News and Commentary
Copyright © 2011-2012 - Timothy S. Midura - All Rights Reserved
Last Update - January 18, 2012
1 - Federal Estate and Gift Tax Congressional Action
Effective December 17, 2010, the President signed into law The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. It will last for two years and then Congress has to act again.
An extensive explanation of the new federal estate tax law and its implications for estate planning and administration can be downloaded here:
Presentation Paper on New Federal and Illinois Estate Tax Laws
The following are some of the key provisions.
- Estate tax is the default rule and is retroactively effective as of January 1, 2010. The basic exclusion amount is $5,000,000 with a maximum rate of 35% and step-up in tax basis.
- There is an option to elect carryover basis instead of estate tax (Form 8939 - due January 17, 2012).
- The default is for estate taxation with a $5,000,000 basic exclusion amount (and step-up in tax basis) with an opt out for no estate taxation and carryover tax basis (with the $1,300,000 basis allocation plus $3,000,000 more basis allocation for gifts to spouses).
- Estate tax returns (Form 706) are due by September19, 2011.
- Disclaimers for testamentary gifts effective by death at any time in 2010 (prior to December 17, 2010) are due by September 17, 2011.
- Disclaimers for lifetime gifts are due within nine months from when the lifetime gift was made. The September 19, 2011 extention does not apply to lifetime gifts.
- Gift tax basic exclusion amount is $1,000,000 (no change) with a maximum rate of 35% (no change).
- Generation-skipping tax (GST) also returns, but with a zero tax rate (only for 2010).
- Estate tax basic exclusion amount is $5,000,000 with a maximum rate of 35%.
- Gift tax basic exclusion amount is $5,000,000 with a maximum rate of 35%.
- Brand new is a "deceased spousal unused exclusion amount" (DSUEA) that permits a surviving spouse to later use the unused (estate and gift) basic exclusion amount of the predeceased spouse who dies in 2011 or 2012 (if the surviving spouse does not remarry). The will also be commonly referred to as "portabililty."
- The DSUEA could be lost if the surviving spouse remarries and is then "rewidowed." Only the last deceased spouse's DSUEA is usable.
- So the available basic exclusion amount of $5,000,000 is also increased by any available DSUEA (as much as an additional $5,000,000). So the total combined exclusions for a surviving spouse can be as much as $10,000,000 for 2011 and 2012.
- For a surviving spouse to receive the benefit of the predeceased spouse’s unused exclusion amount, a timely estate tax return will have to be filed and the executor of the predeceased spouse irrevocably assign the predeceased spouse’s unused exclusion amount to the surviving spouse.
- Practically, this means that an estate tax return will have to be timely filed for EVERY married person estate in order to preserve the predeceased spouse’s unused exclusion amount.
- The familiar 2009 step up in basis rules return.
For 2013 and After - The 2001 tax law is scheduled to return, which is the $1,000,000 exclusion amount and a 55% maximum rate. The DSUEA is set to expire.
Some New Estate Tax Law Implications:
- In 2011 and 2012, the default position should be to file an estate tax return, Form 706, for each married person's decedent estate in order to preserve the deceased spousal unused exclusion amount (DSUEA). If after full disclosure to the parties in interest a Form 706 is not to be filed for lack of size, waivers should be signed by the surviving spouse choosing not to file a Form 706 and forego preserving the DSUEA. However, if the surviving spouse is not the executor, then the executor probably has a fiduciary duty to file a Form 706 and make sure the DSUEA is preserved.
- Note: Even a small estate now can become larger later: invention, new business, inheritance, lottery, personal injury award, wrongful death award, etc.
- Note: The only way to preserve the DSUEA is by timely filing a Form 706 with an assignment of the DSUEA on the Form 706.
- Since the DSUEA is set to expire in 2013, its lifetime usuage in 2011 and 2012 might be considered.
- 2011 and beyond: Credit shelter planning during the presumed first-to-die spouse's lifetime should still continue, and not rely on the DSUEA, because:
- Potential loss of DSUEA through remarriage or expiration in 2013.
- Removing appreciation from gross estate.
- Potential audit issues of predeceased spouse's estate tax return, Form 706, that remain open.
- Note: The statute of limitations remains open for the IRS to audit the predeceased spouse's Form 706 for purposes of verifying the DSUEA.
- Creditor, remarriage, and third party influencer issues.
- The DSUEA only carries forward for gift and estate tax planning, but not for generation-skipping tax planning. Therefore, any GST planning must be exploited during the first-to-die spouse’s lifetime.
