Chicago Law Blogger » Estate Planning and Probate

Asset Protection if you hit your head…like Conan O’Brien

Clint — Wed, 30 Sep 2009 22:32:03 +0000

Conan O’Brien made news last week when he cracked his melon against the Tonight Show floor. Luckily, he was fine with just a minor concussion. Obviously, Conan didn’t set out to slip and fall on his head…but he did. Life happens, including undesirable events. This is why people buy insurance, and why most everyone can benefit from a comprehensive estate plan.

Whenever I talk about asset protection, most people have visions of Learjet rides to Barbados with a suitcase full of cash and exotic trust documents. But asset protection can be as simple as having a comprehensive estate plan, for instances just like Conan’s accident. How can an estate plan serve an asset protection role?

Let’s assume for a moment that after Conan hit his head, he wasn’t fine. In fact, let’s assume that he hurt himself to the extent that he became permanently impaired for the rest of his life…unable to walk, talk, eat or competently make his own decisions. This is bad enough of course, but in the days and weeks following the shock of the accident, Conan’s family and advisors would very likely need to be able to deal with his property…this could be something as complex as executing a major media business deal (perhaps the use of his likeness for a new toy doll to be marketed throughout the United States) or something as simple as selling his house.

Either way…Conan needs to sign. Problem is (at least in our example) he can’t sign…he can barely say his name. Without an estate plan in place, Conan’s wife will have to go to court and obtain a guardianship over him. This will give her the power to deal for him. In addition, she’ll need to get a “bond” in the amount of his total assets…this process can be very, very expensive, time-consuming and emotionally trying.

With a comprehensive estate plan, Conan’s wife would have the power as successor trustee of Conan’s trust and as Conan’s agent under power of attorney for property to deal with his property without the delay and cost of obtaining a guardianship. No business deals lost, no additional emotional strain. Pretty good.

Chicago Asset Protection: Cover Your Ass(ets)

Chicago Tax Guy: Demystifying Wealth Taxes

Clint — Thu, 30 Jul 2009 03:02:47 +0000

With advances in medical science being what they are, the only sure thing in life is that everyone will have to pay taxes. Taxes come in all sorts of shapes, forms and varieties. There is one little understood tax genre broadly known as “wealth” taxes…I think you should know more.

The federal and all of the various local governments around the country like to levy taxes on their citizens. It’s fun for them, and they’ve thought of many different ways of doing just that.

There are sales taxes, income taxes, property taxes, luxury taxes, sin taxes and, of course, wealth taxes. Wealth taxes breakdown into three specific taxes: Gift, Estate, and Generation Skipping Transfer taxes. I’ll “skip” (pun, get it?) talking about the Generation Skipping Tax for another post, and focus on Gift and Estate taxes.

The underlying policy of Gift and Estate taxes is basically two-fold: (1) if you’re wealthy you can pay more tax and (2) lawyers need jobs. The primary concept to remember in this area is that these are taxes on wealth…money and property accumulated (usually over the course of a lifetime) by a person. Although similar, these taxes have different triggers.

Estate Tax

The Estate Tax is imposed by the federal government and almost all of the states. Fear-mongers refer to this tax as the “Death Tax” because it sounds scary and unfair. Basically, at the moment just before a person’s death, he/she has or is deemed to have ownership of certain assets. The value of all of these assets is added up, which figure becomes that person’s Gross Estate. A few deductions later and the Gross Estate becomes the Taxable Estate. Apply tax rate and voila, you have an amount of Estate Tax that must be paid from the person’s assets. Pretty straightforward all in all.

Want an example? Okay. Imagine Joe dies after a long, fulfilling life. At Joe’s death, he had a bank account as his only asset with $10M in it. All other deductions, credits and complicated concepts aside…assume the estate tax rate is 30%. Joe’s family will need to pay an estate tax of $3M. If they don’t, the government will come down hard.

Gift Tax

The Gift Tax is a necessary supplement to the Estate Tax. The Estate Tax, as described above, is basically a tax on wealth at the death of the owner. So death is the triggering event. The tax would be applied even if the owner was buried with all of his money.

