Archived Newsletter Topics

1. Client Message: Do We Need To Meet?
   
2. Life is so many things. Death is…Inevitable.
3. The Tax Relief Act Of 2001--What Does It Mean? Will Estate Taxes Be Eliminated?
4. Estate Tax Reform?
5. Illinois Estate Taxes
6. Illinois Estate Tax 2009
7. My Approach To "Moving Target" Of Estate Taxes Has Changed – For Some Married Couples
8. Can or Should a Trust Be Used to S-T-R-E-T-C-H Your IRA?
9. Don’t Let This Be You—Protect Family Heirlooms!
10. More Unusual Bequests
11. Family Limited Partnerships
12. Series Limited Liability Corporations
13. Who Owns Your Primary Residence?
14. Recent Changes In Tax Law Makes 529 College Savings Plans Very Attractive
15. The Disposition of Remains Act
16. Medicaid Eligibility Will Become More Difficult
17. Moving to Another State
18. Families in Need of Incentives
19. Disabled Family Members
20. Is Your Power Of Attorney Stale?
21. Segregating Assets to Protect Against Future Ex-Spouses
22. The Effect of Divorce on Your Estate Plan
23. The Effect of HIPAA on Illinois Powers of Attorney for Health Care
24. Who Needs a HIPAA Authorization?
25. Proper Grooming
26. What About The Dog?
27. Pet Trusts
28. Can You Take It With You?
29. Estrangements
30. You Can Help
31. Cartoons

1) Client Message: Do We Need To Meet?

Every newsletter that I send, asks certain questions of my clients, namely:

• Are your assets properly structured in accordance with our discussions so as to avoid probate and/or minimize estate taxes?
• Do you know where your original signed estate plan documents are? I do not keep original documents, only photocopies.
• Do key people have access to your original documents in case they are needed?
• Have we reviewed your estate plan within the last 4 years?

If you answered "no" to any of these questions or if you have any questions or confusion about your estate plan, its provisions, or the impact of new laws upon your plan, let’s talk right away.

2) Life is so many things. Death is…Inevitable.

Life is joy, pain, need, love, beauty, discovery, fear, feelings, relationships and much more. Its vastness is incomprehensible on so many levels. We attach myriad philosophical and theological components to life, but the single universal truth about death is its inevitability. Some people grow very old and ill and wither away. Others are tragically and suddenly struck down in their prime. We never truly know which paths our lives and the lives of our loved ones will take.

Too many people equate estate planning with saving money on taxes. While taxes may indeed be important, that's not all most people are concerned about. What about your legacy, reputation and family? No one really wants to check out of this world leaving behind a mess.

It is hyperbole to say that every single person should have an estate plan, but consider that in estate planning matters, deadlines hit without notice, and the consequences of not planning can be severe to the people you love. If you already know that you need an estate plan or at least a “tune-up” to the one you have, and you are procrastinating, ask yourself why you are avoiding doing something that you know needs to be done. As unpleasant as the task may be, you will feel better when it’s completed. Failing to plan can unintentionally hurt the ones you love, both financially and emotionally.

Often, the most difficult or painful planning decisions, such as those involving blended families or irresponsible heirs, are the most important to give proper attention. You have the ability to lessen the possibility that assets could be tangled up for lengthy periods, that a family business could be put at risk or that some favored heir could be inadvertently shortchanged.

The old saying “you can’t control from the grave” is only partially true. In fact, there are many things that you CAN control from beyond, or at least influence. When planning, look to yourself, be introspective, plan for the inevitable and shape those things that you would like to be shaped. It’s NOT morbid, it IS inevitable!

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3) The Tax Relief Act Of 2001--What Does It Mean? Will Estate Taxes Be Eliminated?

The Tax Relief Act of 2001 ("Tax Act") incrementally phases out estate taxes. Rates are also lowered.

The punch line to the Tax Act: The Tax Act contains a "Sunset" provision. Unless superseded by some other law, the clock resets after December 31, 2010 back to the year 2001. This means that on January 1, 2011, the possibility exists that there will again be a tax of as much as 55% or more on assets exceeding $1,000,000. One New York Times article that I read refers to 2010 as the "throw mamma from the train" year. The implication is that the best time for a very wealthy person to die is sometime between January 1, 2010 and December 31, 2010.

Post Tax Act, the Applicable Exclusion Amount Shelter Trust ("Shelter Trust"), which preserves the exemption of the first spouse to die from estate tax, is still the cornerstone estate-tax savings strategy of affluent married couples, except that somewhat fewer estates need to plan for estate tax. I say "somewhat fewer" because we still must plan for the possibility that the Sunset provision will kick in and that estates greater that $1,000,000 in 2011 and thereafter will be subject to estate tax. Even if this does not occur, many things can happen between now and 2011, including changes in Congress, the White House and economy. The whole scenario presents a moving target in estate tax planning.

Gift tax rates will be reduced parallel to the estate tax rates, except that in 2010, when estate taxes are scheduled for elimination, the gift tax rate levels off at the top income tax rate, scheduled at that time to be 35%. However, the maximum lifetime gift (in addition to annual exclusion gifts, which are currently $12,000 per year, per person) will still be $1,000,000. Above that, you will pay a gift tax. Apparently, Congress did not eliminate gift taxes along with estate taxes because it did not want a loophole where high-income taxpayers could transfer income-producing assets to lower bracket taxpayers.

The IRS will make up at least some of the lost revenue by eliminating the "stepped-up" basis for appreciated assets after 2009. However, there will still be a limited basis step-up on $1.3 million in assets as allocated by the executor and a $3 million limited basis step-up will be available if the transfer is made to a surviving spouse. In large estates, the elimination of the step-up could create a bookkeeping nightmare. Try to figure out the cost basis on Dad’s AT&T stock that he purchased in 1971, reinvesting all of the dividends ever since! It becomes more important than ever to keep good records.

