Categories

On December 6, 2010, President Obama announced that he has reached a deal with Republicans regarding the estate tax and other Bush Tax Cuts:

Under the deal, the repeal of the estate tax in 2010 would not be extended.  The estate tax would be revived, but not as it is scheduled.

Under current law, if Congress reaches no agreement, the estate tax is scheduled to come back in 2011 at a top rate of 55% (60% in some cases) and an exemption of a mere $1 million for individuals.

Under the Obama-Republican deal, the estate tax would come back at a rate of 35% and with an exemption of $5 million for individuals.

The impact that the Obama estate tax deal would have on estate planning does not appear to be positive.

Estate planning: chilled further.

Many Americans do not have proper estate plans. According to a Lawyer.com survey from earlier this year, there has been a drop in estate planning: only 35% of Americans now report having a will and only 21% have a trust.

Comments by estate planners indicate that the Obama estate tax deal would chill estate planning even further.

(1) Joshua Rubenstein (head of the estate and trust practice at Katten Muchin Rosenman LLP), said that without details it is hard to determine how estate planning would be impacted. But he added, “I would guess that having an estate tax rate equal to the income tax rate will discourage estate planning. Usually people gift if the gift tax and income tax on the carry over basis is less than the estate tax. Having a transfer tax equal to income tax rates will likely make hoarding cheaper.”

Rubenstein further explains, “If the gift tax stays 35% as well, that should cool substantially the rush to pay 35% at year end to save 55% some day when now you might be facing only a 35% estate tax some day.”

For more on the year-end rush to make gifts and how a proposal by Senator Baucus would chill it, see Ashlea Ebeling, Estate And Gift Tax Bombshell (The Best Revenge).

(2) Martin Shenkman thinks that that a lower estate tax rate and a higher exemption might lead more people to rely on do-it-yourself estate planning:

If taxpayers are given a comfort level that a $3.5 million to $5 million estate tax exclusion is permanent, most taxpayers will likely resort to on line self-help will preparation software, or frequent living trust mills or other cheap “estate planning” options with even greater frequency than before. After all, the complexity of the estate tax won’t affect them. . . .

Too few general practice attorneys or consumers begin to understand that estate tax is but one of many complex but vital matters estate planners address.

(3) In Obama and GOP Agree on Estate Tax: Winners and Losers, Scott R. Zucker (attorney, licensed in Virginia, Maryland and Pennsylvania) writes that those without wills (and estate planning lawyers) will be losers. He explains, “There is a prevalent myth that only the wealthy need estate planning services. Many people will see the new $5 million exemption level and be even less inclined to get a will.”

Continue reading: Obama Estate Tax Deal Would Chill Estate Planning

On December 6, 2010, President Obama announced that he has reached a deal with Republicans regarding the estate tax and other Bush Tax Cuts.

Under the deal, the repeal of the estate tax in 2010 would not be extended.  The estate tax would be revived, but not as it is scheduled.

Under current law, if Congress reaches no agreement, the estate tax is scheduled to come back in 2011 at a top rate of 55% (60% in some cases) and an exemption of a mere $1 million for individuals.

Under the Obama-Republican deal, the estate tax would come back at a rate of 35% and with an exemption of $5 million for individuals.

Many individuals are concerned about asset protection. By doing estate planning, they can often increase their asset protection.

The key to effective asset protection is to structure your affairs to minimize exposure to potential lawsuits prior to a threatened claim. If steps are taken to manipulate assets after a threatened claim, there can be potential problems with fraudulent convey- ance laws.

This article will set forth a few techniques that are important for preserving and planning an estate while emphasizing asset protection.

It is crucial to review insurance coverage to be certain that it is adequate. Personal liability umbrellas are relatively inexpensive and are a must.

If you own rental property, investment real estate or business assets you should strongly consider forming a business entity such as a corporation – either an S Corporation or C Corporation – or limited liability company. By forming a business entity, you can shield your personal assets from claims.