- Most importantly, the DSUEA is presently only available when one spouse dies in 2011 or 2012 and the surviving spouse gifts or dies in 2011 or 2012. The DSUEA is set to expire after December 31, 2012 and the 2001 $1 million exemption law is scheduled to return.
- The $5 million GST exemption is applicable for 2010 even though an estate elects out of estate tax. See footnote 53 of the Technical Explanation of the Revenue Provisions Contained in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 as prepared by the Staff of the Joint Committee on Taxation, “53 The $5 million generation skipping transfer tax exemption is available in 2010 regardless of whether the executor of an estate of a decedent who dies in 2010 makes the election described below to apply the EGTRRA 2010 estate tax rules and section 1022 basis rules.”
- This means that a GST exempt trust in an estate plan can be funded with the available GST exemption even though the estate elects out of estate taxation.
- An open issue then is how to notify the IRS of the GST exemption allocation because an estate tax return, Form 706, will not be required. I anticipate that the opt out form should have an attachment, signed by the executor, making notification of such allocation.
2- Estate Planning Has More Opportunities Than Ever!
The new $5 million basic exclusion has not killed estate planning nor estate tax planning. It has made better and more sophisticated estate planning more vital than ever!
With less tax evaporating an estate, it means that there is more wealth to plan for … and also more wealth for family, creditors, and a divorcing spouse to fight over.
Also, importantly, remember that Congress revisits estate taxes in two years and “What Congress Giveth, Congress May Taketh Away.” So planning and locking in what you want is important before Congress can tell you again what it wants for you.
Estate tax planning now means more estate tax free wealth transfers later. And, similar planning also lock in benefits for planning towards spendthrifts, multiple marriages, creditors, divorces, and special needs, such as potential disability and Medicaid planning.
IMPORTANT: EVERY ESTATE PLAN SHOULD NOW BE REVISITED AND THE NEWEST OPPORTUNITIES EVALUATED!
Existing plans that have tax sensitive formula provisions have to be reviewed for interpretation, application and outcomes.
Spousal Joint Revocable Trusts. Spouses with long-term, stable marriages with common children may find having an estate plan with a shared single joint trust now more attractive. This eliminates the complexities of choosing what assets go into which spouse's separate trust.
Surviving spouse marital trusts can be planned for more flexibility.
1- There can be a single highly discretionary marital trust with flexibility available through use of trustee discretions, powers of appointment, and trust protectors. This provides the ultimate in creditor protection and third party influencer protection.
2- There can be layered marital trusts:
First layer can be a power to withdraw marital trust. This provides the most access to the surviving spouse, probate avoidance, but no tax planning or creditor protection.
The second layer can be funded by a predetermined fraction or amount or through a surviving spouse's disclaimer choice to a qualified terminable interest property (QTIP) marital trust. Here financial security is provided, with significant tax planning opportunities, and some creditor protection.
The third layer can be funded through a predetermined fraction or amount or the surviving spouse's disclaimer choice to a highly discretionary marital trust. Here is the most creditor and third party influencer protection and flexibility is provided through trustee discretions and trust protector provisions.
Protective Child's Trust. Because of greater wealth potential, lifetime (or perpetuity, dynasty, or generation-skipping) trusts for the benefit of children can be highly advantageous. A lifetime child's trust will provide the ultimate in tax planning, creditor protection, and divorce defense. It can provide a great deal of flexibility through trustee discretions, powers of appointment, and trust protector provisions. It can pass to multiple generations with further direction and provisions by your child.
Lifetime Spousal Gift Trust with Loop Back. One spouse can establish a trust during that first spouse's lifetime (not waiting for the first spouse's death) that completes a gift (for tax and creditor protection purposes), provides for the second spouse's financial security, and the first spouse can still potentially benefit from the trust should the second spouse predecease - and the first spouse too has protections from taxation and creditors.
Self Benefitted, Self Settled Trusts. One can establish a completed gift self-settled (for one's own benefit) trust that provides tax planning and creditor protection. Because of the $5 million basic exclusion amount, the funding of this protected self-settled trust can be very significant.
There are more planning opportunities than ever!
3- Deceased Spousal Unused Exemption Amount – More Detail
This provides more explanation on the brand new estate and gift tax concept of the Deceased Spousal Unused Exemption Amount ("DSUEA") installed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”).
The estate tax is reduced by an amount called the Unified Credit. The Unified Credit is equal to the amount of tax that the estate would incur if the taxable estate were exactly equal to an amount called the Applicable Exclusion Amount (AEA). It is the AEA that is often thought of as the exemption amount or exemption equivalent. For decedents dying after 2010, the AEA for estate and gift tax purposes is generally $5,000,000.