Heirs of homeowners will still get a break on capital gains for a principal residence. The $250,000 exemption from capital gains taxes will be extended to heirs after 2009.

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4) Estate Tax Reform?

On August 4, 2006, the U.S. Senate rejected a bill passed by the House of Representatives which would have exempted from taxation all estates worth as much as $5 million (or $10 million for a married couple) and applied a 15% tax rate to inheritances above that threshold, up to $25 million. The value of estates exceeding $25 million would have been taxed at 30%. Perhaps cynically, the bill was tied to a hike in the minimum wage. In other words, the working poor were not going to get a break unless the wealthiest Americans also got a break. An interesting tactic, to say the least.

With a reduction in estate taxes rejected, it seems highly unlikely that estate taxes will be permanently eliminated altogether. At this time, only people dying in 2010 will have the privilege of leaving unlimited wealth to their families with no estate tax consequences. On the other hand, people dying in 2011 face the prospect of their assets above the $1 million threshold being taxed, with the maximum rate a staggering 55%. This may present daunting liquidity crunches to small business owners, farmers and others whose assets are relatively modest by today’s standards.

With federal deficits running into the hundreds of billions, does it make moral or fiscal sense to drastically reduce estate taxes, conferring a spectacular benefit upon the wealthiest among us? Does it make sense to tax all Americans worth more than $1 million at their death? The truth lies somewhere in between, but the devil is in the details.

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5) Illinois Estate Taxes

In past years, estate taxes for Illinois residents were linked to federal estate taxes via a “pickup tax.” Although a state estate tax filing was required in every case where a federal estate tax filing was made, the net effect of the Illinois tax was nil, because any estate taxes paid to Illinois were offset by a federal tax credit. The changes in federal estate tax law brought about by the 2001 Tax Act, which phase out the state tax credit, presents a shortfall in revenue to many states, including Illinois. As a result, Illinois decoupled its estate tax from the federal tax. For taxable estates (over $2,000,000 in 2007 and 2008), Illinois will access a separate state estate tax to the extent that it loses out from the elimination of the federal tax credit. In 2009, the threshold for federal estate taxes is $3,500,000, but in Illinois state estate taxes will be paid on estates that exceed $2,000,000. In 2010, neither the state nor the federal government will collect any estate tax. In 2011 and beyond, the Illinois estate tax will be added to the federal estate tax, which will return to 2001 levels (the threshold for estate taxes reverting to $1,000,000). The net result is that in Illinois and other states that decouple, taxable estates will pay more taxes. Of course, the estate tax law may (and probably will) change completely between now and then.

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6) Illinois Estate Tax 2009

As it stands right now, the families of Illinois residents who die in the year 2009 face a potentially costly aberration. Presently, the Illinois estate tax threshold is equal to its Federal counterpart, $2 million per person. But in 2009, the Federal estate tax threshold is scheduled to be raised to $3.5 million while the Illinois estate tax threshold remains at $2 million. For married people with shelter trusts that automatically fund upon the death of the first spouse, the problem is this: At the first spouse’s death (in 2009), if that spouse is worth over $2 million, and his or her planning automatically funds a typical shelter trust, no Federal estate tax will be incurred, but an Illinois estate tax of more than $200,000 may be triggered. Ouch!

I am taking a wait and see approach to 2009, as it’s likely that either the Illinois or the Federal law will change before then. Stay tuned.

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7) My Approach To The Moving Target Of Estate Taxes Has Changed – For Some Married Couples

My approach to the moving target of estate taxes has shifted fundamentally for married couples with a commonality of interests.

A quick explanation:

If you are a married couple with a commonality of interests (the same children, for example) and you have Shelter Trusts, a different Disclaimer Trust format might be preferable. Under the Disclaimer Trust format the surviving spouse can decide which of the deceased spouse’s assets, if any, should be sheltered from estate taxes.

A more complicated explanation:

I compare estate tax planning to shooting at a moving target because the amount exempt from estate taxes (the "applicable exclusion amount") increases in 2009 to $3,500,000, becomes irrelevant in 2010 and rebounds to $1,000,000 in 2011 and thereafter.

As explained above, here are the details, presented in a different format:

• The applicable exclusion amount:
• in 2007 and 2008, it is $2,000,000;
• in 2009, it is $3,500,000;
• in 2010 (the "throw momma from the train" year), there is no estate tax.
• in 2011 and thereafter, and the applicable exclusion amount reverts to $1,000,000.

Estate taxes, while of less concern to many, cannot be ignored altogether, because of the sunset provision effective in 2011 and beyond. However, the varying threshold for estate taxes makes some past Shelter Trust formulas less desirable.

A Commonality of Interests?
When a commonality of interests exists between married people, there is no reason to think that the surviving spouse will act against the wishes of the first spouse to die, as in leaving money to anyone contrary to the wishes of the predeceased spouse.

An example of a married couple with commonality of interests: their only children are children they had together, they built their estate together and (absent estate tax considerations) intend for the surviving spouse to be the sole beneficiary of each other's estate. Typically, without substantial estate planning, they may hold the bulk of their assets as joint tenants and name each other as sole primary beneficiary of retirement plans and insurance.

If either the husband or wife has children from previous relationships, there is no commonality of interests, because the surviving spouse naturally tends to want to leave more assets to his or her descendants than to those descendants of the deceased spouse. Or if there is a great disparity in age and/or wealth between the husband and wife.  Or if there are no children and each spouse wants different ultimate beneficiaries.

