Tag Archives | Estate Planning

New Illinois decanting statute allows trustees to fix some trust problems

I have a confession to make:  I am not a wine connoisseur.  There are a few wines that I enjoy, but my taste palate for wine is not very broad.

Even so, I occasionally end up discussing wine with our clients because of the concept of decanting.  Decanting is the practice of pouring wine into another container before serving it.  This is done to expose the wine to air, refreshing its flavor.  Or so I am told.

The same concept exists in trusts and estates.  Over time, a trust may not do everything it needs to do, which can be a problem if the trust is irrevocable (because, for example, the creator of the trust has passed away).  At times like this, we turn to decanting.

Decanting a trust allows the trust assets to be “poured” from one trust into another trust.  The newer trust can be designed to fix some of the problems found in the original trust.

A great example of the usefulness of decanting is in the case of special needs beneficiaries.  We often see cases where someone passes away and leaves an inheritance to a special needs relative in a general needs trust.  The problem is that, for benefits purposes, a general needs trust is treated the same as an asset of the beneficiary.  The result can be a loss of benefits for the special needs individual.

In an attempt to address this problem (and others), Illinois recently passed a law amending the Trusts and Trustees Act (Public Act 097-0920).  The new law allows trustees to decant most trusts, whether or not the trust includes the right language.

Under the new law, a general needs trust can be “poured” into a new special needs trust for the same beneficiary.  The essential parameters of the trust aren’t changed.  The trustee, beneficiary, and remainder beneficiaries are all the same.  But the special needs individual won’t lose access to their benefits

The decanted trust works better, just like decanted wine.  Same wine, but better tasting.

Of course, a special needs beneficiary is just one use for trust decanting.  But it’s good to know that Illinois has joined the list of states that allow trustees to “freshen” trusts through the use of decanting.

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Understanding Illinois estate taxes

Federal estate taxes get all the press.  But don’t forget that Illinois has an estate tax too.

And, to be honest, the Illinois estate tax is one of the most misunderstood things in estate planning.  We frequently get questions about how it works…even from other Illinois estate planning attorneys.

Calculating Federal Estate Taxes

The federal estate tax is pretty straightforward.  You can gift or pass on up to the exemption amount (currently $5.12 million but scheduled to go down to $1 million in 2013) without paying any taxes.  If your estate is larger than the exemption amount, you pay taxes only on the excess.

Calculating federal estate taxes is a simple matter of subtracting the exemption amount ($5.12 million) and multiplying the remainder by the tax rate (currently 35%).

Calculating Illinois Estate Taxes

We prepared an Illinois estate tax chart to highlight how the exclusion works for different estate sizes.  A good picture can often make a point much more clearly than paragraphs of the best explanation.

The blue line shows the estate taxes due (these figures were obtained from the Illinois Attorney General estate tax calculator).  As you can see, no Illinois estate taxes are due until an estate exceeds $3.5 million (the amount of the 2012 Illinois estate tax exclusion).  But once an estate hits that mark, Illinois taxes shoot up like a rocket.  Then, around $4.8 million, the taxes level off.

The red line is a continuation of that part of the blue line above $4.8 million. It is there to show what the taxes would have been in the absence of the exclusion.  The straight line starting at zero and continuing on through the blue line tells us that the taxes at and above $4.8 million is a flat percentage of the entire estate, not just the amount of the estate over $3.5 million.

Illinois Estate Tax Example

Let’s see how that works in practice.  In 2011, the Illinois exclusion amount was $2 million.  In 2012, that amount was raised to $3.5 million.

So that means a person can pass on an additional $1.5 million to their heirs tax free in 2013, right?

Not necessarily!

It’s easiest to see by looking at an example.  We’ll use an estate size of $5 million because that is the amount of the federal exemption from 2011.

  • Illinois Estate taxes owed in 2011 (exclusion $2.0 million):  $352,158
  • Illinois Estate taxes owed in 2012 (exclusion $3.5 million):  $352,158

Yes, you read those numbers correctly!  The taxes owed on a $5 million estate are exactly the same regardless of whether the exclusion amount is $2.0 million or $3.5 million.

The convergence point seems to be around $4.8 million.  Below that amount, an estate will owe less taxes under the 2012 rules than under the 2011 rules.  But for any estates over that amount, the Illinois estate taxes didn’t change with the increase in the exclusion.

What It Means For You

If your estate is between $2 million and $3.5 million (or from $4 to 7 million for a couple with the proper estate planning to take advantage of both spouse’s exclusion amounts), you can rest easy.  The increase in the exclusion amount saved your future heirs lots of money in Illinois estate taxes.

But if your estate is above $4.8 million (or $9.6 million for a couple with the proper estate planning) the increase in the exclusion amount didn’t reduce your estate taxes by even a single penny.

The good news for everyone with an estate over (or even close to) $3.5 million (or $7 million for couples) is that estate tax reducing strategies are available.

The best medicine for treating estate taxes is a good strategy + time to make it work.

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Looking back at 2011: all the rest

In Part 2 of our year-end review, we discussed the new Power of Attorney statute.  Next up are some changes affecting couples.

Tenancy by the Entirety

The first major change of 2011 provided new options to married couples in how they own their home.  Tenancy by the entirety was a special protection available for the marital residence.

