Posts By : Darcy

Are Do-It-Yourself Estate Planning Documents Really Such a Bargain?

There are many software programs, as well as websites, that sell do-it-yourself estate planning documents. These websites and form tools seem to offer a convenient and cost-effective alternative to consulting with an estate planning attorney. But do they really meet your needs and protect your family? Is online, do-it-yourself estate planning worth the perceived upfront savings?

Penny Wise and Pound Foolish

In all but the simplest scenarios, do-it-yourself estate planning is risky and can become a costly substitute for comprehensive in-person planning with a professional legal advisor. Typically, these online programs and services have significant limitations when it comes to gathering information needed to properly craft an estate plan. This can result in crucial defects that, sadly, won’t become apparent until the situation becomes a legal and financial nightmare for your loved ones.

Creating your own estate plan without professional advice can also have unintended consequences. Bad or thoughtless documents can be invalid and/or useless when they are needed. For example, you can create a plan that has no instructions for when a beneficiary passes away or when a specific asset left to a loved one no longer exists. You may create a trust on your own but fail to fund it, resulting in your assets being tied up in probate courts, potentially for years. Worse yet, what you leave behind may then pass to those you did not intend.

Each family situation is unique. Modern families – Non-traditional families, blended families, subsequent marriages – require more thorough estate planning. The nuances of these situations are not adequately addressed in an off-the-shelf document. In addition, the options available in a do-it-yourself system may not provide the solutions that are necessary. A computer program or website cannot replicate the intricate knowledge a qualified local estate planning attorney will have and use to apply to your particular circumstances.

If you’re a person of significant wealth, then concerns about income and estate taxes enter the picture too. In addition to the federal estate tax, some states have a separate estate tax systems with significantly different tax thresholds. An online estate planning website or program that prepares basic wills without taking into account the size of the estate can result in hundreds of thousands of dollars in increased (and usually completely avoidable) tax liability. A qualified estate planning attorney will know how to structure your legal affairs to properly manage – or, in many cases, even avoid – the burden of the death tax as well as minimize the impact of ongoing income taxes.

Persons who have children or adult loved ones with special needs must take extra caution when planning. There are complicated rules regarding government benefits that these loved ones may receive that must be considered, so that valuable benefits are not lost due to an inheritance. We take a particular interest in helping families plan for loved ones with special needs.

Give Us a Call to Discuss Your Situation

No matter how good a do-it-yourself estate planning document may seem, it is no substitute for personalized advice. Estate planning is more than just document production. In many cases, the right legal solution to your situation may not be addressed by these do-it-yourself products – affecting not just you, but generations to come. Using DIY forms can seem like a good idea now but create stress, confusion, and be costly down the road for your loved ones. Let us help you get this right and give you peace of mind your loved ones won’t be burdened upon your incapacity or death. We’re here to help, call us at 630-571-0222 to schedule a time to meet.

ESTATE PLANNING AFTER THE TAX CUTS ACT

On December 20, 2017, Congress passed a tax bill (herein “Tax Cuts Act”), with provisions that impact the Estate, Gift, and Generation Skipping Taxes (transfer taxes) effective January 1, 2018 through December 31, 2025.

For people who have not reviewed their estate plan documents for some time, it may be prudent to take another look. The current increased federal estate tax exemption is scheduled to sunset at the end of 2025 and a later Congress may take action to roll back the exemption or indeed repeal the federal estate tax.

For people who have estate plans drafted a number of years ago, taking a second look is warranted. Several provisions in older documents are phrased in terms of tax concepts, such as the estate tax exemption and marital deduction that may skew your intentions based on the increased federal exemption and the separate Illinois estate tax. It may be important to update the estate plan to match your intentions to protect against a future drop in the exemption (such as expiration of the current exemption in 2026 or earlier or later action by a new administration.)

Action Steps for People Not Likely to be Subject to Federal or State Estate Tax

For people with older estate plan documents, their plans should be reviewed to make sure thie intentions match the tax concepts that may be included in those plans in light of the Tax Cuts Act.
People who will not likely be subject to the federal or state estate tax, the non-tax benefits of proper estate planning still exist, including protections for an immature beneficiary or beneficiary with a disability, creditor protection, protections in case of divorce or remarriage, probate avoidance, or incorporating business planning strategies to take advantage of the qualified business income deduction for pass through entities.

