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
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.
Dodge Probate and Keep the Car…No Pun Intended
A popular reason people use trusts as estate planning tools instead of wills is because a properly constructed trust will typically avoid probate. As mentioned on my web site, probate can be lengthy, costly, and just plain unpleasant. Still, having a trust prepared, for some individuals, is like taking a bath when all they need to do is wash their hands. So over the next few weeks, I’ll add to last week’s commentary about how to avoid probate using tools other than a trust, which can also be costly. All of us don’t have Warren Buffett’s money and keeping up with the Joneses is getting difficult even for the Joneses. In addition to the Illinois Transfer on Death Instrument, or TODI, another tool that may allow heirs to avoid probate is the Illinois Small Estate Affidavit, established by Article XXV (25) of the Illinois Probate Act. The Small Estate Affidavit allows a decedent’s personal estate to be distributed if certain criteria are met: The estate is no more than $100,000 in total value. No real property is included in the estate. No contested claims exist on the estate. The person filing and completing the affidavit is called an “affiant,” and upon signing the document swears under penalty of perjury that the statements made, boxes checked, or information provided in the affidavit is true. One may still use a small estate affidavit if there is a will; the will simply must be valid. Additionally, the affidavit cannot be used to bypass the terms of the will. It is inadvisable to use a small estate affidavit if one or more of the heirs is a minor or disabled. However, if a person simply needs to retitle Aunt Bee’s Coronado, the Small Estate Affidavit will probably do the trick.
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!
Caution: Fund-Raising Spoiler
Tis the season to be giving … and we all have our favorite causes. Yet, many of us would likely become impoverished if we tried to contribute financially to each one. But those tax deductions are so darned attractive. So, if you want your deduction, then get out the checkbook or, better yet, \”go green\” and donate online. Still, you might want to recall that old axiom, “charity begins at home.” Then, before you start writing in those zeroes or clicking the bright green “Donate” button, consider whether you’ve been sufficiently charitable to yourself and your family: Has \”life happened\” to or around you? Has a significant event occurred in your life that you should consider, and, accordingly, recalculate your retirement projections? If a life event hasn’t happened to you, has it happened to a member of your immediate family? Perhaps your son or daughter married or became civil union partners. If that’s the case, might a trip to whatever popular children\’s fantasy world developed in Florida 10 years from now be on your retirement travel list? Has the likelihood of these little people been considered in your estate plan? Were your investments negatively affected by the Great Recession? If so, have you recovered your losses and is there enough room for you to take aggressive steps, if you can tolerate the risk, to place you back on track? Or do you need to revise your retirement and estate plan? If your retirement planning is on track and in sound shape, have you ensured that the education of your children and their descendants is reasonably secure? Are you relying on 529 plans and, if so, are you confident about the state’s (such as Illinois’) fiscal outlook in 10 or 20 years? My late grandmother’s words always ring true for me and may make sense to you, “Home and family come first.” Keeping that in mind, I have advised clients, “Before you write the check to the institution that will educate the next generation of alumni, be sure that your estate and retirement plan is solid so that you can help educate the next generation of your descendants.” They may not want to attend your alma mater. Money-Saving Tip: When travelling to children\’s destinations, stay away from nearby golf resorts for accommodations, unless you or a travel companion is a golf enthusiast, because the amenities, e.g., greens maintenance, that you will not use will be added to the price of your stay. Now, other than family, what is your favorite cause? Send me your responses and comments below.
