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The term "estate planning" means many things to many people. It includes everything from a "simple will" to the preparation of complex estate planning documents for clients with large estates. Estate planning necessarily involves more than a Will to dispose of assets upon death. It requires careful examination of your values, goals and needs, as well as a review of your assets and the various forms of ownership available to you. The following is a partial list of commonly used and more sophisticated estate planning tools and techniques: Commonly Used Techniques: More Sophisticated Estate Planning Techniques: Selection of a Trustee Fees - We make it a policy to discuss fees with each client before an attorney-client relationship is established. Fees for estate planning, except for the use of more sophisticated estate planning techniques outlined above, are generally on a fixed fee basis. We will discuss legal fees with you and confirm fees in writing for every estate plan we prepare. It is impossible to give a final fee estimate prior to an initial meeting to review your particular situation. For each new estate planning client an initial meeting is held to review your estate planning objectives and your assets. Based upon the initial meeting we will recommend an estate plan to accomplish your objectives and explain to you the fees to implement such an estate plan. Those fees and costs are confirmed in writing so there is no misunderstanding about the services being provided and the fees being charged. Health Care Powers of Attorney and Living Wills In almost every estate plan we prepare we include an Illinois Statutory Health Care Power of Attorney and/or a statutory Living Will Declaration. These documents are commonly referred to as 'advanced directives' by the medical community. Illinois Statutory Short Form Power of Attorney for Health Care This document is prepared for the purpose of giving your agent broad powers to make health care decisions for you, including the power to require, consent to or withdraw any type of personal care or medical treatment for any physical or mental condition and to admit you to or discharge you from any hospital, home or other institution. Statutory Living Will Declaration While a power of attorney for health care is the "document of choice"when it comes to making health care decisions, some people also desire to have a statutory living will declaration. The health care power of attorney permits you to delegate powers to the person of your choice to make all health care decisions for you. A living will declaration delegates the power to your attending physician to withhold or withdraw heroic measures when death is imminent. The Illinois Statutory Short Form Power of Attorney for Property is prepared for the purpose of enabling the person you designate (your agent) to provide management of your assets and handle other financial matters in the event you become incapacitated during your lifetime. A Will is used to transfer assets which are in the decedent's name alone at the time of death. A "simple Will" estate plan leaves all assets in one's name alone at the time of death outright to specific persons, such as adult children. No trust is involved either during life or after death. As the name implies, simple Wills are only appropriate in the most basic of circumstances. With a simple Will you designate a personal representative, called an executor, to pay all of your bills and expenses following your death and distribute the remaining assets according to the terms of your Will. A "Young Couple's" estate plan utilizes a trust to manage assets for the benefit of children after one's death or the death, of a surviving spouse. Generally, a young couple's estate plan leaves all assets outright to a surviving spouse, or, if there is not a surviving spouse, then to a trustee for the benefit of the children. The trustee manages the assets until such ages as one designates for the children to withdraw the assets. An extremely important feature of this type of Will is the appointment of a guardian of any minor children. The guardian is the person who will raise the minor children until they reach adulthood (age 18). In addition to an executor, the selection of a trustee is needed who will manage the trust assets and distribute the assets to or on the behalf of the children in accordance with the terms of the trust. The selection of a trustee is extremely important. It may be an individual or a professional, such as a bank or private trust company. The trustee's role is to invest the trust assets, make decisions regarding discretionary distributions from the trust for the children's benefit, and prepare and file annual accountings and income tax returns for the trust. This type of estate plan is very important for families with young children. under Illinois law, minors (under age 18) may not legally own assets. Therefore, without a trust, assets left to minor children will be controlled by the probate court. This includes all investments and expenditures. Most importantly, without a trust the assets will be distributed to the children