For Clients, Community and Advisors.  Every day, we assist our clients in transferring assets to their trusts to ensure that the goals and objectives of their estate plans are accomplished.  Once the assets are transferred, we endeavor to verify  that the assets are correctly titled.  I would venture to say that every year, we deal with hundreds of financial institutions.  Some are easier to work with than others.  When we collaborate with financial planners, CPAs and investment advisors, the task is almost always easier.  However, recent changes in the banking laws have made working with many banks a little more difficult.  For the most part, all these institutions realize that they exist because of their customers.

There is one exception that looms large.  In professional meetings across the country, I have heard one nightmare after another recited by attorneys and paralegals about dealing with this national institution – particularly after the death of a client.  While our office has had some frustrations before, they are nothing like what I personally have experienced recently.

My parents live in Tucson, AZ.  They have both been sick recently.  I have been handling their finances.  Late last year, I took their standard power of attorney to their bank at a time when both of them were hospitalized.  The bank refused to honor the power of attorney.  The reason?  They dreamed up an oddball technicality – a provision that ALL attorneys normally use in well drafted powers of attorney.  I was fit to be tied!

Then, late this week, Mom needed money in her checking account.  They have a money market account at the same bank.  Both accounts are in the name of “Mom and Dad”.  No problem, right?  I drove over to the local branch with a $15,000 check.  The teller called over the manager who proceeded to give me the third degree as though I was a thief!  Then, she told me that she could not accept the check, she could not tell me why, and insisted that my 83 year old mother call her so she could let her know!  Then, right in front of me, she tore up the check and the deposit ticket.  I was livid!  I called my parents.  My sister was with them.  She took them over to the branch in Tucson.  Within an hour all of their money was removed from the bank and taken to their competitor.

Who is the bank?  Bank of America has a really bad reputation among estate planning attorneys and financial planners across the nation.  They are obstructive and they are difficult.  In an era where the customer experience is paramount, Bank of America does not understand anything but hard and fast rules.  Eventually, the marketplace will catch up them and either they will come to understand or they will continually lose market share.  In the interim, we will be recommending other financial institutions who are customer oriented.

For Clients, Community, Advisers.  President Obama’s 2013 budget gives us some insight concerning what might happen if he is reelected and his 2013 budget (or any of its broad concepts) are adopted.

• LIFETIME EXCLUSION FROM ESTATE TAX:  The law would essentially revert to that which was in place in 2009.  That is, the current Republican endorsed $5.12 million exemption which is in force in 2012 would become $3,500,000 per individual ($7,000,000 per couple).  The estate tax on amounts over $3,500,000 would be 45% instead of 35%.  Of course, if Congress does nothing before January 1, 2013, the exemption will become $1 million and the rate will be 55%.
• TARGET:  GRANTOR TRUSTS.  For many years, irrevocable grantor trusts have been used as a sophisticated estate planning technique to reduce the size of an individual’s estate while avoiding income tax.   It’s a “have your cake and eat it, too” type of transaction.  These trusts come in all sizes and flavors.  They are often used to pass a business interest to another generation without payment of income and deferral of estate tax.  The administration’s proposal eliminates the key benefits of grantor trust transactions.  These have been around for many years.  They have been an important tool in our toolbox.  The administration seeks to take away this key tool.
• QUALIFIED GRANTOR ANNUITY TRUST:  Sam Walton made the GRAT famous.  He transferred billions of dollars of Wal-Mart stock to his family at very little transfer tax cost.  Describing how a GRAT works is beyond the scope of this brief article.  The proposed legislation prohibits the “zero’d out” GRAT which is the tool that Walton used.  It is an important technique for transferring property that increases in value over a short time to others.  It keeps the growth in value outside the donor’s estate.  The administration has been after this technique since Obama came in to office.
• VALUATION DISCOUNTS.  To value property for gift or estate tax, an appraiser will take into account its marketability and whether or not the interest transferred is that of a majority interest or that of a minority interest.  If the interest or parcel has limited marketability, a marketability discount of 5-25% can be applied.  If a minority interest is transferred (such as a minority interest in a business), a minority interest discount of 5-35% can be applied.  It is not uncommon for us to see combined discounts of 35% to 45%.  Over the years, some taxpayers have become very aggressive.  As a result, the IRS has also become aggressive in challenging discounts.  Here, the administration seeks to cut back the discounts.  However, the 2013 budget does not specify exactly how they seek to do this.