The Act establishes a new rule that the AEA can be increased for a surviving spouse by the deceased spouse’s unused AEA. This is commonly referred to as “portability.”
Portability means any or all of the $5 million AEA not used by the estate of a predeceased spouse may now be transferred to a surviving spouse by making an election on a timely filed estate tax return. This new rule is effective for decedents dying and gifts made after December 31, 2010. The carryover is called the “Deceased Spousal Unused Exclusion Amount” (DSUEA).
The DSUEA addition to the surviving spouse’s AEA will reduce gift and estate taxes of the surviving spouse.
Notable is that the DSUEA, however, does not apply to generation-skipping tax (GST) transfers.
DSUEA is scheduled to expire on December 31, 2012, along with the rest of the Act’s tax provisions.
This makes it possible for a married couple to transfer up to $10 million free of estate and gift taxes to their intended donees and beneficiaries. Before portability was enacted, a surviving spouse could not utilize any part of the unused Applicable Exclusion Amount of a predeceased spouse.
The AEA is now defined as the sum of (1) the “Basic Exclusion Amount” and (2) the DSUEA. The Basic Exclusion Amount is the $5 million amount that we used to call the AEA before the law change. The DSUEA is the difference between the decedent’s last predeceased spouse’s Base Exclusion Amount and the taxable estate of that last predeceased spouse. Congress was worried about stacking up unused exclusion amounts of more than one predeceased spouse, so it limited the DSUEA to the amount equal to the decedent’s Base Amount.
The Joint Committee Report on the Act contains several examples:
Example 1. Assume that Husband 1 dies in 2011, having made taxable transfers of $3 million and having no taxable estate. An election is made on Husband 1's estate tax return to permit Wife to use Husband 1's deceased spousal unused exclusion amount. As of Husband 1's death, Wife has made no taxable gifts. Thereafter, Wife's applicable exclusion amount is $7 million (her $5 million basic exclusion amount plus $2 million deceased spousal unused exclusion amount from Husband 1), which she may use for lifetime gifts or for transfers at death.
Example 2. Assume the same facts as in Example 1, except that Wife subsequently marries Husband 2. Husband 2 also predeceases Wife, having made $4 million in taxable transfers and having no taxable estate. An election is made on Husband 2's estate tax return to permit Wife to use Husband 2's deceased spousal unused exclusion amount. Although the combined amount of unused exclusion of Husband 1 and Husband 2 is $3 million ($2 million for Husband 1 and $1 million for Husband 2), only Husband 2's $1 million unused exclusion is available for use by Wife, because the deceased spousal unused exclusion amount is limited to the lesser of the basic exclusion amount ($5 million) or the unused exclusion of the last deceased spouse of the surviving spouse (here, Husband 2's $1 million unused exclusion). Thereafter, Wife's applicable exclusion amount is $6 million (her $5 million basic exclusion amount plus $1 million deceased spousal unused exclusion amount from Husband 2), which she may use for lifetime gifts or for transfers at death.
Questions: What happens in Example 2 if Husband 2’s estate makes no election? Is the DSUEA reduced to zero – Wife losing the DSUEA from both Husband 1 and Husband 2?
And what happens if Wife in example 2 uses up all of the augmented AEA in making lifetime gifts before Husband 2 dies? Does the gift tax increase retroactively? Is there an additional tax to pay on Wife’s death?
Here’s the third and last example appearing in the Joint Committee reports:
Example 3. Assume the same facts as in Examples 1 and 2, except that Wife predeceases Husband 2. Following Husband 1's death, Wife's applicable exclusion amount is $7 million (her $5 million basic exclusion amount plus $2 million deceased spousal unused exclusion amount from Husband 1). Wife made no taxable transfers and has a taxable estate of $3 million. An election is made on Wife's estate tax return to permit Husband 2 to use Wife's deceased spousal unused exclusion amount, which is $4 million (Wife's $7 million applicable exclusion amount less her $3 million taxable estate). Under the provision, Husband 2's applicable exclusion amount is increased by $4 million, i.e., the amount of deceased spousal unused exclusion amount of Wife.
Election on a Timely Filed Estate Tax Return. The first step in preserving the opportunity to use a DSUEA is that (1) a timely estate tax return must be filed and (2) an election must be made in order to port the unused AEA from the predeceased spouse to the surviving spouse. Both of these acts are required in order to effectively vest the surviving spouse in the DSUEA.
Extended Statute of Limitations to Review the Calculated DSUEA. In order to protect the integrity of proper determination of the calculated DSUEA, the time for auditing the estate tax return that contains the election is extended indefinitely.