upon the child reaching age 18. Lastly, a young couple's estate plan provides the flexibility to distribute the trust assets at ages when the children may be more mature to manage the assets on their own. Distribution may also be in staggered amounts or percentages at various ages. An example would be distributions of one-third at age 25; one-third at age 30; and one-third at age 35. Standby Appointment of Guardian Illinois law permits the standby appointment of a guardian for a minor child. A standby appointment of guardian form is provided for every estate planning client who has minor children. This document may be used when the parents leave the area and entrust their children with grandparents, friends, etc. It permits the standby guardian to act on behalf of the parents until the parent returns. A revocable living trust has become very common and is a great estate planning tool for the lifetime management of assets and the disposition of those assets at death without going through probate. Revocable living trusts have significant advantages over a standard Will. While the revocable living trust is an important tool in estate planning it is not appropriate for everyone. What is a revocable living trust? A revocable living trust typically has the following characteristics: 1. Creation during the lifetime of the trust's creator (called the "grantor"); 2. Appointment of a trustee (generally the grantor initially) to receive and hold legal title to assets and, thereafter, to administer the assets of the trust; 3. Designation of beneficiaries of the trust following the death of the grantor; 4. Naming the grantor as either trustee or beneficiary or both; 5. Retention by the grantor of the power to amend or terminate the trust; and 6. Irrevocability upon the death of the grantor. The purpose of a revocable living trust is to administer assets during one's lifetime and dispose of those assets at death. Therefore, the revocable living trust constitutes an estate plan and is intended to be a substitute for a Will. However, a simple "pour over" Will still is needed if the grantor acquires assets after the trust is created and does not transfer them into the name of the trust for whatever reason. Moreover, grantors of revocable living trusts with minor children must sign a Will in order to designate a guardian in the event of their death. It is important to emphasize that revocable living trusts are not tax avoidance vehicles. They will not save federal income, estate or gift taxes by themselves. Nor is a revocable living trust needed to dispose either of assets held in joint tenancy or of third-party beneficiary contracts, such as life insurance policies, IRA accounts, profit and pension plans, etc. Moreover, if the grantor's personal (non-real estate) assets estate do not exceed the $100,000 statutory minimum for an Illinois "small estate," and the estate does not include solely owned real estate, the benefits of a revocable living trust may be minimal. Some of the main reasons for having a revocable living trust are as follows: * Probate Avoidance - Assets held in a revocable living trust on the grantor's death are not subject to probate administration. Probate avoidance may be more convenient and can save the cost of administrator/executor's fees and attorney's fees. However, the creation of a revocable living trust has its own costs, particularly those associated with transferring title of assets into the name of the trust. * Privacy - The terms of revocable living trusts are private. A Will is a public document that, upon filing as required by law after death, can be read by anyone. A living trust is not required to be filed in the public record. * Asset Management without Court Adjudication of Incompetency - If the grantor of a revocable living trust becomes disabled due to mental or physical deterioration, a revocable living trust may eliminate the need to seek court adjudication of incompetency and appointment of a guardian of the grantor's estate. * Avoiding Will Contests - The validity of a revocable living trust may be more difficult to contest than a Will. The revocable living trust, thereby, helps insure disposition of the decedent's assets as intended. If there is a second marriage with children by a different spouse, or the threat of other heirs making claims, a living trust may be advisable. * Speed of Administration - In estates which do not involve the filing of a federal or state death tax return, the revocable living trust will often expedite administration. Under Illinois law, a probate estate must be open for a minimum of six months. This is not required when assets are disposed of through a revocable living trust. Supplemental (or Special) Needs Trusts A concern of every parent with a special need or disabled child is how to financially provide for the child after the death of the parent. Supplemental needs trusts are used primarily to provide non-support benefits to family members suffering from disabilities or who have special needs. If the more typical support trust is used, the federal and state governments may deny benefits to which a disabled person is otherwise entitled. However, governmental