In the following information, taken from The Wealth Counselor, we will examine some of the critical rules in using IRAs and qualified retirement plans for estate planning, common misperceptions in this area, and why naming a trust as beneficiary may be the only way to accomplish some of the client’s planning objectives. Completely covering these subjects requires volumes, so we will cover only the basics. 

If after reading this explanation, you have any questions or concerns for your clients’ estate planning and retirement planning needs, please call my office to speak with me or my plan administrator, Kim Kaskel. 

Surviving Spouse as Sole Beneficiary

If the surviving spouse is the only beneficiary, he or she can roll over the inherited benefits into his or her own retirement plan or elect to treat an inherited IRA as his or her own IRA. There is no deadline by which the spouse must make the rollover decision, but until the rollover is made, minimum required distributions would have to be under the inherited IRA rules based on the spouse’s age unless the plan requires more rapid distributions. 

Planning Tip:  A spouse who is under 70 1/2 can postpone distributions until he or she attains the age of 70 1/2. In addition, after rollover the spouse can name his or her own beneficiaries who can then use their own life expectancies after the surviving spouse dies, resulting in the maximum stretch-out. 

Planning Tip:  If the surviving spouse is under 59 1/2, special care must be taken in deciding whether and when to do a rollover. This is because distributions taken from the account after rollover and before the survivor reaches age 59 1/2 are subject to the 10% early withdrawal penalty. 

For Illinois residents, if the spouse beneficiary does a rollover to his or her own IRA the assets will be protected from his creditors and predators under Illinois law. Note, however, once the surviving spouse has died, recent case law indicates that the beneficiaries of the inherited IRAs do not have the same asset protection. Thus, after an accident or lawsuit, a judgment creditor could take away an inherited IRA account. Naming a special retirement trust as contingent beneficiary can solve this problem. 

Trust as Beneficiary

There are two common myths about estate planning for qualified retirement plans and IRAs:

(1)  You cannot name a trust as beneficiary and get a stretch-out; and

(2)  Naming an individual as beneficiary will result in a stretch-out. 

The problem with naming an individual as beneficiary is that he or she is likely to cash out the IRA or plan account, thus negating the participant’s careful planning for long-term tax-deferred growth. Example: A 25-year-old inherits a $100,000 IRA. Will he choose a $60,000 automobile (the amount after cashing in the IRA and paying the income tax) or $400,000 in after-tax income over his or her life expectancy (based on 5% growth and combined state and federal income tax of 35%)? If the client’s goal is to preserve tax-deferred growth, it is advisable to have a trustee involved who will ensure that happens.

Normally a trust is a non-individual and cannot qualify for Designated Beneficiary status, but it is possible to name a trust as beneficiary and still have a Designated Beneficiary for purposes of determining minimum required distributions. Special rules allow a “see-through trust” that lets you look through the trust and treat the trust beneficiaries as the participant’s beneficiaries, just as if they had been named directly as beneficiaries by the participant.

Requirements for a See-Through Trust To qualify as a see-through trust, the trust must meet certain criteria:

(1)  The trust must be valid under state law.

(2)  The trust must be irrevocable or will, by its terms, become irrevocable upon the death of the participant.

(3)  Certain documentation must be provided to the plan administrator by October 31 of the year after the year of the participant’s death.

(4)  Trust beneficiaries who are to be included in the Designated Beneficiary determination must be identifiable from the trust instrument and all must be individuals.

A Designated Beneficiary need not be specified by name as long as the individual who is to be the Designated Beneficiary is identifiable under the plan. Thus, the members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it is possible to identify the class member with the shortest life expectancy. For example, “my descendants” is a class that can be identifiable even if they are not individually named.

Stand-Alone Retirement Trust

Using a stand-alone trust to receive retirement plan benefits is often the best solution. As you have seen, qualified retirement plans and IRAs are special assets with unique tax rules that provide well for accumulating wealth for retirement but do not work so well when trying to pass this wealth on to the next generation. It is always best to transfer property to the next generation in trust rather than outright. When the facts are such that an accumulation trust is best, it is difficult to draft it in a revocable living trust.

A stand-alone trust is an inter vivos trust created by the participant as grantor; it can be revocable or irrevocable. It is nominally funded during the grantor’s life and will receive retirement plan benefits upon the death of the participant by means of properly drafted beneficiary designations. In Illinois, the stand-alone trust is a handy asset protection solution.