Shelter Trusts
The Unlimited Marital Deduction allows married couples who own everything in joint tenancy and name each other as sole beneficiary of insurance and retirement plans to postpone any estate tax, but can ultimately result in a greater tax upon the surviving spouse's death than if a Shelter Trust is used.

The rights of the surviving spouse in the deceased spouse's Shelter Trust can be very flexible. As trustee, the surviving spouse can determine the investment mix and can take assets from the Shelter Trust for, among other things, her health and maintenance in reasonable comfort.

The surviving spouse can also have the right to take principal amounts of $5,000 or 5%, whichever is greater, for any reason.

The surviving spouse also can be permitted to distribute principal to descendants and other defined beneficiaries such as charities. If the surviving spouse wants to distribute assets to her boyfriend she should do that from her own money, because that is generally not permitted from the Shelter Trust. But who will stop the surviving spouse from making those distributions if she is the trustee for the Shelter Trust? If no one has authority to oversee what the surviving spouse does with the Shelter Trust, then as a practical matter the surviving spouse can do most anything she wants.

Even so, the surviving spouse's use of the Shelter Trust is still restricted, as assets owned by the Shelter Trust must be maintained separately and accounted for. Also, a primary residence owned by the Shelter Trust that has appreciated since the death of the first spouse will not receive favorable income tax treatment upon a sale.

So while the rights of the surviving spouse in the deceased spouse's Shelter Trust can be near total, if there is a commonality of interests between the spouses and a reduced threat of estate taxes, why not let the surviving spouse decide whether or not to create a shelter trust? There is a way.

A Moving Target + Commonality of Interests = Disclaimer Trusts
The use of Disclaimer Trusts between married couples with a commonality of interests is gaining popularity. This is how it works: Assets are still divided between "his" and "her" trust. The sole beneficiary of each trust is the other spouse. However, the surviving spouse can "disclaim"—that is legally declare "I don't want to own the assets of that trust (or a portion of the assets)." Any portion legally disclaimed within nine months of death flows into a Shelter Trust with the same authority to the surviving spouse that is permitted in any Shelter Trust, except that the surviving spouse cannot have the limited power to make gifts, during lifetime or upon the survivor’s death.

The surviving spouse may, in fact, not disclaim at all, in which case he or she owns all of the deceased spouse's trust assets outright. Or the surviving spouse can still do estate tax planning by deciding the amount that is sheltered. This adds another dimension of flexibility for married couples with a commonality of interests!

My own disclaimer: This type of planning may not work as expected if the surviving spouse is, or becomes, untrustworthy or unstable.

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8) Can or Should a Trust Be Used to S-T-R-E-T-C-H Your IRA?

If you have read my newsletters over the past few years, you know that IRA planning is an area that I have touched upon (and struggled with) in the past. My goal has always been to figure out the best way to allow clients to control assets after death while deferring income taxes for as long as possible. In my mind, the “control” factor often outweighs the income tax factor. I have had many spirited discussions with CPAs and other planners who are only interested in maximally deferring taxes.

Since IRA assets have become so significant, this planning is crucial. Unfortunately, it’s also very tricky. The IRS allows certain trusts to be “conduit” vehicles to stretch tax deferral, but it throws numerous hoops in the way that must be jumped through to avoid rapid acceleration of taxes after your death. Some beneficiary designations may lead to taxes being deferred over five years or might cut that time to just one year. The SAFEST and SUREST way to defer income taxes for as long as possible is to name individuals as beneficiaries. But unless your IRA is being given to charity, taxes will always eventually be paid and taxes usually aren’t the only consideration.

Spouse Is Usually, Though Not Always, #1. In almost all cases where spouses have a commonality of interests (e.g. same kids, etc.), I will advise naming the spouse as first beneficiary, because a “spousal rollover” is usually the most beneficial tactic for the “marital unit”. But there are some situations where naming the spouse first doesn’t make sense, particularly if you have a “blended” family (e.g. kids from previous marriages), in which case a strategy may call for the trust to be named first. The trust can restrict your surviving spouse in such a way that he or she benefits from the IRA during his or her lifetime, but when the spouse dies everything that is left over goes to your kids, not your step-children. Also, there may be estate tax reasons to name the trust ahead of the spouse if one of your goals is to fill up a shelter trust and there are no other assets with which to accomplish that goal. {Why a Shelter Trust? Due to budget strains caused by Hurricane Katrina and the war, Congress now seems to be no closer to a permanent repeal of estate taxes now than when the 2001 Tax Act was established, making very real the possibility that in 2011 and thereafter the threshold for estate taxes will again be $1 million dollars with a top rate of 55%.}

What About After the Spouse—Trust Advantage? After the spouse, I often prefer to name a trust as beneficiary over naming individuals, because of the many situations that a trust is better equipped to handle. The income tax deferral issue is often the only one solved by naming individuals. A trust can better ensure that your IRA flows properly in accordance with your non-tax wishes.

By naming a trust, you can better control the flow of IRA funds in the event of a beneficiary’s death. If an adult daughter dies, do you want the money designated for her to go to her children rather than your son-in-law? If the answer is that you want it to go to your grandchildren, then what if those grandchildren are babies? In that case, should the money then be accounted for in probate court every year until the 18 year old gains complete authority? Do you want an 18 year old to be able to spend inherited IRAs all at once? Or even a 30 year old? You can force beneficiaries to stretch the inherited IRA, ensuring that they only take the minimum required distribution (MRD) each year and nothing more without the trustee’s permission. MRD is based upon life expectancy, ideally the beneficiary’s, but if a group of people are trust beneficiaries, then it may be based upon the oldest beneficiary’s actuarial life expectancy. Failure to take MRD results in severe penalties.