benefits do not cover all of the needs of a disabled person. Therefore, a supplemental needs trust may be established to provide for those additional (or supplemental) needs. Such needs include experimental medical treatments, dental and eye care not otherwise provided and trips for the disabled person and companions. Irrevocable Life Insurance Trusts Irrevocable life insurance trusts ("ILIT") are used to remove the face value of life insurance from your estate for federal estate tax purposes. All assets, of whatever kind, owned are included in your estate for federal death tax purposes. This includes the face value of life insurance (although the receipt of life insurance proceeds is generally non-taxable from an income tax standpoint). In order to remove the proceeds of life insurance out of the estate for federal death tax purposes, an ILIT is often used to "own" the life insurance policy and to receive the proceeds following the death of the insured. In order to achieve the goal of keeping the life insurance proceeds out of the estate for federal death tax purposes, the ILIT must be irrevocable, the trust creator cannot be the trustee (nor should the spouse), and various technical rules must be complied with. In addition, for existing life insurance policies which ownership is transferred into the name of an ILIT, there is a three year waiting perioud before the proceeds are excluded from estate taxes. This three year waiting period is not applicable for new life insurance policies purchased directly by the ILIT. Despite these technical rules the ILIT is a superb estate planning tool to reduce federal death taxes, for people with estates in excess of the Fderal estate tax exemption. Family Limited Partnerships and Limited Liability Companies Family limited partnerships ("FLP") and limited liability companies ("LLC") are popular techniques used to provide asset management and control over assets while at the same time reduce the value of the assets for federal estate tax purposes. Limited partnerships differ from general partnerships. With general partnerships all the partners are liable for partnership debts and the acts of the other partners. This is not the case with a limited partnership where a limited partner's liability is limited to one's investment. There are two types of partners with a limited partnership-general partners and limited partners. The general partner manages the limited partnership and makes all partnership decisions without any input from the limited partners. This includes the right to make or not make distributions to limited partners, and typically includes the right to dissolve the partnership. Limited Liability The major difference between a limited partnership and a general partnership is that with limited partnerships there are "limited partners" who are not liable for partnership debts. Limited partners are merely investors who invest their money without risking liability beyond their investment. In return for limited liability, a limited partner has no control over the management of the partnership-this is solely in the hands of the general partner. The general partners, who control the management of the limited partnership, have unlimited liability. In an estate planning context, a corporation is generally used as a general partner. Discounting Valuation discounting is the second benefit of limited partnerships. The concept behind "discounting" is the market value of a limited partnership unit is not equal to its economic or liquidation value. For example, it can be argued that if you own a limited partnership interest worth $1 million in economic terms, your limited partnership interest is not worth $1 million. Instead it is worth more in the range of $650,000 to $700,000. The reason for this "discounting" is that limited partnerships are not regularly traded (in fact, interests in small limited partnerships are not traded at all) and a limited partner has no say in the management of the limited partnership. In addition, limited partnership units are also subject to the terms of often very restrictive limited partnership agreements regarding the transfer of partnership units. Therefore, it may be very difficult for a limited partner to receive back his investment from the partnership. This gives rise to a discount from the underlying economic value. The effect of "discounting" can make a significant difference where federal gift and estate taxes are concerned. The value of limited partnership units must be based upon a valuation by a qualified appraiser. The Internal Revenue Service, of course, does not like "discounting" and has been trying to eliminate it for some time, both by proposing legislation to Congress and by attacking discounting in court. So far, the IRS has been generally unsuccessful. Additional Non-Tax Advantages of the FLP Centralized Management and Control - The FLP can consolidate and centralize control of family assets. Instead of simply leaving assets to the children, the FLP permits the assets to be kept together and changes in family control can be facilitated by simply changing the directors of the general partner corporation. This is