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Want to Defer $407,550 of Estate Tax?
Critical Reasons to Update Your Estate Plan
By: Lindsey Paige Markus, Principal, Chuhak & Tecson, P.C.
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| The topic of “death and taxes” is not an uplifting discussion, but it is a reality for everyone. Many individuals remark, “I will get an estate plan when I have an estate to plan!” The reality is that regardless of one’s net worth, everyone needs a proper estate plan in place to:
• Avoid guardianship/conservatorship proceedings;
• Document health care wishes;
• Avoid guardian of the estate appointments for minor children;
• Circumvent probate;
• Leverage estate tax exemptions;
• Minimize income tax consequences for the next generation;
• Provide asset protection for beneficiaries; and
• Maximize charitable planning.
With family and work demands, far too many clients allow estate planning to fall to the bottom of their “to do” list. With this in mind, the following list serves as a summary of critical changes that need to be reviewed in an existing estate plan, or the information can be used as a useful check list for the implementation of a new one.
Income Tax Planning – With the increase in estate tax exemptions, there has been a paradigm shift in the estate planning world. Perhaps you have heard the recent buzz that “income tax planning” is the “new estate planning.” Specifically, now that the lifetime exemptions are so high, many clients are no longer concerned with estate taxes. Rather, the focus has shifted to minimizing 23.8 percent income tax. For married couples, the traditional trust funding formula identifies how assets pass on after the first spouse’s death. As a result of a revised or newly created estate plan, the formula can be customized to minimize or avoid income tax consequences for the next generation.
Estate Tax Exemptions – Effective January, 2015, the federal estate tax exemption is $5.43 million1. This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount as well as the generation-skipping transfer tax exclusion amount. This means a married couple, with proper planning, could transfer a $10.86 million estate, gift and GST tax free to their children and grandchildren in 2015. However, the estate tax exemption in Illinois is only $4 million, and the Illinois estate tax rate can be as high as 28.5 percent2. Married couples with existing plans should have their estate plans reviewed in order to save, or defer the $407,550 estate tax of Illinois on the first spouse’s death3. The tax rates for Illinois residents range from 28.5 to 50 percent when state and federal taxes are combined. With proper planning, these taxes can be minimized or avoided entirely.
Remove Rights of Withdrawal – Historically, it was popular to allow beneficiaries the right to withdraw portions of principal of a trust upon reaching specific ages. When a beneficiary has a right to withdraw principal, the assets are included in their taxable gross estate and are potentially reachable by creditors. Instead, where appropriate, clients are encouraged to designate an age in which the beneficiary may become sole trustee (or co-trustee) of their separate trust. This allows the maximum amount of estate assets to pass from generation to generation tax free and it also ensures asset protection.
Portability – The federal government now recognizes portability, which allows the estate of a married taxpayer to pass the unused part of the decedent’s exclusion amount to a surviving spouse4. This can result in millions of dollars of estate tax savings. However, portability is not applicable at the state level, and a time-sensitive tax return must be filed in order to capture the additional exemption.
Powers of Attorney (POAs) – The most recent statutory POA for property and healthcare became effective July, 2011, and in January, 2015, respectively5. More importantly, the healthcare power of attorney form (from 2011 and 2015) now incorporates language that comports with the Health Information Portability and Accountability Act (HIPAA) privacy provisions to ensure an agent will have access to the principal’s healthcare records to make informed medical decisions. These documents are critical to help avoid guardianship or conservatorship appointments. Everyone over 18 years of age should have POAs in place, including adult children. It is important to remember that just because mom and dad are paying for their adult child’s college education, it does not mean that they have access to that child’s medical information in the event of an emergency.
Title to Primary Residence – Effective January, 2011, Illinois allows married couples (or partners in a civil union) to hold title to a primary residence through their trusts, as tenants by the entirety (TBE) in order to reap the estate planning and asset protection benefits6. With its origins in common law, TBE ownership continues to be an incredibly powerful tool. Under TBE, spouses (or partners in a civil union) are considered to own the property together as a single legal entity. Therefore, creditors of an individual spouse may not attach and sell the interest in the property of a debtor spouse, although joint creditors may attach to the property interest. This new form of titling allows for maximum wealth protection and estate planning.