Life Insurance and 90210 Accessories
Most of us know that life insurance is the most basic and essential of estate planning tools. It serves 2 fundamental purposes we face with end of life issues: (1) not leaving our loved ones with hefty funeral or memorial service bills and (2) replacing income if we were the primary wage earner or part of an even wage-earning team. So, most individuals who are employed have some type of life insurance. As discussed in a former blog post, it is further understood that life insurance can not only afford relatives a certain solace during their grieving period, but it also affords benefits before the end of life, i.e., during retirement. However, when using life insurance for its additional benefits, individuals should be careful not to overdo it or you might end up losing money instead of earning a return on your investment. Let’s visit the Petry’s, a small family of 3. Robbie is in her mid-30s and works as a middle manager for a high end office furniture sales company. Jerri is in her early 30s and works at a lucrative nail salon. Robbie and Jerri have one son, Ritchie, who is in his terrible twos. Robbie and Jerri each bought life insurance policies providing $500,000 of death benefits in the event one dies. That would provide about 7 years of replacement income. They also bought another $500,000 as retirement income, which will begin to earn value in about 10 years. Ritchie is so cute they thought he might one day be in movies, perhaps another McCaulay Culkin. So Robbie and Jerri also took out a $200,000 policy on Ritchie. Other investments include their home, which was left to Jerri by Aunt Sally, and is now paid for and valued at $200,000; and about $400,000 in other retirement planning instruments. By now you have probably identified a number of issues involving Robbie and Jerri’s insurance decisions but I’ll point out a few basic points: If your family can move to 90210 or 60043 after you’ve departed, when before they lived in an area that didn\’t consider dogs as purse accessories, that’s not a good sign. If you’re empty nesters, plan to stay that way. If the kid hasn’t been discovered by e-Trade yet, don’t put your money on it. Millions of really cute kids never make it to either screen – the big one or the little one. BUT what you need to do is talk to your team – your estate planner, your financial planner, and your CPA. Talking shouldn’t cost, initially, and this discussion should give you a good idea of how much insurance you need to purchase in the event of premature loss. You’ll also know how much will be needed to keep the nest strong, sans the birdies in the event your retirement years are lengthy. Money saver tip: Bundle your insurance like your family cell phone plans.
Money-Saving Tips with Estate Planning
This may sound counterintuitive coming from a lawyer, but my practice is purposely designed around protecting families and loving interests and saving my clients money. Yes, and I am a lawyer and said, “I want to save folks money.” So for the next few months, the focal point of my blog posts will be how you can save money through estate planning. Of course, I’ll digress occasionally, but I’ll return to the course in due time. Sometimes the discussion will be about how certain estate planning processes clients experience may be costly or inexpensive depending on the approach. Other times, the discussion will address decisions that may be costly or may save you a bundle depending on various considerations and scenarios. So let’s get started and today’s piece will cover very basic ways to save with wills or, more accurately, the lack of one or keeping the cost of probate down if the estate requires one. Money Saver Tips: In Illinois, if the estate is less than or equal to $100,000.00, probate and its accompanying court costs may not be necessary. If at any time your estate grows to more than $100,000.00, a valid will that is kept current may save your heirs thousands in having to open a significant estate where there is no will or the will is invalid. A valid will has 2 witnesses and is not handwritten. Save some money and don’t get it notarized. Wills in Illinois do not require notarization. When calculating the size of your estate for probate purposes, do not include life insurance; life insurance and retirement plans are not part of the probate estate. So if all you have is a $50,000 home and no creditors, see Money Saver Tip #1. If your estate is more than $100,000.00 and you aren’t completely sure about how to distribute your assets, don’t use a DIY program or a Big Box Store will-in-a-box. Refer to Money Saver Tip #2 for the possible consequences. Tune in next week for money-saving tips with estate planning.