particularly good for difficult to manage assets, such as the stock in a family business or farm property. Income Tax Flexibility - By transferring assets into a FLP it is sometimes possible to "spread" income among family members in a lower tax bracket by gifting limited partnership units to other family members. Disadvantages of FLPs Formalities and Costs - Partnerships require management and increased tax filings. Partnerships should not be formed by persons who are not willing to completely separate their business and personal affairs. In other words, you cannot use the partnership to provide for your personal expenses. To achieve the benefits the FLP offers you must be willing to follow the formalities that a partnership entails. The "discount" cases which the IRS has challenged have primarily been "bad fact" cases. These are cases where substantially all of the creator's assets have been transferred into the FLP (including the house, personal checking account, etc.) and the creator has not retained enough assets for day-to-day living expenses. Fact situations such as this merely open the door for the IRS to argue the FLP is a sham. Cost-Benefit - In deciding to use an FLP, or any other estate planning technique for that matter, you must weight the cost of establishing the FLP and ongoing administrative costs against the benefits you will receive. A FLP likely will entail legal, accounting and appraisal fees to both establish and maintain the FLP. Tax Traps - There are several hidden tax traps. For instance, if only securities are transferred to the FLP, there is a risk the partnership will be classified as an "investment company"and the partners may be required to pay capital gains taxes on the transfer of the securities to the partnership. If securities are just one of many types of assets being transferred to the partnership, then this should not be a problem. FLP planning is complicated and you need professional assistance in establishing and maintaining a FLP. Charitable remainder trusts ("CRT") are excellent tools to avoid paying capital gains taxes on the sale of highly appreciated assets, such as stocks and real estate. A CRT provides a way for you to make a gift that benefits both you, your family as well as your favorite charity. By creating a CRT you receive several immediate benefits: 1. You avoid capital gains taxes on the sale of appreciated property - this is the primary reason most people set up a CRT; 2. You receive a current income tax deduction for the estimated future amount which will go to charity; 3. You reduce your potential in estate taxes; 4. You may increase your current income by selling a low income producing asset in return for a fixed annual payment; and 5. You provide a future benefit to the charity or charities of your choice. A CRT is an irrevocable, tax-exempt trust divided into income and gift portions. After a highly appreciated asset is transferred to a CRT it often is sold. Since the CRT is a tax exempt entity, there is no tax on the sale which permits the CRT to retain all of the sales proceeds without any dilution for taxes. Income Portion - The CRT will pay income to you and/or others at a rate of at least five percent of the trust value for life or a selected term of years (not to exceed 20 years). The CRT will often pay to the trust creator substantially more than income produced before the gift. Gift Portion - The second part of the CRT is the remainder interest which will pass to the charity or charities of your choice after the CRT term has ended. This portion, reduced to its present value, constitutes the value of your charitable income tax deduction which you receive in the year you create the CRT even though the charity does not receive the gift for many years in the future. The charitable lead annuity trust ("CLAT") is the opposite of a charitable remainder trust. Instead of giving a sum of money to your favorite charity and receiving income for life, with a CLT, you place assets in an irrevocable trust, with the income going to the charity for a specified number of years. Upon termination of the trust, the remaining assets in the CLAT return to either you or to someone you name. The CLAT is often used to transfer significant assets at little or no gift tax cost to your children. The CLAT is extremely popular in a low interest rate environment. To the extent the rate of return of the assets of the CLAT exceed the deemed IRS growth rate, the growth in assets will pass to the year children estate and gift tax free. A grantor retained annuity trust ("GRAT") is similar to a charitable lead annuity trust, except that with a GRAT, the annual payment is made to the creator of the trust the grantor and not to charity. In a GRAT the trust creator transfers assets to an irrevocable trust in return for the right to receive fixed payments based upon the initial fair market value of assets transferred to the trust. Although the assets may increase in value during the term of the trust, the fixed amount paid to the grantor will not change. The GRAT can also be designed to increase the payments based upon the changing market value of the assets in the GRAT. To the