Action Steps for People Subject to Illinois Estate Tax

Older estate plan documents may not take into account the disparity between the Illinois estate tax exemption and the substantially increased federal estate tax exemption. Upon the death of the first spouse, the trust may mandate that the amount exempt from federal estate tax be placed in an exemption trust (sometimes called a “Family Trust.”) The end result is that trust being overfunded and possibly exposing the trust to Illinois estate tax. A review can confirm whether any changes to the documents should be made.

Action Steps for a Person who is a Current Beneficiary of a Trust

For a person who is beneficiary of a trust created by a deceased spouse or other deceased Grantor, these trusts should be reviewed to ascertain whether any action can be taken to secure basis step up at the death of the beneficiary. For many such trusts, upon the death of the beneficiary, the assets in the trust do not receive another step up. These trusts should be reviewed to examine withdrawal rights and powers of appointment. A strategy such as “trust decanting” may enable the trust to be amended to allow basis step up, if appropriate.
For people who have created irrevocable gift trusts for the benefit of other family members, these trusts should also be reviewed to consider whether any action can or should be taken to secure basis step up at the trust’s termination. In addition, there may be opportunities to sell low basis capital assets to the irrevocable gift trust or perhaps a swap of assets may be an option.

Action Steps for People with Significant Wealth

For people with significant wealth, the increased exemption presents a “use it or lose it” opportunity to leverage gifts for future generations particularly if the increased exemption does sunset. Traditional estate planning techniques take on new significance in the current environment and might include:
Making gifts to existing or new irrevocable gift trusts, including but not limited to GST Trusts, Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), Lifetime QTIP Trusts;
Leveraging gifts to support funding of life insurance or existing sales to trusts;
Pairing gifts with philanthropy;
Re-evaluating valuation discounts on gifting assets;
Re-evaluating estate plans for maximum creditor protection.

Some people may feel comfortable they will not be subject to the federal estate tax, but for a client who is still working, he or she can expect their estate to double within ten years; they may want to evaluate their current estate plans in that light.
In light of the tax law changes and uncertainty in the future, now is the time to review your estate plan. Estate planning reviews are an integral part of the process to be sure your plan accomplishes your goals, complies with current law, allows for flexibility for the future, and takes advantages of benefits available now but not guaranteed in the future. To schedule a review, please contact our office at 630-571-0222. We look forward to working with you!

First Party Special Needs Trust

FIRST PARTY SPECIAL NEEDS TRUST
The Amendment to the Omnibus Budget Reconciliation Act of 1993 allows the person with disability to create the First Party Special Needs Trust (OBRA Payback Trust) himself or herself.

In 1993, Congress passed a law as part of the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93) allowing a person with a disability to transfer his or her solely owned assets to a first party special needs trust (1st Party SNT); however, this trust had to be created not by the person with the disability, but by a parent, grandparent, court or guardian on behalf of the person with the disability.  See 42 U.S.C. Section 1396 p (d) (4) (A). The 1st Party SNT (also sometimes called an OBRA Payback Trust) is appropriate for a person with a disability who is under age 65, and but for her or his separate assets, would otherwise be eligible for needs based government benefits, such as Supplemental Security Income (SSI) and Medicaid.   Assets assigned to the 1st Party SNT will not be counted by SSI or Medicaid as available to the claimant; yet the assets held in the trust can be used to provide for those things for the benefit of the claimant that are not otherwise paid for by government benefits.

On December 13, 2016, President Obama signed into law the “21st Century Cures Act” (hereinafter referred as “the Act”).  Section 5007 of the Act, entitled “Fairness in Medicaid Supplemental Needs Trusts”, allows the person with a disability to establish the 1st Party SNT himself or herself, whereas before only a parent, grandparent, guardian or the court had authority to establish a 1st Party SNT.

The amendment resolves a gap that existed in the law for over twenty years. As of December 13, 2016, persons who are mentally capable will now be able to establish their own 1st party SNT.

