Just Let Go! Estate Planning and Losing Control

Just Let Go! Estate Planning and Losing Control
By: Alan Orlowsky

Let's Talk about.....The biggest obstacle to smart estate planning, the fear of letting go.

Stan (not real names) was a successful business man living in Northbrook, IL. Over the past few decades he had made all the right moves, was a success in both his business and personal life and had set up a Estate Plan to ensure his life's work would take care of his biggest asset his Family. On the advice of his financial and legal advisers, Stan set up a special needs trust for the benefit of his disabled son Dan. Not only would the trust help reduce estate taxes, because it held assets outside of Stan's estate for tax purposes, but it provided a professionally manages fund for Dan, the beneficiary, after Stan's death. The same year he set up the trust, Stan gave a $12,000 gift to each of his other children so they would not feel slighted. Doing so also reduced the value of his estate for tax purposed, without incurring gift tax consequences, thanks to the annual gift tax exclusion.

Unfortunately, Stan made one of the most common estate planning mistakes. He neglected to transfer to the trust valuable assets that he acquired years later, and so the trust was now inadequately funded, and those assets ended up in probate when he passed years later. He had worried that once he transferred assets to the trust he would lose access to them in case of emergency. This fear was true, because the trust was irrevocable. Stan had also stopped giving annual exclusion gifts towards the end of his life.  His advisers assured Stan that he had enough wealth, as well as insurance coverage, to survive just about any emergency, and still to give generously to his loved ones. Stan's biggest issue was he could not let go. Luckily, after Stan's death one of his well-to-do children helped to take care of Dan, otherwise Dan would have had to rely on the state for support.

Security is in your mind. The fear of letting go is a common affliction among people who are planning their estates, especially those who are accustomed to being in charge.  The irony is, gifting and transferring assets can actually make you feel more secure rather than less. Advisers often have a hard time persuading people that giving up control of their money, or giving it away, or move from being active investor to a passive investor, is in their best interests. Knowing that you have provided for your loved ones in the event of your death can give you more peace of mind than mountains you of wealth. It can also improve family relationships and let you enjoy the gratitude you earn during your lifetime from your beneficiaries. It's so important to understand how estate planning can enhance, rather that destroy, your financial security. Below is a brief guide to some of the basic estate planning tools and their benefits.

• Revocable Living Trust - Assets that you transfer into a living trust will pass to your heirs outside of probate, sparing your heirs delays and extra costs. You have access to all trust funds at any time, and you can amend, terminate or revoke the trust as well.
• Irrevocable Trust - You can;t revise or revoke it, but you can rest assured that your estate will not pay estate tax on the assets that you transfer to it. You can use irrevocable trusts to accomplish various goals from minimizing estate taxes, like Stan's special needs trust. 

Other kinds include incentive trusts, irrevocable life insurance trusts, trusts for minor children from previous marriage (which also keeps the funds out of the ex-spouse's control), and Trusts for the spendthrift beneficiaries or others who are not ready or able to manage an outright inheritance. Knowing that the trust beneficiary is going to be well cared for, and/or the funds will be managed by a competent trustee after your death will help you sleep better at night.

• Annual Exclusion Gifts - You can give away $12,000 ($24,000 for married couples) to any recipient, and to as many recipients as you wish, free of gift tax consequences. Gifting also reduces the value of your taxable estate. At the same time, you can help your loved ones make a down payment on a home, pay college tuition, take a vacation, or simply pull through a rough period. Of course you would not give money away if you really need it for your own survival and comfort, but you should always consult your financial adviser before the end of each year to decide whether you are in a position to make exclusion gifts.

•  Durable Power of Attorney for Property - A durable Power of Attorney gives your agent the authority to manage your financial affairs if you become incapacitated. As long as you are competent (as determined by your own physician and/or judge), you do not give up control. But if you do become unable to make sound decisions, the person who takes over is the person you selected. If you do not have a durable Power of Attorney and become incapacitated, a judge will appoint an agent to make decision on your behalf.

The Best time to take action - You will probably derive greater satisfaction sharing your wealth now, while you are able to enjoy the gratitude of your loved ones, rather than after your death. If you have not created an estate plan, or have neglected to transfer assets to your living trust or irrevocable trust now is the time to take action. Your options only narrow as you age.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or visit our website http://orlowskywilson.com/

Nothing has Changed in Estate Planning in 30 years!