This is especially important if you have employees. Without a business entity to separate your business affairs and your personal assets, your personal assets would be subject to claims resulting from misdeeds of your employees.

An important form of asset protection and estate planning is the separation of assets between spouses.

Often, it is advisable for one spouse to own the business interests and the other spouse to own the assets that are less subject to potential creditors. If something does go wrong for the spouse involved in the business, the assets owned by the other spouse should be protected.

An important form of asset protection is to own assets that are exempt from creditors’ claims. Significantly, personal residences, qualified retirement plans, life insurance and annuities can be exempt from creditor claims.

Because most individuals want to protect their assets, it is important to coordinate asset protection efforts with estate planning. By coordinating these efforts, the family’s assets will be better protected from creditors and estate taxation of the assets can be minimized.

For help with IL estate planning contact Chicago estate planning lawyer Don Thompson.

Source

• Can say who gets what
• Can choose executor and guardian for kids
• Can waive surety on executor’s bond – (a surety is an insurance company which agrees to pay if executor defaults – quite expensive)
• Can direct executor to take specific action he might not otherwise be able to take (retain family company)
• Can give some property free of debts and other property subject to debts
• Can make gifts of specific items to particular people
• Can make conditional gifts, i.e., to X if he does something and if he does not to Y ( must be a legal condition)
• Can disinherit wife or kids
• Cannot defeat wife’s right to take against will – she can elect to take what will gives or 1/3 of the probate estate if there are descendants or one-half if there are no descendants.
• Cannot defeat spouse’s award, which is in addition to what will gives spouse, of amount necessary for support for nine months – at least $10,000 plus $5000 for each dependent child.

There is a yearly exclusion from gift tax of $13,000 per year per donee in 2009 (the amount rises periodically). This applies only to gifts of present interests. A gift in trust is not considered a present interest. For instance there is a gift in trust if you give money to a trustee to hold and pay the income to grandchildren each year until the youngest reaches 25 when all the rest of the trust assets are distributed to them. Since the grandchildren cannot get the trust assets presently, this is not considered a present gift.

If the children are given a right to withdraw the money contributed to the trust for a limited time after the contribution, then their interest in the contribution is a present interest and the contribution qualifies for the gift tax annual exclusion. The right to withdraw the contribution is called a Crummey power after a case by this name in which the principal was established.

The beneficiary who has power to withdraw the contribution or leave it in the trust is said to have a power of appointment. The beneficiary can appoint who gets the contribution – in effect either the beneficiary or the person who gets the trust assets after the beneficiary’s interest ends. Unfortunately exercise of a power of appointment in favor of someone else – or expiration of the right to exercise the power with the result that someone else then gets the property – constitutes a gift. When the trust income beneficiary decides not to withdraw the contribution and his or her right to withdraw expires the result is that the contribution stays in the trust as principal and ultimately passes to the remainderman. This is a gift to the remainderman. Since the remainder is not a present interest this gift does not qualify for the yearly exclusion.

Continue reading: Crummey Trust/Crummey Powers

The object is to keep assets in the qualified plan or IRA and defer tax as long as possible. To do this you delay distributions by the owner and name beneficiaries who qualify for extended payment or who can roll over the benefits to their own IRAs and defer distribution even longer. In some cases the plan assets will have to be withdrawn for living expenses and tax deferral is not the most important thing.

Qualified retirement plans and IRAs turn capital gain into ordinary income and make it impossible to take advantage of stepped up basis on death so you should consider:

a) What is age of client?

b) What type of income do they get on plan assets?

c) Maybe they should not contribute any more.

d) Maybe they should start withdrawing from the plan rather than using other assets which are generating capital gain during their life.

Any planning for these interests must consider:

a) All distributions from an IRA or qualified plan are ordinary income and the plan interest or IRA is subject to estate tax on its fair market value on the date of death or the alternate valuation date.

b) Retirement plan interests cannot be given away irrevocably because of the anti-alienation rules under ERISA. Therefore they are not useful for gifting strategies.

c) Retirement plan benefits are Section 691 income in respect of a decedent so the beneficiary does not receive a stepped up basis on death.

