Planning for the Spendthrift Child

Let's Talk about......Planning for the Spendthrift Child
By: Alan Orlowsky

One of the main reasons our clients get involved in estate planning is to provide loved ones with protection from claims of future creditors, and “predators” such as divorcing spouses or lawsuits. If you leave your property to your child as an outright distribution, the property will not be protected from these things, but by using well-designed trusts, many protections are available. However, in some families, protection of assets from outside forces is not as important as protection from the child who is receiving the inheritance!

 

What is a parent to do when they want to treat children equally, but are afraid that one of the children will waste their inheritance within weeks or months of inheriting it? There is a longstanding concept in trust law known as “spendthrift” protection. These are provisions which provide that the Trustee will have sole control to make distributions from the trust without interference from others. The spendthrift clause prevents a third party (creditor or “predator”) from being able to compel the Trustee to make distributions of trust property.

Under the spendthrift rules of most states, a person is free to leave assets in trust for another person, with specific language in the trust specifying who, besides a trust beneficiary, can have access to the trust assets. If the trust includes a “spendthrift” clause that specifically states that trust income and principal is not to be available for payment to a trust beneficiary’s creditors, then as a general rule the trust would be immune from attack by a beneficiary’s creditor. This sweeping protection would apply regardless of the amount or nature of a beneficiary’s liabilities, and would include protection of the trust assets if the child were to go through a divorce.

However, the extent of protection offered by a trust with a spendthrift clause will depend upon state law. Under some states, certain creditors are still allowed access to a trust. This could include a beneficiary’s obligations for alimony or child support, or payments to creditors who have provided certain “necessities of life” to the beneficiary.

For even stronger protection, your trust can be very specific on how and for what purposes funds are to be distributed. For example, you might specify that distributions will be made to your child on the condition that your child remains gainfully employed or, if unemployed, that your child is demonstrating steady progress toward becoming gainfully employed. You can also establish guidelines in your trust that provide that trust funds are to be used for funding non-luxury items, such as a used but safe car for transportation, and only if the beneficiary is able to pay for the ongoing maintenance and insurance of the car.

You can use very conservative distribution guidelines that allow the Trustee to make distributions solely based on demonstrated need. When combined with incentive provisions that allow the Trustee to pay for expenses that enhance a beneficiary’s career, such as funding further education, a child’s dependency over trust funds can be controlled.

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

Estate and Tax Planning for 2014

Let's Talk about Estate and Tax Planning for 2014
By: Alan Orlowsky

The United States tax code and regulations are absurdly complicated. In 1939, the entire tax law was contained in 504 pages. The current tax law is nearly 74,000 pages in length! There is no professional advisory and no employee of the IRS or the U.S. government that knows the entire code.

The most recent changes in the tax law are detailed in the American Taxpayer Relief Act of 2012 (ATRA) which was signed into law on January 2, 2013. Here are some key provisions that will impact estate planning for 2014.

Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws

1. The federal estate tax, gift tax, and generation-skipping transfer tax exemptions have been indexed for inflation. The exemption amount was $5.25 million in 2013 and increases to $5.34 million for 2014.

2. The maximum estate, gift, and generation-skipping transfer tax rate increased from 35% in 2012 to 40% in 2013. It remains at 40% for 2014.

3. The annual gift tax exclusion for 2014 remains at $14,000 ($28,000 for married couples). That is the amount that may be gifted to any individual without gift taxes, and without using any of your lifetime exemption.

4. Prior to 2010 married couples could use both of their individual estate tax exemptions by using what was known popularly as “A/B Trusts” in their estate planning. The Tax Reform Act of 2010 made the tax exemptions for married couples “portable” through 2012. That means that the surviving spouse could apply the unused portion of their deceased spouse’s exemption, along with their own exemption, to reduce estate taxes on the 2nd spouse’s death. ATRA made this “portability” permanent for 2013 and beyond (as much as any tax law can be deemed permanent). In other words, in 2014 a married couple can pass $10.68 million to their heirs without special planning. To take advantage of this opportunity, the surviving spouse must file IRS Form 706 after the first death, and elect to use the deceased spouse’s exemption.

