Articles Posted in Estate Planning

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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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When a guardian has been appointed for a person with a disability (the “ward”) there are sometimes disagreements as to that person’s care.  These disagreements are usually between the guardian and the other relatives of the ward.  Sometimes a guardian may attempt to push the limits of their power by blocking visitation by the ward’s adult children.  In this circumstance, the adult children may feel like they have no options but to obey the commands of the guardian.  However, under Illinois law there is a remedy available for those children.

The Illinois Probate Act provides that an adult child of a ward may petition the court if it is believed that the guardian is unreasonably preventing visitation.  755 ILCS 5/11a-17(g)(2).  If the court finds visitation to be in the best interests of the ward, the court may order the guardian to allow visitation.  When determining whether visitation is in the ward’s best interests, the primary question the court will ask is whether the ward, if competent, would have wanted to engage in visitation with the adult child.

If the wishes of the ward cannot be determined, the court will then review the following factors to determine his/her best interests:

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When a guardian is appointed for a person with a disability (the “ward”), the guardian is required to follow certain guidelines.  There are two types of guardianships in Illinois, and they each have different rules to follow.

The first is “guardianship of the person.”  The guardian of the person is responsible for securing the support, care, comfort, education, and professional services for the ward.  Pursuant to the Illinois Probate Act, the guardian of the person is also expected to assist the ward in the development of maximum self-reliance and independence.  Despite the fact that guardians seemingly have a substantial amount of authority, they are not given carte blanche permission to make every decision associated with the ward.  A guardian is still expected to listen to the wishes of the ward and make an effort to carry out those wishes.  Furthermore, a guardian cannot change the residential placement of the ward without explicit authorization from the court.  This prevents a guardian from being able to place a ward in a nursing home without a thorough investigation by the court to determine if that home is in the ward’s best interests.

The second type of guardianship is called the “guardianship of the estate.”  The estate guardian is responsible for handling the finances and assets of the ward.  He/she is expected to manage the estate frugally and apply the income and principal of the estate so far as necessary for the comfort and suitable support and education of the ward (755 ILCS 5/11a-18).  The guardian may make payments directly to the ward, or to a third party to pay for things like rent, food, clothing, entertainment, etc.  Once again, this is a significant amount of power, but it is not without its limits.  A guardian of the estate can only spend the ward’s assets on things that directly benefit the ward or the ward’s minor or adult dependent children.  If the guardian is not following these guidelines, it may be grounds for the guardian to be removed.

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Many times clients will call our firm and state that they need a Power of Attorney for their elderly relative because he/she has dementia or some other condition which causes diminished capacity.  Unfortunately, depending on the current mental capacity of the relative, it may be too late for them to sign a Power of Attorney.  The person signing the Power of Attorney has to completely understand the document to which they are executing.  It is not simply enough to be able to physically sign one’s name.  They need to comprehend the nature of the document and who they are appointing as their agent under the POA.

Powers of Attorney are important legal tools that allow a person to name an agent to handle their financial or medical decision making.  These are crucial documents which must be executed according to the standards set forth in the law.  If the documents are not executed properly, it could invalidate the Power of Attorney.  One common problem is where people attempt to have their relative sign the Power of Attorney when they lack the proper mental capacity.

However, even if someone does not have the proper mental capacity, there are other routes which are available to the family members.  Often times the only choice for the family in this situation is to pursue a guardianship.  When this happens, one or more of the family members will petition a court to become the court-appointed guardian of their relative (known as the “Respondent”).  If the judge approves the petition, the family member(s) will have the ability to handle the personal and financial affairs of the Respondent, in the same manner that an agent under a Power of Attorney would act.

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A holding by the U.S. Supreme Court in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, et al. makes clear the importance of keeping on top of estate planning matters.

In that case, a divorced father did not take all of the steps necessary to change with is pension plan the name of the beneficiary of his plan. When he died, the pension plan paid all of the benefits to the person named as the beneficiary. That person was his ex-wife. The father’s estate sued, claiming that it should have received the benefit because the ex-wife had waived her right to receive the benefit.

The law in that state held that a divorce ends the right of a spouse to an interest in the other spouse’s pension benefits.

A trial court ruled that the estate should receive the benefit. The 5th U.S. Circuit Court of Appeals reversed and ruled that the ex-wife should receive the benefit. The U.S. Supreme Court confirmed.

When naming beneficiaries, it is good to keep the following in mind:

  1. It is easy to change beneficiaries. Most financial firms make copies available online or you can call and ask for them. The forms are simple. Once completed it is good to make a copy of the form after submitting it and include the form with other estate planning documents;
  2. Name an alternate beneficiary. This addresses the situation where the primary beneficiary dies before you do. It also provides for the instance where the primary beneficiary disclaims the interest.
  3. Your will has no effect regarding who receives accounts with beneficiary designations like IRAs, 401(k)s, insurance policies and annuities. Be sure to update these beneficiary designations.

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Many people believe that if they have a Will, their estate planning is complete. But there is much more to a solid estate plan. A good plan should be designed to avoid probate, save on estate taxes, protect assets if you move to a nursing home and appoint someone to act is you become disabled.

All estate plans should include a Durable Power of Attorney for Property and a Will. A Trust can also be useful to avoid probate and to manage your estate both during your life and after you are gone. In addition, Medical Directives allow you to appoint someone to make medical decisions on your behalf.

A Will is a legally binding statement directing who will receive your property at your death. If you do not have a Will, state law determines how your property is distributed. A Will also appoints a legal representative (called an executor) to carry out your wishes. A Wills is important if you have minor children because it allows you to name a guardian for the children. However, a Will covers only probate property. Many types of property or forms of ownership pass outside of probate. Jointly owned property, property in trust, life insurance proceeds and property with a named beneficiary, such as IRAs or 401(k) plans, all pass outside of probate and are not covered under a Will.

