Blood or Money? Making Fiduciary Designations that Maintain Family Harmony
Tons of articles have been published advising individuals and couples about what to bring to or how to prepare for a meeting with your estate planning attorney. Most of these articles provide the typical list: financial statements, copies of tax returns, mortgage statements, retirement information, and so forth. Not surprisingly, few articles discuss the “hard list”: names of successor guardians for the children, names of successor trustees – particularly if the children have trusts, how special gifts will be distributed, and who should hold title to the home for asset protection purposes. A previous post discussed guardians but another issue that couples may want to consider is how to maintain family accord for the children’s benefit when a member from one spouse’s side of the family may be emotionally closer to the children than a member from the other spouse’s side, but both families want to be involved in the event of an emergency. Under those circumstances, the harmonious decision to name Uncle Louie Guardian and Uncle Gus as Trustee, for example, may be not-so-harmonious. Baby Gina’s and Big Brother Brett’s Uncle Louie on Mama’s side and Uncle Gus on Papa’s side may in fact have a great relationship. However, designating one guardian and the other trustee may place a strain on the relationship that would cause Robin to reconsider his relationship with Batman. Consequently, designating one person as both guardian and trustee would probably be more prudent. Plus, Uncle Gus might even appreciate it once you shared with him the critical and long list of duties a trustee must agree to undertake. Still, what if Uncle Gus is a control freak and would wreak havoc on the rest of you and your spouse’s living days if some authority wasn’t given to him? In that case, you could make Uncle Gus the Executor of the estate. But what if that wasn’t enough? Perhaps he would be satisfied with being the successor trustee of the family trust funds that remained after the children’s trust was fully funded. And if Uncle Gus wasn’t satisfied with that and Uncle Louie refused to switch places? Then consider the following 2 options: Creating a solid co-trustee agreement between the 2 uncles; or Designate a corporate trustee to manage the children’s trust. Sometimes to maintain family accord, retaining a reasonable corporate trustee is the only option. Yes, money leaves the estate but at least it\’s money and not blood.
A Fiduciary\’s Lesson on IRS Pre-emption
On April 11, 2012, the Second District Appellate Court of Illinois filed an Opinion emphasizing the importance of a fiduciary’s role in trust and estate planning. As a fiduciary, an executor or trustee typically has the responsibility to ensure items such as the estate’s value and the relevant taxes are calculated correctly and, subsequently, paid. Accordingly, it is important for individuals to select appropriate fiduciaries. It is equally important for those approached to be fiduciaries to understand the scope of duties involved and the consequences if those duties are not performed properly. Case on point: People of Illinois v. Kole, No. 09-L-892. The Lay of the Land In 1993, Anthony F. Crespo named Julius Kole as executor and successor trustee of the Anthony F. Crespo Living Trust. Crespo died in 2002 and Kole paid $127,000 in Illinois estate taxes. Kole also filed a request for an extension to file the Illinois estate tax return, which was granted. Six months later, he filed the Illinois return reporting an approximate $81,000 estate tax liability. The Illinois Attorney General’s office received the return and issued a “Certificate of Discharge and Determination of Tax,” stating that, based on the information provided, the estate taxes were fully paid and, therefore, the estate was clear of any liens from the State. The Certificate of Discharge also relieved Kole from any personal estate tax liability for the Crespo estate. However, an IRS audit of the federal estate tax return reported in 2006 a revised value of the estate, increasing the value from more than $2.1M to $4.4M. This, of course, increased the Illinois state tax liability. Consequently, Illinois sued Kole, personally, seeking the additional estate tax owed plus penalties and interest, amounting to more than $300,000. The Arguments Kole first argued that the plain language of the Certificate of Discharge had relieved him of the obligation to pay additional taxes. The State replied that the Certificate of Discharge was routinely issued upon initial filings, which were based on the information provided at the time. So the initial issuance did not negate the need for supplemental filings if new information resulted in additional taxes owed. Kole’s response to the State, however, was enough to cause this reader to question her eyesight: “[Kole] admitted that the estate never paid any additional tax to Illinois or filed a supplemental return, but he then objected on hearsay grounds to the contents of the IRS Report.” Commentary and Conclusion To use the common vernacular, “Hearsay? Really?” Kole’s argument about the Certificate of Discharge’s plain language meaning at least had some merit, but arguing that an IRS Audit Report is hearsay was quite colorable. Even non-lawyers have watched enough Law & Order to learn the public records and business records hearsay exceptions. The trial court, however, agreed with Kole’s plain language argument. The Illinois AG appealed and the Appellate Court reversed the trial court’s decision (see Lesson #2, infra). Lessons Choose a fiduciary who will obtain a correct valuation and pay the appropriate taxes due – whenever they\’re due; A Certificate of Discharge isn\’t really final until the IRS says so; and Take great care in accepting a fiduciary role.
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 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.
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.
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.
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.