5. NOTE that “portability” applies only to the federal estate tax, not to the generation-skipping transfer tax, or to state inheritance tax laws (with the exception of Hawaii who has made the state estate tax exemption portable between married couples). Careful planning is still required to take full advantage of existing tax laws.

Income and Capital Gains Taxes

1. The highest marginal income tax rate increased to 39.6% for 2013 for those above the taxable income thresholds. The thresholds are adjusted each year for inflation. The top rate applies to single filers with taxable incomes over $406,750 for 2014 and to married joint filers with taxable incomes over $457,600. These threshold amounts will continue to be adjusted annually.

2. Using the same threshold amounts, the long term capital gains tax rate for 2014 is 20% for those in the highest marginal tax bracket; 25% on Depreciation recapture; and 28% on Collectibles and qualified small business stock after exclusion.

3. There is a 3.8% Medicare tax on net investment income for single filers whose “modified adjusted gross income” exceeds $200,000 or married joint filers who exceed $250,000 for 2014. This effectively results in a maximum capital gains rate of 23.8%.

4. For 2014, itemized deductions are reduced or phased out for single filers with incomes over $254,200 and married filing jointly over $305,050.

5. The Alternative Minimum Tax (AMT) was “permanently” indexed for inflation. For 2014, both single taxpayers and those who are married filing jointly, there is a 26% rate on AMT taxable income under $182,500 and 28% over $182,500. The threshold amounts are cut in half (under and over $91,250) for married filing separately.

Medicare and FICA Social Security Taxes

1. The employee portion of Social Security (FICA) taxes increased back to 6.2% during 2013. (The 2% reduction was temporary, and was allowed to expire.) For self-employed individuals, the rate reverted from 10.4% to 12.4% and remains there for 2014.

2. For single filers who earn $200,000 and married joint filers who earn $250,000 there was an additional 0.9% Medicare tax for 2013. That rate continues for 2014.

3. The FICA wage base for 2013 was $113,700 and is $117,000 for 2014 with the annual adjustment for inflation.

4. A 3.8% Medicare tax was added to capital gains taxes in 2013 for single filers whose “modified adjusted gross income” exceeded $200,000 or married joint filers who exceeded $250,000. Those thresholds remain the same for 2014.

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 at: www.orlowskywilson.com

Baby Boomers: Do Your Parents Have an Estate Plan?

Let's Talk about.......Baby Boomers: Do your parents have an Estate Plan?
By Alan Orlowsky

Baby Boomer Joe McGill (not his real name) loved his parents, and when they died, Joe and his sister grieved. The fact that his parents left their estate in a chaotic mess didn't diminish Joe's affection for them, but it did cost him and his sister hundred of thousands of dollars in estate tax and legal fees, plus many hours of administrative hassles. Since their mother's will was confusing, Joe and his sister feuded when deciding which of them would keep their mother's collection of antique sculptures. Joe wanted to keep it intact rather than divide and his sister only wanted certain pieces.

The taxes and fees were paid by the estate, to be sure. The problem was the if older McGills had planned their estates wisely, their children - not the IRS and the lawyers - would have inherited that money.

Estate Planning not only preserves wealth for succeeding generations,it also gives the aging parents satisfaction and peace of mine. If they really think about it, most parents would rather leave behind a grand legacy than a costly mess - not to mention help their children and grandchildren achieve their dreams and goals.


Let's talk about what a good estate plan consist of, and then suggest strategies for raising the subject of estate planning with your parents if they normally avoid talking about their financial situation with you.

What's in a good estate plan?