A Trust is a legal arrangement through which one person (or an institution, such as a bank or a law firm), called a “trustee”, holds legal title to property for another person, called a “beneficiary”. There are several reasons for setting up a Trust. The common reason is to avoid probate.

Certain Trusts can result in tax advantages for the beneficiary. These are referred to as Credit Shelter Trusts. Other Trusts can be used to protect property from creditors or to help the donor qualify for Medicaid.

A Durable Power of Attorney for Property allows the person you appoint to act in your place for financial purposes if you become incapacitated. In that case, the person you choose will be able to step in and take care of your financial affairs. Without a durable power of attorney for property, no one can represent you unless a court appoints a guardian. That court process takes time and money, and the judge may not choose the person you would prefer. In addition, under a guardianship, your representative may have to seek court permission to take planning steps that he could implement immediately under a Durable Power of Attorney.

A Power of Attorney for Health Care allows you to designate someone to make health care decisions if you are unable to do so yourself. A Living Will instructs your health care provider to withdraw artificial life support if you are terminally ill or in a vegetative state.

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There is a lot of information your heirs should know which does not necessarily fit into a Will, Trust or other component of an estate plan. The solution is a Letter of Instruction which can provide your heirs with guidance if you die or become incapacitated.

A Letter of Instruction is a legally non-binding document that gives your heirs information crucial to helping them tie up your affairs. Without such a letter, heirs can miss important items.

The following are some items which can be included in a letter:

  • A list of people to contact when you die and a list of beneficiaries of your estate plan
  • The location of important documents such as your Will, insurance policies, financial statements, deeds and birth certificates
  • A list of assets such as bank accounts, investment accounts, insurance policies, real estate holdings and military benefits
  • Passwords and PINs (personal identification numbers) for online accounts
  • The location of safe deposit boxes
  • A list of contact information for lawyers, financial planners, brokers, tax preparers and insurance agents
  • A list of credit card accounts and other debts
  • Instructions for funeral or memorial service
  • Instructions for distribution of sentimental personal items

Once the letter is written, store it in an easily accessible place and tell trusted family members about it.

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Social Security provides benefits to a worker’s spouse or ex-spouse and to a deceased worker’s surviving spouse.

Spouses are entitled to benefits if the marriage lasted at least 10 years. A spouse is entitled to an amount equal to one-half of the worker’s full retirement benefit. To receive this benefit, the spouse must be at his full retirement age or caring for a child who is under 16 years of age. In addition, the spouse must file for Social Security benefits even if he is not receiving them.

If you could receive more from Social Security based on your own earnings record than through the spousal benefit, the Social Security Administration will automatically provide you with the larger benefit. If you have reached your full retirement age, you may also elect to receive spousal benefits and delay taking your benefits, allowing your own delayed retirement credits to accrue, and switch to your own benefits at a later date. You cannot elect to receive spousal benefits below your retirement age and later switch to your own benefits.

An ex-spouse is also entitled to receive one-half of the worker’s full retirement benefit so long as the marriage lasted at least 10 years. Unlike a current spouse, a divorced spouse can begin receiving benefits even before the worker has applied for benefits. The worker must be at least 62 years old and the divorce must have been final for at least two years.

If you are a surviving spouse at full retirement age, you are entitled to the worker’s full retirement benefits. If the worker delayed retirement, the survivor’s benefit will be higher. Survivors are entitled to benefits even if they are divorced as long as they had been married for at least 10 years. If you file for benefits after you are over age 60 but below full retirement age, you will receive a reduced percentage of the worker’s benefits. Surviving spouses who are younger than 60 receive benefits only in limited circumstances, such as cases of disability or caring for a disabled child.

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As she points out in her article titled, Estate Planning for Your Eighteen Year Old: What You Need to do Now May Surprise You, Lauren Keenan Rote points out that becoming an adult comes with certain privacy rights and independence under the law.

An eighteen year old has rights under HIPAA (Health Insurance Portability and Accountability Act) and medical professionals will require a release to be signed by your child before sharing his health care information or records with you.

In the event your child is incapacitated, even temporarily, he will be unable to consent to you accessing his vital health records or authorize you to make decisions on his behalf. Without Medical Powers of Attorney and General Durable Powers of Attorney for Property, you will likely find that you are unable to act on your child’s behalf and that court intervention is required for you to do so.

There are two critical documents any individual over the age of eighteen should have:

  1. Medical Power of Attorney – This document appoints an agent to make health care decisions, including end-of-life care decisions, on your child’s behalf. This document should include a HIPAA release authorizing the agent to access important health records.
  2. General Durable Power of Attorney for Property – This document appoints an agent to handle financial transactions on your child’s behalf. This includes transactions involving bank accounts, scholarship funds from school and rental agreements.

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In his article, Estate Planning 101: Don’t forget the Digital Assets, Eric McWhinnie points out the need to consider intangible property when creating your estate plan.

The internet is increasingly becoming the main storage of an individual’s financial life. A survey from Pew Research shows that 51% of American adults bank online and 32% bank using their mobile phones. Nine out of 10 Americans use the Internet.

“Digital assets hold both financial and sentimental value to family and friends that should be addressed in the estate planning process”, said James Lamm, an estate planning and tax attorney. “The first challenges are finding that person’s digital property and identifying which digital property is valuable or significant. Additional obstacles with digital property are passwords, encryption, computer crime law and data privacy laws. Any one of them can make it practically impossible to do anything with the digital property unless you’ve planned ahead.” Continue Reading