Articles Posted in Asset Protection

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Many of our clients have children or grandchildren (beneficiaries) that need protection from their own proclivities even as adults.  Some of these habits include addictions, poor spending habits or just not living up to their potentials.

So what is a parent or grandparent to do?  Why not use an “Incentive Trust”?  An Incentive Trust is a type of trust that attempts to encourage and reward “good behavior” and discourage “bad behavior” of the beneficiaries.

For example, if a beneficiary is known to have bad spending or saving habits, the trustee of your trust can be directed not to distribute any monies or assets to that beneficiary unless the spending beneficiary shows by a check register or other record keeping system that he or she is spending monies responsibly in the eyes of the trustee.  The trustee can be given guidelines as to what the maker of the trust would consider responsible.  This might include percentages put away by the beneficiary for savings, housing, auto and auto allowances.

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Probate is the process by which a court will supervise the administration of an estate when someone passes away.  Many clients prefer to avoid probate because the process can be time-consuming and costly.  This article will examine the various ways probate can be avoided.

Joint Tenants with Rights of Survivorship.  When there are more than one owner to a piece of property, there are different ways the property can be titled.  One example is joint tenancy.  When a decedent dies while holding property in joint tenancy with another person, the property will pass to the surviving owner by operation of law.  This applies for both real estate and personal assets such as a bank account.

Beneficiary Designation/Payable on Death.  Many assets such as retirement accounts will allow for a beneficiary designation or payable on death designation to be placed on the account.  In this case, when the owner of the account dies, it passes automatically to the beneficiary who is listed on the account.  However, the key for this technique is that there must be a valid and living beneficiary at the time of death.  If there is no beneficiary listed, the asset will pass with the decedent’s estate, which will most likely trigger a probate proceeding.

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One of the most important, but most often overlooked estate planning documents, are the Powers of Attorney. Powers of Attorney fall into one of two categories: (1) Powers of Attorney for Property and (2) Powers of Attorney for Health Care. Essentially a Power of Attorney legally authorizes a trusted family member or friend to make decisions on your behalf in the event that you become incapacitated or are unable to make decisions on your own. Powers of Attorney are powerful documents that can protect you and your family from the need for expensive guardianship proceedings.

Although Powers of Attorney for Health Care are regularly accepted by hospitals and doctors, many banks and financial institutions are making it harder and harder to use a legally valid Power of Attorney Document. If a manager at your financial institution believes, in good faith, that your Power of Attorney is no longer valid you may be left with no choice but to petition a court for guardianship.

To avoid this from happening we advise that you review your Powers of Attorney to ensure (1) the your Power of Attorney documents are up to date and include the most recent statutory language; (2) that your Powers of Attorney are no more than 5 years old; and (3) that your Power of Attorney allow sufficient authority for your agent to amend trust documents, make gifts, and designate or change beneficiaries.

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In a time when advances in medicine are providing longer, more fulfilling lives for our family members with special needs, it is more important than ever to take advantage of all the financial planning tools available for their specific needs.

The Illinois ABLE Act provides for a new tax-advantaged investment program that allows a blind or disabled person (or their family) to save for disability related expenses without jeopardizing the disabled individuals means tested federal benefits. Unlike the assets of a traditional Special Needs Trust, ABLE account assets can and should be spent on expenses related to the family member’s disability. These expenses include education, housing, transportation, employment training, assistive technology, personal support services, health, prevention and wellness, financial management, legal fees, and funeral/burial expenses.

A properly established ABLE account will allow a disabled individual to save up to $100,000 in their own name. The disabled person or their family may contribute up to $14,000 per year into the ABLE account without effecting eligibility for SSI or other federal means tested programs. Although the Illinois State Treasurer’s Office is responsible for administering the ABLE program, the funds are privately held assets that are totally controlled by the account holder.

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The Reverse Mortgage has gotten a bad reputation in the time since it was first created by the Federal Housing Administration in 1988. The mere mention of the Reverse Mortgage usually brings to mind foreclosed homes and declining financial health. In fact a Reverse Mortgage is simply an equity loan secured by someone’s home with a deferred payment plan. Unlike a traditional home equity line of credit, no reverse mortgage interest or principal is due until the loan reaches maturity. As long as the homeowner resides in the property and stays current on property tax and insurance payments, they can reside in the home without making any payments on the money they have borrowed.

In order to qualify for a reverse mortgage, a homeowner must be age 62 or older with substantial equity in their home. There are no income or credit score requirements. Typically, the older the homeowner, the more they can borrow. A homeowner has the option of taking out a lump sum amount or establishing a line of credit that grows over time if money is not withdrawn.

