To provide each person the comfort and peace of mind that comes with making sure that your loved ones are taken care of and your wishes are respected. Through clear communication and accessible, reliable service, we can work together to make the most of your assets and ensure that this mission is accomplished as efficiently as possible.
Please explore the legal services I provide and how these services will help you protect your wishes, your assets and most importantly, your family.
Over the past decade, transfer tax exemptions, rates and planning opportunities have varied from year to year due to nearly annual changes in the laws. As the calendar turns to the new year, it is important to take a look at what Federal and Illinois legislatures have told us about Estate, Gift and Generation-Skipping Transfer (“GST”) Taxes for 2012 and beyond as well as the uncertainty ahead.
Estate Tax 2012
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”), signed into law by President Obama on December 17, 2010, affects the estates of decedents dying between January 1, 2010, and December 31, 2012. The Act includes a Federal Estate Tax exemption of $5 million per individual, as well as $5 million exemptions from Gift Tax and GST Tax for 2011. Since the taxes were indexed for inflation, the exemption amounts will increase to $5.12 million for 2012. All three transfer taxes have a maximum tax rate of 35% through 2012.
The Act also introduced us to the portability of the Estate Tax exemption, which allows the surviving spouse of a decedent to utilize the decedent’s unused Estate Tax exemption amount (see the January 2011 Newsletter). The portability feature will remain available to the estates of decedents dying in 2012 but has not yet been made permanent.
Additionally, the annual Gift Tax exclusion remains at $13,000 per individual for 2012. Meanwhile, the annual Gift Tax exclusion amount for gifts made to a spouse who is not a U.S. citizen has increased to $139,000 for 2012.
Regarding Illinois’ exemption, Governor Pat Quinn signed Senate Bill 0397 into law on December 16, which increases the Illinois Estate Tax exemption to $3.5 million for decedents dying in 2012. This is a significant increase to the state’s exemption, which was only $2 million for decedents dying in 2011, and will allow greater flexibility in planning for the estates of Illinois residents.
Estate Tax Beyond 2012
After a rumor that the Congressional “Super-Committee” would roll back the $5 million Gift Tax exemption to $1 million effective November 2011 rather than after the provisions of the Act expire at the end of 2012, Congressman Jim McDermott (D-WA) introduced a bill (the Sensible Estate Tax Act of 2011) (the “Bill”) that would restore pre-2001 levels of the Estate, Gift and GST Taxes.
The Bill would bring the Estate Tax exemption back to $1 million per individual ($2 million for married couples) with a maximum tax rate of 55%. The exemption amount would be indexed for inflation from the year 2000. Additionally, the Bill would reunify and make permanent the portability of the Gift and Estate tax exemptions for spouses, require a minimum 10-year period for Grantor Retained Annuity Trusts and modify the rules for asset valuation and minority discounts.
There will certainly be other proposals regarding the Estate, Gift and GST Taxes beyond 2012, but the Bill gives us an idea of the levels and rates for which the Democrats will campaign. An additional bargaining tool at the disposal of Congressman McDermott and other Democrats is the existing law that is in place; without Congressional action prior to 2013, the Estate Tax exemption will return to $1 million and a maximum tax rate of 55% on January 1, 2013.
The Illinois Estate Tax exemption will be $4 million for decedents dying in 2013. However, if the Federal exemption were to decrease below $4 million, Illinois law would likely match it.
Planning Opportunities
With the increased exemption amount in Illinois for 2012 and Federal uncertainty ahead, this is an ideal time to discuss your estate with a specialist to ensure that all opportunities for reducing transfer taxes and protecting your assets are utilized. If you have an existing estate plan, it should be reviewed at this time. If you do not currently have an estate plan, this is the time to discuss your goals and financial situation and to have a proper estate plan in place.
Not having an estate plan or having an improperly drafted plan can result in a significant tax bill and probate costs that can be avoided through proper planning.
For additional information on Estate, Gift and GST Taxes and how to plan for your estate, please feel free to contact me at your convenience.
Some questions regarding Estate Planning are unique and based on specific family situations, but many are common questions that arise from misconceptions regarding Estate Planning. Below, you will find the top five questions that I receive from clients, along with a brief explanation of the issues related to each answer.
1. I know I need a Will—how much will it cost?
This is the most common question that I receive. Since a Will is the most popular document associated with Estate Planning, people often incorrectly assume that this is all they need.
