Wills, Trusts & Estate Planning

Why It's Important For You To Have A Will

A Will is a legal document that sets forth your wishes about how your assets are to be distributed after your death. It is also called your Last Will and Testament. If you do not have a Will, your assets would be distributed according to the provisions of state law.

A Will must conform to very specific requirements. It must be executed in a particular way, including having two witnesses and a notary present. The legal requirements in each state can differ. If a Will is not drafted or executed correctly, it could be contested or invalidated, so it is important that you have a competent lawyer prepare your Last Will and Testament and supervise its execution.

If you have minor children, it is in your Will that you would appoint guardians for them. If you don’t make such a provision, if the need for a guardian arose, the decision would be made by a judge, who would not know your express wishes.

In your Will, you appoint an executor to be in charge of your estate after you die, to take control of your assets, and to distribute your assets as you have directed in your Will. If you did not have a Will, there could be a dispute between your relatives as to who would have the right to be in charge of your estate.

If you do not own any real estate and if your assets are under $100,000, your estate would not have to be probated. Nevertheless, there are specific things which must be done. For example, it is required that the original Will be filed with the clerk of the circuit court within thirty days after your death. Your executor should consult us for guidance. (See our section on Estate Administration).

For people who own real estate or whose assets are over $100,000, their estates could be subject to probate (See our section on Probate). Probate is the court process that governs the transfer of property from the name of the deceased person to a living person. Many people wait years to receive property left them by loved ones. Probate is expensive. Fees can range up to 8% and 10% of the value of the property in the estate. The easiest and best way to avoid probate is to create a trust.

What Is A Trust?

A trust is a legal entity in which a person called a “Trustee” holds title to property for the benefit of someone called a “beneficiary.”

The person who creates a trust is called the Grantor or Settlor in the trust document. The Trustee is the person that holds legal title to the property in the trust. In some trusts, like a revocable living trust, the Grantor is also the Trustee. This means that the person for whom the trust is created maintains control of his or her assets as Trustee. The trust would name successor Trustees, who would take over responsibility if the Grantor becomes incapacitated or dies.

The body of the trust document describes what is to be done with the property in the trust. The persons who benefit from the trust are called the beneficiaries. Usually, you are the beneficiary of your own trust while you are alive. Your spouse, children, grandchildren, friends or charities may be beneficiaries during your life or after your death.

A trust is like a suitcase. It can only protect what you put into it. Putting property into the trust is called funding the trust. Real estate is transferred into a trust by means of a Quit Claim Deed. Investment accounts are transferred into a trust by changing the owner of the account to the trust ("re-titling"). One should also look at stock certificates, ownership interests in closely held entities, certificates of deposit, savings bonds, and so on to determine whether they should be re-titled in the name of the trust. Property which is not titled or registered such as jewelry, collectables, private offerings, etc. can be transferred into a trust by means of an Assignment.

When a husband and wife each have a trust, they can double their state and federal estate tax exemptions because each trust can qualify for the exemption.

Because property which is in a trust is not subject to probate, the transfer of assets to the beneficiaries can be done quickly and confidentially. The successor Trustee named in your trust can pay the necessary bills and distribute your assets. It operates without court intervention. It is private.

You do not need to be a millionaire to have a trust. Anyone who owns a home should have a trust. Any person with a loved one who requires special protection, like minor children, elderly relatives or disabled beneficiaries, can make very good use of a trust.

Special Needs Trusts provide that the Trustee, on a continuous basis, would apply the designated assets for the benefit of the beneficiary, but the beneficiary would not “own” the assets and thus would not lose eligibility for governmental or other benefits to which they would otherwise be entitled.

There are many types of trusts, e.g. Revocable Living Trusts, Special Needs Trusts, Grantor Retained Annuity Trusts (GRAT), Charitable Remainder Trusts (CRT), Irrevocable Life Insurance Trusts (ILIT), etc. Each serves a different purpose. Each has different provisions.

Trusts are complex documents, with specific uses and tax implications. They should be prepared by competent attorneys. They can be very helpful in many ways. But they must be done right to be effective.

Estate Planning

Estate planning entails taking a broad look at all of a person’s assets to make sure that all of the instruments are in place to provide for an orderly transition if the person became incapacitated or died. This includes not only real estate holdings, IRAs, 401-Ks, and investment accounts, but also business assets, private placement investments, loans, long-term care insurance, and life insurance.

Power of Attorney for Property

Everyone should have a Power of Attorney for Property (POA-P). This covers the situation in which you are alive, but unable to handle your own financial matters. (While your successor trustee could handle property which is in your trust, the POA-P covers all of your other property, such as bank accounts and automobiles, as well as your property rights and duties, such as filing your income tax return.)

In the POA-P, you name your agent and successor agents who are authorized to handle your financial affairs. You also state when your agent’s authority becomes effective. It could be effective immediately or upon the occurrence of some event, such as a written statement from your doctor that you are incapacitated.