Each of your parents (in fact, every parent and person with substantial assets) should have a solid estate plan. At the very least, such a plan includes a will, durable power of attorney for property and a power of attorney for health care. Affluent parents should use revocable trusts to keep trust assets our of probate - which in IL can take months or years to resolve.

Depending on the value of the estate, the nature of the assets and the family relationships, a plan might also include a life insurance policy and irrevocable life-insurance trust, or a generating skipping gift trust, for example. Irrevocable trusts which we have talked about in this blog, help protect assets from estate tax.

If your parents have trusts, each year they should transfer new probate assets to their trusts. Probable assets include, cash, stocks and bonds, limited partnership shares, valuables and collectibles.

A Estate Plan should also involve life insurance to provide estate liquidity, if a substantial portion of the estate comprises liquid business interests or real estate.

Each Parent should appoint a competent and reliable executor (in the will), trustee (for a trusts) and agents (for powers of attorney). Those designations will need to be reviewed and modified if any of those people become disabled, or deceased.

Raising the Subject

In many families, especially in your parents generation, talking about your personal finances can be very difficult. Some parents don't feel comfortable telling their adult children how much money they have and what's going to happen to their wealth when they die. In some families, if adult children ask their aging parents about their assets, wills, trusts,beneficiaries or heirs the parents might suspect their children of having purely selfish motives. If the children raise the subject of powers of attorney, the parents might wonder if their kids are trying to take control of their property. They also might feel a little wary or suspicious if you advise them to give you and your spouse and your children $12,000 each, this year and every year.

Before you raise these issues with your parents, discuss them with your siblings, so when you do speak about this you present a unified, concerted message. Then you can either approach them as a team, or approach them alone, acting as the quarterback with their consent.

The best way to raise the subject of money, death and taxes with your parents who don't normally discuss those topics with you is to over the course of several visits ask them questions about their lives, their ancestors and your family history. Ask them how they hope to live out the rest of their lives, their dreams and goals, their worries and concerns, how they would like to be remembered, what would they like their grandchildren to remember about them and what family values would they like you to preserve.

If you are sincerer and truly interested in the answers, you will provide your parents with a sense of continuity and heritage. This will also build trust and open up an avenue for talking about sensitive issues like money, estate planning, their health and welfare and any other personal concerns that your parents were previously reluctant to reveal.

 If all fails, you might suggest they talk to their legal and financials advisers about their future - including their financial security, estate plan, long-term health care and future residential options.


There is no shame in wishing to preserve your parents wealth for the sake of your children and future generations.

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

Are you concerened with your current Estate Plan?

Let's Talk about........Being concerned with your current Estate Plan or your Parents.
By: Alan Orlowsky 

Below is a video showing some of the concerns Orlowsky & Wilson can help with. For a full list of services please visit us at www.orlowskywilson.com 

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

5 Asset Protection Planning Mistakes

Let's Talk About.......5 Asset Protections Planning Mistakes That Can Annihilate Your Business And Personal Finances!

By Alan Orlowsky

The honest unvarnished truth is that the vast majority of business owners and individuals fail to take simple precautions to protect and preserve their personal and business wealth. Regardless of the value of your assets, they can be protected from unforeseen or even foreseeable, business and personal risk. Catastrophe may occur unexpectedly and can annihilate even the best run business and personal financial portfolio. 

The past recession has heightened awareness of this sobering fact. As such, many of my clients now realize that it is incumbent upon themselves, as prudent businessmen and/or investors, to implement "asset protection planning strategies" that will insulate their economic interests from events beyond their control that could otherwise lead to economic annihilation! As a practicing attorney with over 25 years of experience, I have witnessed firsthand how little or no asset protection planning can lead to catastrophic results which could have been avoided through the use of basic asset protection strategies. This is what I have found:

5 of the most common asset protection planning mistakes I see individuals and business owners make are:

• Failure to legally separate business from personal assets. This mistake is made all the time and allows a business creditor to attack the personal assets of a business owner and his or her spouse. Many business owners erroneously believe they are protected by their corporate shield when in fact they are not. Avoid this mistake and you just might avoid a personal Waterloo.
• Failure to have or maintain required corporate legal records. Time after time I see business owners who fail to expend the resources to create and maintain their corporate records. People are notoriously pound wise and penny foolish and just don't want to expend the time or finances engaging an attorney. In the long run failure to do so can lead to economic devastation. You just have to have good and up to date corporate records in order to protect you business, and sometimes even your personal assets.
• Failure to hire a good attorney. Failure to hire a good attorney to navigate you through a virtual maze of rules and regulations is like rafting down the Amazon River in an inner-tube! Again, I have seen DIY (do it yourself) business records, contracts and paperwork lead to huge financial problems. I advise all my clients that it is always a lot cheaper to hire me now to prevent a legal problem then to hire me later to fix it.
  
• Unnecessarily having a spouse take on business liability exposure. It is not an honor to be an officer or director of your spouse's company.....it is an obligation! Involvement in your spouse's business exposes you to lawsuits, bank obligations and worst of all.....Federal and State Tax obligations!. Such exposure violates one of my most sacrosanct rules.....keep marriage out of it!
• No Estate Planning. There is no easier way to ruin your family's future than by failing to have a Will and Trust and the planning that accompanies them. There can be huge business and personal problems caused by an unplanned death; a few of them follow:
  • forced sale of a business to a surviving partner
  • loss of income for surviving family members
  • fighting among siblings for control of family assets
  • squandering a lifetime of your hard work and
  • government involvement and taxes!

If you have a business, investments and a family and you wish to protect against the harsh realities and consequences of an unforgiving world, you must engage in at least the basic asset protection strategies that are available. Nobody can go it alone, so you will need to hire trained professionals to build the firewalls required in a risky and unpredictable world.

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

Only You Can Prevent Feuds Between Your Children

Let's talk about......Only You Can Prevent Feuds Between Your Children
By Alan Orlowsky

 

Hank and Betty, both in their eighties, each named their two adult children as co-trustees of their trusts. Hank died, leaving a $2 million estate.

While Hank´s estate was still being administered, Betty died, leaving a $1.5 million estate. The two children, Bill and Diane (both in their fifties), feuded over every dime in both estates, causing long delays and costly legal fees.

Hank and Betty (we´re not using real names in this article) could have prevented that messy state of affairs by doing one of the following when they created their estate plan:

• Name only the most competent of their children as trustee of their trusts, and explaining this decision to both of them so they would know what to expect
• Appoint a corporate trustee, which would have administered their estates dispassionately and prevented feuds and hard feelings

Feuds between siblings are not rare when one or both parents pass away. They feud over who should be in charge of the estate, the amount of fees that the executor takes out of the estate for services, how to divide up their inheritance, how and when to sell or take possession of their parents´ real property or business interests, who´s taking advantage of whom, who´s being greedy, and who´s being left out of the decision-making process. Sometimes they will use the occasion of a parent´s unfortunate death to perpetuate ancient sibling rivalries, even if it becomes very costly and is contrary to their best interests. Welcome to real life.

By taking a few simple precautions now, you can prevent - or at least minimize - feuding between your adult children. Here are the most important precautions:

• Meet with your children, either individually or in a group, and describe your estate plan to them. This includes your will, trusts, powers of attorney, and health care directives. If they have questions or concerns about equality or fairness, they can raise them now. You can explain your intentions, or revise your estate plan to accommodate their legitimate needs.

•  Select only one of your children to be executor, trustee, beneficiary, or attorney-in-fact (in the power of attorney)  If you don´t, and your reasons are misconstrued, there may be resentment or even hostility toward you, as well as among your children, after your death.

