There are many software programs, as well as websites, that sell do-it-yourself estate planning documents. These websites and form tools seem to offer a convenient and cost-effective alternative to consulting with an estate planning attorney. But do they really meet your needs and protect your family? Is online, do-it-yourself estate planning worth the perceived upfront savings?

Penny Wise and Pound Foolish

In all but the simplest scenarios, do-it-yourself estate planning is risky and can become a costly substitute for comprehensive in-person planning with a professional legal advisor. Typically, these online programs and services have significant limitations when it comes to gathering information needed to properly craft an estate plan. This can result in crucial defects that, sadly, won’t become apparent until the situation becomes a legal and financial nightmare for your loved ones.

Creating your own estate plan without professional advice can also have unintended consequences. Bad or thoughtless documents can be invalid and/or useless when they are needed. For example, you can create a plan that has no instructions for when a beneficiary passes away or when a specific asset left to a loved one no longer exists. You may create a trust on your own but fail to fund it, resulting in your assets being tied up in probate courts, potentially for years. Worse yet, what you leave behind may then pass to those you did not intend.

Each family situation is unique. Modern families – Non-traditional families, blended families, subsequent marriages – require more thorough estate planning. The nuances of these situations are not adequately addressed in an off-the-shelf document. In addition, the options available in a do-it-yourself system may not provide the solutions that are necessary. A computer program or website cannot replicate the intricate knowledge a qualified local estate planning attorney will have and use to apply to your particular circumstances.

If you’re a person of significant wealth, then concerns about income and estate taxes enter the picture too. In addition to the federal estate tax, some states have a separate estate tax systems with significantly different tax thresholds. An online estate planning website or program that prepares basic wills without taking into account the size of the estate can result in hundreds of thousands of dollars in increased (and usually completely avoidable) tax liability. A qualified estate planning attorney will know how to structure your legal affairs to properly manage – or, in many cases, even avoid – the burden of the death tax as well as minimize the impact of ongoing income taxes.

Persons who have children or adult loved ones with special needs must take extra caution when planning. There are complicated rules regarding government benefits that these loved ones may receive that must be considered, so that valuable benefits are not lost due to an inheritance. We take a particular interest in helping families plan for loved ones with special needs.

Give Us a Call to Discuss Your Situation

No matter how good a do-it-yourself estate planning document may seem, it is no substitute for personalized advice. Estate planning is more than just document production. In many cases, the right legal solution to your situation may not be addressed by these do-it-yourself products – affecting not just you, but generations to come. Using DIY forms can seem like a good idea now but create stress, confusion, and be costly down the road for your loved ones. Let us help you get this right and give you peace of mind your loved ones won’t be burdened upon your incapacity or death. We’re here to help, call us at 630-571-0222 to schedule a time to meet.

While there may be efforts with the new administration to repeal or otherwise replace the Federal Estate and Gift Tax, as of January 1, 2017, the Federal Estate and Gift and Generation Skipping Taxes remain in force.  The 2017 Estate and Gift and Generation Skipping Tax exemptions will increase from $5,450,000 to $5,490,000.  The annual exclusion for a gift will remain at $14,000 per donee.

Illinois retains a separate estate tax.  The Illinois exemption remains at $4,000,000.

On December 18, 2015 Congress passed the Protecting Americans from Tax Hikes Act (the Path Act of 2015) which, among many changes, renews as well as makes permanent the Charitable IRA rollover provision. This provision enables an individual over age 70 ½ to gift up to $100,000 annually from IRAs directly to charities without such donation(s) without being treated as taxable income to the individual.

The IRS has announced the 2016 Estate and Gift and Generation Skipping Tax exemptions. The exemptions will increase from the current $5,430,000 to $5,450,000. The annual exclusion for a gift will remain at $14,000 per donee.

Illinois as well as 17 other states retain a separate estate and/or inheritance tax. The Illinois exemption remains at $4,000,000.

2015 Estate Tax Update

The amount that individuals may transfer by lifetime gift or at death free of federal estate tax will be increasing to $5,430,000 for 2015, up from the $5,340,000 exemption in effect for 2014.  Illinois continues to impose a separate state estate tax and its exemption remains at $4,000,000.  While the federal exemption adjusts annually for inflation, the Illinois exemption does not.   For married couples with estates in excess of $4,000,000, they should review their estate plan to make sure their plans are designed not to inadvertently trigger Illinois estate tax  upon the death of the first spouse.

One simple way you can reduce estate taxes and, in limited circumstances, shelter assets to achieve Medicaid eligibility, is through lifetime gifting. Certain rules apply, however.  There is no actual limit on how much money you can give during your lifetime, but if you give any individual more than $14,000 in 2015, you must file a gift tax return reporting the gift to the IRS and use your available exemption to offset the gift tax due.

