Debunking Estate Planning Myths & Developing Wealth, Pt 4
To navigate around and through some of the disadvantages to basic estate planning I talked about previously and to provide a client and his or her family with more protection, estate planners typically use intermediate tools and techniques. The most basic intermediate tool is a trust, but before getting too far ahead, let me point out the difference between a land trust and a living trust. Illinois is one of a handful of states that allows a party to place primary residential property in a land trust. An Illinois Land Trust is an agreement entered into by the owner of a property and an institutional trustee. The trustee becomes the legal and equitable owner of the property and the former owner, becomes the owner of a beneficial interest in the property. The property essence also changes from real property to personal property for the sake of this agreement, which means the property is easier to dispose of. So, if a person is aging and has relatively few assets, say less than $50,000, a land trust may be a viable option for avoiding probate. However, if the person has other significant assets or is younger and will be accumulating more assets, it is probably more advisable for that person to gift the property to their spouse or other beneficiaries using a revocable living trust. The reason for this is that a land trust can only hold primary residential property; while a revocable living trust can hold almost anything that is allocated to it. Therefore, if a person owns a home, has retirement proceeds, and investment accounts, those can be assembled under one umbrella revocable living trust, but not so for a land trust. Often, the creator (aka \”grantor\” or \”settlor\”) of the trust is also the trustee and trust beneficiary and can, like a land trust, make changes to the trust during his or her lifetime, ergo, \”revocable.\” All revocable trusts become irrevocable on the creator\’s death. Individuals typically place property in a land trust to avoid creditors or probate. Avoiding probate is a valid reason; however, MYTH BUSTER: creditors can typically reach into a land trust with the appropriate court order and have a judgment lien placed on the property. As mentioned, revocable living trusts allow individuals to place more than land into a trust for their beneficiaries. Placing assets in a valid revocable or irrevocable trust, also similar to a land trust, prevents beneficiaries from going to probate court and keeps the terms of the estate distribution private. However, unlike a land trust, real property in a revocable or irrevocable trust retains its essence as real property and the owner, as trustee, retains legal and equitable ownership. Not only do revocable and irrevocable trusts save beneficiaries the time and money required to open a probate estate, but trusts may also provides estate tax and income tax minimization for beneficiaries and sometimes for grantors, which isn\’t the case with land trusts. Part 1 | 2 | 3 | 4 | 5
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.
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.
Can a TODI Keep You Out of Probate…Good Question
I’ve been asked a few times recently about the simplest way a person can transfer property, when they pass away, to loved ones. Undoubtedly, the probate horror stories reached a few ears. My response has generally been, “Glad you asked and good timing!” Then I start sharing the following information. On January 1, 2012, the Illinois Transfer on Death Instrument Act became public law. Under this law, the Illinois Transfer on Death Instrument (TODI) became available for Illinois residents who want to transfer property in a relatively efficient and inexpensive manner. The TODI only applies to residential property, primarily defined as 1-4 units or 40 acres or less of a single tract of land on which a family home was built. The TODI cannot be cast in stone, meaning, its creator can change it; and it is only effective when the owner dies. Furthermore, only a natural person, not a corporation or similar entity, may create a TODI. However, a corporation, trust, or other legal entity may be a designated beneficiary of a TODI. Another important point is although the TODI owner must have the same mental faculties to create a TODI that are required to create a will and a TODI allows for beneficiary designations, it is not a will. A valid TODI must Contain the identical aspects of a recordable deed; Expressly state that the property will transfer to the designated beneficiary when the owner dies; Be recorded before the owner’s death in the appropriate county; and Be prepared by a lawyer. Admittedly, I like that part. A few other items should also be noted about the TODI: It’s not a deed, even though it must be recorded. Beneficiaries have no legal interests in the TODI until death. A TODI beneficiary will not lose his or her needs assistance eligibility just because he or she is a beneficiary. Finally, because this instrument is based on new law, it hasn’t been tested. And no, I don’t like that part. As a result, the outcome of the “right to challenge,” which is provided by the law and the ineffective acceptance of beneficiaries is unknown. Thus, a TODI may be very beneficial for individuals of modest means with a small piece of property they want to keep in the family. However, the unanswered questions about challenges and invalid acceptance might create a Pandora\’s box for some. Do you have questions or comments? Feel free to drop me a line here or by e-mail.
