Dupage, IL Estate Planning Blog

Life insurance can be an integral part of an estate plan. Policies can be set up to be paid directly to the beneficiary, without the need to pass through the estate, and without the need for any taxes to be paid. Having a life insurance policy ensures that some assets will be liquid, so that debts and expenses can be paid quickly and easily without the need to dispose of assets. Beneficiaries can be changed at any time as can the benefit amount. The policy can be used to accumulate savings if the plan is surrendered before death. Life insurance policies, especially those purchased later in life, can pay out significantly more than what was invested into them. There are many benefits to purchasing a life insurance policy as part of an estate plan.

An attorney can set up a life insurance trust to help avoid estate taxes. A life insurance trust must be irrevocable, cannot be managed by the policy holder, and must be in place at least three years before the death of the policy holder. Any money received from the life insurance trust is not a part of the taxable estate. The need for this is rare as the exemption for estate taxes is currently almost five and a half million dollars, but it is a useful tool for some nonetheless.

There is a limit to how much life insurance an individual is permitted to purchase. A person may carry a multiple of his or her gross income which reduces with age. A twenty five year old can buy a policy worth thirty times his or her annual income. A sixty five year old may only purchase ten times his or her annual income worth of life insurance. This is an important factor to consider when deciding whether life insurance should be a part of your estate plan.

Life insurance as a part of estate planning is a complicated issue. It makes sense to consult with an estate attorney and a tax professional before meeting with an insurance broker. Both can help an individual understand the benefits of insurance over other means of transferring assets.

Transfer of property at death can be rather complex.  Many are under the impression that instructions provided in a valid will are sufficient to transfer their assets to the individuals named in the will.   However, there are a myriad of rules that affect how different types of assets transfer to heirs and beneficiaries, often in direct contradiction of what may be clearly stated in one’s will.

The legal process of administering property owned by someone who has passed away with a will is called probate.  Prior to his passing, a deceased person, or decedent, usually names an executor to oversee the process by which his wishes, outlined in his Will, are to be carried out. Probate property, generally consists of everything in a decedent’s estate that was directly in his name. For example, a house, vehicle, monies, stocks or any other asset in the decedent’s name is probate property. Any real or personal property that was in the decedent’s name can be defined as probate property.  

The difference between non-probate property and probate centers around whose name is listed as owner. Non-probate property consists of property that lists both the decedent and another as the joint owner (with right of survivorship) or where someone else has already been designated as a beneficiary, such as life insurance or a retirement account.  In these cases, the joint owners and designated beneficiaries supersede conflicting instructions in one’s will. Other examples of non-probate property include property owned by trusts, which also have beneficiaries designated. At the decedent’s passing, the non-probate items pass automatically to whoever is the joint owner or designated beneficiary.

Why do you need to know the difference? Simply put, the categories of probate and non-probate property will have a serious effect on how plan your estate.  If you own property jointly with right of survivorship with another individual, that individual will inherit your share, regardless of what it states in your will.  Estate and probate law can be different from state-to-state, so it’s best to have an attorney handle your estate plan and property ownership records to ensure that your assets go to the intended beneficiaries.

Another event that can cause problems with moving and estate planning is moving from a community property state to a common law state or vice versa. In community property states, all property earned or acquired during marriage is generally owned in equal halves by each spouse, with some exceptions, such as any property received by only one of them through gift or inheritance. The property that is considered community property includes income, anything acquired with income during the marriage, and any separate property that is transformed into community property. Separate property includes anything owned by either spouse before marriage, property received by only one spouse by gift or inheritance, and any property earned by one spouse after permanent separation. One spouse is not required in community property states to leave his or her half of the community property to another spouse, although many do.

In common law states, property acquired during a marriage is not automatically owned by both spouses. In common law states, the spouse who earns money and acquires property owns it by himself or herself, unless he or she chooses to share it with his or her spouse. Common law states usually have rules to protect a surviving spouse from being disinherited.