There are a few additional points which are somewhat esoteric and beyond the scope of what I believe clients and advisers want to read in a short article.  The administration also seeks to cut back the use of dynasty trusts and the use of trusts which length exceed the traditional rule against perpetuities.

In 2012, it’s anyone’s guess as what is going to happen in the political area.  As a result no one can predict what, if anything, will be passed and signed when it comes to the estate tax and gift tax.  This area has been a political football since before George Bush left office.  My only prediction is that it will continue to be.  As a result, as lawyers and planners, we need to be proactive on our clients’ behalf.  And our clients need to be diligent in ensuring that their plans are reviewed on a continuing basis and are up-to-date.

Are Living Trusts Created Just For Tax Benefits?

For Professional Advisors.  Lawyers and advisors around the country are getting some push back from their clients when they recommend Revocable Living Trusts (RLT). The issue seems to be that their clients perceive RLTs to only be good as tax planning tools.

With the federal estate tax exemption currently set at $5 million per individual and $10 million per married couple, some perceive a reduced need for such trusts.

But there are many important benefits to the RLT beyond tax protection.

Keeps You in Control

With a properly drafted RLT, a client can not only control who inherits his assets, but also how those assets are disbursed and under what circumstances.

The Grantor (your client) can set up rules or stipulations in the trust that must be met before assets are inherited by beneficiaries. The Trustee, chosen by your client, manages those assets according to your client’s wishes.

Some clients want the Trustee to have a lot of control, particularly when beneficiaries are minors or are financially inexperienced.  Others want the Trustee to exercise less control, particularly when the beneficiaries are mature adults.  We encourage our clients to keep beneficiary assets in trust for Protection and Privacy.

Protection and Privacy

Even properly drafted, a simple Will is essentially no more than a letter to a probate court judge. It informs the judge of the decedent’s wishes about what he or she wanted done with personal property and other assets, but the court can rule differently.

Court hearings and documents filed in a probate case are public record, meaning that if all your client had was a Will, then his personal worth and any records of family infighting over the estate could make the headlines. An RLT is executed outside of a probate court’s venue, keeping the entire matter private and out of public view.

After death, the RLT continues to offer protection to the client’s heirs. If left in the name of trust, assets are shielded from the beneficiaries’ creditors, lawsuits and divorce settlements. It also helps protect your client’s children from “accidental” disinheritance when a surviving spouse remarries.

Reduction in Stress

Probate can last many months to several years, depending on the size and complexity of your client’s estate. Administering a trust can often take less than a year.

Ask your clients how much grief and anxiety they are willing to let their heirs endure after their death due to poor planning. An RLT can dramatically reduce the wait time for an estate to be settled, allowing beneficiaries to move forward with their lives much sooner and receive the assets your client wanted them to enjoy and benefit from.

Have you experienced push back from a client when you propose a revocable trust?  Please let me know by post a comment.

Revocable Living Trusts are flexible tools. If you think you have a client that may need one as part of his or her plan, we would be delighted to talk to both of you about its benefits.

On first glance, it looks like the recently signed “Illinois Residential Real Property Transfer on Death Instrument Act” would only interest lawyers, title companies, and the government.  In fact, this new law, which goes into effect on January 1, 2012, will allow a majority of our clients to “have their cake and eat it, too”, just by addressing how their residence title is issued.