Conclusion

Understanding retirement planning enables the planning team to help clients pass more wealth to their loved ones, integrate a client’s IRA with their estate planning, maximize continued tax-deferred growth, protect and grow IRA savings for their families, and take advantage of the rules applying to separate accounts governing IRAs and qualified plans so that each beneficiary can control his or her own inheritance.

Like other aspects of planning, it is helpful to review client retirement planning objectives and beneficiary designations frequently to ensure they coordinate with the client’s estate planning needs.

George Clooney is starring in a movie about a family trust. Yes, you read correctly.

“The Descendants,” which opened in select theaters last month, offers a great depiction of what the Trust industry is all about.

The film comes from the creators of “Sideways” and “About Schmidt.” It tells a humorous and tragic story of Clooney’s character Matt King, a father who must re-examine his past and face his future when his wife suffers a boating accident. King is also a land baron in charge of property handed down through generations from Hawaiian royalty and missionaries.

Difficult Decisions for Trustees

Amid trying to reconnect with his two daughters, King struggles with a decision on whether to sell the family’s lush land in Kauai. He is torn between cash-strapped beneficiaries and the original intent of the family trust to preserve the land for future generations.

The scenario King faces as both a Beneficiary and a Trustee mirrors real-life dilemmas and tough decisions faced by Trustees every day. King just wants to “do the right thing.” But doing what is right isn’t always popular.

Legal bloggers have written that the film is reminiscent of Hawaii’s billion-dollar Campbell Estate and of the Bishop Estate, created by Charles Reed Bishop, a banker who married Hawaiian Princess Bernice Pauahi. (See: www.thetrustadvisor.com/news/descendants)

Real Life Families, Real Life Drama

Hawaii’s 107-year-old Campbell Estate dissolved in 2007. Some grandchildren of the original grantor took a cash disbursement and paid the tax accruing, but most rolled their interests into a new national real estate corporation. The estate had to distribute its tax liabilities and assets to the beneficiaries.

The Bishop Estate was founded by missionaries as a non-profit trust that could have lasted indefinitely if it had not been restructured after a scandal.

A Great Client Gift Idea

I think this film should be required viewing for Advisors and Trustees alike, and I urge you to consider buying copies of the blu-ray or DVD when it becomes available next year. It offers Trustees and potential Grantors a look at what can go wrong when circumstances take a family trust off course.

To learn more about the movie, visit the official homepage: www.foxsearchlight.com/thedescendants.

If you have any questions about trusts, please contact our office and speak with me or my paralegal, Suzanne Othman.

This information is from The Daily Plan-It.

Jay Kaufman and I had only been married for 5 years when he started his law practice in October, 1981. And while our office location has moved several times (from Arlington Heights to Buffalo Grove, to Chicago, to our house in Buffalo Grove, to Northbrook and now also Lake in the Hills), Jay’s approach to working with clients has remained constant since Day 1.

Jay has always dealt with people, not files or numbers. It is what has made working and sharing this journey of 30 years in law practice the most meaningful.
You see, if we need to prepare documents for Mr. Smith and Smith Tiles, Jay will have a conversation with Mr. Smith about his life’s plans and dreams, how his spouse and children fit into those dreams and how the business works with all those decisions.

Sharing those plans and dreams have made all our clients part of a growing family. We have many clients who have been with us into second and even third generations. It is thrilling to have clients bring wedding pictures to a meeting or send us announcements of their newest grandchild. Jay has helped sell businesses to Fortune 500 companies and has helped people publish books of poetry written by loved ones.

Likewise, our client family has shared with us. When Jay had his gastric bypass surgery, clients checked on his progress with phone calls and thrilled at the pictures of our “incredible shrinking man.” They mourned the loss of Kim’s father and my father with calls and personal notes.

It’s the people that make our office work important to all of us. When it comes to our clients’ plans and dreams, we really feel that “Our family serves your family.” Jay and I look forward to sharing more with our office and client families for many years to come.         Karen Kaufman, wife and Business Manager

For Professional Advisors

In the current political environment, it’s impossible to know what will change in the tax laws.  In our last blog post, we outlined some ideas for income tax planning before 1/1/2013 based on current laws.  In this blog post, we add some additional ideas.