Whether a couple lives in a community property state or a common law state is important for estate planning purposes, because that can directly affect what each spouse is considered to own at death.

If a couple moves from a common law state to a community property state, there are different rules about what happens depending on where you move. If you move from a common law state to California, Washington, Idaho or Wisconsin, the property you bring into the state becomes community property. If you move to another community property state (Alaska, Arizona, New Mexico, Nevada, or Texas), your property ownership won’t automatically change. If a couple moves from a community property state to a common law state, each spouse retains a one-half interest in property accumulated during marriage while they lived in the community property state.

As you can see, the laws of different states vary significantly with respect to incapacity planning, estate planning and inheritance rights. Therefore, it’s important to contact an estate planning attorney in your new area, especially if you are moving from a community property state to a common law state, or vice versa.

When someone dies without a will, it is known as dying intestate.  In such cases, state law (of the state in which the person resides) governs how the person's estate is administered. In most states, the individual's assets are split -- with one third of the estate going to the spouse and all surviving children splitting the rest. For people who leave behind large estates, unless they have established trusts or other tax avoidance protections, there may be a tremendous tax liability, including both estate and inheritance tax.

For just about everyone, the cost of having a will prepared by a skilled and knowledgeable attorney is negligible when compared to the cost of dying intestate,  since there are a number of serious consequences involved in dying without a proper will in place.

Legal Consequences

The larger your estate, the more catastrophic the consequences of dying intestate will be. If you die without a will, the freedom to decide how your property will be divided will be taken from you and the state in which you reside will divide your assets.

Not only will you not be able to decide on the distribution of your property, but a stranger will be making personal, familial decisions. This may be divisive among your family members; instead of leaving your loved ones in peace, you may leave them engaged in bitter disputes over a family heirloom or even a simple memento. This can be especially true in situations where there are children from a previous marriage.

Tax Consequences

In addition to the legal and personal problems associated with dying intestate, the tax results can be severe as well. This is particularly true for clients who have not consulted with an estate planning attorney in order to protect themselves through tax avoidance methods. Both the state and federal governments can tax the transfer of property and an inheritance tax may be imposed on the property you have left to your heirs.

The most effective way to avoid all of these negative tax consequences is to create a will with a competent attorney. Your lawyer will help you to choose a proper executor (the person who will administer your estate, distribute your property and pay your debts), and will assist you in finding ways to limit your tax liability. There are several ways your attorney can help you to do this:

• By gifting some of those you want to inherit before you die
• By creating one or several trusts
• By purchasing a life insurance policy
• By buying investments in your loved one's name

These methods will ensure that your loved ones receive the assets you desire them to have, while simultaneously protecting them from possibly enormous tax burdens after you pass.

For those who have no family, dying without a will can be even more troublesome and costly, since their entire fortunes can be left to the state. If a genealogical search doesn't turn up any blood relatives, all of your assets will be claimed by the government. This means that any individual, group, organization or charity you wished to endow will receive nothing.

It is never easy to think of one's own mortality, but it is even more painful to contemplate leaving a messy, uncomfortable situation behind when you pass. By engaging the services of an excellent estate planning attorney, who will help you fashion a legally binding, precisely designed document,  you can make sure that your loved ones are well taken care of and that your final wishes are respected and implemented.

In this computer age, when so many tasks are accomplished via the internet -- including banking, shopping, and important business communications -- it may seem logical to turn to the internet when creating a legal document such as a will . Certainly, there are several websites advertising how easy and inexpensive it is to do this. Nonetheless, most of us know that, while the internet can be a wonderful tool, it also contains a tremendous amount of erroneous, misleading, and even dangerous information.

In most cases, as with so many do-it-yourself projects, creating a will most often ends up being a more efficient, less expensive process if you engage the services of a qualified attorney.  Just as most of us are not equipped to do our own plumbing repairs or automotive repairs, most of us do not have the background or experience to create our own legal documents, even with the help of written directions.