The $14,000 figure is an annual exclusion from the gift tax reporting requirement.  You may give up to $14,000 to each of your children, their spouses, and your grandchildren (or to anyone else choose) each year without triggering any IRS reporting requirements.  In addition, if you’re married, your spouse can duplicate these gifts.  For example, a married couple with four children could gift up to $112,000 in 2015 to their children with no gift tax implications.  In addition, the gifts would not count as taxable income to their children (although any earnings on the gifts would be taxed.)

Keep in mind that payments directly to an institution for tuition or to a provider for medical expenses on someone else’s behalf are not treated as taxable gifts and do not count against the $14,000 annual exclusion.

On the charitable giving front, on December 19, 2014, President Obama signed off on Congress’s a one-year extension for charitable IRA rollovers, but the extension is only good through December 31, 2014.   IRA owners 70 ½ or older can exclude up to $100,000 a year from income if the IRA funds are paid directly to certain public charities.   Without this extension, the IRA owner would have to pay tax on the IRA funds before claiming the deduction.  While we do not know if Congress will extend that tax break on IRA rollovers to charities for 2015 or beyond or indeed make this provision permanent, for future planning, an individual over 70 ½ might considering directing that his withdrawal from his or her IRA be paid directly to a charity.  If the law is again extended, then that individual would be able to exclude the withdrawal from his or her gross income.

Estate Planning for Pet Owners

Many pet owners consider their pet a beloved part of the family…and yet when they update their estate plan, they often forget to make provisions for these furry family members.  The following is a brief summary of some helpful tools that may ensure your pets receive appropriate care in the event you are unable to provide it yourself:

1. Power of Attorney:

Powers of attorney are documents that appoint an agent to make financial or medical decisions on your behalf if you are unable to do so.  You may want to include a provision in your power of attorney specifically authorizing your agent to care for and make decisions regarding the needs of your pet.

What if your entrusted agent is allergic to cats or nervous around large dogs?  One option is to execute a limited power of attorney, which can be limited in scope to simply grant a pet-savvy agent decision-making authority over your pet (not you).

You should also consider what would happen if a sudden emergency arose:  Would your agent have access to your house key to feed your pets?  Do they live close enough to do so on short notice?  Speak to your agent or a trusted neighbor to arrange an emergency plan.

1. Will:

A will provides for the distribution of property at your death.   You may include a provision that names an individual who shall receive your pets upon your passing, or you may grant the executor the ability to select an individual of his choosing.  Although you may not leave a sum of money directly to your pets, you may leave the individual in charge of your pets a sum of money, with the request that she use it to care for your pets.  Note that such a will provision would not be legally enforceable.

In some situations, this may be sufficient.  In other situations, you may prefer to have the money set aside with a more secure guarantee that the funds be used for the benefit of your pet.  In that case, you may prefer to execute a “pet trust” as described below.

1. Trust:

In 2005, the Illinois Trust and Trustees Act was amended to authorize the creation of pet trusts.  A pet trust allows you to set aside money for the care and maintenance of your pet.  You may leave the money to a trustee to dole out to the individual charged with caring for your pet.  This can in turn create a system of checks and balances to provide greater assurance that the funds are applied appropriately without being depleted too soon.

A trust provides an added benefit of taking effect quickly in the event of the owner’s death, whereas probating a will can be a process that can drag on for months or years in probate court.  Note that a judge does have the authority to reduce the amount of property transferred to the pet trust if the amount is deemed excessive.

1. Letter of Instruction:

Regardless of whether you choose any of the aforementioned estate planning documents to ensure the care of your pets after your passing, we strongly recommend leaving a letter of instruction.  This informal document provides care instructions so an agent can appropriately and confidently provide care for your pet if you are unable to do so.  This document should include instructions regarding your pets’ food, water, shelter, veterinary care, medical conditions, daily schedule, and general preferences so your agent can begin caring appropriately for your pet as soon as it becomes necessary.

2014 Tax Update

The American Taxpayer Relief Act, which was signed by President Obama on January 2, 2013, implemented those federal estate and gift tax laws that shall control during 2014.  Under this law, the federal estate and gift tax exemption was indexed for inflation, and therefore increased from $5.25 million per person in 2013 to $5.34 million per person in 2014.  In other words, each individual can transfer up to $5.34 million tax free, during life or at death, but transfers over this amount will be taxed (the maximum tax rate is 40%).  Likewise, the generation-skipping transfer (GST) tax exemption was reunified with the federal estate tax exemption, meaning it will continue to match the federal estate tax exemption, subject to the same annual inflation index.