As a practical matter, that extension to audit will be limited by the statute of limitations on assessment and collection applicable to the deceased spouse’s estate that receives the DSUEA. The language of the extended statute of limitations appears to limit the audit extension period to the determination of the DSUEA. Therefore it should not be possible to assess estate taxes against the predeceased spouse’s estate after the “normal” time for assessing and collecting tax has expired. This should also leave unchanged the length of time for transferee liability exposure.
Tracking. Any available DSUEA must be tracked. Estate planning data collection questionnaires should now include a question covering any such availability. The estate tax return, Form 706, for the predeceased spouse is especially important to be permanently preserved.
Strategic Use of Taxable Gifts and Filing Gift Tax Returns. Making taxable gifts, using the DSUEA, and filing gift tax returns seems to assure the DSUEA use and its evidentiary tracking. Because of the liberal drafting of the tax law, for now it’s being assumed that a gift tax return will use the DSUEA first before the surviving spouse’s basic exclusion amount. If a surviving spouse (Spouse 2) remarries (to Spouse 3), uses the predeceased spouse’s (Spouse 1) DSUEA for lifetime gifting, and Spouse 3 dies with the effect of replacing Spouse 1’s DSUEA with Spouse 3’s DSUEA, it does not seem logical that the any “over use” of Spouse 1’s DSUEA will need to be recaptured – arguing for aggressive lifetime gift use of the first predeceased spouse’s DSUEA should the surviving spouse remarry.
Because the DSUEA does not apply to GST, taxpayers and their return preparers will now have to track separately the gift and estate tax AEA versus GST AEA.
Estate Tax Returns for All Predeceased Spouses? Because the financial fortune of a surviving spouse cannot be predicted (new businesses can thrive, lottery won, personal injury award, wrongful death award to the estate), even a small estate probably should file an estate tax return and make the DSUEA election in order to preserve its use. Therefore, expect that every married person’s decedent’s estate should file an estate tax return.
Preemptive Drafting for the DSUEA. Who wants to pay for estate tax return preparation that seems wasteful or for the benefit of the family of a second spouse (thinking multiple marriage situations). It might be appropriate to have the first spouse (the presumed predeceased spouse) settle preparation and cost issues by including a will provision saying whether the executor will (a) never, (b) sometimes, or (c) always file an estate tax return and make the DSUEA election. The will might include exculpatory language to hold the executor harmless from acting or failing to act. Alternatively, the will could provide that the executor will notify the surviving spouse of the potential election and that the executor will make the election or not as the surviving spouse may direct. In other words, the will could put the surviving spouse in charge of whether the executor will make the election.
If the will has no provision regarding the election, the executor could nevertheless seek the surviving spouse’s direction. If the surviving spouse wants the election, there could be some negotiation and written agreement about who will bear the costs and responsibilities. If the surviving spouse doesn’t want the election, the executor could ask the surviving spouse to sign off and hold the executor harmless in an agreement binding on the estate of the surviving spouse, including heirs and devisees.
Estate Tax Return Extensions. Whatever method is used to decide, the estate tax return filing due date of the predeceased spouse should always be extended in order to provide the maximum amount of time to make that decision, gather return filing information, file the return, and make the election.
Avoid the DSUEA Mess. Credit shelter trust planning is the best way for the presumed predeceased spouse to control his or her use of his or her AEA and also the potential waste of it due to the potential remarriage of his or her surviving spouse. It will also preserve the exemption for GST purposes if the trust is so designed.
QTIP Marital Trust Even More Important. Using the maximum federal AEA will potentially bring a cost of incurring state death tax that has a lower state exemption. QTIP type trusts with reverse elections could be a response. But QTIP trusts have much less beneficiary, discretionary distribution, and creditor protection flexibility. However, QTIP trusts can also be implemented for optimal use for GST planning through reverse elections. Carving out marital QTIP trusts into sub-trusts with various elections may be the future norm.
Social Implications. If a surviving spouse (“Spouse 2”) has inherited DSUEA of some significance from predeceased Spouse 1, will he or she consider it a significant disadvantage to remarry someone (“Spouse 3”) of wealth who, if the new Spouse 3 predeceases, loses the DSUEA from Spouse1? Will there be nuptial negotiation and consideration paid for the potential of the loss of one’s DSUEA?
Because the DSUEA means as much as $1,750,000 gift or estate tax savings to the inheritors, children-inheritors may have their own perspectives on whether a new marriage is worth $1,750,000 to them. What influences might be asserted for the potential costs of $1,750,000 for remarriage?
