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Estate Planning Newsletter November 2012 Issue From the Estate Planning Practice of Hinshaw & Culbertson LLP

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Estate Planning  Newsletter November 2012 Issue From the Estate Planning Practice of Hinshaw & Culbertson LLP Powered By Docstoc
					     Estate Planning
     Newsletter
                                                                                                                                          November 2012 Issue



                                                                From the Estate Planning Practice of Hinshaw & Culbertson LLP
In This Issue
                                                                  Hinshaw’s Estate Planning Newsletter includes reports on opportunities
•	 Federal Gift Tax — The Window of Opportunity
                                                                  and challenges that may impact individuals’ estate plans. This publication
•	 What Will the Federal Estate Tax Look Like                     is designed to keep readers aware of such opportunities and challenges
   in 2013?                                                       so that they may determine whether changes to their estate plans are
•	 Illinois Estate Tax Becomes Permanent                          necessary or desirable. Our goal is to provide the information necessary to
•	 Marital Trust Allocation Formulas in Illinois Wills
                                                                  ensure that readers are effectively providing for their loved ones, planning
   or Trusts May Need to Be Updated Now                           for the transition of their businesses, protecting their assets, and paying
                                                                  as little tax as possible. Comments or suggestions concerning the Estate
•	 Marital Trust Allocation Formulas in Minnesota
                                                                  Planning Newsletter should be directed to Stephen A. Frost.
   Wills or Trusts May Need to Be Updated
•	 Indiana’s Inheritance Tax to Be Phased Out and
   Estate Tax May Become Effective Again
•	 Florida’s Dormant Estate Tax May
   Become Effective Again
                                                                 Federal Gift Tax — The Window of Opportunity
•	 Asset Protection Trusts Can Be Used to Protect                On January 1, 2013, the present $5.12 million federal gifting and estate tax
   Property From Creditors                                       exemption drops to $1 million and the federal estate tax rate — now at 35
                                                                 percent — increases to 55 percent. These factors combine to create a tax
•	 2013 Limit for Annual Exclusion Gifts Increases
   to $14,000
                                                                 savings opportunity that may never exist again in our lifetime.

•	 Breach of Trustees’ Duties May Result in
                                                                 A political compromise between now and year-end is possible. However,
   Personal Liability
                                                                 many experts think that these issues will not be sorted out until some time
•	 Word to the Wise — Keep Lists of Digital Assets               in 2013, with the compromise to be retroactive to January 1, 2013.
•	 “Fixing” Irrevocable Trusts
•	 Health Care Documents for College Students                    The Republican-controlled U.S. House of Representatives may be able
                                                                 to resist having some of the new restrictive estate tax provisions enacted.
                                                                 However, because many wealthy individuals have used some or all of their