The Gift Tax is applied in the case of lifetime transfers, known in legalese as “inter vivos” gifts. So your Grandma gives you a $50 birthday gift…that’s a gift and theoretically if the gift was large enough, the Gift Tax would apply.

A major concept to understand in terms of the Gift Tax is that the person giving the gift pays the tax, not the person receiving the gift. In this respect, the Gift Tax differs from the Income Tax. Again, just to be clear, the person GIVING the gift pays the Gift Tax, not the person RECEIVING the gift.

Why? Well…in part, a Gift Tax is needed to make sure the Estate Tax has any teeth. If people could just give everything away before death, then nobody would have a taxable estate and the Estate Tax would be pointless. The other reason is similar to that of the Estate Tax…if you can give away a bunch of money you can pay some extra tax.

One more example? Okay.

Joe gives his friend Jake a gift of $25,000. If the gift tax rate is 10%, Joe owes the government $2500 in respect of his $25,000 gift to Jake. Joe should learn not to be so generous.

Many, many, many planning opportunities exist with respect to both the Gift and Estate Taxes. I’ll talk about more in later posts.

No related posts.

Chicago Estate Planning: Planning for the Special Needs Child or Adult

Clint — Fri, 17 Jul 2009 17:23:51 +0000

Having a special needs child can, I am sure, be both the biggest challenge and greatest reward of parenting. One of the biggest challenges for many is the fact that often, the parent will likely not out-live the special needs child. At some point, the special needs child will grow into an adult and will not be able to rely on the parent for all of his or her needs. This is the basis for what is known as Special Needs Planning.

Special Needs Planning is concerned with balancing two competing priorities: (1) conserving assets to the extent possible; while (2) assuring that the special needs child is provided for. The two underlying rules for special needs planning are: (1) 24/7 medical care and supervision costs A LOT; and (2) Medicaid/Social Security are in the best position to pay for this type of care.

So let’s assume the following example: Ma and Pa Smith have a child named Joe who is born with Down’s Syndrome. Ma and Pa take care of Joe up through Joe’s mid-20s. At some point, Joe qualifies for Medicaid and SSI (Supplemental Security Income…disability). Joe is placed in a group home and does well, with Ma and Pa visiting often. Joe has three other siblings as well. As Ma and Pa get on in years, they realize that they will not out-live Joe and they have to decide what to do with their assets. They certainly don’t want Joe left out in the cold after they die.

The primary planning tool for situations like this is the Third-Party Discretionary Special Needs Trust. This type of trust is designed to provide for Joe if needed, while maintaining his Medicaid and SSI eligibility. See, if Ma and Pa were to simply bequeath to Joe his share of inheritance, the assets could disqualify Joe for Medicaid and SSI. Why? Becuase these assets would be considered Joe’s and now maybe he doesn’t qualify under the Medicaid needs test…unless Joe is receiving $100M or some very large amount, there is no way this inheritance can pay for Joe’s care for years to come, so these assets will have to be “spent down” (on Joe’s medical care) before he would be able to re-qualify for Medicaid.

Don’t forget rules (1) and (2).

So how does the Third Party Discretionary Special Needs Trust (“SNT”) work? Let’s assume Ma and Pa want to equally divide their assets among their children. Basically, they would take care of this in their estate plan as normal. But, Joe’s share would not go directly to him…his share would go into an SNT for his benefit. The trustee of the SNT would likely be one of Joe’s siblings, or another loved one that Ma and Pa trust. The trustee would make sure that Joe has everything he needs and could use the money in the trust to buy things for Joe that Medicaid/SSI don’t cover (perhaps a television or food or additional clothing). But, these assets are not counted as Joe’s because Joe has no right to compel the trustee to make any distributions…distributions are completely discretionary on the part of the trustee.

The assets in the trust could then be split among Joe’s siblings after Joe’s death (Joe’s life expectancy is likely much less than that of his siblings).