2017 Estate and Gift and Generation Skipping Tax Exemptions

While there may be efforts with the new administration to repeal or otherwise replace the Federal Estate and Gift Tax, as of January 1, 2017, the Federal Estate and Gift and Generation Skipping Taxes remain in force.  The 2017 Estate and Gift and Generation Skipping Tax exemptions will increase from $5,450,000 to $5,490,000.  The annual exclusion for a gift will remain at $14,000 per donee.

Illinois retains a separate estate tax.  The Illinois exemption remains at $4,000,000.

REAL PROPERTY TRANSFERS

STARTING JANUARY 1, 2017, REAL PROPERTY IS TRANSFERRED INTO TRUST BY WRITTEN AND RECORDED CONVEYANCE OF LEGAL TITLE.

 

Public Act 009-609 amends section 6.5 of the Illinois Trusts and Trustees Act. The amendment will become effective January 1, 2017. The amendment requires that all transfers of real property to a trust must include a written conveyance of legal title and an acceptance by the trustee. Further, the amendment mandates that the trustee shall record the conveyance of the real estate to the trust with the county’s recorder’s office.  760 ILCS 5/6.5.

 

This amendment clarifies the confusion created by the holding in the Estate of Mendelson, where the Court on appeal found that the failure to create and record a deed did not negate the grantor’s stated intention to dispose of the home in accordance with the terms of the trust. 2015 IL (2d) 150084. The Court held that “a settlor who declares a trust naming herself as trustee is not required to separately and formally transfer the designated property into trust.” Id.

 

However, the amendment to section 5/6.5 sets forth the rules requiring a written and recorded conveyance of legal title for transfers of real property into trusts.

STARTING JANUARY 1, 2017, REAL PROPERTY IS TRANSFERRED INTO TRUST BY WRITTEN AND RECORDED CONVEYANCE OF LEGAL TITLE.

 

Public Act 009-609 amends section 6.5 of the Illinois Trusts and Trustees Act. The amendment will become effective January 1, 2017. The amendment requires that all transfers of real property to a trust must include a written conveyance of legal title and an acceptance by the trustee. Further, the amendment mandates that the trustee shall record the conveyance of the real estate to the trust with the county’s recorder’s office.  760 ILCS 5/6.5.

 

This amendment clarifies the confusion created by the holding in the Estate of Mendelson, where the Court on appeal found that the failure to create and record a deed did not negate the grantor’s stated intention to dispose of the home in accordance with the terms of the trust. 2015 IL (2d) 150084. The Court held that “a settlor who declares a trust naming herself as trustee is not required to separately and formally transfer the designated property into trust.” Id.

 

However, the amendment to section 5/6.5 sets forth the rules requiring a written and recorded conveyance of legal title for transfers of real property into trusts.

Donating IRAs to Charity

On December 18, 2015 Congress passed the Protecting Americans from Tax Hikes Act (the Path Act of 2015) which, among many changes, renews as well as makes permanent the Charitable IRA rollover provision. This provision enables an individual over age 70 ½ to gift up to $100,000 annually from IRAs directly to charities without such donation(s) without being treated as taxable income to the individual.

2016 Estate and Gift and Generation Skipping Tax Exemptions

The IRS has announced the 2016 Estate and Gift and Generation Skipping Tax exemptions. The exemptions will increase from the current $5,430,000 to $5,450,000. The annual exclusion for a gift will remain at $14,000 per donee.

Illinois as well as 17 other states retain a separate estate and/or inheritance tax. The Illinois exemption remains at $4,000,000.

Congress Passes ABLE Act

Congress Passes ABLE Act

Congress has passed the ABLE Act of 2014 (Achieving a Better Life Experience.)  Beginning in 2015, states may choose to develop savings plans akin to the popular 529 college savings plans.  The ABLE account may provide an efficient way for family members or friends to provide small gifts to benefit a loved one with a disability.  The ABLE account should not be considered a replacement for special needs trust planning, but as an additional tool that may be appropriate under certain circumstances.