Editors                       Attorney Contributors       Stuart J. Friedman          James M. Lestikow           Aric T. Stienessen           Contact Us
Stephen A. Frost              Albert C. Angelo            sfriedman@hinshawlaw.com    jlestikow@hinshawlaw.com    astienessen@hinshawlaw.com   info@hinshawlaw.com
sfrost@hinshawlaw.com         aangelo@hinshawlaw.com      219-864-4503                217-467-4913                612-334-2504                 www.hinshawlaw.com
630-505-4140                  312-704-3509                Kelly E. Hintzsche          Kirk A. Pinkerton
                                                                                                                  Paralegal Contributor
                              Geri Lynn Arrindell         khintzsche@hinshawlaw.com   kpinkerton@hinshawlaw.com
Marcia L. Mueller                                                                     219-864-4540                Robert R. Kulak
                              garrindell@hinshawlaw.com   815-490-4928
Chair of Hinshaw’s National                                                                                       rkulak@hinshawlaw.com
Estate Planning Practice      217-528-7375                James W. Keeling            David K. Ranich             954-375-1140
mmueller@hinshawlaw.com                                   jkeeling@hinshawlaw.com     dranich@hinshawlaw.com
                              Steven W. Cutler
815-490-4919                                              815-490-4904                219-864-4532
                              swcutler@hinshawlaw.com
                              305-428-5070                Timothy J. Leake            Dennis L. Simon
                                                          tleake@hinshawlaw.com       dsimon@hinshawlaw.com
                              Mindy A. Ferrer
                                                          815-490-4939                920-380-2064
                              mferrer@hinshawlaw.com
                              954-375-1136
                                    $5.12 million gifting exemption in 2011 and 2012, or are finalizing their plans to
Estate Planning Practice            do so by December 31, 2012, we may not see significant resistance to allowing
                                    the gift tax exemption to fall to $1 million. It is therefore imperative to review
                                    options and act in the next four weeks for gifting strategies of $1 million or more
Hinshaw’s Estate Planning
                                    in 2012.
Practice members provide
the sound planning, strategic
                                    Individuals who have the financial means should consider making gifts
foresight and creative solutions
                                    exceeding $1 million in value to take advantage of all or part of the $5.12 million
required to capably manage
                                    tax-free temporary gifting allowance. Donors hesitant to gift significant amounts
and preserve assets. We help
                                    because they fear the depletion of their assets should consider listing a spouse
business owners, real estate
                                    as a beneficiary. Structuring a trust in this way enables the donor to derive
owners, executives and other
                                    indirect benefit by being supported by the spouse while the spouse is being
individuals comprehensively
                                    supported by the trust, for as long as the spouse is alive.
plan for the present and future.
More specifically, we:
                                    If you are interested in discussing the possibility of implementing this strategy,
 Assist business owners,           you can contact a member of Hinshaw’s Estate Planning Practice Group or
  executives, and individu-         your regular Hinshaw attorney. This is a substantial opportunity that should be
  als in effectively and tax-       seized upon. We look forward to assisting you in determining the best options
  efficiently planning for the      for capturing these potential tax savings.
  financial ramifications of
  marriages, major lifetime                        Contact for more information: Stephen A. Frost or James W. Keeling
  events, disability and death

 Help our clients preserve         What Will the Federal Estate Tax Look Like in 2013?
  wealth for the next genera-       Unless Congress takes additional action, the federal estate tax provisions in
  tion, protect their beneficia-    2013 will automatically revert to the provisions as they existed in 2001, which
  ries, avoid or help mitigate      could negatively affect taxpayers. Beginning in 2013, the federal applicable
  the taxable effects of various    exclusion amount (the tax-free amount) will be $1 million per taxpayer. Married
  activities, accomplish effec-     couples can transfer up to $2 million of combined value, tax-free, if they plan
  tive and smooth genera-           properly. This may sound like a lot of money. However, taxpayers should realize
  tional transfers and facilitate   that all of the equity in their homes, and the value of all of their investments —
  charitable gifting                including retirement benefits, and life insurance proceeds — are included in the
                                    applicable exclusion amount. Therefore, even middle-class families may end up
 Serve as trusted advisors in      with taxable estates if they do not plan properly.
  administering the assets and
  activities of trusts and
                                    Beginning in 2013, the federal estate tax rate will be as high as 55 percent, with
  estates by assisting with a
                                    a five percent surtax on large estates. A tax credit (i.e., not a deduction) for state
  full range of distinctive op-
                                    death taxes and a deduction for small businesses will be allowed. Regardless, if
  portunities and challenges
                                    a taxpayer has a taxable estate, the estate tax bill may increase if he or she dies
                                    after 2012.
 Help our clients achieve their
  goals, preserve their assets
                                    Congress knows that the 2013 estate tax provisions remain generally unpopular
  for the long term and ensure
                                    among those who may pay the tax, particularly among business owners.
  the present and future
                                    Therefore, it may change the provisions of the federal estate tax after 2012.
  well-being of their loved
                                    Tax-free amounts of $3.5 million and $5 million per taxpayer have been
  ones with special needs by
                                    discussed. Yet, only time will tell if Congress will timely address this issue.
  preparing for the adequate
  and sufficient provisions for
  elderly, minor and/or             Those concerned about this issue should contact their representatives in
  disabled family members           Congress. Hinshaw will continue to follow the issue closely.
  and other beneficiaries
                                                 Contact for more information: Marcia L. Mueller or Stuart J. Friedman