• Although money is still taboo in some households, tell your children as much as you feel comfortable telling them about your assets, income, net worth, and debts. Give them the names and contact information for your attorney, financial advisers, and business partners. Show them where your assets are located and how they are titled. Then there will be no surprises, and they´ll be prepared to take the necessary action to manage your estate when the time comes.

 Having such discussions with your children will help teach them the right way to relate to their children.

If you are uncomfortable discussing any of these topics with your children, ask your lawyer or other adviser to meet with them. Even if your relationships with your children are somewhat strained, they are still your children, and you undoubtedly want to save them from undue stress and heartache. Also, the discussions you have with them now can go a long way toward mending those relationships so that you can enjoy your family in your remaining years.

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

Property Inspections and Disclosures - Sellers Obligations

Let's Talk About.....Property Inspections and Disclosures - Seller's Obligation
By: Alan Orlowsky

To view my Part 1 Property Inspections and Disclosures follow link: previous article.

 When it comes to Property Inspections it is important to realize the Seller's Obligation and what they need to disclose regarding the property. Let's talk about what their rights are and discuss good guidelines when purchasing Real Estate.


Seller´s obligations 

The sellers are not required to actively look for defects, only to state what defects they are aware of, if any. For example, they do not need to hire an engineer to assess the property's structural integrity or review floodplain maps.

Sellers also do not have to disclose previous defects that have since been corrected. If a flood control system has been installed in the basement, for instance, the sellers would not have to disclose previous flooding problems - assuming the problems have not recurred since the system was installed.

Inspect, no matter what

Even if you receive the seller´s disclosure report and are satisfied with it, you should conduct a thorough inspection of the property. Take the time to find a qualified inspector: Get recommendations from friends, your lender, or real estate professionals who aren't involved in your deal. (Realtors involved in the deal are likely to favor lenient inspectors who will understate defects, because they want the deal to settle quickly.)

Generally, a sales contract will include an inspection contingency clause, which makes the contract contingent on a satisfactory inspection by the buyers within a limited period, typically five to ten days.

 

Post-inspection options

If your inspector finds defects that weren't in the disclosure report, that doesn't necessarily mean the seller concealed or intentionally omitted them. They simply may not have been aware of them. At this point, your main concern is not whether the inspection report was fraudulent, but how serious the defect is and what you want to do about it. You have several options:

• Terminate the agreement
• Ask the seller to repair the defect
• Revise your offer (lower the price)
• Don't change the deal (repair the defect at your own expense)

You should also conduct a final walk-through inspection immediately before closing, especially if the seller has removed furniture and furnishings since your inspection.

At this point, the sellers have a legal obligation to report any new defects, or defects that they become newly aware of. But you do not now have a right to rescind the contract unless the seller knew of the defect prior to completing the disclosure form.

Fraud 

If you discover, after you close the deal and take possession of the property, a significant defect that was not disclosed by the seller, you can certainly contact the seller and ask them to pay the expense of repairs. In some cases, they might comply with your request in order to avoid legal action.

On the other hand, they might respond: We didn't disclose that problem because we didn't know about it, so we're not obligated to pay? Maybe they're telling the truth, maybe not. If you think they're lying, and they falsified the disclosure report, you can bring an action under the RRPDA (within one year of closing) or sue for fraud in state court. If you win the lawsuit, the sellers must pay the cost of repairing the defect, plus court costs and possibly attorneys fees.

To prevail in court, of course, you would have to prove that the seller was actually aware of the defect and failed to disclose it. Your attorney can do this by introducing repair estimates, inspection reports, appraisals, or statements from contractors or neighbors who were aware of the problem before the property went up for sale.

Anxiety and excitement 

Often the sellers are anxious to sell their property, and fail to adequately reveal defects hoping that they'll be overlooked. At the same time, many buyers are excited about the property and tend to rush through the inspection phase of the negotiations. Protect yourself by taking advantage of every opportunity that the law allows to uncover possible problems before you make what might be the biggest investment of your life.


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