The trustee can have discretion to make additional distributions beyond the MRD in certain situations, such as:

• For a young beneficiary, who has little or no income, the trustee may decide that it’s a wise idea to “fill up” the beneficiary’s low tax bracket.
• If the beneficiary needs IRA funds for health, education or to meet daily needs, the IRA can be used for those purposes.

Additionally, by naming a trust, your IRA funds could be protected from your beneficiaries’ creditors, ex-spouses and bankruptcy.

There are various other factors that must be accounted for if your trust is going to be used as a conduit for your IRA. Your IRAs make superb gifts to charities, since such gifts will not be subject to either estate tax or income tax. Or you may want to make monetary gifts from your trust to people outside your immediate family. In both of those cases, additional care must be taken in the drafting of the trust and/or in naming the beneficiaries to avoid an accelerated tax.

Regardless of advice that I have given you in past years, call me if you have a large IRA and want to stretch it via your trust. Your existing trust can be modified with new language that specifically addresses your IRAs.

Even with the latest language, the techniques I am advocating are relatively new and untested. Because of that, I cannot even guarantee that the stretch strategy will allow optimal tax avoidance. However, for most of us, the ability to control these assets greatly outweighs potential tax savings. Get in touch with us, perhaps as part of your regular review that should occur every three to five years at minimum. We’ll advise you on this and other aspects of your plan. Review meetings are always free and we’ll let you know the cost of making changes if any are required.

The best solution may be to spend it all, but if that’s not going to happen, make certain that you understand your options.

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9) Don’t Let This Be You—Protect Family Heirlooms!

A client related to me shared that her mother inherited a diamond engagement ring from her own grandmother a number of years ago. After Dad died, Mom remarried. Though Mom verbally promised my client that upon her death the ring would be given to my client’s daughter, and everyone in the family knew about “the promise”, when Mom died she only left behind a “simple” will leaving all assets to her husband (the stepfather), with her children as secondary beneficiaries. The stepfather was in no hurry to give the ring to my client, and when he died five years later, “evil stepsister” inherited the ring from him. Evil stepsister then gave the ring to her son, who in turn gave it to his wife, who gave it to her own daughter from a previous marriage. Evil stepsister’s son and second wife then divorced. What happened to the ring? All we know is that “the promise” will never be fulfilled. The lesson: If you don’t bother to plan correctly anything can happen.

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10) More Unusual Bequests

A client bequeathed his “mojo” to his son. Although mojo is a subjective noun, and it remains to be seen if it can truly be inherited, the kid told me that it was the greatest thing he could have received from “Pops”.

Another client, bitter about her ex-husband, wanted her trust to instruct the trustee after her demise to hire someone to pick up all of her dog’s feces in the back yard, put it into a plastic bag, wrap the bag in a gift box, put the box into a nice shopping bag and present it to the ex. I vetoed the idea as being excessive. I encourage client creativity, but am opposed to anything that might subject an estate to a lawsuit.

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11) Family Limited Partnerships-If it sounds too good to be true....

I have written about Family Limited Partnerships (FLPs) in prior newsletters and in my book The Procrastinator’s Guide to Wills and Estate Planning .

Recently there has been a lot of buzz about FLPs due to a series of seminars on the subject, with companies that promote them barnstorming the country. A number of my clients have attended these seminars, which characterize the FLP as a safe yet simple way to substantially reduce estate tax liability and block creditors, while allowing you to retain complete control over your assets, all at a low cost. Like most things, if this sounds too good to be true, then it most likely is too good to be true.

In my opinion, the notion that an FLP is a safe and low-cost alternative to a more traditional estate plan utilizing a will and trust(s) is dangerous. For one thing (and this is major), the IRS hates the type of FLPs being promoted and has been increasingly willing to audit them post-death. While battles with the IRS have created extensive litigation regarding FLPs, there is little in the way of settled law for attorneys to rely upon, presenting a potential legal quick-sand.

For these reasons and others described below, I have come to the conclusion that establishing and maintaining an FLP (which has a good chance of standing up against the IRS’ heightened scrutiny) is, in fact, an expensive proposition and cannot be done by this office “on the cheap”. “i”s must be dotted and “t”s crossed. The FLP document must often be tweaked on a regular basis and before using one, you also need to know that there are annual reporting requirements which, among attorney, accountant, appraisal and filing fees, may cost hundreds or thousands of dollars each year.

One of the most deceptively attractive qualities about FLPs is the proposition that they can be used to gift shares of value to your heirs at a discount of as much as 50%, depleting your estate for estate tax purposes. The theory is that FLP shares aren’t worth as much as the assets that comprise the FLP because the FLP (in theory if not in practice), ties up those assets, and therefore you and your heirs are entitled to a substantial marketability discount. Of course, everyone wants to have their cake and to eat it too: the larger the discount you attempt to take and the more control you try to retain, the more likely it becomes that the FLP will be audited and shot down by the IRS.

Another misleading selling point of the FLP promoters is the idea that the FLP shields assets from a family member’s individual creditors. FLPs do provide some creditor protection, but not necessarily to the degree that these seminars proclaim. Generally, the only remedy available to a non-FLP creditor against an FLP interest is obtaining a “charging order” by a court after obtaining a judgment.

A charging order limits a partner’s creditor to distributions of income or principal made from the partnership and not to the partnership interest itself. Since the general partner (presumably a family member) controls the timing and amount of distributions, the creditor’s ability to grab partnership interests is largely blocked. On top of that, by obtaining a charging order, the creditor risks receiving “phantom” taxable income, with the creditor becoming obligated to pay income tax on a portion of the FLP that he or she doesn’t actually control, even though he or she does not receive any income distribution.