Situations that Require an Attorney for Will Creation

 In certain cases, the need for an estate planning attorney is inarguable. These include situations in which:

• Your estate is large enough to make estate planning guidance necessary
• You want to disinherit your legal spouse
• You have concerns that someone may contest your will
• You worry that someone will claim your mind wasn't sound at the signing

Mistakes and Omissions 

It has always been possible to write a will all by yourself, even before the advent of the typewriter, let alone the computer.  Such a document, however, is unlikely to deal with the complexities of modern life.  Many estate planning attorneys have seen, and often been asked to repair, wills that have mistakes or significant omissions. These experts have also become aware of situations in which the survivors of the deceased wind up in court, spending thousands of dollars to contest ambiguously worded or incomplete wills. Without legal guidance from a competent estate planning attorney, creating a "boxtop" will can result in tremendous financial and emotional risk.

Evidence that Online Wills Are Not Foolproof

Evidence that many other complications can arise when an individual creates a will using generalized online directions can be found in the following facts: 

• Each state has its own rules (e.g. requiring differing numbers of disinterested party signatures)
• Even uncontested wills can remain in probate if not executed in an exacting fashion
• Estate planning attorneys find legal software programs inadequate
• Even legal websites themselves recommend bringing in an attorney in all but the very simplest cases
• Some legal websites provide inexpensive monthly legal consultations with attorneys to protect their client and themselves

Areas that Frequently Cause Problems 

Self-constructed wills often become problematic when the testator:

• Names an executor who has no financial or legal knowledge
• Leaves a bequest to a pet  (legally, you must leave the bequest to an appointed caretaker)
• Puts conditions on payouts to an that are difficult, or impossible, to enforce
• Makes unusual end-of-life decisions or puts living will information into the will
• Designates guardians for children, but neglects to name successor guardians
• Neglects to coordinate beneficiary designations where, for example, the will and  insurance policy designations contradict one another
• Leaves funeral instructions into the will since the document will most likely not be read until after the funeral has taken place
• Leaves inexact or ambiguous instructions dealing with blended families
• Neglects to mention small items in the will which, though of small financial value, are meaningful to loved ones and may cause contention

In order to ensure that you leave your assets in the hands of those you wish, and to avoid leaving your loved ones with bitter disputes and expensive probate costs, it  is always wise to consult with an experienced estate planning attorney when making a will.  In this area, as in so many others, it is best, and safest, to make use of those with expertise in the field.

While the terms "estate tax" and "inheritance tax" are often used interchangeably, they are not synonymous. Let's try to clarify the difference.

Estate Tax

Estate tax is based on the net value of the deceased owner's property.  An estate tax is applied to these assets when they are transferred to the beneficiary. It is important to remember that an estate tax doesn't have anything to do with the beneficiary or that person's resources.

Federal estate tax only affects individuals who die with more than $5.45[s1]  million in assets and individuals with such large estates can leave that amount to their beneficiaries without being subjected to a  tax liability. Ninety-nine percent of the population will not owe federal estate tax upon their death.

In most circumstances, no federal estate tax is levied against spouses. As of the Supreme Court's recent ruling, this includes gay married couples as well as heterosexual couples. Federal estate taxes can, however, be charged if the spouse who is the beneficiary is not a citizen of the U.S. In such cases, though, a personal estate tax exemption can be used.  Even where remaining spouses have no liability for federal estate tax, they may be charged with state taxes in some states, taxes which cannot be avoided unless the couple relocates.

Inheritance Tax

Inheritance tax, as distinguished from estate tax, is imposed by state governments and the tax rate depends on the person receiving the property, and, in some locations, on how much that person receives. Inheritance tax can also vary depending upon the relationship between the testator and the benefactor. In Pennsylvania, for example, a spouse is not taxed at all; a lineal descendant (the child of the deceased) is taxed at 4.5 percent; a sibling is taxed at 12 percent, and anyone else must pay 15 percent.