Instead of assuming that they need a Will, clients should focus on their goals. A better question for an Estate Planning attorney would be “here are my goals, what do I need to do to accomplish them?”
The most common goals are to ensure that (a) Guardians are named for minor children and (b) the maximum amount of assets pass to their loved ones as efficiently as possible. While a Will allows you to name Guardians for your children, it fails to maximize tax exemptions, avoid probate or protect assets from a beneficiary’s creditors or divorce, and is therefore rarely the ideal answer for clients. Please see question 2 for a discussion of how to accomplish these important goals.
2. My estate is small—do I really need a Trust?
The benefits of Trusts go well beyond tax savings. While dual Revocable Living Trusts are the ideal instruments for maximizing a couple’s Estate Tax exemptions, use of a Trust also allows the creator (the “Grantor”) to provide the terms for distribution of the Trust’s assets and protect inheritances from the children’s creditors or divorce. Additionally, assets held by the Trust at the Grantor’s death avoid probate, allowing the estate to minimize administration costs and transfer assets to the beneficiaries as quickly as possible.
Protecting a child’s inheritance is often a priority for parents who have worked hard to build their estate. If a Will states that the individual’s assets shall be left to his children in equal shares, any adult children (older than age 18) will receive the assets outright at the time of death, after probate is completed. Probate lasts a minimum of six months, which allows creditors to file their claims against the estate. A minor child’s assets will be held by a Guardian on behalf of the child until he or she reaches age 18, at which time the assets will be distributed outright to the child.
Instead, by establishing a Trust, the Grantor can provide that (a) the assets shall be held in Trust for the benefit of the child, (b) the assets shall be managed and administered by the individual named as Trustee, (c) the assets may be withdrawn by the child at the stated ages in the stated amounts, (d) the Trustee may delay withdrawals if the child is involved in litigation at the time of withdrawal, and (e) if assets remain in the Trust at the time of the child’s death, they shall be distributed as provided in the document.
As you can see, a Trust provides much more protection and flexibility in planning than a Will. When used properly, a Trust can greatly reduce the costs, time and headaches of estate administration for your loved ones.
3. I had a Will prepared about 10 years ago, so it should be fine, right?
Over a 10-year period, it is likely that your goals and wishes have changed. Existing documents should be reviewed when there is a significant change in your family or financial situation. Additionally, with the frequent changes in transfer tax laws in recent years, you should ideally have your documents reviewed every two to three years.
It is important to make sure that you understand your documents as written and that they meet your goals and expectations. A review by an experienced Estate Planning attorney is the best way to ensure that both of these objectives are achieved.
4. What is probate?
Probate is the process by which a court validates a decedent’s Will (if the decedent had one) and administers the decedent’s estate pursuant to the Will or, if the decedent did not leave a Will, then pursuant to the intestacy laws of the state. Probate can be a complex, lengthy process which requires the court’s approval for distributions of assets and the opening and closing of the estate.
As stated above, a probate estate must remain open for a minimum of six months. This window allows creditors to file claims against the estate. Additionally, probate is a public process which makes court documents available to anyone who wishes to see them.
The cost of probate will almost always exceed the cost of having a proper Estate Plan prepared. Proper planning can allow the estate and its beneficiaries to avoid probate and complete the estate administration process as efficiently as possible.
5. What happens to my estate if I do not have an Estate Plan?
When an individual passes away without a Will (“intestate”), his or her assets will be required to pass through the probate process based on the laws of the decedent’s state of residence. As discussed above, probate is a complex, lengthy process which can increase the likelihood of conflict amongst family members, open the doors to creditors and delay the distribution of assets.
Under Illinois’ intestacy laws, the estate’s assets would be distributed in the following manner:
Keep in mind that intestacy laws only apply to probate assets, not to assets with named beneficiaries or joint owners or those held in Trust.
Generally, individuals want to ensure that the surviving spouse has access to all of the estate’s assets before any assets pass to the children. However, under Illinois’ intestacy laws, only half of the estate’s assets would pass to the spouse, while the other half would pass to the children in equal shares.
To most people, it is important that their estate passes based on their own wishes rather than the laws of the state. The best way to accomplish this goal is to discuss your wishes with an experienced Estate Planning attorney and have documents prepared that will allow for your estate to be administered in the most efficient way possible for the benefit of your loved ones.
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