An "Empty" Estate Plan is Worthless

An "Empty" Estate Plan is Worthless

By Alan Orlowsky

When it comes to estate planning, you will often hear the phrase “title = result.” The phrase means that the ultimate results of an estate plan will depend on how each asset in the estate is titled. If something is titled incorrectly, it will remain outside the control of the estate plan, and will likely not be handled according to the expectations of the person who designed the plan.

For example, if you own an insurance policy or a retirement plan with a designated beneficiary, that is considered a contract. In that instance, the contract instructions will control the distribution, regardless of the instructions found in your will or trust.

By the same token, if you title a piece of real estate, a bank account, or any other item in joint tenancy with another person, the estate plan’s instructions (whether will or trust) are irrelevant. The property will pass from one joint tenant to the other immediately upon death by operation of law.

 Some people think that their Last Will and Testament will handle everything they own, but a will actually only controls things titled in an individual name. Trust instructions will only apply to assets that are titled in the name of the trust and its trustees. If you intend to pass a business to your kids through a family partnership, the partnership must own the shares of stock or the LLC units. In every situation, how an asset is titled will determine how it is handled after death. 

Although estate planning documents may be signed, the estate planning process is not complete until asset titles are changed so that they can be controlled by those documents. The act of retitling assets is called “funding.” So when the estate planning attorney speaks of “funding your trust,” for example, he or she is talking about changing the title to assets which may currently be owned individually or in joint tenancy, or may be controlled by contract, into the name of the trust. 

One of the biggest mistakes made in the estate planning process is to spend a lot of time and money to create great documents, but then fail to complete the funding process. A good funding strategy is to make a comprehensive list of all assets and how they are currently titled. Next, the attorney can advise how things should be titled to fit with the estate planning documents that have been created. Then the attorney or a financial advisor can help to shepherd the asset through the ownership change paperwork.

If some asset is overlooked, or if you pass away before a recently-acquired asset can be properly funded, most plans will include a safety net called a “pour over will.” This is a special will that has one primary function – to take mistitled assets and “pour them over” into the trust or other planning entity where they belong. But you should never depend on the pour over will to handle funding. It should only be used as a last resort because, like any other will, the pour over will is required to go through the probate process…one of many things you were trying to avoid when you established your estate plan. Of course, as mentioned above, even a pour over will won’t help with assets that are controlled by contract or are owned in joint tenancy at the time of death.

Funding is not necessarily fun, but it’s also not terribly complicated. It is primarily a matter of contacting financial institutions and providing the proper paperwork to get the account and other asset titles changed. The process can be tedious and time-consuming, and although follow-up is most often required with the involved institutions, it is not difficult. Professional advisors should have processes and procedures to help you accomplish this important task, but it’s up to you to avoid procrastination and to persevere until the funding is complete!

If you have any questions about same gender estate planning and how we can help please contact the Law Office of Orlowsky & Wilson by calling 847-325-5559 or visit our website www.orlowskywilson.com for more information.

Planning for Unwed or Same Gender Couples

Planning for Unwed or Same Gender Couples

By Alan G. Orlowsky

Lets Talk About........Estate Planning for Unwed or Same Gender Couples.

 

As American culture changes, an increasing number of unwed couples have questions about Chicago estate planning services and how to do them correctly. Planning for an unwed or same gender couple is not the same as planning for two singles. And under most laws in the United States, a “civil union” is not the same as marriage.

Married couples enjoy several benefits that are not available to unwed couples:

• The ability to file joint income tax returns
•  The ability to receive survivor’s Social Security benefits
• The protection of state spousal inheritance protections
• The ability to receive employer insurance benefits, wages, or retirement plan benefits as a surviving spouse
• The ability to receive alimony in a divorce situation

In addition to the above, there are certain challenges that pertain specifically to estate planning and Estate Administration.

• The unlimited marital deduction does not apply. The unlimited marital deduction allows a spouse to pass on any amount of wealth to the other, without paying gift or estate taxes. An unmarried couple would be subject to both types of transfer taxes.
• In the event of a special needs or mental disability, with no health care power of attorney or other medical directive in place, a judge will typically appoint the next of kin to make health care decisions for the disabled partner. This can create problems, especially if the relatives do not approve of the partner or the disabled person’s lifestyle.
• To die without any estate plan in place, is said to be dying “intestate.” If one of the partners dies intestate, state law (not the other partner) determines what happens to the deceased partner’s assets. In most states, such assets would pass first to a spouse and/or children. In this case, when there is neither, intestacy laws typically will designate the deceased’s parents and then siblings, followed ultimately by more distant relatives. But since the partner is not related by blood or marriage, they would be left out of the distribution altogether.