Until now, assuming there are no estate tax considerations, we have been faced with a dilemma when planning for the asset protection of a married couple’s primary residence. We could have the residence titled in the name of one or
both spouse’s revocable trusts, avoiding probate costs, delays, and creditors. Unfortunately, doing so meant that both husband and wife had to previously surrender important asset protection against potential judgment creditors and others.

When a residence is held as “tenancy by the entireties”, a spouse’s creditors could not foreclose on the residence because of the other spouse’s interest. So, if there were a car accident with a large judgment, financial mistakes, or other circumstance, the property was at least temporarily protected for the remaining spouse.

Last year, the General Assembly tried to create a law where married clients could put property in trust AND still retain the asset protection benefit of tenancy by the entireties. But, the legislation was drafted in a way that no
attorney could understand how to accomplish it, so we were stuck without a solution.

One solution we’ve recommended for clients is to have the residence owned by an Illinois land trust, which gives them the advantages of a trust (including flexibility, private administration and reduced costs) and the asset protection of entireties property. But, this solution comes with an annual cost to a bank or trust company, so it’s not perfect.  And, only one residence can have entireties protection from judgment creditors.

Now, using the new “Transfer on Death Act” provisions, we can help clients protect their property assets without the attendant cost of maintaining a land trust. We draft these provisions into the conveyance instruments, and
once they are properly recorded, they are immediately effective.

The residence can be owned by the spouses as tenants by the entireties.  Upon the death of the first spouse, the survivor is instantly and automatically the owner. Upon the death of that surviving spouse, the property is conveyed into the trust, by providing only a copy of the death certificate and a form affidavit.  There is no probate, no delays, no creditor interference.

The Residential Real Estate Transfer on Death Act doesn’t just apply to married couples.  Single individuals can convey their property to heirs through a Transfer on Death Deed, and avoid the probate process. Under most circumstances, holding a single individual’s property in a revocable trust may be a better, more comprehensive solution.

The act also simplifies planning for non-traditional couples, including those taking advantage of Illinois’ new civil union laws, though the benefits of entireties property do NOT apply in these cases.

In light of the new legislation, we will take time at each client’s annual review to re-examine how the residence title is held. If changes are appropriate, based on client objectives, we will recommend and implement them.

If you have questions about how your residence is titled, please call our office.

For Clients, Community, Professional Advisors.

At least once per year (and sometimes more often) we receive a phone call from the children of one of our clients.  It sounds like this:  “Dad died yesterday.  We’re trying to find the original of his will (and/or trust).  Does your office have it?  Might you know where it is?”

In a recent case, three different copies of a will showed up and were filed in court.  The judge refused to admit any of them to probate because it appeared all were copies.  This will cause major difficulties in the settlement of the estate.

So, “Do you know where the original of YOUR will or your trust is?”  More importantly, does your executor (or your trustee) know where to find it?

It’s true that many law firms have a vault that is filled with original wills of their clients over decades and decades.  They want the appointed executor or trustee or the family to call them when the time comes to settle the estate.  It’s good business for many law firms. That works for many firms and many clients.  We’ve gone a different direction.  We’ve taken the approach that, if we maintain a good relationship with our clients and their families, they will want to come to us.  So, as a matter of practice, we don’t have a “will vault”.  We are very specific on how we instruct our clients.

We take time to prepare our clients’ original estate planning documents on high quality paper and bind them together in a complete package.  At our final meeting when a plan is created or amended and restated, I am very specific.  I ask each client where it is they intend to store the originals of the documents.  My file contains an annotation on what they tell me.  I recommend that they keep the originals in a fire-proof safe box either in their home or in a safe deposit box at a bank (titled in a way that the appropriate persons will have access at the right time).  We try to keep a record of where the originals are located so that when that phone call comes, we can say, “Look in the fireproof box in the closet”.   We review the status and placement of the documents at each client’s annual review.

It’s equally important, however, that the appropriate people (executor, trustee and sometimes the heirs) know where to find the documents.  That’s why we often have a short “family meeting” when a family estate plan is completed. In this meeting, I will briefly review the highlights of the plan (using a color diagram) and then talk about roles.  These meetings rarely take more than 30 minutes.