A homeowner does have the option to pay down the balance of a reverse mortgage over time. Interest paid on the loan can be taken as a tax deduction. If no payments are made, the reverse mortgage is still not due until the last surviving borrower passes away or fails to occupy the home as their primary residence. Reverse mortgage lenders will give the heirs of an estate up to 12 months to complete the sale of the home or refinance the balance of the reverse mortgage. It is VERY important that the heirs of a deceased home owner contact the mortgage lender as soon as possible to inform them of the passing and the heirs’ plans for the property.

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In the past, creditor protection was afforded to your IRA and to the beneficiaries that would inherit your IRA, such as your children.  However, in June of 2014, the United States Supreme Court ruled that an “Inherited IRA” is not protected from creditors of the beneficiaries.

This major change in the exempt status of the Inherited IRA, motivated estate planners  to examine new ways to protect these retirement assets from creditors.

The need to restore creditor protection while maintaining the favorable tax treatment of IRAs has led many clients to consider adding a stand alone Retirement Trust to their estate plan.  If drafted properly, this type of trust can protect Inherited IRA accounts from creditors, including a beneficiary’s divorcing spouse.

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A Special Needs Trust (“SNT”) or Supplemental Needs Trust is a certain type of trust which can be used for goods and services that governmental programs will not cover.  The SNT must have special language within the trust such as: “This trust shall be used to supplement and not supplant governmental programs”.  Having such necessary language, the assets in the trust are not counted against the special needs beneficiary as an asset in determining eligibility for governmental programs such as Medicaid and Supplemental Security Income (SSI).

There are two types of SNTs.  The First Party SNT is funded with the special needs person’s own funds.  For instance, if a person with a disability is awarded monies from a settlement from an auto -mobile accident, those funds can be placed in a First Party SNT to preserve the eligibility for SSI and/or Medicaid.  The same process can be used for when a special needs person inherits a sum of money outright.

There is one disadvantage with the First Party SNT.  When the beneficiary dies, Medicaid will send a bill to the Trust for the monies spent by that program during her life.  The trust must pay back Medicaid the amount of the bill. However, if the trust assets are less than the Medicaid charge, Medicaid will absorb the balance of its bill.  If there is a balance after paying the Medicaid bill, the proceeds may be distributed to family or anyone who is a distributee of the Trust.

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When clients think about Asset Protection Off-shore trusts or some elaborate scheme of trusts and other entities usually come to mind.  However, there are several vehicles that are less complicated that a client can use that will probably suffice for her protection.

Here are some strategies that are not complicated and relatively easy to implement:

  1.  Purchase an Umbrella policy in addition to a Homeowners policy for your home.  An Umbrella policy is very inexpensive and will protect you for claims that exceed other policies for your home and auto.
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In general, IRAs, 401(k)s and pensions are exempt from the account owner’s creditors under Illinois law. They cannot be seized or garnished by creditors. In an article by Bruce E. Bell, Protecting Retirement Plan Assets from Creditors, he points out that assets passing to beneficiaries of the deceased plan owner are also in many cases exempt from claims of creditors. Exceptions include divorcing spouses, child support obligations and some Federal tax obligations.

Regarding bankruptcy, IRAs are exempt subject to a statutory cap which is currently $1,283,025. IRA owners can avoid this cap by creating a trust to hold the owner’s retirement assets at the owner’s death. With this trust in place, the beneficiaries of the IRA owner are protected in the event a beneficiary declares bankruptcy.

It is important not to comingle conventional IRA assets with funds rolled over from qualified retirement plans. The qualified retirement plan funds should be rolled into a separate IRA containing only funds which originated from qualified retirement plans. This segregating will allow all qualified retirement plan funds to be exempt from bankruptcy. Continue Reading

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If you die without a Will or Trust, your assets will be divided up based on the intestacy laws of the state where you live at the time of your death and the intestacy laws of any other state where you own assets.

Many times the intestacy laws will give different results from what you would have wanted had you taken the time to make a Will or Trust. If you own assets located outside of your home state, you could have two different sets of beneficiaries of your assets.

For example, in Florida and in Virginia, if you are survived by a spouse and children from the marriage, your spouse will inherit 100% and your children will receive nothing.

Use the same set of facts, except that your children are from a different spouse. In Florida, your current spouse will inherit one-half and your children will share equally in the remaining one-half, while in Virginia your current spouse will inherit one-third and you children will share equally in the remaining two-thirds.

Take that same set of facts in Illinois, and if you are survived by a spouse and children, no matter which spouse (current or former) the children are from, your current spouse will inherit one-half of your assets and your child (or children) will inherit the other half.

The examples illustrate what a difference state intestacy laws can make. The only way to insure that after your death your assets will go to the beneficiaries of your choice and will be distributed by the person you want making the distributions at the time you want your beneficiaries to receive them is to make an estate plan which includes a Will or a Trust.

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