In spite of these challenges, there are still techniques that the unwed or same gender couple can use to create a workable estate plan. Some options include:

• One partner names the other as the beneficiary of bank and brokerage accounts by making them a “payable on death” recipient. Of course that type of arrangement comes without any type of asset protection.

• Title all bank and brokerage accounts jointly. However, that could lead to gift and/or estate tax liability. There could also be serious complications if the couple breaks up.
• Name the partner as the beneficiary of a life insurance policy. Of course, if that policy is owned by an irrevocable life insurance trust, it will keep the insurance proceeds out of the deceased’s estate.
• One final alternative is for the partners to enter into a contractual arrangement – often called “cohabitation agreements.” The agreement can be very broad, including such things as: financial responsibilities of each partner during the relationship; how existing individual debts will be handled; ownership of a residence; the right to make emergency medical decisions for the other during disability; designating outcomes for minor children in the event of a partner’s death; and the ultimate distribution of assets.

If you have any questions about same gender estate planning and how we can help please contact the Law Office of Orlowsky & Wilson by calling 847-325-5559 or visit our website www.orlowskywilson.com for more information.

ESTATE PLANNING SCENARIO - Planning, Failures and the Consequences that Follow

ESTATE PLANNING SCENARIO - Planning, Failures and the Consequences that Follow
By Alan Orlowsky, Attorney at Law

This is the third series in our Estate Planning Scenarios. Let's talk about an example of Estate Planning in Chicago and some consequences that can happen.

Mary was a physically and mentally failing 88 year old widowed great-grandmother living in the northern suburbs of Chicago.  She was blessed with 6 attentive children and 38 grandchildren and great-grandchildren.....a very large family by today’s standards.  Mary’s plate was full.

Mary’s daughter, Elizabeth, solicited my services to prepare a new will and trust for her mother and to address the $1.5 million estate tax bill that would be due upon her death.  Her estate was valued at approximately $4 million.  The existing will was outdated and the trust was required to avoid probate and pass on the estate to her children. 

Mary was receptive to preparation of the will and trust which was prepared and signed, but when it came to estate tax reduction...we hit a brick wall.  I proposed to Mary that to reduce her estate tax exposure she establish a family gift trust and make annual gifts thereto.  The trust would be structured so that she would be able to use all her family members as donees by invoking the arcane, but often used, Crummy notice provisions allowed by IRS.  At this time the Annual Gift Tax Exclusion was $10,000 per donee.  Accordingly she would be able to make 38 Annual $10,000 gifts to each grandchild and great-grandchild, a $10,000 annual gift to each child and a $10,000 annual gift to each in-law - 6 in all.   As such, for each year she lived she would be able to reduce her estate by $.5 million and save approximately $250,000 in estate tax each year as well.   Furthermore, since it was October, so she could make these annual gifts before the end of the year and again on January 1^st of the following year. So in a span of 3 months we would potentially save $500,000 in tax!  In estate planning parlance...a no brainer!  And if Mary lived a few years the savings would be $1 million.

So what when wrong?  Why did Mary refuse to make the gifts?  Clearly she had sufficient funds that would last the rest of her life; even if her estate was reduced to $2 million.  After all, she didn’t live large.   Unfortunately, Mary, like many elderly folks, was afraid to give up control, was afraid she’d run out of money and afraid her children would fail to come to the rescue if she was in financial difficulty.  Irrational as this seems, it is a common barrier in planning for the elderly.   Fear trumps common sense all the time!

 

So, what can you do to prevent a parent from making an irrational decision like the one Mary made?  I suggest to my clients that they call an informal meeting (well before the parent(s) are 88) where all close family members are present to discuss the issues which concern the parent(s) and the children.  Once the issues are out on the table the foundation for rational conversation can begin.  The issues should be presented in a kind compassionate way to avoid family strife.  There will be disagreements, but it is important that honesty and rational conversation win the day.  Once this is done then it may be possible to create a timetable and framework to move forward with the planning that is needed and to bring in the professionals that will be required.  In some cases we recommend that the help of a family business counselor be present to address the psychological issues that often get in the way.  And in some situations a CPA or attorney should be present.  In any case, there is no one format that fits all families, but two rules always apply: (1) procrastination never facilitates the planning process and (2) once a parent passes there is no estate planning time machine that can help.

Sadly, Mary passed in her 91^st year without making the gifts I recommended.  We prepared the Estate Tax Return and Elizabeth paid $1.5 million to the IRS.  It was a very sobering and disappointing day.

 

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or contact us here.