Oil and Gas Investments

Intangible drilling costs (IDCs) provide a large immediate income tax deduction (up to 85% of the initial investment). Losses, if any, created as a result of IDCs will be ordinary and will lower the taxpayer’s Adjusted Gross Income.  Depletion and other depreciation provide for additional deductions during the term of the investment. Additional tax credits may be available for certain oil and gas ventures.

Planning Tip: Be careful with oil and gas investment where the client may be subject to the alternative minimum tax (AMT). The AMT may limit the amount of deductions allowed.

Gold Investments

Generally, gold held as coins or bullion is treated as “collectibles,” for which the long-term capital gain rate is 28%. All short-term capital gains are treated as ordinary income. Therefore, a taxpayer in a lower tax bracket would be better off triggering short-term rather than long-term capital gain on gold coins or bullion. On the plus side, the “wash sale rule” (explained below) does not apply to “collectible” losses.

Planning Tip: The “collectibles” tax rate does not generally apply to gold held in mutual funds or to non-exchange-traded options on gold.  Gold futures must be “marked to market” and the unrealized gain/loss must be recognized each tax year. Moreover, gold futures gains are subject to special tax treatment (60% long-term capital gain or 40% short-term capital gain

Foreign Currency Transactions

Gains and losses in foreign exchange transactions are ordinary income/loss rather than capital gain/loss. Generally, taxpayers will want to recognize ordinary income in 2011 and 2012 and push ordinary losses to 2013 and later years.

Index Options

These have special gains treatment on certain broad-based listed options (60% long-term and 40% short-term). For taxpayers in the highest marginal income tax bracket in 2013, this would result in a blended capital gains tax rate of 29.36% ((.6 x .2) + (.4 x .434)).

Loss Harvesting

Loss harvesting can apply to individuals, trusts/estates, and charitable lead and remainder trusts. Considerations include:

Wash Sale Rule:
Capital losses are denied to the extent that a taxpayer has acquired (or has entered into a contract or option to acquire) a “substantially identical” stock or security within a period beginning 30 days before the sale and ending 30 days after the sale of a stock that was sold at a loss (“loss stock”). The disallowed loss on the loss stock is added to the cost basis of the new stock, and the holding period of the loss stock is carried over to the new stock. This rule also applies to ETFs, index funds, IRAs and taxable investment accounts. It does not apply to “collectibles.”

Diminishing Real Value of Capital Losses: Because of the cost of capital, the sooner a capital loss is used the better.

Efficiency of Capital Loss Offsetting: In general, capital losses are more tax effective if they can be used to offset income taxed at higher tax rates (short-term capital gains and ordinary income). Long-term losses used against short-term gains are  tax-efficient. Short-term losses used against long-term capital gains are tax inefficient.

Income Shifting to Junior Generations

Income taxes can be saved by shifting income-producing assets from parents or grandparents who are in a high income tax bracket to their children and grandchildren who are in lower tax brackets. Planning considerations include asset protection (accomplished through the use of trusts) and the “kiddie tax” for beneficiaries under age 24.

What makes this most attractive in 2011 and 2012 is the $5 million per person gift tax exemption: a married couple can gift up to $10 million and no gift tax will be incurred on the gift. The gift can be made in trust and then used to invest and/or purchase life insurance on the donors.

Example: Husband and wife, who are taxed at the current top (35%) rate, own $16,000,000 in S Corporation stock. They gift $10 million of it to their four adult children (15 5/8% of the S Corporation stock to each child). The S Corporation income is $2 million per year. After the gift, 37.5% is attributed to the parents and taxed at their rate and 62.5% is attributed to the children and taxed at their lower rates (assume 25%). Annual income tax savings: $10,000,000 x 10% = $100,000.

Planning Tip: Income can also be shifted upwards. For example, a high-earning professional can make the gift to his/her elderly parents who are in a lower tax bracket. The additional income can be used to help pay for medical and/or assisted living expenses. After the parents die, the assets can go to the original donor’s children (if the “kiddie tax” does not apply) for additional income shifting.

Roth IRA Conversions

Benefits of converting include a lowering overall of taxable income long-term; tax-free compounding; no required minimum distributions (RMDs) during the owner’s life; tax-free withdrawals for beneficiaries; and more effective  funding of the bypass trust. For most people, converting to a Roth IRA is highly beneficial over the long term.

