignored. The lesson of the third side is one I share with not just clients but everyone I can. However, let’s talk about estate planning for a minute. Of course, there’s no “what if” about death; we’re all going to die one day whether we want to or not, but estate planning is about much more than death. Consider the phrase, “estate planning”: Legally speaking your “estate” is everything you own. “Planning” is self-explanatory. So, estate planning is about planning for what you own. If you have loved ones, this plan naturally includes determining how those assets will be distributed to your loved ones during your lifetime and upon your death. The lesson of the third side is also about the “what ifs” of estate planning: Today, you’re a young couple with an infant and nothing but life insurance and what if…you win the lottery? Your parents left you with a substantial inheritance, which could have adverse tax implications for you, what if…there was a way you could roll it over? Your health is fine, your kids are adults and financially stable, your estate is sufficient to see you through retirement and what if…you don\’t own a home? You want to start taking a lot more time away from your small business, which you’ve successfully established and maintained over the last 15 years, what if…you\’ve been the sole proprietor all those years? This year, you’re taking advantage of the homestead exemption for your residence but you’re approaching retirement , want to give the house to your children, what if…you still need a place to stay? Like millions of others, you’re now behind retirement planning because Enron, the subprime mortgage, and the boyz on Wall Street took a chunk out of your 401(k), and what if…your partner becomes seriously ill? Today the federal estate tax exemption is $5.12 million; if Congress does nothing by December 31, 2012, what if …on November 30, you had sold your business for $8 million? Gran always said the third side is the least best or worst expected outcome. Consider the coin’s third side as you plan and you’ve planned just about as well as you can.
5 Smallbiz Takeaways from Torrents and Blizzards
In the wake of Superstorm Sandy was nearly unfathomable destruction of lives and businesses. However, the American spirit is resilient and, together, we\’re recovering. It is simply taking time. During disasters of that magnitude, we often chide ourselves for not being prepared or as prepared as we could have been because much more needs to be done long before the insurance check arrives. As an attorney and smallbiz owner who assists clients with preparing legacies and for potentially unpleasant events, the need to prepare for disasters isn’t lost on me. Smallbiz owners and their families who depend on the businesses\’ earnings are particularly vulnerable, so it\’s critical that we have a continuity plan for emergencies. Like the preparations outlined in a business plan that consider key operations and resources, so should your continuity plan. Below, are a few questions smalbiz owners should consider when devising a disaster recovery plan. Caveat: This list is by no means exhaustive, comprehensive, or tailored to any particular business. It just serves to help us prepare for the next storm. What would an all out disaster look like for your business? Consider the elements – wind, fire, earth, water – and how extreme amounts of any would impact your business operations, e.g., causing network outages, inventory destruction, and so forth. What are the procedures that would put your business back on track and, specifically, who will be responsible for what and when and how will they perform the necessary tasks?a. Who will lead the team or how will tasks be divided?b. Who will contact clients and vendors, and how? What if cell towers are down?c. Is the disaster just affecting your business or is it also affecting clients?d. What if the disaster occurs “after hours”?e. How will you assess the overall impact to your go forward? Which business resources or operations are likely to suffer more, e.g., are you a restaurant owner with no electricity but with a refrigerator and a freezer full of food? Are your clients local but your employees commute from long distances? Where are your critical client or customer files stored? What if you can’t access the building or your company’s network? Where exactly is your \”cloud?\” Can you temporarily relocate your business, where and do you have sufficient resources to do that? Indeed, this is a “short list” to help small business owners think about a particularly unpleasant topic. Yet, we smallbiz owners know that asking the important “what ifs?” often saves a bundle down the line, despite the torrential downpours, tumult in the streets, blazes, or blizzards. The Law Offices of Max Elliott continues extending its thoughts and prayers to families and businesses who experience disaster as winds of change forever sweep our world.