Inherited IRAs and Asset Protection Concerns – Individual retirement accounts (IRAs) are asset protected during one’s lifetime, but the same is not true for inherited IRAs. In June, 2014, the U.S. Supreme Court held that inherited IRAs to a beneficiary other than a spouse are not asset protected7. However, if a client names her revocable living trust as the beneficiary of an IRA, it is critical that the trust have conduit or look-through language to ensure the maximum income tax for planning. Absent such language, the IRA may have to be cashed out within five years, or be distributed over the lifetime of the oldest beneficiary, thereby creating devastating income tax consequences8.
Same Sex Marriage in Illinois – Same sex marriages are now recognized at the state and federal levels9. If one of your loved one is in a same sex relationship, these rulings may have an impact on your estate plan (and theirs). Clients must be vigilant in their planning to make certain their estate plan properly reflects their testamentary intentions, and ensures assets pass to designated beneficiaries such as family, friends, and charitable organizations, instead of to federal and state governments, or the creditors of a beneficiary.
For more information on these and related topics, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
About the Author
Lindsey Markus is a shareholder with the law firm of Chuhak & Tecson, P.C. and heads the firm’s 21 attorney estate planning and asset protection group. Lindsey works closely with clients to design and implement estate plans, formulate business succession plans, advise on choice of entity formation, maximize wealth preservation, and minimize gift and estate taxation. She counsels clients on forming not-for-profits and family foundations and advises clients on formation and ongoing management. In her wealth protection practice, she designs customized holding company structures to maximize wealth protection for clients' business and personal assets. Lindsey’s early career in business, finance, and clinically applied neuroscience gives her a unique perspective to develop creative and innovative solutions for her clients. She is comfortable with numbers and understands how client’s needs are most effectively secured in our dynamic economic environment.
In 2012, Lindsey became one of the first estate planning attorneys certified as a collaborative law fellow in Illinois. Her training in this area uniquely qualifies her to consult individuals regarding premarital agreements and individuals going through a divorce on estate planning and tax implications. Using the holistic, team-oriented approach of collaborative law, Lindsey works to meet her clients’ needs while ensuring a healthy resolution is reached for all parties involved.
In 2013, Lindsey was recognized by Chicago Lawyer and Chicago Daily Law Bulletin as one of seventeen Women Making an Impact in the Law. In 2012, Lindsey was recognized by Chicago Lawyer and Chicago Daily Law Bulletin as one of Forty Illinois Attorneys Under 40 to Watch. Lindsey was named a Super Lawyer Rising Star for 2010 – 2015, among 2.5 percent of the lawyers in Illinois.
Lindsey speaks regularly on Estate Planning, Asset Protection, Corporate, and Not-for-Profit Organizations to groups and through a variety of media appearances. Lindsey also publishes articles on topics in her field and has authored two books. Lindsey is licensed in Illinois and Florida. For more information about Lindsey and her practice, visit her website at www.LindseyMarkus.com.
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| 1. Rev. Proc. 2014-61.
2. 35 ILCS 405/2(b)(iii) (2013).
3. As of the date of publication, the Illinois Attorney General Estate Tax Calculator for 2015 was not yet available. Analysis is based on Illinois historic estate tax rates for 2013-2014 as applied to the 2015 exemption.
4. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010., 124 Stat. 3296.
5. 755 ILCS 45/3-3 ; 755 ILCS 45/4-10.
6. PA 96-1145.
7. Clark v. Rameker, 134 S. Ct. 2242 (2014).
8. Treas. Reg. § 1.401(a)(9)-3.
9. PA 98-0597; U.S. v. Windsor, 133 S. Ct. 2675 (2013).
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