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.
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.
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.
Why There\’s a \”Trust\” in Trustee, Part 2
In Part 1 of this series, I discussed why one should be careful in selecting a trustee. Family members are often considered the most trustworthy with respect to family matters, so people typically select them as trustees. However, this endearing gesture can cause serious problems later: Trust assets could be inadvertently wiped out. A trustee is usually responsible for managing the trust assets. If the trust is significant, the trustee should either have the required financial investment background or the ability to wisely choose someone with the needed background to act as the trust investment advisor. If the trustee is not well informed about investment matters relevant to the trust assets and does not employ someone who is, then the trust funds could dissipate leaving the terms of the trust unfulfilled, and probably one or more displeased beneficiaries. This last point is particularly important if the trust isn’t large, but the beneficiaries depend on its income for health and educational support, for example. Valid claims could go unanswered; or a trust claim could be ignored. The trustee is responsible for responding to or initiating litigation on behalf of the trust. So if a long lost family member who would have been provided for had their whereabouts been known, emerges claiming they should receive under the trust, the trustee should properly address that claim. If the trustee is a family member, however, the problem becomes one of bias against that claim because a valid claim could dilute the current beneficiaries’ shares, possibly including the trustee’s share. Another problem is that it takes time to respond to these claims, time that a family member may not have. Equally important is a trust may have a claim that needs to be litigated. But, if the trustee does not recognize the claim issue, a potential financial award for the beneficiaries may go unnoticed. Co-trustees don’t always agree. While the grantor may have gotten along well with both individuals, when it comes time to make a distribution decision or another decision involving the trust, the co-trustees may not see eye-to-eye and both could have valid perspectives. This type of disagreement starts many long-term family arguments resulting in costly court battles. If nothing else, by choosing a corporate fiduciary, the family will be at peace with each other and at war with someone else. Trust administration responsibilities are time consuming and numerous. The following is an incomplete list of trustee duties: Distributing beneficiary shares Providing a regular accounting to beneficiaries Paying debts, taxes, fees and expenses associated with the trust administration Giving notice to guardians or legal representatives of beneficiaries who are minors or incapacitated Executing documents required for trust administration Settling claims against the trust, not just from possible beneficiaries but from estate creditors Buying insurance for trust assets Perhaps now you’re thinking that a Last Will and Testament may circumvent this “trustee” matter, but that\’s not necessarily true. A Will’s executor or “personal representative” often has the same responsibilities as a trustee. So, establishing a Will not only requires delegation to the executor some of the responsibilities above, but in Illinois, it also entails more costs and more time because of probate. Therefore, it is critical to resist the urge to select a family member as a trustee – or executor – without first giving the decision the thought and discussion it deserves.