   December 2012 Page 2
Illinois Estate Tax Becomes Permanent                                                    Estate Planning Practice
                                                                                         Attorneys
As of 2012, the Illinois estate tax only applies to estates worth more than $3.5
million. However, if an estate is worth more than $3.5 million in 2012 or later,
Illinois will tax the entire estate, not just the portion exceeding $3.5 million.        Charlie R. Alden
                                                                                         calden@hinshawlaw.com
The Illinois exemption amount will increase to $4 million in 2013 and remain at          Albert C. Angelo
that level permanently. However, if an estate is worth more than $4 million in           aangelo@hinshawlaw.com
2013 or later, Illinois will tax the entire estate, not just the portion exceeding $4    Geri Lynn Arrindell
million.                                                                                 garrindell@hinshawlaw.com
                                                                                         Elizabeth S. Baker
              Contact for more information: Timothy J. Leake or James M. Lestikow        ebaker@hinshawlaw.com
                                                                                         Steven W. Cutler
                                                                                         scutler@hinshawlaw.com
Marital Trust Allocation Formulas in Illinois
                                                                                         Mindy A. Ferrer
Wills or Trusts May Need to Be Updated Now                                               mferrer@hinshawlaw.com
In 2012, the federal estate tax tax-free amount exceeds the Illinois estate tax          Stuart J. Friedman
exemption amount. In 2013, unless Congress acts, the Illinois exemption amount           sfriedman@hinshawlaw.com
will significantly exceed the federal tax-free amount. The decoupling of the
                                                                                         Stephen A. Frost
Illinois estate tax from the federal estate tax has created significant complexities     sfrost@hinshawlaw.com
in the estate plans of married couples residing in Illinois.
                                                                                         Kelly E. Hintzsche
                                                                                         khintzsche@hinshawlaw.com
Historically, married couples in Illinois used A/B trust provisions to ensure that
no estate taxes would be due on the death of the first spouse. A credit shelter          James W. Keeling
trust (i.e., the “B” trust) would receive the federal tax-free amount (i.e., the basic   jkeeling@hinshawlaw.com
exclusion amount in today’s nomenclature) and a marital trust (i.e., the “A” trust)      Timothy J. Leake
would receive the balance. Power of appointment marital trusts were often                tleake@hinshawlaw.com
used in first marriage situations. Wills or trusts that still use these traditional      James M. Lestikow
approaches may need to be updated because there may be unintended Illinois               jlestikow@hinshawlaw.com
estate tax consequences upon the death of the first spouse and/or the second             Marcia L. Mueller
spouse.                                                                                  mmueller@hinshawlaw.com
                                                                                         Kirk A. Pinkerton
Beginning in 2013, the historical approach to allocating value between a credit
                                                                                         kpinkerton@hinshawlaw.com
shelter trust and a marital trust based solely on the federal estate tax tax-free
amount may cause unnecessary Illinois estate taxes upon the death of a                   David K. Ranich
second spouse whenever the combined family assets (including life insurance)             dranich@hinshawlaw.com
exceed $4 million.                                                                       Dennis L. Simon
                                                                                         dsimon@hinshawlaw.com
Because Illinois allows an “Illinois-only” marital deduction for QTIP (qualified         Aric T. Stienessen
terminable interest property) marital trusts, the discord caused by the difference       astienessen@hinshawlaw.com
between the federal estate tax tax-free amount and the Illinois exemption
amount can be mitigated. However, the executor or trustee must timely make the
necessary special election on the Illinois estate tax return.
                                                                                         Join our electronic mailing
                                                                                         list for the Estate Planning
Note that Illinois only allows a marital deduction for QTIP marital trusts, not          Newsletter by sending your
power of appointment marital trusts. Therefore, no “Illinois-only” QTIP election         contact information to:
is available for a power of appointment marital trust. This may result in the            info@hinshawlaw.com.
unnecessary imposition of Illinois estate taxes in some circumstances unless the
operative will or trust instrument is updated to address the Illinois tax law changes.
                                                                                         Periodically, we send our
                                                                                         clients and contacts electronic
                Contact for more information: Marcia L. Mueller or James M. Lestikow     alerts, newsletters, invitations
                                                                                         to seminars and events,
                                                                                         firm mailings and other
                                                                                         communications.
                                                                                         You may unsubscribe at
December 2012  Page 3                                                                   any time.
Marital Trust Allocation Formulas in Minnesota Wills or Trusts May Need to Be Updated
The Minnesota estate tax applies to estates worth more than $1 million. Because the state has decoupled from
the federal estate tax tax-free amount, married couples residing in Minnesota face significant complexities in their
estate plans.