Exemptions

There are exemptions that can reduce the amount of inheritance tax owed by significant amounts, but it is important that there be proper documentation of such exemptions for them to be applicable. Any part of the inheritance that is donated to charity does not require inheritance tax payment on the part of the beneficiary. Because of the inherent complexities of tax law and the variations from state to state, working with a tax attorney who has expertise with state tax laws s the best way to make sure you take advantage of any possible tax exemptions or avoidance.

A tax basis is essentially the purchase price of a piece of property. Whenever that property is sold, the seller must pay taxes on the difference between the sale price and the original purchase price. This concept applies to all property, including stocks, bonds, vehicles, mechanical equipment, and real estate. If debts are assumed along with the purchase price, the principal amount of the debt will be included in the basis. The basis can be adjusted downwards when a person deducts depreciation costs on his or her income tax returns, and may be increased for capital investments towards improving the property that are not deducted for income tax purposes. Selling a property that has been held for a long time can carry a serious tax burden because of inflation, particularly when real estate prices have increased.

When an individual receives property as an inheritance, the tax basis is reset to whatever the fair market value is at the time of the transfer of title. This means that the heir would pay significantly less taxes if that property is sold by the beneficiary than if the original owner were to sell it and devise the money to his beneficiaries. Most simple wills provide that all of a testator’s assets are placed into a residual estate to be divided equally among the heirs. This means that an executor must liquidate the assets of the estate and divide the proceeds among the heirs. However, because there is no transfer of title before the property is sold, the heirs are stuck with the grantor’s basis and they lose an opportunity for a sizeable tax break.

A person planning his or her estate may also reset the basis in his or her property by giving it as a gift directly to his or her heirs or by gifting the property to an inter vivos trust. These actions can have their own tax related consequences, or create other unintended problems for the beneficiaries. Only an experienced estate planning attorney can advise you on the most efficient way to pass your assets on to your heirs.

When a loved one dies, an already difficult experience can be made much more stressful if that loved one held a significant amount of debt. Fortunately, the law addresses how an individual’s debts can be paid after he or she is deceased.

When a person dies, his or her assets are gathered into an estate. Some assets are not included in this process. Assets owned jointly between the deceased and another person pass directly to the other person automatically. If there are liens on the property at that time, they will stay on the property, but no new liens can be placed on the property for debts in the name of the deceased. Similarly, debt jointly in the name of the deceased and another party may continue to be collected from the other party. In community property states, all assets and debts are the joint property of both spouses and pass automatically from one to the other. The community property states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 

From the pool of assets in the estate, an executor is required to pay all just debts. This means that, before a beneficiary may receive anything, all debts must be satisfied. Property might be sold to create liquidity in order to accomplish this. If there are more debts than there are assets, the estate must sell of as many assets as possible to pay off the creditors. If there is no money in the estate, the creditor can not collect anything. Rather than force people into this tiresome process, many creditors will agree to discharge a debt upon receipt of a copy of a death certificate or obituary. This is particularly true of small, unsecured debts. Life insurance proceeds were never owned by the decedent and should pass to a beneficiary without consequence to the estate. Proceeds of a retirement account may also be exempt from debts.

If creditors continue harassing the beneficiaries of debtors, they may be violating federal regulations under the FDCPA. They can be held accountable by their actions, either by the FTC, the state attorney general, or a private consumer law attorney.

The conversation about a person’s last wishes can be an awkward one for both the individual who is the topic of conversation and his or her loved ones. The end of someone’s life is not a topic anyone looks forward to discussing. It is, however, an important conversation that must be had so that the family understands  the testator’s final wishes before he or she passes away. If a significant sum is being left to someone or some entity outside of the family, an explanation of this action may go a long way to avoiding a contested will. In a similar vein, if one heir is receiving a larger share of the estate than the others, it is prudent to have this action explained. If funds are being placed in a trust instead of given directly to the heirs, it makes sense for the testator to advise his or her loved ones in advance.