11 Truths about Trusts, Part 1 of 2
Colleagues who bemoan the online legal services world are sometimes criticized by those in the online world for trying to keep the “Wizard” behind the curtain, so to speak. The criticism, which I agree with, is that clients are served better when they can understand what Mr. Wizard, Esq. is actually doing and saying. Yet, even my online colleagues can be a tad overly zealous in encouraging DIY applications. So to temper the curtain yanking but also shed sunlight on Mr. Wizard’s machinations, this 2-part series will provide a few truths about trusts, so let’s click our heels and get started: Attorneys charge more for trusts because we’ll never see clients again after creating the trusts for you, whereas wills keep you and your family coming back at least for probate, which generates big fees. Fact: Attorneys often charge more for trusts because it’s more work. We do see you again because life events such as divorces, re-marriages, and births often require a redesignation of beneficiaries at the least. Sometimes, we see you again because the IRS will inevitably change the tax code in a way that affects your trust. We will also see your beneficiaries if we are designated to administer the trust assets. So, the fees associated with creating a trust are not compensating for the loss of probate fees, they are compensation for the real work that is associated with creating, monitoring, and/or administering a trust. Provisions for tax benefits placed in wills can provide the same results as most trusts. Plus, tax savings in trusts are generally for the wealthy. Fact: True; provisions that save taxes can be placed in a will. However, a properly drafted, stand-alone will must be probated and probate fees will bite into the tax savings. Also, even if it is a small bite, heirs will still have to wait until the claims period ends – 6 months in Illinois – before receiving their distribution. With a trust, there is no probate. Still, while tax savings trusts are generally more applicable to the wealthy, who needs to ensure that they receive the benefits of tax savings and the distribution and sooner rather than later – wealthy beneficiaries or beneficiaries who are below the highest tax bracket? I cast my vote for those who need the money for college tuition, medical bills, or a mortgage payment. The trustee is not the owner of the trust assets because the relationship between trust, trustee, and beneficiary is a legal fiction. Fact: The trustee is the legal owner of the trust assets. With a “self-settled trust,\” the grantor (trust creator) can be the trustee and beneficiary, if the designation is proper under state law. Some grantors are comfortable with a different trustee and don’t require a self-settled trust; some are not. However, if the grantor and trustee are different persons, the grantor can hold the trustee legally accountable if the trustee does not comply with the trust terms. Some colleagues call the relationship as “legal fiction” and it could be interpreted that way. But, consider this: If your home is subject to a mortgage, can the bank come in and tell you what color to paint your walls or that you can’t tear down a wall or put in a closet? No. Similarly, if your house is subject to a trust you created and your son is trustee, he cannot tell you to move or paint the house blue, unless you give him that authority in the trust. Only attorneys can create trusts. Truth: A trust is a legally binding agreement. A legally binding agreement generally requires 2 parties who intend to enter into a mutually beneficial exchange, an offer of benefit, and acceptance of the offer. The parties are not required to be attorneys. Caveat: Agreements can be challenged by parties to the agreement or by intended third party beneficiaries, and that is why attorneys should usually be consulted when creating a trust. Those who say that a trust cannot be challenged by third parties are not considering what is legally referred to as “remaindermen,” and what folks like you and I call “grandkids.” A trust is needed only when a great deal of money is at stake. Truth: A trust is needed especially if a limited amount of income at stake, in case you become incapacitated, even temporarily. If you’re a trustee, with a back-up (\”successor\”) trustee, and you become temporarily incapacitated, the successor trustee will manage the trust until you recover. If you don’t have a trust, your family will have to petition probate court to have you declared incapacitated and appoint someone to look after your financial affairs and possibly a guardian until you recover. This process costs money that will be probably taken out of your limited income.
5 Reasons Why a Will Might Be for You
Generally, I advise clients that trusts are more appropriate, especially if the client wants his or her heirs or beneficiaries to avoid probate. Preventing an estate from going through probate is beneficial if the estate is sizable, i.e., consists of a house, life insurance, a retirement plan or securities, one or more automobiles, and furnishings. However, there are circumstances when a will may be more appropriate: If there is no will, then the property might be distributed to, or in proportions, someone unintended by the decedent. For example, your spouse might only receive 1/3 of the estate’s personal and real property and the remaining 2/3 will go to a child or relative who kicked your dog. Equally egregious is that the property could be distributed to the state, which may have already benefited from receiving several years of income and sales taxes from you. If the estate is modest, for example $100,000 – $200,000, avoiding probate is even more reasonable and it may be possible to waive a probate hearing, so a trust under these circumstances is probably unwarranted. A grantor may not want to designate a trustee and may not want to be a trustee during his or her lifetime.* So, by using a will, a sizable estate will go through probate but each legatee will ultimately be responsible for the preservation and enrichment – or diminution – of his or her own gift. If the testator has minor children and doesn’t want the court to determine guardianship in the event of death or incapacity, then a will can nominate who should be the guardian. A grantor with no desire to continually update a trust document may use a pour-over will, a simple mechanism by which all of the estate is designated to a trust. Okay, so this one is a compromise betwixt the 2 but \”4 1/2 Reasons…\” just didn\’t flow. * A settlor, also referred to as a “grantor,” is the individual who creates the trust.