As of July 1, 2011, the State of Illinois mandated new wording for the statutory POA-P. In fact, I usually add several pages of additional provisions that deal with elder care issues.

Power of Attorney for Health Care

In a similar fashion, the Power of Attorney for Health Care (POA-HC) covers the situation in which you are alive, but unable to make your own medical care decisions. In the POA-HC, you name your agent and successor agents who are authorized to make your medical care decisions. Again, you also state when your agent’s authority becomes effective. It could be effective immediately or upon the occurrence of some event, such as a written statement from your doctor that you are incapacitated. In the POA-HC you will give your agent direction about your wishes in regard to end-of-life decisions.

As of July 1, 2011, the State of Illinois mandated new wording for the statutory POA-HC. Lawyers can add things to the statutory form, but they cannot delete or omit any of the statutory wording. It is important to have up-to-date powers of attorney.

A Living Will Declaration is a shorter document which accompanies the POA-HC and expresses to your doctor your wishes about treatment in terminal situations, where death is imminent.

HIPAA Patient Confidentiality Release

The federal Health Insurance Portability and Accountability Act (HIPAA) became law in 1996. One aspect of that law is that it imposed severe penalties on doctors or health care providers who disclose a patient’s confidential medical information without the patient’s permission. That is why your doctors ask you to sign a HIPAA release to share your medical information with your health insurance company. While the POA-HC does include a HIPAA release for the specific agent who is acting at a particular time, it is a good idea to sign a more general HIPAA release which allows your medical care providers to share information with all the people you name, such as your family members.

Beneficiary Designations

IRAs and tax-deferred accounts need to remain titled in the name of an individual. Most annuities are not re-titled in the name of the trust. If the beneficiary designation of an IRA is the trust, upon the death of the owner, the deferred taxes would become due. Usually, it is preferable to have named individuals as the beneficiaries, because family members have options to stretch the tax deferral over a longer period of time. In beneficiary designations one should be mindful about what would happen if the named beneficiary were to predecease the owner. For example, if someone is naming their children as beneficiaries, they should add the words per stirpes or “by right of representation” if their intention is that if a beneficiary has predeceased them, that beneficiary’s share would pass to their children, if any.

Life Insurance & Irrevocable Life Insurance Trusts

There are many good reasons for people to purchase life insurance. One of them is to provide cash to pay estate taxes. However, most people have a serious misconception about life insurance. They know that the death benefit of a life insurance policy is tax-free to the beneficiaries. What they often don’t know is that the death benefit is included in calculating the gross estate of the decedent, if the decedent holds any incidents of ownership like the ability to remove or change beneficiaries. If the proceeds from the insurance policy push the estate above the amount which is exempt from federal and state estate taxes, the estate could owe half of the excess in federal and state taxes.

A solution is to create an Irrevocable Life Insurance Trust (ILIT) which is the owner and the beneficiary of the insurance policy. The ILIT itself contains the names of the beneficiaries and the provisions that will be made for them, as well as the operative terms and conditions that govern the trust. Because the ILIT is irrevocable, the grantor cedes control of the trust to an independent Trustee. The Trustee handles all communications with the insurance company, including the receipt of premium due notices from the insurance carrier and the payment of premiums.

ILITs are complex documents which must be carefully drafted and meticulously managed, taking into account the IRS regulations and tax court rulings. I have considerable experience in drafting ILITs and acting as the Trustee for ILITs.

Family Limited Partnerships (FLP)

The FLP is a tax shelter plan which is a partnership restricted to parents, children, and grandchildren (and their spouses). To minimize liabilities that might be associated with any of the assets such as investment properties, it is advisable that the General Partner be a corporation owned and controlled by the parents. The Limited Partners would be the parents and their designated descendents. Initially, all or most of the ownership of the FLP is in the hands of the parents. Each year they can gift percentages of the FLP (rather than percentages of the underlying assets) to their descendants, while retaining substantial control of the FLP, as long as they retain a 1% ownership interest. As long as the value of the gift does not exceed the amount established by the IRS each year for tax-free gifting ($14,000 in 2014), the gifts are not counted against the lifetime gift tax limits for an individual. This means, for example, that a mother and father could each give $14,000 worth of interest in the FLP to each of their children and grandchildren and their spouses. Furthermore, the IRS allows the value of the gifts to be discounted for minority interest and lack of marketability. In this way, more assets can be transferred to family members with lesser tax liability.

I am experienced in drafting FLPs and advising clients in regard to their on-going administration.

Family LLCs

Family LLCs work in a similar manner to the FLP. The difference is that an LLC is the vehicle rather than a limited partnership.

Resource Links

American Bar Association, “An Introduction to Wills”
Answers some of the most common questions related to Wills.

American Bar Association, “Revocable Trusts"
Answers some of the most common questions related to Revocable Trusts.

American Bar Association, “Estate Planning FAQs”
Answers some of the most common questions related to Estate Planning.