Marry for Love or Trafficking in a DSUEA Market? Might someone now prefer marriage to an older and poorer person to gain a DSUEA? Might Internet dating now having a new question … What is your unused Application Exclusion Amount? What about arranged marriages with terminally ill persons with compensation for his or her DSUEA? Might there be situations where there is “plug pulling” in order to lock in a DSUEA? There are no anti-trafficking provisions for DSUEA. And those romantic prenuptial agreements may be contracting terms for assuring timely filing of the estate tax return and making the DSUEA election. Let’s start the negotiations for what is the DSUEA worth in the matrimonial relationship? Practically, it’s worth as much as $1,750,000.
4 - Illinois Estate Tax
1. In 2010, Illinois followed the Federal 2010 estate tax sunset. So there was no Illinois estate tax for 2010 (notwithstanding the Federal estate tax retroactive reinstatement for 2010). On January 13, 2011 signed into law was a reinstatement of Illinois estate tax for deaths after 2010. So effective January 1, 2011, Illinois has estate tax with a $2,000,000 exemption. This is the same law that was in effect in 2009. Public Act 097-0636 (signed by the Govenor on 12/16/11) makes the Illinois estate tax exemption $3,500,000 for deaths occurring in 2012 and $4,000,000 for deaths occurring in 2013 and thereafter.
More technically, the Illinois estate tax is equal to the full amount of the state tax death tax credit that would have been allowed under the Internal Revenue Code in effect on December 31, 2001 but limiting the exclusion amount to $2 million for 2011, $3.5 million for 2012, and $4 million for 2013 and thereafter.
The most significant planning implication is that a taxable estate of $5,000,000 that creates no federal estate tax will create Illinois estate tax of about $352,000 when the Illinois exemption is $2 million (this of course reduces as the 2012 and 2013 exemptions phase in). This is particular relevant for estate plans that utilize "credit shelter" or "by-pass" trust planning.
2. Effective September 8, 2009, Illinois permits Illinois only QTIP trust elections for qualifying a trust for Illinois only marital deduction. See topic of "decoupling" below.
3. State death tax implications:
a. Decoupling: Many states have "decoupled" their death taxes from the federal death tax system. State death tax planning has taken on more importance.
b. Drafting change from the two trust (A-B) plan to the decoupled three trust (A-B-C [QTIP qualifying]) plan.
i. The Federal exemption is $5 million and the Illinois exemption is (presumed) at $2 million.
ii. QTIP (qualified terminable interest property) or QTIPable trusts have taken on more significance versus spray or accumulation trusts.
c. Domicile in Florida or other no death tax state.
i. Think 7-8% Illinois estate tax savings for assets with a tax situs in Florida (or other state with no death tax).
ii. Florida state death tax is constitutionally tied to the Federal "pick up" tax.
d. Use of LLCs:
i. Avoid probate – converting real property to personal property.
ii. Move estate tax situs: for good or bad. Florida real property in LLC now taxed for Illinois domiciled decedent?
5 - Applicable Federal Rates (AFRs)
For current or past AFRs, go to
6 - New Illinois Laws Affecting Estate Planning
1. Transfer on Death Instrument for Residential Property. Public Act 97-555 creates the Illinois Residential Real Property Transfer on Death Instrument Act. It allows an owner of real estate to transfer residential real estate on his or her death pursuant to a transfer on death instrument (TODI). A TODI must: (1) contain the essential elements and formalities of a properly recordable inter vivos deed; and be executed, witnessed, and acknowledged [see below]; (2) state that the transfer to the designated beneficiary is to occur at the owner's death; and (3) be recorded before the owner's death in the public records in the office of the recorder of the county or counties in which any part of the residential real estate is located. The definition of "residential property" is improved with not less than one nor more than 4 residential dwelling units, units in residential cooperatives; or, condominium units, including the limited common elements allocated to the exclusive use thereof that form an integral part of the condominium unit; or a single tract of agriculture real estate consisting of 40 acres or less which is improved with a single family residence. Every TODI shall be signed by the owner or by some person in his or her presence and by his or her direction, and shall be attested in writing by 2 or more credible witnesses, whose signatures along with the owner's signature shall be acknowledged by a notary public. The witnesses shall attest in writing that on the date thereof the owner executed the transfer on death instrument in their presence as his or her own free and voluntary act, and that at the time of the execution the witnesses believed the owner to be of sound mind and memory. Effective January 1, 2012.
2. Access to Medical Records After Death. Public Act 097-0623 expands the Illinois health care power of attorney law to permit the agent to access the principal’s medical records after the principal’s death. This will require a change to the health care power of attorney form. If there is no acting executor, administrator, or health care agent, the Public Act then allows the following persons to access the deceased's medical records: (1) surviving spouse, or (2) if there is no surviving spouse then, any of adult child, parent or sibling (“family”). However, the family cannot access medical records if the deceased patient had a written objection to medical records disclosure. Effective November 23, 2011.