As in Illinois (as discussed above), the historical approach to allocating value between a credit shelter trust and a
marital trust based solely on the federal estate tax tax-free amount may cause unnecessary Minnesota estate taxes
whenever the combined family assets (including life insurance) exceed $1 million. Further, Minnesota does not allow
a “Minnesota-only” marital deduction for QTIP (qualified terminable interest property) marital trusts or any other type
of marital trust. Wills and trusts that still use the traditional approaches to funding marital trusts may therefore need
to be updated because there may be unintended Minnesota estate tax consequences.

                                                    Contact for more information: Aric T. Stienessen or Stephen A. Frost


Indiana’s Inheritance Tax to Be Phased Out and Estate Tax May Become Effective Again
Indiana’s inheritance tax will be phased out between 2013 and 2022. A 10 percent credit will be subtracted from the
bottom-line inheritance tax computed on at-death taxable transfers of decedents dying in 2013. For decedents dying
during calendar year 2014, the credit will be 20 percent. The credit will increase by 10 percent per year through
2021, when it will be equal to 90 percent of the computed bottom-line inheritance tax. Effective for decedents dying
after December 31, 2021, the Indiana inheritance tax will no longer exist.

Effective January 1, 2012, the definition of Class A transferees under the Indiana inheritance tax was broadened to
include a spouse, a widow, or a widower of a child or step-child of a transferor. Additionally, the Class A transferee
exemption (for lineal descendants and lineal ancestors such as children, grandchildren, step-children, parents and
grandparents) was increased from $100,000 to $250,000 per person.

Note that in addition to its inheritance tax, Indiana’s currently dormant estate tax and generation-skipping tax will
become active again beginning in 2013 unless Congress acts to make the state death tax credit ineffective for
federal estate tax purposes. Because the Indiana estate tax is a “pick-up tax,” the federal estate tax will be reduced
by the estate tax amount payable to Indiana.

                                                    Contact for more information: Stuart J. Friedman or David K. Ranich


Florida’s Dormant Estate Tax May Become Effective Again
Florida’s estate tax is currently dormant but will become active again beginning in 2013 unless Congress acts to
make the state death tax credit ineffective for federal estate tax purposes. Because the Florida estate tax is a “pick-
up tax,” the federal estate tax will be reduced by the estate tax amount payable to Florida beginning in 2013.

                                                      Contact for more information: Steven W. Cutler or Mindy A. Ferrer


Asset Protection Trusts Can Be Used to Protect Property From Creditors
The economic downturn that began several years ago has spurred increased interest in asset protection strategies.
Because fraudulent conveyance statutes restrict transfers in excess of current debts (including contingent liabilities),
individuals often wait too long to consult an attorney regarding asset protection.




December 2012  Page 4
Individuals who have assets exceeding their debts can invest the excess in “protected assets” (e.g., qualified
retirement plans and assets held as tenants by the entirety). The excess can also be transferred to a domestic asset
protection trust. Special irrevocable trusts formed under the laws of Alaska, Delaware, South Dakota and several
other states are increasingly being used for asset protection purposes. Individuals with assets exceeding their
liabilities, including contingent liabilities, can use a domestic asset protection trust to guard their excess assets from
creditors if all of the rules are followed and the transfer is not deemed to be for the primary purpose of hindering or
defrauding known or reasonably foreseeable creditors. Individuals who are exposed to professional liability or own
rental real estate may also consider creating a domestic asset protection trust.

                                                    Contact for more information: James M. Lestikow or Kirk A. Pinkerton


2013 Limit for Annual Exclusion Gifts Increases to $14,000
“Annual exclusion” gifts are relatively small gifts that may be made tax-free to a donee. The annual exclusion limit
for 2012 is $13,000 per donee; it will increase to $14,000 per donee in 2013. Individuals who have the resources
with which to make annual exclusion gifts should seriously consider doing so as these gifts generally need not be
reported for gift or estate tax purposes and will pass tax-free to the donee. Note that the annual exclusion limit
includes all gifts to the donee during the year; special rules apply for gifts to trusts. If the donees are grandchildren
or trusts for grandchildren, generation-skipping implications will also need to be considered. Note also that a donee
will receive a carried over basis in any property received, so income tax implications will need to be evaluated too.

                                                    Contact for more information: Dennis L. Simon and Kelly E. Hintzsche


Breach of Trustees’ Duties May Result in Personal Liability
Trustees owe several duties to each trust beneficiary. The most important are the duties of loyalty, to keep books
and records, and to use reasonable care. A breach of any such duty may expose the trustee to personal liability.