Our job is to ensure that not only that the plan is accomplished, but that it works when it is needed.

Do you know where the original of YOUR will is?

For Clients, Professional Advisors

Since my March 3, 2011 posting on inherited IRAs, there has been an interesting precedent. A Federal Court in Texas has issued an important appellate decision. The case is Chilton v. Moser.

What happened? Shirley died in 2007 naming Janice as beneficiary of her $170,000 IRA. Janice opened an IRA titled, “Janice, beneficiary of Shirley IRA” and transferred the funds to this account. Janice filed a bankruptcy petition in December, 2008. Janice sought to protect the IRA from the bankruptcy estate, claiming that the assets were exempt from her creditors under Federal law. The United States Trustee objected. The bankruptcy court judge held that the assets were part of the bankruptcy estate and that they could be distributed to the creditors. Janice appealed to the Federal District Court.

In a well-reasoned appellate decision, Judge Ron Clark reversed the bankruptcy court decision. He held that in order for inherited IRA funds to be exempt from creditors in a bankruptcy (a) they must be tax exempt under §401 or §408 or §403 (or other) section of the Internal Revenue Code (covering individual retirement accounts, pension and profit sharing plans and certain non-profit organization annuity plans) and (b) they must be retirement funds.

The court went on to conclude that Shirley’s funds were both tax-exempt and were retirement funds. Therefore, the exemptions under the bankruptcy code applied and the money was in fact Janice’s. Her creditors in the bankruptcy case would be unable to reach them!

Can Illinois residents rely on these cases? The trend of the decisions is clear. All Federal District Court Decisions to date and one Appellate Court decision has been consistent with the holding in Chilton v. Moser.

However, one cannot say for certain that this is the law of the land. There is some likelihood that the Federal appellate courts will differ in how they apply the bankruptcy code to IRAs. Nationally respected IRA and tax expert Bob Keebler recommends that professionals continue to offer clients an individualized IRA trust for asset protection. It provides certain asset protection.

Until the matter is resolved by the Seventh Circuit Court of Appeals (Illinois, Wisconsin and Indiana), or if the circuits disagree, by the United States Supreme Court, we continue to offer our clients with large IRA accounts an individual retirement plan trust that provides the asset protection they need.

Why take a chance if a deal goes bad?

For Community, Clients, Advisors

In the first installment of this blog series, I described how, for one family we recently represented, procrastination caused unnecessary delay, expense and worry that their objectives would not be achieved. In the second installment, I discussed a case currently in my office where delay and a reliance on joint tenancy property caused husband and wife’s estates to be court supervised.

The final installment in this series is simpler. It applies particularly to older folks, but really to anyone.

Betty is 91 years old. She is very proud that she has been living independently. In the last few months, however, her two sons have begun to notice that her short-term memory has been limited. She does not remember what happened earlier the same day and asks the same question several times within a 20-minute period. They are concerned about this.

Earlier this year, Betty fell and required surgery. Her sons were told that she might not be able to walk again. Betty made it very clear: She wanted to continue to live at home. She did not want to be admitted to a nursing home facility under any circumstance. However, an individual with early dementia who cannot ambulate requires round-the-clock care.

I met with her sons. We made a plan to create a new trust for Betty and use her assets to hire round-the-clock aides to care for her. (The objective was not to spend down her assets to qualify for Medicaid).

I drafted the trust and other instruments to implement the plan. Unfortunately, Betty did not return to her home for very long. She passed away a week later. The plan was never signed or implemented.

Lesson learned. It can, of course, happen to anyone. But after a serious illness or a fall, folks in their 80s and 90s can be subject to rapid decline. Sometimes, even with the best intentions, it’s not possible to implement a plan at the last minute.

The best course of action is not just to think about it “some day”, but to ensure that your estate plan is always up to date.

For Community, Clients, Advisors

In the first installment of this blog series, I described how procrastination caused unnecessary delay, expense, and worry for one family we recently represented.  Here is another.