3. Illinois Estate Tax. Illinois has reinstated its estate tax as of January 1, 2011. It is the same estate tax law of 2009, with a $2,000,000 exemption.
- The most significant planning implication is that a taxable estate of $5,000,000 that creates no federal estate tax will create Illinois estate tax of about $352,000. This is particular relevant for estate plans that utilize "credit shelter" or "by-pass" trust planning.
4. Civil Union Partnerships
- Senate Bill 1716, the Illinois Religious Freedom Protection and Civil Union Act, effective June 1, 2011.
- This law defines a “civil union” as a legal relationship between 2 persons, of either the same or opposite sex, established pursuant to the Act.
- A party to the civil union will now have the same meaning within Illinois law as "spouse", "family", "immediate family", "dependent", "next of kin", and other terms that denote the spousal relationship.
- Reciprocity is expressly granted. A marriage between persons of the same sex, a civil union, or a substantially similar legal relationship other than common law marriage, legally entered into in another jurisdiction, shall be recognized in Illinois as a civil union.
- A party to a civil union is entitled to the same legal obligations, responsibilities, protections, and benefits as are afforded or recognized by the law of Illinois to spouses, whether they derive from statute, administrative rule, policy, common law, or any other source of civil or criminal law.
- A civil union’s dissolution will be governed by the Illinois Marriage and Dissolution of Marriage Act.
- Estate planning implications are that a party to a civil union will now have “spouse” standing for priority surrogate decisions, guardianship, spouse awards, will renunciation, and the like.
5. New Power of Attorney Act. Public Act 096-1195 (derived from House Bill 6477) amends the Illinois Power of Attorney Act, effective July 1, 2011. It makes numerous substantive and stylistic changes. There also was an additional amendment concerning HIPAA personal representative signed by the governor on July 14, 2011 and effective July 1, 2011.
In relation to Durable Powers of Attorney:
- Defines "incapacity".
- Provides that the execution of a new power of attorney does not revoke a prior power of attorney, unless the new power expressly revokes the prior power.
- Adds specific requirements relating to an agent's records and disclosures, and provides remedies for violations of an agent's duties.
- Creates a form to be used for the agent's certification and acceptance of authority.
- Includes provisions relating to co-agents and successor agents, and creates separate forms for their use.
- Limits liability in certain cases of good faith reliance.
- Sets forth requirements, including acknowledgement of the principal's signature, for nonstatutory forms.
- Includes savings provisions.
In relation to both the Statutory Short Form Power of Attorney for Property and Powers of Attorney for Health Care:
- Makes both substantive and stylistic changes in the prescribed statutory short forms.
- Requires an explanatory Notice page to be a part of the form, and includes various Notes and instructions in the body of the form.
- Also provides for a Notice to Agent form that describes the agent's duties.
- Prohibits certain persons from acting as witnesses.
- Includes savings provisions.
Also in relation to Powers of Attorney for Health Care:
- Defines "incurable or irreversible medical condition", "permanent unconsciousness", and ""terminal condition".
- Amends the form to provide that its use does revoke all prior powers of attorney for health care.
- Adds provisions relating to the agent's power to authorize an autopsy, direct the disposition of remains, and make anatomical gifts, and makes those decisions binding.
- Provides that signing the power of attorney authorizes physicians, health care providers, insurance companies, and others to disclose the principal's confidential health care information to the designated agent, and supersedes any contrary agreement with the health care provider.
- Grants the agent power to use and disclose individually identifiable health information and confidential medical records covered by HIPAA and other confidentiality Acts.
- Provides that the agent's powers to obtain, use, and disclose that confidential information take effect upon signing the form, even before the agency itself takes effect, and do not expire unless specifically revoked in a writing delivered to the health care provider.
It makes other changes.
Effective July 1, 2011.
6. Tenancy by the Entirety Deeds for Trusts. Public Act 96-1145, amending 765 ILCS 1005/1c and 735 ILCS 5/12-112, provides where a homestead is held in the name or names of a trustee or trustees of a revocable inter vivos trust or of revocable inter vivos trusts made by the settlors of the trust or trusts who are husband and wife, and the husband and wife are the primary beneficiaries of one or both of the trusts, and the deed or deeds conveying title to the homestead to the trustee or trustees of the trust or trusts specifically state that the interests of the husband and wife to the homestead property are to be held as tenants by the entirety, the estate created is deemed to be a tenancy by the entirety. Effective January 1, 2011.
a. Tenancy by the entirety (TBE) can be held in trust (primarily for asset protection element purposes) when the recorded deed of conveyance specifically so states.