So there you have it…a device that can bring some security to a special needs child after the death of his or her parents…making a tough situation a little bit easier. Of course, this type of arrangement can extend to others who have or may have special needs…like elderly or infirm parents or grandparents. Anyone for whom Medicaid/SSI is a needed resource can benefit from an SNT.

Chicago Estate Planning: Revocable Living Trusts…can’t Beat It

Clint — Thu, 09 Jul 2009 18:00:45 +0000

Ever since news of Michael Jackson Related posts:Chicago Estate Planning: Planning for the Special Needs Child or Adult Chicago Estate Planning 101 Prince Harry and Estate Planning for your Kids Related posts:

Chicago Estate Planning 101

Clint — Thu, 09 Jul 2009 17:40:23 +0000

So what the heck is this thing…”Estate Planning?” Why do you need it? What does it include?

Check this out (a 30-minute presentation I gave on the subject): http://www.snsfe-law.com/lawyer-attorney-1250832.html

This is my bio. Scroll down to the bottom of the page and click “Estate Planning: 101 – How You Can Benefit From The Basics.” I promise it’s interesting. I talk about Britney Spears, Thomas Jefferson and Rosa Parks.

Probate In Chicago (and elsewhere): A Legal Root Canal

Clint — Sat, 27 Jun 2009 05:08:09 +0000

Just what you want to do after a loved one dies…pay money to an attorney to get a probate court deeply entrenched in your most personal family business. The best part: the probate proceeding will likely last at least a year if not longer. That’s right.

Probate is the law’s way of making sure that a dead person’s (“decedent”) estate is settled fairly and according to his or her intent as evidenced by a will. Probate starts with filing a series of documents which tell the court:

Who died (the decedent)
Whether the decedent died with or without a will
The estimated value and composition of the estate of the decedent
Who the decedent’s heirs were at death (includes surviving spouse and children); and
Who is going to be the executor (or, if no will, the administrator)

So long as everything looks to be in order, the probate estate is opened and someone is named executor or administrator. The executor/administrator then has the power to deal with the decedent’s property, distribute assets, deal with creditors and eventually close the estate.

I’ll write more about specific aspects of probate, but probate is (1) expensive and (2) totally avoidable. Oh…and it also is time consuming and causes loved ones to literally be knee-deep and reminded of death for a year or so. Not so good. Here are some horror stories about inadequate estate planning for your reading leisure: http://www.smrslaw.com/articles/2007-02-art1.htm

Dying Without a Will in Chicago (and elsewhere): Not Good

Clint — Sat, 27 Jun 2009 04:57:34 +0000

Ahhhh…the Will, the most basic and best known estate planning tool. Used since the dawn of time to pass fiefdoms both large and small to loved ones (or to stick it to bratty kids). Wills are great for a few things. First, entertainment: http://money.howstuffworks.com/personal-finance/financial-planning/will6.htm. But more importantly, a Will can (1) assure desired distribution of property to the decedent’s (dead person’s) intended distributees; and (2) save a lot of time, expense, and trouble.

The former is pretty clear. You write a will to make sure the gold panda locket you got in China goes to your niece. In this respect, the main thing to watch out for is the division of probate property versus non-probate property. Probate property passes through a will…like the golden panda locket or the contents of a safe deposit box that has only the decedent’s name on it. Non-probate property passes via outside agreement, like a house or bank account in joint tenancy, or the assets in an IRA where beneficiary designations have been made.

The latter is clear only to lawyers. Even a basic will can make the probate process much cheaper, less time consuming and less horrible for loved ones of the decedent. How? First, the family can avoid fighting over the golden panda locket (you never knew how many people wanted that thing). A will can “undo” certain default state law rules which require the executor to put up a bond, or require strict court supervision of the estate. Finally, a will can be the decedent’s last statement on who he or she wants as guardian of minor children (and generally a court will respect that statement).

As I’ll write in the future, a will is just a piece of a comprehensive estate plan. But it’s a vital piece if you want your golden panda locket to go to your niece and not someone else who might sell it to Cash 4 Gold.