What I now describe is a matter in our office right now.  I have the family’s permission to write and publish this expressly for the purpose of helping other families.

Phyllis and Sam.

Phyllis and Sam were in their 80s.  They lived comfortably in Skokie.  They had two adoring daughters and several grandchildren.  They lived frugally during their lifetimes and have accumulated some assets in brokerage accounts, IRAs, stocks and bonds (share certificates and reinvestment accounts with the share transfer agent) and their home.  They had no debt.  Some of the accounts were in Phyllis’s name only.  Some were in Sam’s name only.  But, mostly, the accounts and the house were titled in joint tenancy.

They had wills prepared in 1992 by another firm.  They were “simple” wills that made bequests to their grandchildren, generous gifts to several charities and left the remainder equally to their two daughters.  No trust was prepared.  As they got older, they began to have some health problems.  Of course, the Number One priority was taking care of Phyllis and Sam.  Sam had severe diabetic problems that led to the need for regularly scheduled dialysis.

Phyllis Dies.

Soon, Phyllis began to forget things and increasingly needed help in managing daily affairs.  In 2010, the family was informed that she had a brain tumor and that her life expectancy was likely quite limited.  The family rallied.  Both daughters live in adjoining suburbs and were there to help.  However, they weren’t really worried about their estate because they had wills and most of the assets were in joint tenancy.  Phyllis died just a few weeks ago.

Sam did okay for a short while.  But soon, without his wife, he realized that, with multiple health issues, his quality of life was simply not what he wanted it to be.  His daughters were with him, helping him constantly.  His grandchildren came to see him.  He made a very clear, knowing decision that he would stop dialysis, fully understanding the consequences of his actions.

Soon thereafter, his daughters reviewed his 1992 will with him.  They asked, “Dad, does this will reflect what you want to happen now?”  His answer was, “No, not really”.   He described for them the relatively minor changes he wanted made.   The next day, the daughters met with me to review the changes that Sam wanted.

I looked at all of the assets – the brokerage accounts, stocks, bonds, real estate.  I wanted Sam to have a revocable trust because all of the property could be distributed exactly as he wished by the two daughters without government interference upon his death.

Sam Dies.

We needed to revise his will very quickly.  There was no time to implement and fund a trust. Sam’s daughters knew that his mental condition could change at any time.  He had stopped dialysis.  His other medical conditions had forced another hospital stay.  I had to draft a new will over the weekend.

On Monday, Karen and I went to the hospital and met with Sam to ensure that the will reflected what he wanted done.  The will was signed in accordance with the legal requirements on Monday afternoon.  Sam would not have had the legal competence to sign a new will had we come the next day.

Sam passed away on Friday, just a few short weeks after Phyllis died.

Estate Settlement.

So, how do we settle Sam’s estate?  What do we have to do?

Suzanne and I have now met with the heirs and have an inventory of all the assets.  All of Phyllis’s assets will become the property of Sam’s estate.  All of Sam’s sole property and the property received from Phyllis’s estate will be distributed to the other heirs and the daughters.

Unfortunately, the only way to settle both these estates is to bring two probate estates in the Circuit Court of Cook County.  It makes the estate settlement laborious and time consuming compared to a private trust settlement.

The good news?  There are provisions for “independent administration” in Illinois probate law.  This will allow the daughters to handle most of the administration work without court supervision.  It will ease the burden to a great degree.

Lessons Learned.

So, what lesson have Phyllis, Sam and their family taught us?  There are two.  First, procrastination in estate planning limits the options available.  Don’t wait.  No one expects both spouses to die in rapid order, but, it does happen.  Second, while joint tenancy accounts are a simple solution and work well if one spouse dies, there can be severe complications, and they don’t work in the event of a common disaster or in the event that one spouse dies soon after the other.

I’m going to do everything I can to make the estate settlement as easy as possible.  However, I wish I could have helped this family more.