b. Remember TBE result is not a separated allocation of wealth between trusts for estate tax purposes, because survivorship vests the whole in the surviving trust (the basic element of TBE, similar to joint tenancy). Beware of a situation where a trust specifically gifts the homestead property but “survivorship” yanks the homestead property from the predeceased spouse's trust.
c. Although a TBE interest can be the subject of a qualified disclaimer, the fiduciary duties of a trustee (particularly a trustee who is not the settlor, i.e., the settlor is incompetent or is recently deceased) may have such fiduciary duties owed to the trust beneficiaries (including the remainder beneficiaries) that a conflict of purposes is inherently created.
d. Beware of a situation where a creditor could argue that the trust is not one where the settlor is the “primary beneficiary” that could jeopardize the TBE creditor protection. A creditor might also challenge the “revocable inter vivos trust” created for “estate planning purposes.”
e. The trust itself might be better (or worse) if it has special language governing any TBE property that is a part of its corpus.
f. If it’s super important to use TBE for creditor protection, then I recommend, until this law settles out, that TBE be used without trust installation.
g. My view is that the more appropriate use of a trust TBE is where TBE creditor protection is a nice (but not dominant) feature and TBE best assures probate avoidance: (1) title vesting by survivorship and (2) within a trust. It's been legislatively talked about that transfer-on-death deeds are coming to Illinois (as some other states have them) and TOD titling would be a cleaner approach than trust-TBE.
7. Crummey Withdrawal Rights Lapsing and Creditors. Public Act 96-0980 provides a beneficiary of a trust will not be considered to be a settlor or to have made a transfer to the trust merely because of a lapse, release, or waiver of his or her power of withdrawal to the extent that the value of the affected property does not exceed the greatest of the amounts specified in Sections 2041(b)(2), 2514(e), and 2503(b) of the Internal Revenue Code. This is effective July 2, 2010.
8. Surviving Spouse and Child Award. Public Act 96-0968 increases the minimum surviving spouse award from $10,000 to $20,000 and increases the minimum award for a surviving minor child or an adult dependent child from $5,000 to $10,000. This applies only to estates in which the decedent died on or after July 2, 2010.
9. Convenience only bank accounts. This permits another person to be on the bank account for signing purposes but not as a joint tenant with a right of survivorship – "for the convenience of the depositor." So the account becomes a probate asset (or could be a payable on death) at the owner’s death, rather than vest in the other person. This is effective January 1, 2010 and sunsets (automatically repealed) on January 1, 2015.
10. Orphan Wills and Trusts. This establishes a state depository maintained by the Secretary of State for wills and other estate planning documents when the testator or settlor cannot be located. This is effective January 1, 2010.
11. Virtual Representation and Total Return Trusts. Generally, this enhances the ability to modify documents by non-judicial agreement. This is effective January 1, 2010.
12. Transfer on Death for Automobile Titles. This permits someone to own a car title but it vests in another at the owner’s death. This is effective January 1, 2009.
7 - New and Developing
Estate Planning Practice Perspective:
Disputes Planning, Administration, and Litigation.
1. Complex or less than perfect planning documents or transactions.
a. Beware of not paying for the better estate planning job and administration processes.
b. "Forensic estate planning" or "ripening problems."
c. Transitioning laws affecting directed trustee clauses, exculpation clauses reliance (investments and distributions), fiduciary duties, fiduciary processes, etc. What once was something that could be relied upon may now or in the future be on soft ground.
2. Growth slippery slopes:
a. Tortious interference with an expectancy versus contest actions.
b. Aiding and abetting by third party professionals – co-conspirators or co-tortfeasors.
c. Presumption of fraud based on confidential or fiduciary relationships.
d. Trust protector abuses – not acting independently and with due diligence.
3. Beneficiary expectations.
a. Greater unearned wealth.
b. Greater sense of entitlement.
c. "Someone else has to be responsible."
d. Three halves dilemma. (Three children each "needing" or deserving at least half of the estate)
4. Beneficiaries personalities.
5. Relationship issues.
6. Multiple marriages and children of different unions.
7. Three generations living together or dependencies.
8. Changes in financial fortune creating desperation.
8 - What’s Not Usually Happening
in Plain Vanilla Estate Planning
1. Extended tax planning.
2. Risk management and asset protection for client.
3. Risk management and asset protection for client’s beneficiary.
a. Significant future creditor = former spouse.
4. Medicaid planning for client.
5. Medicaid planning for client’s beneficiary.
a. Potentially wasted inheritance.
b. A little goes a long way in a supplemental (special) needs trust (SNT).