4+ Million Reasons and a Kid
It\’s sometimes difficult to understand the federal and state (for my purposes, Illinois) estate tax regimes and how they may affect you and your family. So this post and next week\’s post will try to explain visually and very simply, what the implications may or may not be. And this visual is so simple that it serves a dual purpose – it illustrates why some things should be left to graphic designers and not clipart. This week shows what can happen through December 31 of this year. Next week, you\’ll get to see 2013. 7 Points to Ponder: If you\’ve a minor child, then doing it yourself (DIY) is a bad idea; If you\’ve real property, then the Small Estate Affidavit probably won\’t work in Illinois; If you\’ve more than $100K in personal and/or real property, then a DIY will likely end with your loved ones in court; A trust should generally always include a will but court shouldn\’t be part of the deal; If loved ones end up in court with a sizable estate on a dispute regarding the estate\’s value, then they may also end up with a tax bill; The typical cost to probate a will in Illinois (take it to court) starts at about $2500; If the trust is valid and the estate is under $5.12M, then both Uncles should walk away empty-handed.
6 Not-so-Legal Ways to Protect Your Family
It seems there\’s a week, day, or month to celebrate every relationship and, accordingly, the third week in October has been designated \”National Estate Planning Week.\” Why we, estate planners, have a week dedicated to our practice area may, at first glance, seem self-aggrandizing. Yet, estate planning isn’t about lawyers but estate planning is about how individuals can protect their loved ones. Lawyers and other professionals simply guide the way. So instead of calling this week “National Estate Planning Week” maybe we should call it “National Family Fortification Week,” hmmm… Then again, I was going to suggest “National Family Planning Week” but that, too, could have been very misleading. Well, as they say, “a rose by any other name…” Throughout The Lotus Rules (fka the Shark Free Zone) are pieces explaining why estate planning is for everyone and not only the 1 percenters, discussions on basic estate planning documents, analyses on historical and pending cases and legislation involving relationship rights, and scary stories about car crashes and funeral home terrorists. However, I think this is the first post on point for fortifying your family, so welcome. Take simple steps early. If you’re a working young adult with loved ones, then you need a plan to keep potential serious illness or untimely demise from causing your loved ones even more grief. Your plan could be as simple as Powers of Attorney and life, health, and disability insurances. Tell your loved ones that they are indeed loved: “Mom, I won’t let you mortgage the house to pay for my medical bills and, here’s the agent information for all of my insurances.” Tears will probably flow but they\’ll be happy, proud tears. Teach your children the important lessons about life and money early, e.g., age 6, exemplify for them that living a happy and productive life is the goal and money is one tool that can help them reach that goal. Tailor your goals for you and your family; you\’re unique. An estate plan isn’t a goal; it’s another tool. Still, some wrenches are better than others. The same thing applies with respect to estate plans. A good estate plan just doesn’t involve obtaining life insurance, throwing funds in a retirement account, and creating a will. Those are good steps, but before taking those steps consider who will be your trusted advisors. Who\’ll take the time to get to know you and your family, work the plan, helping guide you and your family along over the next few decades? Take your time. OK, so you didn’t start out when you should have and you haven’t taken any steps yet, but holy crap, someone very close to you just passed away and surviving are kids, a dog, a spouse and…you want to do something NOW! Don’t. Well, don’t make any rash decisions, interview a few attorneys, talk to a few friends, chat with a few financial planners, and after the pain of losing a loved one has lessened, then start building your team. It will likely save you tons of resources down the road. Trust your team. Because of the attorney-client privilege issue, loved ones are not typically part of the initial consultation, but sometimes, if they\’re the cornerstone of the family or if a family business is involved, perhaps they should be. Make the initial meeting a \”let\’s get acquainted\” team meeting loved ones and professional advisors can give each other the \”sniff test.\” Discuss the broad strokes: wanting to ensure that the family is protected, that everyone knows who the “team” is, and create a comfortable, collaborative environment. Then later you can meet or speak with the attorney one-on-one regarding specifics. Estate planning is a technical practice with many complex moving parts, but some fundamentals have nothing to do with instruments and everything to do with being a loving family member.