Normally, a person’s house is completely exposed to their creditors apart from a $15,000 homestead exemption.  But married couples can own their primary residence (and only their primary residence) in tenancy by the entirety.

Tenancy by the entirety works the same as joint tenancy, meaning that when one spouse dies the other spouse inherits the entire property.  But it also adds some major creditor protection.  A home held in tenancy by the entirety can’t be lost to creditors of only one spouse.

Of course, creditors try to find a reason (any reason!) to drag the other spouse into the picture.  Even so, it’s a very strong protection.

Prior to 2011, tenancy by the entirety was only available to married couples who owned their homes directly or via a land trust.  Owning a home directly exposes the home to probate.  Land trusts were a common solution to the probate problem, but that usually meant paying annual fees to a bank to maintain the land trust.

Starting January 1, 2011, tenancy by the entirety protection became available to couples who want to own their home in a traditional revocable living trust.  It’s not automatic and it does not apply to people who transferred their home into their trust prior to January 1, 2011.  The trust and the deed need to be drafted with tenancy by the entirety in mind.

The new statute provides a useful alternative for married couples who want to: (1) hold their home in tenancy by the entirety; (2) keep their estates out of probate; and (3) avoid paying a bank for an expensive land trust.

Civil Union Act

On June 1, 2011, the Illinois Religious Freedom Protection and Civil Union Act went into effect.  That law made Illinois just the sixth state in the nation to recognize civil unions for same-sex couples. Civil union partners have the right to be treated as a spouse under the Probate Act.  They can also hold their primary residence in tenancy by the entirety (previously granted only to married couples—singles and same-sex couples were out of luck!).

While the Civil Union Act provides certain safeguards, its benefits don’t extend to every aspect of estate planning.  And at best, it means that same-sex couples get the same bad “default” Illinois estate plan as traditional married couples.  So it is important for same-sex couples to have a comprehensive estate plan that addresses their property and health care.

To 2012…and Beyond!

Those are the major stories from 2011.  There’s more to come for 2012, and we’ll be sharing it with you as it happens.  We look forward to a great year of serving you!

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Looking back at 2011: new powers of attorney

In Part 1 of our year-end review, we discussed the reemergence of the Illinois estate tax.  Next up are the changes to powers of attorney.

A new version of the Illinois Power of Attorney Act went into effect July 1, 2011.  The law changed the rules and statutory form for the Power of Attorney for Property and the Power of Attorney for Health Care.

No doubt, you are probably thinking, “what happens to the powers of attorney I signed 1 (or 2, 5, 10) years ago?”  Don’t worry.  If you have existing powers of attorney, you are not required to rush out tomorrow and sign new ones.

Of course, if they’re more than a few years old, you may still want to get them updated.  Banks sometimes question outdated powers of attorney (those more than 3 years old).  And if you’re over the age of 55, you’ll definitely want to consider a power of attorney with long-term care and elder law provisions (the statutory form which most people have does not address these issues).

While there are many technical changes to the Power of Attorney for Property, the most noticeable change is the ability to name multiple people to act as your agents simultaneously under a Power of Attorney for Property.  Your panel of agents can then act on your behalf by majority vote if you become incapacitated.

The new Power of Attorney for Health Care also provides broader access by your agents to your health care information if they need to act under the power of attorney.  These changes were made necessary by the HIPAA privacy rules that were published in August, 2002.  If you have a separate HIPAA authorization as part of your estate plan (and you do if we drafted your plan), you may not need to update your Power of Attorney for Health Care.

From a legal standpoint, I would describe the changes as a “solid upgrade”.  Something to be aware of, but not likely creating any need for action on your part—unless you were sorely lacking in the power of attorney department to begin with!

In Part 2, we’ll fill you in on the rest of the changes from 2011 and look ahead at what to expect in 2012.

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Looking back at 2011: the Illinois estate tax resurfaces

The past year ushered in many changes to the Illinois estate planning landscape.  There’s a lot to cover, so I’m breaking it into three posts.  First up is the Illinois estate tax.

The Illinois estate tax rules have caught many people by surprise.  So much attention has been paid to the federal estate tax (which currently has a $5 million exemption) that many have forgotten that Illinois has an estate tax too.

Under the 2009 and 2011 Illinois estate tax rules (there was no Illinois estate tax in 2010), a person dying with an estate of $2.5 million would owe no federal taxes.  But their estate would have to write a $128,518 check to the Illinois Department of Revenue.  That big number often shocks people who think of their estates as “just a little bit over the $2.0 million limit.”

Good news arrived last week, though, for Illinois families.  On December 20, Governor Quinn signed a law raising the estate tax exclusion (the minimum estate size before Illinois estate taxes are due) from $2.0 million (currently) to $3.5 million for 2012 and $4.0 million for 2013 and beyond.

Too many times this year I’ve had clients ask whether they should consider moving to another state to avoid Illinois estate taxes.  By narrowing the gap between the Illinois and federal estate tax rules, fewer families will need to consider advanced planning techniques.

But…the good news from Illinois is tempered by the uncertainty behind the federal estate tax rules that is still hanging over everyone’s heads.  The federal estate tax exemption for 2012 is currently $5.0 million, but it drops back down to $1.0 million for 2013 and beyond.  Several proposals have been made in Congress for a permanent solution.  So stay tuned!

In Part 2, we’ll fill you in on the changes to powers of attorney.

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