Pursuant to the duty of loyalty, the trustee must administer the trust solely in the beneficiaries’ interests, may not
sell property to himself or herself — even when the price is fair — and may not use trust property for his or her own
purposes. Under the duty to keep good books and records, receipts and records of all transactions should be kept.
A trustee may be held personally responsible whenever a loss results from the trustee’s failure to keep good books
records. The duty of reasonable care requires the trustee to invest and manage trust assets as a prudent investor
would do.

Trustees must be scrupulous about their duties if they intend to avoid litigation and, potentially, personal liability.

                                                      Contact for more information: Albert C. Angelo or Stephen A. Frost


Word to the Wise — Keep Lists of Digital Assets
The law often moves slower than technology. Those who have not done so already should maintain a list all of their
digital assets (including passwords) and digital accounts. This list should be available to the asset owner’s agent,
executor and/or successor trustee. The ability to transfer and utilize one’s digital devices (e.g., computers, smart
phones, etc.); digital assets (e.g., email accounts, licenses and registrations); and digital accounts (e.g., financial
accounts, social media accounts, online stores) should be specifically added to the owner’s powers of attorney, wills
and trusts. All relevant software licenses should also be considered in the owner’s estate plan.

                                                     Contact for more information: Steven W. Cutler or Stuart J. Friedman




December 2012  Page 5
“Fixing” Irrevocable Trusts
Irrevocable trusts are inherently difficult to change once they are created and funded. Because irrevocable trusts
tend to survive for long periods of time and circumstances often change, the ability to “fix” an irrevocable trust can
be problematic.

Fortunately, there are several ways to address the need for flexibility. With regard to irrevocable trusts that have
not yet been created, the trust agreement should include a provision for a “trust amender” or “trust protector” who
can amend the trust in the future. The trust amender and/or trust protector must be an independent third-party.
With regard to existing irrevocable trusts, a trust agreement may be amended or reformed by a court of competent
authority. In some states, a virtual representation agreement statute may allow the beneficiaries and trustee to
agree to such changes by contract without court involvement. In a few states, the trustee may “decant” the trust
assets into a new trust created by the trustee. However, this is only allowed when the relevant state (e.g., Illinois)
has adopted a “decanting statute.”

                                                                                    Contact for more information: Marcia L. Mueller or Timothy J. Leake


Health Care Documents for College Students
When a child attains the age of majority, his or her parents are no longer entitled to access to the child’s medical
records, to talk to the child’s medical care providers about the child, or to communicate with the child’s medical
insurance provider about the child, unless the child consents. This can be problematic because the parents often
provide for the medical insurance and drug benefits for such child. Should the child request help from the parents,
neither the health care provider, the medical insurance carrier nor the drug company is permitted talk to the
parents about the child. Further, university health care clinics and hospitals will not generally communicate or share
confidential medical information with the student’s parents unless they have the appropriate health care documents
on file.

Before a child heads off for college, he or she should seriously consider executing a health care directive. The
directive should grant the child’s parents access to his or her medical records and give the parents authority to
act for the child with regard to medical matters.

                                                                               Contact for more information: Geri Lynn Arrindell or Kelly E. Hintzsche




IRS Tax Advice Compliance Disclosure: To ensure compliance with the regulations governing the issuance of
advice of federal tax issues, we advise you that any tax advice in this newsletter is not written with the intent that it
be used, and cannot be used, to avoid penalties that may be imposed under the Internal Revenue Code. Further,
any tax advice contained in this communication is not intended or written to support the promotion or marketing of
any matter or transaction addressed by such tax advice.




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Description: Estate Planning Newsletter November 2012 Issue From the Estate Planning Practice of Hinshaw & Culbertson LLP. Hinshaw’s Estate Planning Newsletter includes reports on opportunities and challenges that may impact individuals’ estate plans. This publication is designed to keep readers aware of such opportunities and challenges so that they may determine whether changes to their estate plans are necessary or desirable. Our goal is to provide the information necessary to ensure that readers are effectively providing for their loved ones, planning for the transition of their businesses, protecting their assets, and paying as little tax as possible. Comments or suggestions concerning the Estate Planning Newsletter should be directed to Stephen A. Frost