(i) The beneficiary gets a deduction for the estate tax generated by the interest. The deduction is not subject to the 2% of adjusted gross income limitation. Section 67(b)(7).

d) The generation skipping transfer tax (GST) applies to interests passing to beneficiaries assigned to at least two generations below the owner. The exemption is $1,500,000 through 2003, $2 million in 2006-2008 and $3.5 million in 2009.

(i) There is an income tax deduction for GST taxes under Section 691(c)(3).

e) Distributions to the owner before age 59-1/2, except in limited instances, are subject to a 10% penalty.

There are minimum distribution rules – the tax shelter cannot last forever. There are 2 sets of rules. One for distributions during the owner’s life and one for distributions after the owner’s death.
read more…

This refers to preventing creditors from getting your assets. There are no magic techniques. A variety of techniques are used which may include:

1. Transferring your assets to your spouse – or someone else who is cooperative. There is an unlimited gift tax exemption for transfers to a spouse.

2. Tenancy by the Entireties. This is a type of joint tenancy between married people for their residence. The creditors of one spouse cannot levy on the residence as they can when it is owned in an ordinary joint tenancy.

3. Putting your assets into a form exempt from execution by judgment creditors. A good example is a retirement plan or IRA (in Illinois.) Another exempt asset is life insurance payable to a spouse or dependant, including the cash value. (Creditors can levy on distributions from these plans or insurance).

4. Putting your assets in limited partnerships or LLC’s created under the laws of a few states where the creditors can get only a charging order (a right to get distributions from the entity) rather than an order to sell the ownership interest. You can get the money out in salary – not distributions on the ownership interest.

5. Trusts in general. An irrevocable trust (for someone else’s benefit) puts assets in it (but not distributions) beyond the claim of your creditors. A revocable trust that provides how its assets are distributed after your death protects the assets from your (not the beneficiary’s) creditor’s claims after your death – but not before.

6. Spendthrift trusts. These are trusts that do not allow a creditor of a beneficiary to attach the beneficiary’s interests. They are valid, but only if the beneficiary is someone other than the creator of the trust.

7. Domestic irrevocable asset protection trusts are now permissible in several states. In effect they are spendthrift trusts for the benefit of the creator of the trust. They basically provide that a creditor of the grantor cannot get the trust assets. Illinois has no such law. To have the law of one of these other states apply to a trust set up by an Illinois resident that state must have a substantial relationship to the trust such as a trustee being in that state and/or location of the assets there. Since domestic asset protection trusts are new, certain questions, such as what state’s laws will apply, are not yet settled.

8. Foreign asset protection trusts. Some countries don’t grant “full faith and credit” to a foreign judgment. A creditor having a U.S. judgment cannot enforce it in those countries. The creditor must institute a new law suit there. This alone discourages creditors. If a creditor does sue the trust assets can be distributed to another trust in another country with similar laws before the creditor gets judgment.

9. Limited liability entities. These are corporations, limited liability companies, limited partnerships and limited liability partnerships. If these are set up and operated properly creditors of the business can only get the business assets. They cannot go outside the business and collect from assets of the owners. Note that creditors of the owners can get the owner’s interests in the corporation or partnership and to some degree, the limited partnership and limited liability company.

10. Keeping ownership of assets used by a business outside the business. The creditors of a business can get its assets. They cannot get assets it leases. For this reason owners of assets like real estate used by businesses they own often do not put the real estate in the entity owning the business. They lease it to the entity. This goes for any valuable asset and often includes equipment or other things used by the business. If the asset is of a type which can generate claims, then the asset can be owned by another limited liability entity.

11. Separating risks. If two businesses are conducted or a single business is conducted in separate locations each can be owned by a separate limited liability entity. That way if one goes under the assets of the other will not be exposed.

Some of these devices can be attached by creditors under fraudulent transfer laws. If a transfer is not for equivalent value and is intended to defeat known and existing claims and the transferor does not retain sufficient assets there is a fraudulent transfer which a creditor can get a court to revoke.

