Illinois Estate Planning and Elder Law Blog

In Kelly Greene’s Wall Street Journal article regarding inherited IRAs, she points out that IRA owners must start taking required withdrawals from traditional IRAs by April 1 of the year after they turn 70 ½. If they are past that age and die before taking the current year’s withdrawal, their IRA beneficiary takes the distribution based on the owner’s life expectancy and reports it as ordinary income on the beneficiary’s own tax return.

Ms. Greene goes on to state that many IRA custodians require the beneficiary to set up an inherited account and transfer the assets to it before taking the current year’s withdrawal.
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Under Illinois law, the executor or administrator of an estate may open the Probate proceedings with the court as an Independent Administration.

Under Independent Administration, the executor or administrator has authority to administer most aspects of the estate without court supervision. He has authority to sell estate real estate without first seeking approval from the court. This reduces the expense of the Probate process.

Most individuals who name an executor in their wills have confidence in the person they have chosen and prefer to include language stating that it is their intent that the estate shall be independent of the supervision of any court. While a judge has the authority to make any independent administration a supervised administration, a judge will give weight to a statement in a Will specifying independent administration and will grant a request to terminate an independent administration specified in a Will only upon demonstrated good cause by the party requesting termination.
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In Kelly Greens’s article in the Wall Street Journal, she points out that having a Will or a Living Trust doesn’t necessarily affect your estate planning for your retirement assets. This is because retirement benefits are passed to the beneficiary named in the plan.

An individual should feel confident that his family has the ability and desire to carry out the prescribed plan. This plan includes the two spouses leaving their retirement benefits to each other, with the surviving spouse rolling over the inherited retirement plan into his individual retirement account (IRA). Then the surviving spouse would name a child and grandchildren as beneficiaries of that IRA. This way the surviving spouse would get the maximum income tax deferral from the assets, and the child and grandchildren could split up the account and stretch their withdrawals across their life expectancies.

However, if the assets are large enough to be subject to estate tax (assets over $5.34 million for federal taxes in 2014), a trust may provide the most benefit. Some income tax deferral may be sacrificed on the assets’ growth, but the savings on estate taxes will likely exceed the lost income tax deferral.
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In an article in Smart Money Magazine, Tania Karas points out the importance of securing and transferring your virtual estate upon death. Your virtual estate is the body of nontangible, digital assets an individual creates and stores on his computer and the Internet.

One way to address the matter is to make a list of all digital accounts and their passwords and store this information on a flash drive locked in a safe. Another way is to look into websites like Legacylocker.com and AsetLock.net which allow users to release account information to specific individuals after they die.
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A concern for parents or grandparents of children with disabilities is how to assist with the child’s financial future. One way to assist is to set up a Third Party Special Needs Trust.

Any funds left for a disabled child, whether from an estate or the proceeds of a life insurance policy, should be held in trust for the child’s benefit. Leaving money directly to anyone with a disability jeopardizes his public benefits. Many people with disabilities cannot manage funds, especially large amounts. Some families disinherit disabled children, relying on their siblings to care for them. This approach has potential problems including the sibling being sued, getting divorced, disagreeing with other siblings regarding responsibilities and taking the funds for the sibling’s own use. It can also cause tax problems for the sibling. The best approach is a Third Party Special Needs Trust for the disabled child.

If a Third Party Special Needs Trust is created for the benefit of the child, grandparents and other family members should be told about it so that they can direct any bequest they may like to leave to that child through the trust.
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Individual Retirement Accounts (IRAs) need to be taken into account when doing estate planning.

The most important thing to remember with an IRA for estate planning purposes is to name a beneficiary. While a spouse is usually the logical choice for a beneficiary, you should be sure to name contingent beneficiaries as well. If you and your spouse die at the same time and there was no contingent beneficiary, then the IRA would go to your estate and may require the opening of Probate (the legal process of administering the estate of a deceased person before a judge). When a spouse inherits an IRA, he can roll it over into his own IRA. When a non-spouse inherits an IRA, the beneficiary will need to start taking distributions within a year after the IRA owner dies.

If you don’t need the funds in your IRA for retirement and you want to use them to provide for your beneficiaries instead, you may be interested in “stretching out” your IRA. To do this, when you reach 70 ½, take only the required minimum distributions, leaving more assets in your IRA. When you die, your beneficiary can also stretch distributions out over his lifetime and then designate a second-generation beneficiary. It makes sense to name a young beneficiary because the younger the beneficiary, the smaller each distribution must be, which gives the funds in the IRA extra tax-deferred years to grow.

In some cases, it may make sense to name a trust as a beneficiary. This is particularly true if you have minor children, children with special needs or a beneficiary with poor spending habits. But the trust must be properly drafted to avoid negative tax consequences. If the trust is a “see-through” trust or a “conduit” trust, then the distributions from the IRA to the trust after the participant’s death can be stretched over the life expectancy of the oldest trust beneficiary.
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When you give anyone a gift valued at more than $14,000 in any one year, you have to file a gift tax form. This is so that the government can keep track of gifts you make during your lifetime. You can give a total of $5,340,000 over your lifetime without incurring a gift tax.

Keep in mind that if you decide to give your children your home, while you may not have to pay gift taxes on the gift, if your children sell the house right away, they may be facing steep taxes. The reason is that when you give away your property, the tax basis (original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If your give your house to your children, the tax basis will be $150,000. If the children sell the house, they will have to pay capital gains taxes of the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.

Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property’s tax basis would be “stepped up”, which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.

Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them.
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Durable powers of attorney for property and health care are two very important estate planning documents. Having both in place allows you to avoid opening a guardianship with the Court which is expensive and time consuming. Because the individuals chosen will have to coordinate your care, it is important to pick two people who will get along. You can also have the same person serve as the agent for both powers of attorney.

A power of attorney for property allows a person you appoint – your agent or “attorney-in-fact” – to act in your place for financial purposes whether or nor you are incapacitated.It can be used for convenience when a financial transaction requires your signing documents and you would prefer that your agent attend the signing. A health care power of attorney is a document that gives an agent the authority to make health care decisions for you only if you are unable to, e.g., you are unconscious or lack mental capacity.

While the agent under the health care power of attorney is the one who makes the health care decisions, the agent under the power of attorney for property is the one who needs to pay for the health care. If the two agents disagree, there is a problem. For example, your health care agent may decide that you need 24-hour care at home, but your property agent may think a nursing home is the better option and refuse to pay for the at-home care. Any disagreements would have to be settled in court, which will take time and drain your resources in the process.

The easiest way to avoid conflicts is to choose the same person to do both jobs. But this may not always be feasible – for example, perhaps the person you would choose as agent for health care is not good with finances. If you pick different people for each role, then you should think about picking two people who can get along and work together. You should also talk to both agents about your wishes for medical care so that they both understand what you want.
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