Importantly, the funds in the ABLE savings plan will not be countable when the beneficiary of the plan applies for needs based government benefits such as Medicaid and Supplemental Security Income (SSI).  However, if funds accumulate in the account in excess of $100,000, then the beneficiary’s eligibility for SSI will be impacted.

While the new savings plan look similar to 529 college savings plans, there are significant differences.   To be eligible, the beneficiary must have a disability that began prior to age 26. Funds in the account may be used for approved health care, education, housing, personal support and other care expenses.  Only one ABLE account can be set up for each eligible person.  Total annual contributions cannot exceed the federal annual gift tax exclusion ($14,000 for 2015), while each state can set limitations on total contributions from all donors.  (Illinois currently permits up to $350,000 to be contributed to the 529 college savings plans.)   Unlike 529 plans, contributions to the ABLE account are not tax-deductible; however, earnings in the account will not be subject to income tax.

Law Passed to Help Military Veterans Safeguard Survivor Benefits for their Children with Disabilities

Law Passed to Help Military Veterans Safeguard Survivor Benefits for their Children with Disabilities

As part of the National Defense Authorization Act (NDAA) of 2015, Congress will allow a special needs trust (SNT) to be designated to receive military Survivor Benefit Pans on behalf of the Retiree’s child with a disability. Prior to this law, children of eligible Veterans who received needs based government benefits to pay for the costs of long term care or other services were subject to losing those valuable benefits since the VA required that any Survivor Benefit be paid directly to the child with the disability.  Under the new provision, the Survivor Benefit can be paid instead to a first party SNT which will now protect a child from losing important government benefits, while allowing the Survivor Benefit to be used for other goods and services, such as therapy not covered by the government, respite care, computers that can enhance the child’s well being.    A first party special needs trust (SNT) is created for funds that belong to the person with the disability.  Upon his or her death, remaining trust assets must be used to repay Medicaid for services provided the individual during life.

2015 Estate Tax Update

2015 Estate Tax Update

The amount that individuals may transfer by lifetime gift or at death free of federal estate tax will be increasing to $5,430,000 for 2015, up from the $5,340,000 exemption in effect for 2014.  Illinois continues to impose a separate state estate tax and its exemption remains at $4,000,000.  While the federal exemption adjusts annually for inflation, the Illinois exemption does not.   For married couples with estates in excess of $4,000,000, they should review their estate plan to make sure their plans are designed not to inadvertently trigger Illinois estate tax  upon the death of the first spouse.

One simple way you can reduce estate taxes and, in limited circumstances, shelter assets to achieve Medicaid eligibility, is through lifetime gifting. Certain rules apply, however.  There is no actual limit on how much money you can give during your lifetime, but if you give any individual more than $14,000 in 2015, you must file a gift tax return reporting the gift to the IRS and use your available exemption to offset the gift tax due.

The $14,000 figure is an annual exclusion from the gift tax reporting requirement.  You may give up to $14,000 to each of your children, their spouses, and your grandchildren (or to anyone else choose) each year without triggering any IRS reporting requirements.  In addition, if you’re married, your spouse can duplicate these gifts.  For example, a married couple with four children could gift up to $112,000 in 2015 to their children with no gift tax implications.  In addition, the gifts would not count as taxable income to their children (although any earnings on the gifts would be taxed.)

Keep in mind that payments directly to an institution for tuition or to a provider for medical expenses on someone else’s behalf are not treated as taxable gifts and do not count against the $14,000 annual exclusion.

On the charitable giving front, on December 19, 2014, President Obama signed off on Congress’s a one-year extension for charitable IRA rollovers, but the extension is only good through December 31, 2014.   IRA owners 70 ½ or older can exclude up to $100,000 a year from income if the IRA funds are paid directly to certain public charities.   Without this extension, the IRA owner would have to pay tax on the IRA funds before claiming the deduction.  While we do not know if Congress will extend that tax break on IRA rollovers to charities for 2015 or beyond or indeed make this provision permanent, for future planning, an individual over 70 ½ might considering directing that his withdrawal from his or her IRA be paid directly to a charity.  If the law is again extended, then that individual would be able to exclude the withdrawal from his or her gross income.