Planning Tip: When exploring a Roth IRA conversion, consider the tax rate in the year of conversion vs. the tax rate in years of withdrawals; the owner’s ability to use outside assets to pay the income tax on the conversion; and the need for the IRA to meet annual living expenses.

Net Unrealized Appreciation (NUA) Planning

If an employee has employer securities in his/her qualified retirement plan, he/she may be able to convert a portion of the total distribution from the plan from ordinary income into capital gain income. The distribution must be made as a lump-sum distribution due to the employee’s death, attaining age 59 1/2, separation from service, or becoming disabled within the meaning of Code section 72(m)(7).

Taxation of Lump-Sum Distribution

Ordinary income is recognized on the cost basis of the employer securities distributed (a 10% early withdrawal penalty is due if the employee is under age 55 at the time of distribution). The difference between the fair market value at distribution and the cost basis is Net Unrealized Appreciation (NUA). NUA is not taxed at the time of distribution, but at a later time when the stock is sold, and is taxed then at long-term capital gain tax rates. (Ten-year averaging is available to those born before 1/2/1936; 20% capital gain applies to pre-1974 contributions only.)

Planning Tip: NUA does not receive a step-up in basis at death, although subsequent gain above the value at distribution should. Also, if an estate or trust contains NUA stock, a fractional funding clause must be used; otherwise, the NUA will be subject to immediate taxation.

Charitable Planning

If the capital gains tax rate increases to 20% and the 3.8% Medicare surtax applies, charitable remainder trusts (CRTs) could become very attractive again.  That’s because appreciated assets that are transferred to a CRT are not taxed,
so the full value of these assets is available to provide income to the donor, generating much more income than if the donor had sold the asset, paid the capital gains tax, and re-invested the proceeds.

Planning Tip: With the current historically low 7520 rates, charitable lead trusts can be used now by charitably inclined clients to shift significant wealth while using only an insignificant amount of their estate/gift tax exemption.

Inherited IRAs

An IRA is treated as inherited if the individual for whose benefit the IRA is maintained acquired the IRA upon the death of the original owner. Under the tax law, the IRA assets can be distributed based upon the life expectancy of the
beneficiary if the beneficiary is a living person or a trust that meets certain requirements, such as that it is irrevocable, all beneficiaries are natural persons, and the oldest possible beneficiary can be determined.

Spouse as Beneficiary

A surviving spouse named as beneficiary of the deceased spouse’s IRA may roll it over into a new or existing IRA in the spouse’s own name. The spouse is then treated as the owner and may delay taking required minimum distributions (RMDs)  until he/she turns age 70 1/2 and then take distributions based on his/her life, often allowing for a greater stretch-out period.

Planning Tip: If the surviving spouse is under 59 1/2, rolling over can expose him/her to the early withdrawal penalty if the IRA funds are needed before the surviving spouse reaches 59 1/2. Safer strategy is to wait until then to roll over and use the inherited IRA withdrawal rules before then.

Non-Spouse as Beneficiary

Naming a non-spouse beneficiary avoids having the IRA assets being subject to estate tax in the surviving spouse’s estate. Required minimum distributions (RMDs) occur over the life expectancy of the designated beneficiary.

Common Inherited IRA Mistakes to Avoid

For non-spouse beneficiaries, it is critical to keep the inherited IRA in the name of the deceased IRA owner. Correct wording for an individual: “John Smith, deceased, IRA for the benefit of James Smith.” Correct wording for a trust: “John Smith, deceased, IRA for the benefit of James Smith as Trustee of the Smith Family Trust dated 1/1/2010.”

Other mistakes include not taking required minimum distributions, not using disclaimers when appropriate, not analyzing contingent beneficiaries, and taking a lump-sum distribution at the death of the IRA owner.

Life Insurance Planning for Inherited IRA

If the IRA owner’s taxable estate does not have sufficient other assets, it could be necessary to use a portion of the IRA to pay estate taxes. Because this use triggers additional income taxes, between 60-80% of the IRA could be lost to taxes.