 Let's Talk About......Nothing has changed in Estate Planning in 30 Years!
By: Alan Orlowsky

You may be surprised by the title’s assertion that nothing has changed in the last 30 years in estate planning. After all, during that period we have seen the rise in popularity of living trust-based planning, and the development of many sophisticated and elaborate planning tools for affluent families. But one thing that hasn’t changed in all these years is the percentage of American adults who are participating in estate planning!

During the 1980s, numerous studies showed that more than half of the adult population had no will or estate plan. In 2007, Harris interactive for Martindale-Hubbell published a study that said for the previous three years approximately 55% of all adult Americans still didn’t have a will. In 2011, an EZLaw Wills & Estate Planning survey revealed that although 60% of those surveyed said they believe all adults should have estate plans, 56% said they didn’t have one.

So why, after years of public seminars, hundreds of books, and thousands of articles on estate planning are adult Americans still unresponsive to the importance of estate planning? It’s easy to understand why young adults might be ambivalent. After all, they believe they are in the prime of their life and are blessed with a feeling of immortality. They’ve heard that we are all living much longer lives due to advances in medicine, and they are more concerned with weight and style and friends than they are planning for their eventual demise. Of course, the reality is that life is uncertain, regardless of your age.

You would think that middle aged people would be more interested in estate planning, but they don’t do much better. Their concerns tend to go more to housing, careers, and college educations. Most figure they still have plenty of time to worry about planning later.

Of course, the elderly are more aware of the time constraints, so certainly they will take care of their estate planning. However, the participation rate is roughly the same, regardless of age! Even those who are advanced in years are busy living their lives and don’t want to think about their own mortality.

Other reasons (or excuses) people use for not planning include these:

• “I don’t have enough money or assets to worry about planning.”
• “It’s much too complicated to deal with right now.”
• “I don’t know who to trust to tell me what to do.”
• “I’m too busy worrying about day-to-day life – paying bills and surviving to think about estate planning.”

Perhaps the best way to help people understand the importance of estate planning is to emphasize that it is not merely a legal or financial exercise – it is an act of love for people they care about.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or visit our website www.orlowskywilson.com.

The Qualified Personal Residence Trust

The Qualified Personal Residence Trust
By Alan Orlowsky

Let's Talk About.......The Qualified Personal Residence Trust

A Qualified Personal Residence Trust (QPRT - pronounced "Q-Pert") is a trust that holds a personal residence for a term of years, allowing you, in effect, to give away your residence at a discount and "freeze" its value for federal estate tax purposes - all while continuing to live in it. Each person can set up no more than two QPRTs: one for the primary residence and one for a vacation home or condominium.

A Qualified Personal Residence Trust takes advantage of certain provisions of federal law that allow you to make a gift to the trust of your personal residence, for the ultimate benefit of the remainder beneficiaries at a discounted value. Assume that the remainder beneficiaries are your children - the most common situation for most QPRT planning. Either your principal residence or a vacation home can be transferred into a QPRT. This removes the asset from your estate, reducing potential estate taxes at your death.

For gift tax purposes, the original transfer will be treated as a gift to the children, but not a gift of the current fair market value. Instead, it's a gift of the value of your children's future right to the residence at the end of the QPRT term (called the "remainder interest"). You must file a gift tax return at the time the residence is transferred to the trust.

The value of the remainder interest is derived by first determining the fair market value of the entire property, and then subtracting the value of the right you retain to live in the residence (your "retained interest"). In general, the longer the term of the trust, the longer you get to live in the property and the larger the value of your retained interest. As the value of your retained interest increases, the value of your children's remainder interest decreases. This results in a smaller taxable gift by you.

If you haven't previously used your lifetime federal gift tax exemption amount, the amount of gift tax due may be offset by that amount, thus possibly eliminating the need to pay any gift tax on the transfer of the residence to the QPRT. Of course, if the residence is appreciating quickly, the potential savings can be even greater in a shorter period of time.
If you live to the end of the specified period, the residence, including all post-gift appreciation, passes to the children free of any additional federal estate or gift taxes.

However, one disadvantage is that if you die before the end of the period, the value of the residence, as of the date of death, will still be include-able in your estate for federal estate tax purposes. The result in that case is the same as if you had never created the QPRT. Therefore, for maximum benefit and results, you need to outlive the term of the trust.
A second disadvantage of the QPRT is that if the house continues to be a part of the trust after the initial term ends, it will pass to the remainder beneficiaries with your original income tax basis.


If you have questions about this post or about a particular legal situation,  click here to contact our office to set up a time to discuss this with you or contact Alan Orlowsky directly by calling 847-325-5559.