Contact Chicago business attorney Don Thompson for help with asset protection or visit his Chicago business law website to read further.

The representative (administrator or executor) of an estate can sue in any court for property taken from the decedent. A summary procedure is also provided for in a supplemental proceeding before the same probate court handling the estate. The representative can file a petition for a citation either to discover property or to recover it. The court orders the citation to issue commanding the person to whom it is directed to appear and respond and the citation is served on the respondent by the Sheriff just like any other lawsuit. Any interested party can also bring a citation against the representative.

To learn more contact Chicago Probate Attorney Don Thompson.

The funeral arrangements of a decedent are the first matter which must be attended to. This is done before anyone has been appointed by the probate court and often before any will is found. For this reason burial instructions in wills are not always effective. Someone will have to pay or guaranty the funeral home and cemetery bills. They will be entitled to reimbursement from the decedent’s property along with those who administer the estate before anyone else gets anything.

Whoever handles the arrangements with the funeral home should get a good number of death certificates from the home. At least 10 for ordinary estates and at least 25 for larger or more complicated estates.

The next thing to do is look for a will. If one is found whoever has it is obligated to file it with the probate court. This is not the same thing as beginning probate proceedings. Filing the will is all that is required.

At this stage it will be necessary to determine whether or not to open a probate estate. This will depend on a variety of factors. Often the size of the estate is determinative.

The next thing to do is determine who the heirs are. This sometimes involves a search for missing heirs or trying to determine if a known heir is alive or dead. It is necessary to trace the family tree as well as just determining the heirs by name and relationship. It will also be necessary to get each one’s exact name, address and social security number.

The same information (name, address and social security number) will be needed for all other persons involved such as legatees named in a will and any executor, administrator or guardian. It is important to get zip codes because addresses are useless without them. It is a good idea to get phone numbers also.

The person doing all this is usually the one named in the will as executor or the person who will petition to become administrator. However, sometimes there are questions about who should act or more than one person claims the right to act. The designation in the will usually will be respected by the court, if it accepts the will. Otherwise there is a statute which states which persons have a right to be appointed and in what order.

Read Further: Matters to be Attended to in Estate Settlement

For assistance with any estate planning or probate matters in Illinois contact Chicago probate attorney Don Thompson.

When you think about what the outcome of the highly political battle over the estate tax  might be, just remember: Last year’s common wisdom that lawmakers would not allow the estate tax to expire for one year proved wrong. Even after the deaths of billionaires including George Steinbrenner; Janet Morse Cargill of the family that founded Cargill; Texas pipeline magnate Dan Duncan; and California real estate mogul Walter Shorenstein, the gap year has continued without any clarity.

Talk to estate attorneys and advisors and they laugh at their own predictions for the estate tax, whether past or future. With so many competing proposals, and heated rhetoric on both sides, it’s hard to see what will happen in the 13 weeks remaining till yearend. “It’s been an experience not unlike the market experience, where fear has taken hold and analytics have taken a backseat,” says Frank Dubreuil, national managing director at Bernstein Global Wealth Management in San Francisco.

The issue is, of course, that if Congress doesn’t act, either before yearend or retroactively in 2011, the estate tax will come back at a level that no one seems to want. Where the exclusion was $3.5 million (that’s $7 million for couples) in 2009 — a level at which it affected relatively few households — it will be $1 million (or $2 million for couples) in 2011. The tax rate would also rise, from 45% in 2009, to 55% in 2011.

Competing proposals in Washington place the exemption levels and tax rates all over the map, as Republicans (many of whom would like to permanently repeal what they refer to as the “death tax”) and Democrats (who want it reinstated) fight it out. The Obama Administration wants to return the estate tax to its 2009 level, with a $3.5 million exclusion and 45% rate.

Many states also levy their own estate taxes with a variety of rates and rules, which adds to the complexity for anyone trying to come up with a financial plan.
read more…