A solution is to establish an Irrevocable Trust that holds a life insurance policy on the IRA owner’s life. Upon his/her death, the death benefit proceeds can be used to provide liquidity to the IRA owner’s estate and preserve the inherited IRA. To the extent that the insured does not hold any “incidents of ownership,” none of the trust assets will be included in his/her taxable estate. Another alternative is to annuitize the IRA and contribute the annuity payments to the Irrevocable Trust where they are used to pay premiums for life insurance on the IRA owner.

Conclusion

The current income tax laws and the tax increases that will happen in just 16 months (unless the Congress and President agree otherwise) provide some unique opportunities for planning professionals to work together as a team to help our mutual clients. Take advantage of this limited time to meet with your clients, ask the right questions, and make a positive difference for them and their families.

For Professional Advisors

With the recent discussions about closing tax loopholes and increasing taxes for the “wealthy” incident to increasing the national debt limit, clients are beginning to fear that the taxes on their wealth will increase. Even without higher tax rates, wealthier Americans will pay more in taxes if allowable deductions (possibly charitable) and exemptions (probably estate tax) are lowered. We need to be prepared to help our clients as they begin to draw down retirement savings and look for more tax-efficient investments for their stocks, bonds, real estate and savings.

In this blog post and the next, we will examine some of the top income tax planning ideas to implement in 2011 and 2012.

Income Tax Overview

Anything can happen between now and January 1, 2013, but, based on current law, that will be the date the top income tax rate increases from 36% to 39.6%, qualified dividends become subject to ordinary income tax rates, the tax on
long-term capital gains jumps from 15% to 20%, and the 3.8% Medicare surtax kicks in (unless the Federal Appellate Courts strike down the health care reform act. ) Let’s look more closely at how these taxes
can impact your clients, and what you can do to help them.

Qualified Dividends

Under current law, in tax years beginning on or after January 1, 2013, qualified dividends will be subject to ordinary income tax rates. Therefore, C Corporations with accumulated earnings and profits and the cash to do so should consider making larger dividends in 2011 and 2012.

Example, Distribution of C Corp Dividends: Should the sole shareholder of a C Corp make a $1 million dividend to himself in one lump payment in 2012 or in $200,000 increments over five years (2012-2016)? Assuming he is in the highest marginal income tax bracket, 15% capital gains tax rate on dividends in 2012, and 39.6% + 3.8% = 43.4% ordinary income tax rate on dividends for 2013 and beyond, he would pay $150,000 in taxes on the lump sum distribution in 2012 and $377,200 on the incremental distributions paid over five years. He would save $ 227,200 by taking the lump sum in 2012.

Long-Term Capital Gains

Under current law, in tax years beginning on or after January 1, 2013, long-term capital gains will be taxed at a top rate of 20%. Taxpayers should consider selling (or otherwise disposing of) appreciated property and recognizing the taxable gain in 2011 and/or 2012. Taxpayers who have realized capital gains deferred on an installment note may want to consider accelerating the unrecognized gain in 2011 and/or 2012.

Example, Acceleration of Gains: In 2012, Judy sold her business for $1 million in exchange for a nine-year installment note. At the time of the sale, she realized a $900,000 gain. By electing out of the installment treatment, she would pay $135,000 in capital gains tax on the lump sum in 2012 vs. $175,500 on the installments in 2012-2021, and would save $40,500 in taxes (900,000 x .15 = 135,000 versus 900,000 x .1 x .15 = 13,500 plus 900,000 x .9 x .2 = 162,000).

Ordinary Income

Under current law, in tax years beginning on or after January 1, 2013, ordinary income tax rates will increase to their pre-2001 levels. Taxpayers should consider accelerating certain types of ordinary income (bond interest, annuity income, traditional IRA income, compensation income) into 2011 and 2012 if they expect to be in the same tax bracket or higher in future tax years. This is especially true for top bracket taxpayers who may pay the 3.8% Medicare surtax on their “net investment income.

Example, Accelerating Bond Interest: Mike has $100,000 of accrued bond interest that will be paid on January 3, 2013. Mike is in the 35% tax bracket for 2012 and 39.6% + 3.8% for 2013. If he sells his bonds (at par) before the end of 2012 and recognizes the accrued interest income, he will pay $35,000 in taxes vs. $43,400 if he waits and collects the interest in 2013, and will save $8,400 in taxes.