Thanks But No Thanks: The Benefits of Disclaiming Aunt Val\’s Gift
Occasionally, a person may receive a gift under a will or a trust that they think would be more appropriate for their descendants. In these situations – and if the trust is drafted appropriately – the person usually has a legal right to say, “Thanks, but no thanks,” to the gift. At that point, the gift then “passes” to the person’s descendant(s) or beneficiary(ies). This means that the law will consider that initial recipient dead, i.e., having “predeceased” the testator, with respect to that particular gift and, as a result, the proposed recipient’s descendants take the gift. Why would you disclaim a gift? You don’t need the gift but your descendants might. For example, if Grandpa passes away leaving his house to your father, but Dad has his own home and a retirement condo, Dad may decide that you – a young professional with student loans – may benefit from owning the home more than Dad. So, Dad says in a writing that appropriately describes the gift and is delivered to the appropriate party, “Thanks, but no thanks. I, Dad, am unequivocally and expressly refusing the house … bequeathed to me by my father …” Once Dad’s disclaimer is accepted, if you\’re the only child, then you get the house. If you have siblings, then, generally, you will need to determine with your siblings how best to divide the interest in the house. You can’t afford the responsibility. If you and your partner are urbane empty-nesters, perfectly content with your 2-bedroom city dwelling, do you want the 4-bedroom home in the suburbs that Aunt Val left you with all the maintenance and tax bills that come with it? Probably not. However, your adopted daughter who now has newborn twins and a 3-year-old could probably use the extra space. So you say in writing, “Thanks but no thanks” to Aunt Val’s lush suburban family home. You want to avoid creditors. If you refuse a gift, a creditor claim cannot attach to your interest in the gift because under the law you never had any interest in the gift once your disclaimer is accepted. However, the area of the law using disclaimers as a way to avoid creditors is rapidly closing this loophole, so creditor claim avoidance probably isn’t the most prudent use of this testamentary mechanism. Disclaimers, simple at first blush, are like most legal tools – devilish in the details. If you’re considering disclaiming a gift, below are a few points to discuss with your attorney: Whether or not the property will be completely yours if it is currently held in joint tenancy with you and 2 other tenants; The irrevocability of disclaiming; Your action to date regarding the interest in the property; and Tax implications, which should be considered sooner rather than later. In the world of wills, trusts, and estate planning, the intent of the testator is a cardinal rule. Yet, sometimes the intent of the testator and the needs of the heirs conflict. Using a disclaimer may help resolve that conflict.
Who Takes the Eggs? ART and Estate Planning Considerations
As technology’s digits crawl through the nooks and crannies of our physical world and cyberspace, the legal consequences and questions emerging keep even us non-IP lawyers quite busy. Considering assisted reproductive technology (\”ART\”), family law was the premier practice area for getting caught in ART\’s web. Few lawyers realized the effects ART would have on estate planning and, even as the effects became clear, only a fraction of states passed laws providing legal guidance. Fortunately, Illinois is a state that considered ART in its laws and included laws for in vitro fertilization in the Parentage Act. Additionally, the Probate Act states that children born after a parent’s death (“posthumous” children) are to be considered having been born during the parent’s lifetime. So, what does all this technolegalese mean? Well, in terms of inheritance and/or estate planning laws, it means conversations should be had between Illinois spouses if conception is a challenge or an impossibility for one or both spouses.* The conversations are necessary because of 2 vital estate planning tools often used by couples, Health Care Powers of Attorney (“HCPOA”) and Property Powers of Attorney (“PPOA”), which can also provide instruction for ART cases. Yes, lawyers love acronyms. In Illinois, a posthumous child born via ART typically emerges in 1 of 3 ways: Use of frozen sperm; Use of a frozen embryo; or Use of a frozen egg. Furthermore, obtaining frozen sperm or eggs may not only occur after incapacity but also may occur after death, which is when estate planning mechanisms are triggered. When creating an estate plan, couples usually consider a bunch of “what ifs,” e.g., “what if I become disabled while we’re still in the “prime” of our lives and haven’t had kids yet?” A HCPOA is a tool that requires making those decisions but, consequently, eases the fears associated with the “what ifs.” Accordingly, when considering ART, a HCPOA could, for example, authorize the implantation of frozen sperm or eggs. Of course, other considerations would naturally follow, such as, how one abled-parent and one disabled parent would raise a child. Still, ART combined with the law creates a reasonable and protected possibility for having a family, when that likelihood, outside of adoption, didn’t exist before. Another equally interesting issue relates to the PPOA. But, you say, “That’s about property.” Yes, it is. In a 1993 California decision, Hecht v. Superior Court, which is used by several states, the Court determined that frozen genetic reproductive material, such as sperm and eggs, is property for the purpose of leaving a gift in a will (aka “devise”). Here, you might think the conversation would be easy – women can leave their eggs to their partners; but, not so fast. What if the eggs are frozen, then the relationship is legally dissolved, the donor spouse remarries, and then passes away? Who gets the eggs if the second spouse doesn’t want any (more) kids? She could disclaim them and pass them to her descendants or siblings; that would be interesting. The future brothers and sisters of the former partner? Should the reproductive material be destroyed? Who do you think should get the eggs? * The term “spouses” and \”partners\” are interchanged in this context because the terms are synonymous in Illinois law.