However, there many are instances where the asset protection benefit may be diminished or destroyed:

• If an asset owned by an FLP is the cause of liability, then all other FLP assets could be threatened by a creditor’s lawsuit.
• If a court determines the FLP, lacking a real business purpose, was created solely to protect assets, then the creditor’s remedy will likely go beyond a charging order. An Illinois Bankruptcy court ruling concluded that an FLP’s shield against creditors is easily shattered if it’s not operating an actual business.
• In the case of a single general partner, many states allow the partnership to be dissolved (and its assets left vulnerable) if the general partner withdraws from the partnership. To minimize this risk, more complex planning is recommended, such as adding additional layers of corporations or trusts.
• An FLP’s creditor protection will usually not stand against a transfer that was designed to secure money away from existing (or known to be forthcoming) creditors.

Notwithstanding all this, Family Limited Partnerships may be a useful tool in some situations. The more that it functions as an actual business, the more likely it is that it will pass IRS scrutiny, provided that the discounts do not go overboard. If you are participating in a real business venture with a family member, an FLP might be right for you and it may even be a good way for you to conveniently make gifts to your heirs. However, it’s not a magic bullet and for many people who are enticed by it, it’s more trouble than it’s worth, leading to undesirable results that can undermine your overall planning objectives.

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12) Series Limited Liability Corporations

Legislation was enacted in Illinois in 2005 (805 ILCS 180/37 40) that provides for the formation of a particular type of Limited Liability Corporation (“LLC”) known as a “Series” LLC. You can equate the primary LLC as a parent company that has various sections (“series”) involving different business ventures. Each individual series can be walled off to insulate liability.

Let’s say that you own five different parcels of investment real estate and a catastrophe occurs on the premises of one of the parcels. In most cases, proper insurance will take care of the owner’s liability, but what if there are truly huge damages? With a properly established Series LLC, the liability can only go as far as the series/parcel responsible for the catastrophe. The rest of your holdings in the parent LLC are insulated. A benefit of using a Series LLC over separate LLCs is that only the parent LLC must file yearly reports with the State of Illinois instead of each separate LLC, saving administrative costs. Also each series passes income through to the parent LLC, so that only one annual tax filing is required, simplifying your tax reporting.

Similar to what I said above with respect to Family Limited Partnerships, Series LLCs are not a substitute for more conventional estate planning involving wills and trusts, but in the right situation they can be a vital tool for protecting your assets.

13) Who Owns Your Primary Residence?

If your primary residence is owned entirely or in part by your deceased spouse's Shelter Trust and if you plan to stay in the house for any considerable period of time, it might make sense to exchange assets so your trust owns the house rather than the Shelter Trust. The reason: only an individual (or revocable trust) can, as often as every 2 years, deduct $250,000 in capital gains upon sale. While any interest owned by the deceased spouse in the residence receives a basis "step-up" upon that person's death, more planning may eliminate additional income taxes in the future.

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14) Recent Changes In Tax Law Makes 529 College Savings Plans Very Attractive

Money invested in a 529 plan may grow tax-free and if used for higher education, it may be withdrawn tax-free as well. There are no income restrictions, so anyone may contribute to a 529 plan. 529 plans are governed by the various states, but while they vary substantially from state to state, you are not restricted to investing in a 529 plan in your own state. In some states, the 529 contribution is considered by authorities when determining a student's eligibility for grants and loans. In Illinois, the 529 is not considered a student asset. There are many variables with respect to fees and investment options, so I strongly suggest you talk with a competent financial advisor before making a decision.

By the way, you can use a 529 plan as vehicle for your annual exclusion gifts of up to $12,000 per year. An additional twist allows you to make a $60,000 gift all at once, representing 5 years of contributions. If you wish, you can retain control over the 529 account and you can even change beneficiary designation to a different family member if the originally designated person does not use the money for education. There are generally no age restrictions, so the 529 plan can be used for adult education. For more information, you may also want to check savingforcollege.com, a website devoted to 529 plans.

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15) The Disposition of Remains Act

Recent Illinois law (755 ILCS 65/10) allows a person to appoint an agent to control remains (including the decision as to whether to bury or cremate) and prioritizes a list of relations who may make these decisions if you have not left directions. Until now, the best way to deal with these types of matters was to insert language in your will. While your will can still be used for this purpose, this new stand-alone document is also available to ensure that your wishes are carried out.

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16) Medicaid Eligibility Will Become More Difficult

By the narrowest of margins, the U.S. House of Representatives (by 217 to 215 vote) and the U.S. Senate (by a 51 to 50 vote) passed the "Deficit Reduction Act" making it more difficult for people to qualify for Medicaid by either hanging on to certain assets or gifting assets to relatives. The law was signed by President Bush on February 8, 2006, going into effect immediately thereafter.

The most obvious change is that the old "look-back" of 36 months has been extended to 60 months. The "look-back" is the period of time that it takes for a gift to be effectively removed from an estate when determining Medicaid eligibility. But that's not all. The "look-back" is further extended by new calculations in determining a penalty period. The start of the penalty period changes from the date of the transfer (old) to the date when the applicant would otherwise qualify for Medicaid eligibility (new). The penalty is tacked onto the "look-back". This dramatically affects the calculation in determining the penalty period, but exactly how it is affected is not yet clear, and you can be certain that the penalty period will not be shortened.

Other changes: Primary residences are no longer exempt assets beyond $500,000 in equity, though some states may increase that to $750,000. Also, no type of annuity investments greater than $100,000 are exempt from consideration in determining Medicaid eligibility, even those types that are specifically designed to be disregarded in determining such eligibility.

Medicaid is Federal law, but administered by each state. This change in the program went into effect on February 8, 2006 nationally, but each state has a period of time to comply. Illinois is not, as of this writing, in compliance, and may not be fully in compliance until the end of the year. If you are planning to spend down to qualify for Medicaid, you should know that "spend down" planning is rapidly changing. It may be worthwhile to consult with an expert and get any Medicaid application on file as soon as possible.