Example, Sale/Repurchase of Bond: James purchased $1 million of corporate bonds in 1993 at par value; they mature December 31, 2013. On December 31, 2012, he sold them for $1,050,000. On January 3, 2013, he repurchased the same bonds for $1,050,000.  Under tax law, this $50,000 premium can be used to offset his interest income over the remaining life of the bond (one year). By selling the bonds in 2012 and repurchasing them in 2013, he realizes a net income tax savings of $14,200 ($21,700 in income tax savings on the bond premium, less $7,500 in capital gains tax on the sale of the bonds = $14,200).

We’ll have more 2011-2012 income tax planning ideas in our next blog post.

For Clients, Advisors & Community

In an earlier article, I discussed what a civil union is and how Illinois law affects spouses in a civil union under the new law.

There is a major disconnect, however between the Illinois civil union law and Federal law.  Illinois recognizes civil unions.  Because of the Defense of Marriage Act (DOMA) (defining marriage as a union between a male husband and a female wife only), Federal law does not generally recognize the civil  union.  (There is currently extensive litigation concerning DOMA.  It might or might not be struck down by the Supreme Court.   The Obama administration has taken the position that it will no longer defend DOMA.  For purposes of this article, we  assume that DOMA is still the law of the land.)

Income Tax:  A couple whose union in registered under Illinois’ civil union law should be able to file a joint income tax return, at least in Illinois.  However, that’s not the case.  No joint filing is allowed for unmarried couples under Federal law for filing Form 1040.  The Illinois tax is based on the adjusted gross income of the Federal 1040. So, there is no benefit to a civil union for individual income tax purposes.

Estate Tax: In the eyes of the Federal law, a couple united under Illinois’ civil union law is not married.  So, they cannot take advantage of the unlimited marital deduction that allows a spouse to leave upon his or her death, an unlimited amount of money to the surviving spouse, free of estate tax.  This would allow deferral of any estate tax to the death of the second spouse to die.  (I should comment, however, that for 2011 and 2012, at least, this affects only individuals whose gross estates exceed  $5,000,000).   As a result, spouses of a civil union have the risk of paying estate tax at the first to die where this would not be the case if they had a traditional marriage.  This is a very big deal because it will cost tax money at the death of the first partner to die and could cause significant reduction in the inheritance available to the survivor!

Gift Tax: The same is true with the gift tax.  Each spouse may make an unlimited amount of  gifts to his or her spouse during his or her lifetime.  Since Federal law does not recognize the  spouse under an Illinois civil union, there is no unlimited gift tax marital deduction.  (Again the same comment regarding the $5,000,000 lifetime exemption applies).

Qualified Pre-Retirement Survivor Annuity (QPSA): Many retirement plans require that the automatic beneficiary of the employee’s retirement plan account is the “spouse”.   This law was designed to protect spouses.  Many plans also require that if the employee names a beneficiary other  than the spouse, written spousal consent is required.  This is a Federal law.  Although there has been no firm guidance,  most practitioners think that the QPSA will NOT apply to an employee who has entered into a civil union.  Hence, it  is very important that the employee have a carefully drafted beneficiary designation which makes his or her intentions known concerning the beneficiary of his or her retirement plan benefits.

Social Security Benefits: Here is an area where an anomalous result will be most interesting to seniors.  Once again, Federal law does not, at the present time, recognize Illinois civil unions.   These aspects of the law can bring about an interesting result.  An example explains it:

Art was married to Beverly.  Art died at age 70.  Beverly continues to receive the survivor portion of his social security benefits.  Two years later, Beverly meets Charlie, a widower age 73.  They are thinking about moving in together and getting married.  Beverly knows that if she marries Charlie, she will lose about $1,500 per month in the survivor benefits she is receiving from social security.  However, after consulting us, Beverly and Charlie realize that if they enter into a civil union (where they get most of the benefits under Illinois law), Beverly will continue to receive the survivorship social security benefits from her deceased spouse because Federal law does not recognize the Illinois civil union as a “marriage”.  The difference in  planning could be significant!  Here, the couple is far better financially by choosing the civil union route.

There are many different considerations in choosing a civil union as opposed to a traditional marriage.  Sometimes the results can be surprising.  Couples contemplating a civil union need counsel so that they fully understand the consequences of their actions before taking that big step.

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.