9 - Developing Drafting Trends
1. Joint (non-tax planning) trusts between spouses.
2. Everyday (non-tax) generation skipping trusts: Outright distributions or lifetime trusts with powers, protectors and amenders.
a. Asset protection is now "way hip" for the common person.
10 - Asset Protection Is a Growing Trend
1. Domestic asset protection trusts with situs in empowered states (Alaska, Delaware, Hawaii, Missouri, Nevada, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, and Wyoming).
2. Tenancy by the entirety.
3 Insurance and annuity products for the direct benefit of dependents.
4. ERISA plans vs. IRAs and qualification.
5. Note: Inherent planning tensions (often mutually exclusive principles) between "estate planning" and "asset protection planning."
6. See other site materials on asset protection methods.
11 - Elder Law and Medicaid Planning
Is a Growing Trend
1. Medicaid eligibility planning. Generally, a five year look back period.
2. Note: Inherent planning tensions (often mutually exclusive principles) between "estate planning" and "Medicaid planning."
12 - Those "Other" Documents and Transactions
Can Have Significant Impact on Estate Planning
1. Divorce decrees and settlements.
2. Prenuptial agreement.
3. Future gift or inheritance.
4. Other trusts, including land trusts.
5. Powers of appointment.
6. Past inheritance subject to estate tax.
7. Past taxable gifts.
8. Restrictive agreements.
9. Pledges or other obligations.
13 - Non-Probate Assets
Often Create Estate Planning Problems
1. Joint tenancy and tenancy by the entirety.
2. Beneficiary designations.
3 Payable-on-death (POD) and transfer-on-death (TOD) designations.
a. Bank accounts, stocks, and other than Illinois states that permit real estate deeds to have TODs.
14 - Surviving Spouse’s Automatic Interest
in ERISA (Employer Sponsored) Retirement Plans
Overrides Pre-existing Documentation
The Retirement Equity Act of 1984 or IRC Section 401(a)(11) and qualified waivers pursuant to IRC Section 417(a)(2).
1. Pre-nuptial agreement is not a valid waiver.
2. Particularly an issue in later-in-life second marriage situations.
3. Note: This does not apply to IRAs.
15 - Potential Drafting Problem
Will and Trust Tax and Expense Clauses
and estate claims mandated to be paid by trust
Who will actually have to pay estate taxes, especially on the non-probate and non-trust assets?
16 - Health and Personal Care Management Documents
Have all the documentation bases been covered?
1. Health care power of attorney.
a. HIPAA enhanced?
b. Multi-state use?
2. Living will declaration.
a. Modification for "sustenance"? Clear and convincing evidence of desires to withhold or withdraw artificial administration of hydration and nutrition.
3. HIPAA – a separate authorization for use and release of medical information.
4. Appointment of Agent to Control Disposition of Remains.
5. Declaration for Mental Health Treatment.
6. Do Not Resuscitate (DNR) Order.
a. On The Orange Form.
b. Note: Different than a "living will."
7. Short Term Guardianship for Minor Children.
8. Health care power of attorney for minor child.
9. Stand-by guardianships.
17 - The Baby Adult
Your Child Going to College
1. FERPA – Family Educational Rights and Privacy Act.
a. You, the parent, are expected to pay the bills but you are not entitled to any information on your child who is a legal adult. So your "adult" child will have to sign a FERPA information release and make it of record with the college.
2. HIPAA – Health Insurance Portability and Accountability Act.
a. Just like the doctor's office has you sign a HIPAA information release, your child should sign one for you to have access to his or her medical records and to be able to communicate with healthcare providers.
3. Powers of attorney for health care and financial matters.
a. Yes, you should be named as a legal agent for your "adult" child in formal powers of attorney for financial and healthcare matters.
b. They should be for your state of domicile and also specific to the (out-of) state of college attendance.
18 - Pet Trusts
Yes, you can establish a trust for the care of your companion animals.
19 - Testamentary Gifts to Charity
1. Are you disinheriting your charitable children by not including them as heirs in your estate plan?
a. Question: Why don’t people give more to charity in their estate plans?
Answer: They just don’t think about it.
2. The preferred gift of IRD (income in respect of a decedent).
a. This is a class of assets (such as IRAs, 401(k) plans, and the like) that is always taxed: Single (income tax), double (income and estate taxes), and even triple (income, estate, and generation-skipping taxes).
3. Beware of funding a pecuniary gift with IRD.
4. Tax apportionment care. Beware of losing the charitable estate tax deduction and taxes on taxes (the circular tax calculation).
5. Testamentary charitable gifts from non-taxed "pots." Potential loss of charitable estate tax deduction.
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