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17) Illinois Raises Small Estates Affidavit limit to $100,000

As of August 6, 2004, Illinois raised the limit on estates that can be taken care of by affidavit, as opposed to court probate. If there are no creditors, no disputes and no real estate, then an estate valued at less than $100,000 does not require a full-blown probate. Note that an estate for probate purposes does not include assets owned in trust, assets payable to a surviving beneficiary and assets owned in joint tenancy where the joint tenant survives.

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18) Moving to Another State

Many of my clients have moved out of Illinois. My advice generally runs as follows: If you have moved to another state I encourage you to have your plan looked at by local counsel and possibly updated, notwithstanding the fact that your Illinois estate plan is valid in your new state under "full faith and credit" principles.

Though your Illinois powers of attorney are valid in other states, they may be only reluctantly accepted, as the form may be different from what the health care providers and local banks are used to seeing.

While the basic laws regulating wills and revocable trusts are generally the same in all states, there can be major differences if you have moved to one of 9 community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). In non-community property states, including Illinois, most of the legal community, myself included, generally use two revocable trusts for married couples with assets greater than $1 million. In community property states, practitioners generally use a single revocable trust for married couples no matter how much their combined estates are worth. The reason is that, for community property assets (acquired while living in that community property state), there is a step-up in basis (used to measure capital gains, if any, upon a subsequent sale) on both spouses' interest if held in a single trust, whereas if there are two trusts, one for each spouse, the basis steps up only on that portion of appreciated assets held in the deceased spouse's trust. Bottom line - I strongly encourage my clients who have moved to community property states to have their plans reviewed by local counsel.

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19) Families in Need of Incentives

Provisions may be used in a trust to incentive a beneficiary to do things you want he or she to do, such as:

• go to college;
• attain a certain grade point average;
• become gainfully employed;
• attain a certain net worth through his own efforts;
• get married;
• invite his siblings to “life-cycle events” such as marriages, christenings, bar-mitzvahs or other occasions;

Or such provisions may be used in a trust to incentivize a beneficiary not do things, such as:

• fail a drug test;
• have children outside of marriage;
• pierce his body in various places or cover it with tattoos.

Trusts containing provisions of this sort are occasionally referred to as "values trusts.” Some may cringe at such provisions; they are, in effect, telling other people how to live, but some people do that their whole lives anyway: why stop upon death? When placing incentives into your trust, make sure that the provisions are flexible, because what you think makes sense today may not make sense in the future. For example, if you were to say that a child must obtain a college degree for him or her to receive any assets, would that be appropriate if he or she became disabled and was unable to attend school? Also, any incentive (or disincentive) provisions should be readily verifiable by a trustee. Having children outside of marriage may be verifiable, while a prohibition on extra-marital affairs could involve more than a trustee could stomach.

Provisions containing incentives usually can be enforced, but the court could dismiss those that are contrary to public policy. For example, if you were to insist that your child not marry someone of a different race, this would be an invalid provision because it is racially discriminatory.

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20) Disabled Family Members

If you are responsible for taking care of a family member who will never have the capacity to take care of himself, your estate plan should address the situation. An amazing number of people elect to completely disinherit such a person, relying on others to take care of the disabled person’s needs. I have seen situations where a parent dies and two of the disabled person’s siblings obligate themselves to take care of the disabled sibling while a third sibling spends all of the inheritance on himself. Obviously this is unfair to the siblings who obligate themselves. A better plan will make provisions to ensure that the disabled person will have the means to support his current lifestyle without giving him any money outright, if he isn’t able to handle it directly or if government aid is a factor.

If a beneficiary is legally disabled and receiving some type of governmental aid, a Discretionary Supplemental Special Needs Trust, or SSNT, may be worthwhile. An SSNT allows a trustee named by you to supplement whatever needs your disabled beneficiary has that are not covered by any governmental program. The SSNT is intended NOT to be used to provide basic food, clothing and shelter, nor be available to the beneficiary for conversion for such items, until all local, state and federal benefits for which the beneficiary is eligible as a result of disability have first been fully expended for such purposes.

The trustee should have the discretion to pay for "quality of life" expenditures such as:

• the cost differential between a shared room and a private room;
• travel costs, especially to visit family members;
• reimbursement for attendance at or participation in recreational or cultural events, conferences, seminars or training sessions;
• the cost of a companion or attendant necessary to make travel and similar activities possible;
• elective medical, dental or other health services not freely provided;
• small, irregular amounts of spending money;
• exercise equipment;
• computer hardware and software, audio and video equipment including radios, television sets, and recorders, tapes, books and movies and membership in clubs purchasing such items;
• subscriptions to newspapers and magazines;
• money to purchase appropriate gifts for relatives and friends;
• additional food, clothing, and other expenditures used to provide dignity,
  purpose and optimism and joy to the beneficiary.

The payments referred to above are either made directly or indirectly in such a way that they don’t disqualify or interfere with government assistance.

Additional instructions may be given to the trustee (or someone the trustee designates) to visit the disabled beneficiary on a regular basis to inspect the beneficiary's living conditions and make certain evaluations, which may include:

• Evaluation of the beneficiary’s grooming and overall appearance;
• Physical and dental examination by an independent physician and dentist;
• Evaluation of education and training programs;
• Evaluation of work opportunity and earnings;
• Evaluation of recreation, leisure time and social needs;
• Determination of the appropriateness of existing residential and program services;
• Evaluation of the legal rights to which the beneficiary may be entitled, including free public education, rehabilitation and programs that meet constitutional minimal standards..

Most trusts can benefit from at least a minimal amount of SSNT language, because you never know when a beneficiary may become incapacitated. You may not want your trust to unintentionally cause a beneficiary to lose out on government subsidies that the beneficiary is entitled to receive.