4 Occasions When a Will Won\’t Work
Recently, law students received the following hypothetical to answer: “Ms. Angel Booth has phoned you, Ms./Mr. Associate, and said, “Hi, this is Angel Booth and I want to set up a will because I want to completely disinherit my daughter.” What is your response?” After getting rid of the “deer-in-headlights” look, the students came up with a myriad of answers. Yet and unfortunately, this isn’t an uncommon scenario and for valid reasons. Furthermore, this occurs not just between parents and children, but between as many relationship pairings as you can think of. Still, this scenario goes to reason number 1. Using a will is a tenuous proposition at best if you’re trying to disinherit an heir. Admittedly, I’m being a tad hyperbolic, because it can work – after a lengthy court battle involving lawyers, doctors, and a ton o\’ family members. To disinherit an immediate heir, in Illinois, using a standalone will where the value of the estate is more than $100,000 in personal or real property will beg for a contest and bye-bye goes a large portion of the estate – in probate litigation. Mamma Mega Millions Marries Gorgeous. Yes, you’ve been smitten by the most gorgeous, decades younger, individual walking the planet. You’ve worked your petooty off as a single mother, put your children and your siblings through university, and now want to enjoy the million-dollar fruits of your labor with Gorgeous in the bounds of matrimony. You will probably be advised to have an airtight prenuptial agreement. You also want a will prepared, but a will that leaves most of those millions to Gorgeous will shout, “Probate Litigation!” and siblings, children, BFFs, third cousins, you name it will probably shout back with claims against the estate. Grandpa Disses Daughter-in-Law. So, while it can’t be proven that she murdered your dearly departed son, you, Grandpa, just don’t agree on anything with your daughter-in-law about your grandchildren. In your opinion, she isn’t parenting the way your loving son would have. Still, you’ve saved about $30,000 that you want the children, ages 7 and 8 to have upon your death. I previously wrote about the imprudence of leaving substantial financial gifts outright to minors. This is another example. In Illinois, if a minor receives a substantive gift, e.g., more than $10,000, the funds must be transferred into a restricted vehicle for the minor whereby the guardian or custodian is given control. Typically, the guardian or custodian is an adult member of the minor’s family, i.e., Dastardly Daughter-in-Law or a trust company. Thirty-thousand dollars isn’t usually sufficient for a trust company; thus, DDIL will likely gain control over the $30,000. Calling Dr. Cooper. Finally, setting aside seedy scenarios, let’s consider Dr. Amy Cooper. She has a thriving practice with three other doctors and has started accumulating a substantive portfolio. She doesn’t mind paying her fair share of taxes, but doesn’t want her beneficiaries to pay more than their fair share either. Leaving everything outright to her partner and children in a will, however, results in the very thing she doesn’t want.
3 Traps to Avoid Wrapped in \”No Charge\”
There I was, sitting in a seminar, as my colleague began lecturing on powers of attorney. I was actually interested in hearing the next presentation on a more complex matter but, of course, you never know what nuggets can be gleaned from a refresher on the basics. Plus, Illinois laws change all the time. So I sat and appeared interested while deciding what to cook for dinner when suddenly another panelist blurted out quite fervently, “I disagree! A durable power of attorney is not better than a springing power of attorney!” My ears perked up; no one loves a good shark fight better than a little guppy like me. Somewhere in the annals of The Shark Free Zone is an article or 2 explaining POAs. However, as a refresher, powers of attorney are authorizations to allow others to make important decisions on your behalf when you’re incapacitated. Property POAs allow agents to make financial decisions. Healthcare POAs allow agents to make healthcare decisions. Individuals think because these documents are free that they’re simple. Well…let’s return to the shark fight. A durable POA goes into effect upon signing and lasts through incapacity until death. A springing POA has a designated beginning and ending, even though the agent signs the document. For example, the Illinois Statutory Power of Attorney forms suggest one designates a springing term to begin or end upon the determination of incapacity by a court. This suggestion shows why such basic forms aren’t so basic, even though free, and why they should be carefully reviewed before making the designations and taking the suggestions. Trap 1: Waiting until a court determination of incapacity in order to act under a property POA may result in financial mayhem if a loved one is too ill to pay the bills. Occasionally, individuals will say, “I don’t need a property POA because my child is also on my bank account with me.\” Trap 2: When a person is a joint owner on your bank account, that person’s creditor or creditors can place a lien or liens on the whole account. People also sometimes ask, “I have a living will, so do I really need a healthcare POA?\” If I were the smart-ass sixteen year-old I once was, then my answer would be, “Well, if the only time you want your agent to act is if there is a question about when to pull the plug, then no.” However, I am very far from being 16, thank goodness, and so I answer accordingly: A healthcare POA can include living will language and more. You can give you agent the authority to talk with doctors about your medical allergies, your medical history, and more. Trap 3: A living will only applies to individuals with terminal illnesses or who are in a vegetative state. A lot more can happen to one between a cold and a coma, and it helps you and your loved ones if you’re prepared for that “in-between-time.” Free doesn’t necessarily mean easy and suggestions are not rules.