When a loved one dies, people are often in a state of emotional turmoil. Each deals with grief differently and, often, unpredictably. Anger is a common reaction to loss, one of the five stages postulated to apply to everyone dealing with such a tragedy. Simply by talking to loved ones ahead of time, a testator can preempt any anger misdirected at the estate plan and avoid an unnecessary dispute, be it a small family tiff or a prolonged legal battle.

The executor of the estate must be privy to a significant amount of information before a testator passes on. It is helpful for the executor to know that he or she has been chosen for this role  and to have accepted the appointment in advance. The executor should know the location of the original will. Concerns of fraud mean that only the original copy of a will can be entered into probate. The executor should be aware of all bank accounts, assets, and debts in a testator’s name. This will avoid a tedious search for documents after the decedent passes on and will ensure that all assets are included as part of the estate. The executor of an estate should be aware of all memberships, because it will be the executor’s responsibility to cancel them. An up-to-date accounting of all assets and debts will simplify the settlement of the estate for an executor significantly.

The law allows a person preparing a will to have almost complete control over his or her assets after the testator passes on, but there are limits to such power. A person can restrict a property from being sold, or make sure that it is used for a specific purpose. A property can be bequeathed to a family member as long on condition that the person maintains the family business in a specific city, or exercises daily, or places flowers on the deceased's grave every week, or engages in any other behavior the testator desires. This freedom, however, is not without limits. The time limit on this ability is called the rule against perpetuities. The rule is also referred to as the “dead man’s hand” statute.

The rule against perpetuities is complex and rarely utilized. At the time of the passing of the testator, the heirs of the estate are locked in. These heirs are referred to as “lives in being.” For the purposes of this rule, if a child is conceived but not yet born at the time of the testator’s death, it will be considered a life in being. Once the last living heir named in the will passes away, the restrictions on the property will continue in place as the testator desired for 21 years. The idea is that a testator may control his assets for a full generation after his or her death. The rule is notoriously difficult to apply properly. When it does apply, the conditions on the bequest are abandoned and the gift returns to the residual estate.

What makes this rule so confusing is that, when an individual writes a will, he or she may make gifts to potential children or grandchildren. These children and grandchildren, however, may not be born until years later. If a child has been born at the time the decedent passes away, he or she is subject to the restrictions on the bequest during his or her lifetime. If a grandchild is conceived and born after the decedent’s death, however, the child may avoid the restrictions 21 years after the death of the last heir alive at the time of the decedent’s death. There is no way to predict when this might occur. The rule is archaic and easily avoided. A knowledgeable attorney can help a person planning his or her estate set up an equitable trust. Similar to a will, a trust may impose conditions on the use of assets, but is not subject to the rule against perpetuities. There are other advantages to a trust, but one of the most important is avoiding this unpredictable and confusing rule.

The world of estate planning can be complex. If you have just started your research or are in the process of setting up your estate plan, you’ve likely encountered discussions of wills and trusts. While most people have a very basic understanding of a last will and testament, trusts are often foreign concepts. Two of the most common types of trusts used in estate planning are testamentary trusts and inter vivos trusts.

A testamentary trust refers to a trust that is established after your death from instructions set forth in your will. Because a will only has legal effect upon your death, such a trust has no existence until that time. In other words, at your death your will provides that the trusts be created for your loved ones whether that be a spouse, a child, a grandchild or someone else.

An inter vivos trust, also known as a revocable living trust, is created by you while you are living. It also may provide for ongoing trusts for your loved ones upon your death. One benefit of a revocable trust, versus simply using a will, is that the revocable trust plan may allow your estate to avoid a court-administered probate process upon your death. However, to take advantage this benefit you must "fund" your revocable trust with your assets while you are still living. To do so you would need to retitle most assets such as real estate, bank accounts, brokerage accounts, CDs, and other assets into the name of the trust.

Since one size doesn’t fit all in estate planning, you should contact a qualified estate planning attorney who can assess your goals and family situation, and work with you to devise a personalized strategy that helps to protect your loved ones, wealth and legacy.