The above discussion of SSNT assumes that it is funded by assets other than those belonging to the beneficiary. If it is funded by the beneficiary's own assets, then for it to be valid, there must also be language that the government agency or agencies are reimbursed from the trust upon the beneficiary's death.

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21) Is Your Power Of Attorney Stale?

If your durable Power of Attorney for Property is more than seven years old, it may be "stale", meaning that it might not be honored by certain financial institutions. This differs from bank to bank, brokerage to brokerage, mutual fund to mutual fund and other such organizations.

Other reasons to update a Power of Attorney: If addresses have changed, or if you want an order of agents different than that specified in the document.

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22) Segregating Assets to Protect Against Future Ex-Spouses

Situation One: You've managed to build up a nest egg and are about to get married to someone who is asset-poor.  Do you tell your spouse-to-be that you want a prenuptial agreement? If you ask me whether you should have one, I'll say yes, but you may cringe at the thought of raising the topic and putting your nascent romance at risk. On the other hand, the possibility of losing half your assets in divorce may be terrifying.

Segregating your assets provides a partial solution, helping ensure that what's yours will remain yours. Precise bookkeeping is crucial to doing this correctly. Before you wed, all of your major personal assets are placed in a trust. These trust assets, which you accumulated prior to marriage, must be kept segregated from those you acquire after the marriage. Assets that are commingled (mixed) with those of your newly beloved are at increased risk in a future divorce. Assets can be removed from your pre-established trust account if you so choose, but after the wedding, new assets cannot be moved into it. This is not a foolproof method for protecting assets - in truth, neither is a prenuptial agreement - but it's a solid tool. It's also less inflammatory than a prenuptial agreement because:

• you don't have to get a signature from your future spouse; you don't even have to mention that you have a trust or that assets have been transferred to it;
• you avoid the use of the hot-button term "pre-nup," which carries all sorts of baggage with it;
• you can avoid disclosing all of your assets to your spouse, which is required for a valid prenuptial.

Situation Two: When leaving money to children (or other beneficiaries), you can be as restrictive as you want to be. Yes, you can control from the grave. If you want to ensure that none of the money you leave your daughter goes to your future ex-son-in-law, you can do all sorts of things that may restrict your daughter's use of her share. But even if you leave money to her outright, the son-in-law can't touch it, during marriage or in the event of a divorce, unless she commingles the inheritance with her existing marital assets.

The lesson? Don't commingle.

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23) The Effect of Divorce on Your Estate Plan

Illinois law (760 ILCS 35/1) provides that unless the terms of the will or trust are contrary, a divorce decree entered by a judge automatically terminates all rights of an ex-spouse in such will and trust. The ex-spouse is treated as if he or she has predeceased. If you are merely separated, this tenet does not apply. Also, divorce does not affect joint tenancy interests, payable on death designations or other beneficiary designations on many types of insurance policies, IRAs, qualified retirement plans, annuities, etc.

What’s my point? If you are divorced or separated, you may want to review ownership and beneficiary designations of all your assets. Without informed spousal consent, there may be some things you can change and others you can’t, but at least you should be aware of the future flow of your assets.

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24) The Effect of HIPAA on Illinois Powers of Attorney for Health Care.

The privacy rules of the federal Health Insurance Portability and Accountability Act ("HIPAA") should not interfere with an Agent acting under a properly executed Power of Attorney for Healthcare. Under HIPAA, only the patient or his "personal representative" can access - or grant permission for others to have access to - the patient's private medical records. An Agent under an Illinois Statutory Power of Attorney for Healthcare is, by definition, a "personal representative" under HIPAA.

Despite the reality of the law, overzealous healthcare providers (and their administrative employees you encounter on the "front line") may erroneously refuse access to medical information to an Agent under the Power of Attorney, most likely in a misguided attempt to avoid penalties otherwise authorized by HIPAA for wrongful disclosure of private information.

Since late 2003 some attorneys have sought to prevent this type of problem with healthcare providers by adding a clause in the Power of Attorney that specifically grants the health care agent HIPAA authorization. Other lawyers feel that including the language in the health care Power of Attorney document creates an internal conflict within the document and may actually result in a "compound authorization" - a no-no under HIPAA.

Please note that to the best of my knowledge, no agent of any client of mine to date has been stymied when attempting to use a Health Care Power of Attorney without added HIPAA language. At most, this appears to be more of a "what if" problem. I have decided that to address clients' concerns regarding HIPAA, the best solution is to use a stand-alone authorization and keep this authorization with your estate planning documents. To obtain a stand-alone HIPAA authorization form, download it here: (HIPAA Compliant Authorization Form) or send me an email.  (but don’t rely on the sample without consulting an attorney)

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25) Who Needs a HIPAA Authorization?

The easy answer is that everyone who would want their medical information available to anyone else should sign a HIPAA (Health Information Portability and Accountability Act) Authorization granting permission to those who should be able to access medical records. Without such an authorization, access may be blocked even to those whom common sense dictates should have access, including a spouse, adult children, etc.

• Let’s say your child goes to a college that is 1,000 miles away. He is injured or falls ill. Naturally, you would be desperate for information regarding his condition. The university will certainly accept the tuition payments you make, but will probably not share medical information with you absent a HIPAA Authorization.
• Let’s say you have a Power of Attorney for Property, enabling your designated agent to sign your name to financial transactions and pay your bills. Or a Revocable Trust naming a successor trustee or co-trustee. Some people prefer to grant financial authority immediately upon signing estate planning documents. Others only want to grant that authority if they lose the capacity to manage assets by themselves. A determination of incapacity is usually made by your loved ones together with a physician who has personally examined you. Without a HIPAA Authorization, your physician may feel constrained against certifying to your incapacity, needlessly delaying the authority of someone to act on your behalf.