extent the value of the trust assets increase in value, the increase passes to the next generation free from federal estate and gift taxes. GRATs are particularly attractive in a low rate interest environment if the assets in the GRAT appreciate at a higher rate than the assumed rate of growth as set forth by the Internal Revenue Service. Such additional growth passes to the ultimate trust beneficiaries free of any gift or estate taxes. Qualified Personal Residence Trust (QPRT) A Qualified Personal Residence Trust or "QPRT" is an irrevocable trust that holds a personal residence for a term of years. At the end of the trust term, the residence is distributed to the beneficiaries named in the trust - typically the children of the person creating the trust. There are several tax and economic benefits associated with a QPRT. A QPRT is especially well suited at "leveraging" a client's estate and gift tax exemption. A transfer of real estate to a QPRT is treated as a taxable gift. However, the value of the gift is based on the present value of the remainder beneficiary's right to receive the property at the end of the term of the QPRT. The term of the QPRT is an important factor in determining the tax consequences of a QPRT. As the QPRT term grows longer, the gift to the remainder beneficiaries grows smaller, and the tax savings are improved. The selection of a trustee is an extremely important aspect of any estate plan which utilizes a trust. Trustees are often required to administer trusts for many years. The trustee must be able to handle increasingly complex tax laws in a volatile investment environment. Many factors must be considered when selecting a trustee. General Factors to Consider in Selection of a Trustee 1. The purpose and size of the trust (for a very small trust, a professional trustee may not be economical). 2. The type of assets in the trust and the length the trust will continue. 3. When there are minor children, the issue of a guardian and the trustee being separate entities (to provide a "check and balance"). 4. Location of the trust assets. Non-Tax Considerations in Selection of Trustee The Illinois Trust and Trustee's Act sets forth the duties of a trustee of a trust subject to Illinois law. The trustee's duties are numerous and include the following: 1. Investments - The trustee must make trust assets productive and must prudently invest trust assets to produce a sufficient income for the income beneficiaries of the trust and asset appreciation for the remainder beneficiaries. 2. Discretion in Making Distributions - One of the most difficult duties of a trustee (particularly an individual trustee) is to exercise discretion in making distributions from the trust in accordance with the trust creator's wishes. The trustee must be loyal and fair to all beneficiaries, whether an income or remainder beneficiary. 3. Maintenance of Assets - The trustee must secure and maintain possession of trust assets and keep records of all assets and not commingle the assets with the trustee's own assets. Tax Considerations Tax considerations also play a role in selecting a trustee. 1. State income taxation is based upon the location of the trustee. 2. The trustee must understand (or hire legal counsel, in the case of an individual trustee) of such tax concepts as "ascertainable standards" of withdrawal and "powers of appointment". Advantages of an Individual Trustee 1. An individual who is a family member or friend may be more familiar with family members and have a better understanding of the family dynamics. 2. The costs associated with an individual trustee may be less than with a professional trustee (however, even though an individual named as trustee may serve without compensation, the resulting savings may be offset by the need to retain and compensate attorneys, accountants, and investment advisors). Disadvantages of an Individual Trustee 1. Often an individual trustee lacks sufficient financial knowledge about investments and trust administration. 2. The time commitment necessary is often vastly underestimated by individual trustees, especially for those individuals who have "full-time" jobs. 3. An individual trustee may be influenced by a trust beneficiary or "caught in the middle" between interests of various beneficiaries. 4. An individual trustee may have a real or perceived conflict of interest between his duties as trustee and his interest as a beneficiary or to a person related to a beneficiary. Advantages of a Professional Trustee 1. A corporate trustee is an impartial and neutral party and does not show favoritism. This minimizes or eliminates conflicts among beneficiaries. 2. Professional trustees can serve as an intermediary between quarreling family members. 3. A professional trustee provides professional investment, tax and accounting administration compared to individual trustees. Disadvantages of a Professional Trustee 1. Fees charged by a professional trustee may be higher than compensation paid to an individual trustee. 2. Professional trustees are sometimes perceived to be insensitive and too rigid and inflexible. 3. A professional trustee may not be familiar with the family dynamics. |