A HIPAA Authorization is usually accompanied by a Power of Attorney for Health Care. While an agent under a Power of Attorney for Health Care is legally entitled to access medical records, many lawyers and people in the health care industry believe that a separate HIPAA Authorization can be extremely helpful for people who have to deal with health care staff. Call your attorney for a HIPAA Authorization. A sample HIPAA Authorization is on my website (but don’t rely on the sample without consulting an attorney).

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26) Proper Grooming

You already know about the need for Powers of Attorney for Health Care (Does the name “Terri Schiavo” ring a bell?). Here’s another take on the subject: Have you ever visited an elderly relation in a nursing home who was meticulous about grooming in younger years, but whose appearance is now being neglected? Sadly, I’m talking about Grandma growing whiskers. One client specified in her power of attorney that such grooming matters must be attended to by her agent for health care. Of course, this only works if the agent is diligent, but at least the power of attorney addresses the subject and shame upon the agent who does not properly follow through.

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27) What About The Dog?

When you are gone, who will take care of your pet? I do NOT recommend leaving money outright to a dog or cat. Most people ignore the issue, but some clients will specify that a friend or family member will take your pet and leave a sum of money to that person as compensation. A Reuters news story alerted me to Merry Lynn Pet Estates, located in Melrose, New York. By making a provision in your trust, you can gain peace of mind knowing that after you are gone your pet will be living large, enjoying warm meals and heated beds (not cages) in the serenity of their own private rooms. Daily stimulation includes private walks along the hills and pond, ball throwing games, a boat ride or swimming in the pond. Quiet times include soothing petting and personal interaction, and message therapy is also an option.

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28) Pet Trusts

Per Illinois statute 760 ILCS 5/15.2, effective January 1, 2005, a trust for the care of one or more designated domestic or pet animals is valid. The trust terminates when no living animal is covered by the trust.

I have provided for dogs, cats and horses numerous times over the years in various estate plans. This law ensures that the provisions I have already written regarding the care of pets are recognized by Illinois probate courts. The statute contains a couple of interesting provisions:

• The court may reduce the amount of the property transferred to the pet trust if it determines that the amount substantially exceeds the amount required for the intended use. {My comment—why would someone transfer substantially too much money to such a trust? Then again, who could have predicted that Ruth Lilly would make a testamentary gift of $100 million to Poetry Magazine?}
• The trust is exempt from the operation of the common law rule against perpetuities. {My comment—the Rule Against Perpetuities, a scary piece of law dating back to medieval English common law, is a subject that is explored in ridiculous detail in law school and it tormented William Hurt’s character in the movie Body Heat. I don’t understand how a pet trust designating particular pets can possibly violate the Rule Against Perpetuities, but, then again, the Rule Against Perpetuities assumes that there are “fertile octogenarians” and “precocious toddlers” who may have babies.}

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29) Can You Take It With You?

One of the craziest things that law students learn about is the ancient common law Rule Against Perpetuities (the “Rule”). The Rule prevents any contingent interest in a trust, no matter how remote the possibility, from potentially arising more than “21 years plus lives in being” at the time the document was created. “Lives in being” may include any unborn children. It’s a short but sometimes ridiculously complex doctrine that prevents trusts from lasting forever. If any clause in a will or trust violates the Rule, then the entire document is deemed to be invalid. Preposterous possibilities such as the “fertile octogenarian” and the “precocious toddler” and questions about exactly what a “life in being” is make the Rule a regular part of law school exams. Traditionally, the way most lawyers treated the Rule was to draft carefully and always include a “savings” clause that essentially says any violation of the Rule results in the particular bequest violating the Rule being cut short and existing beneficiaries paid the trust corpus outright. In the noir classic Body Heat, slimy lawyer Ned Racine, portrayed by William Hurt, learned about the Rule the hard way.

In the last few years, several states, including Illinois, have allowed people to “opt out” of the Rule and create Perpetual Trusts that theoretically last forever (“perpetual” and “forever” being defined only by our puny minds). Also known as “Dynasty” Trusts, these devices attempt, and may succeed, in accomplishing the goal of making a pool of assets available for many generations into the future.

Lately, there has been a merger of Perpetual Trust planning with the technologies created by the cryonics movement (where people have their bodies--or just their head if they want to save money--frozen). The “Perpetual Revival Trust” is supposedly being utilized by at least a dozen multimillionaire immortality seekers whose plan is to leave money in a trust that, when they are thawed out in a century or two, will revert back to them. One Arizona resort operator is leaving himself about $10 million that he figures, through the magic of compound interest, may make him “the richest man alive” when he wakes up. This bizarre planning technique is not done by my office, but I find it so twisted that I am compelled to share it with you.

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30) Estrangements

I meet many families with deep estrangements. Professionally, I cannot be judgmental, but as a human being I can’t help myself from forming opinions. Life is too short to be bitter all of the time. Some estrangements are justified. If you really don’t like your brother (cousin, daughter-in-law, etc.—I’m not talking about spouses here) and your refusal to have any contact with that person causes no problems to other people that you love, then there may be nothing further to talk about. Go ahead and be bitter. It’s also your right to write him out of the will. It may even give you satisfaction to have the last word, but don’t write anything that can be construed as libel.

Conversely, your “last word” can be positive. You can use the opportunity of your will to make a final attempt to end a relationship on a high note. Taking the moral high ground can be very satisfying and may heal deep wounds.

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31) You Can Help.

If you are acquainted with someone of modest means who needs an estate plan but is reluctant to seek professional legal assistance because of anticipated cost, please contact me. I believe an up-to-date estate plan is essential, and I will give appropriate consideration to those in need.

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