There is still an unlimited marital deduction from the federal estate and gift tax that operates to defer estate tax on assets inherited from a spouse until the second spouse dies.  This marital deduction only applies if the inheriting spouse is a U.S. citizen.

The Act had also made permanent the concept of “portability,” which is a tax break offered to married couples.  A surviving spouse can add a recently deceased spouse’s unused exemption to their own unused exemption.  This enables a surviving spouse to transfer up to $10,680,000 federal estate tax free for 2014.  While the unused exemption might be portable, the amount sheltered does not adjust for inflation.

Keep in mind that portability is not automatic.  The fiduciary of the estate of the spouse who died must transfer the unused exemption to the surviving spouse by timely filing a federal estate tax return.  Furthermore, portability may not be an attractive option to some couples since there is no portability for unused Illinois exemption.

On a state level, the Illinois estate tax exemption is fixed and consequently not indexed for inflation.  As such, it will continue to be $4 million for 2014, with a maximum tax rate of 16%.  Portability is not available for the Illinois estate tax exemption.

There continues to be a disconnect between the federal and Illinois estate tax exemptions.  Some estate plans call for a division of assets between a credit shelter trust (sometimes called the “Family Trust”) and a marital trust according to a formula that allocates the maximum amount that can be sheltered from the federal estate tax to the credit shelter trust.  Of course, with the substantially increased federal exemption, a greater portion (or perhaps all) will be allocated to the credit shelter trust.

With the Illinois estate tax exemption set at $4 million, an Illinois decedent with a $5.34 million estate that is administered under a typical formula clause (allocating the $5.34 million to the credit shelter trust) would expose that trust to Illinois estate tax.  The Illinois legislature created a “patch” – the so-called “Illinois QTIP election” to defer the Illinois tax until the death of the surviving spouse, but the trust must be drafted to qualify for that election.  If you have not reviewed your current estate plan, we recommend that you consider doing so to make sure your plan document is eligible for the Illinois QTIP election.

One simple way you can reduce estate taxes and, in limited circumstances, shelter assets to achieve Medicaid eligibility, is to give some or all of your estate to your children (or anyone else) during their lives in the form of gifts.  Certain rules apply, however.  There is no actual limit on how much money you can give during your lifetime, but if you give any individual more than $14,000 in 2014, you must file a gift tax return reporting the gift to the IRS and use your available exemption to offset the gift tax due.

The $14,000 figure is an annual exclusion from the gift tax reporting requirement.  You may give $14,000 to each of your children, their spouses, and your grandchildren (or to anyone else choose) each year without triggering any IRS reporting requirements.  In addition, if you’re married, your spouse can duplicate these gifts.  For example, a married couple with four children could gift up to $112,000 in 2014 to their children with no gift tax implications.  In addition, the gifts would not count as taxable income to their children (although any earnings on the gifts would be taxed.)

Keep in mind that payments directly to an institution for tuition or to a provider for medical expenses on someone else’s behalf are not treated as taxable gifts and do not count against the $14,000 annual exclusion.

There is still no news on whether Congress will extend the tax break on IRA rollovers to charities.  Until February 1, 2014, there is a $100,000 “charitable rollover” of IRA distributions for anyone older than 70 ½.  Consequently, a taxpayer can direct up to $100,000 from an IRA to a charity and not have the amount included in his gross income.  These rollovers, known as qualified charitable distributions, were in effect for 2013 with special rules being applied:

1. An individual who received an IRA distribution during the month of December 2013 may transfer a portion not exceeding $100,000 in cash to a qualified charity before February 1, 2014, and the distribution will be excluded from 2013 income.
2. Alternatively, during January 2014, an individual may request that up to $100,000 be transferred directly from his or her IRA to a qualified charity before February 1, 2014, and have that amount included from 2014 income.

Gift, Estate and Generation Skipping Tax After the American Taxpayer Relief Act of 2012

In 2012, there was a federal estate tax in effect, with a $5,120,000 exemption per person.  This exemption was temporary and would have been reduced to $1,000,000 unless Congress took action on or before December 31, 2012 to extend, reduce or increase the exemption.

On January 2, 2013, the American Taxpayer Relief Act was signed into law and it provides some measure of certainty regarding the federal estate tax.  In essence, Congress made permanent the changes that went into effect in 2010, with the only significant change being made to the gift and estate tax rate, with a top rate of 40% from the prior top rate of 35%.

Under the 2010 law, each individual could transfer up to $5,000,000 tax free, during life or at death.  This exemption amount is adjusted for inflation.  For 2012, it was raised to $5,120,000 per person and we expect the exemption for 2013 to be $5,250,000 per person.

There is still an unlimited marital deduction from the federal estate and gift tax that operates to defer estate tax on assets inherited from a spouse until the second spouse dies.  This marital deduction only applies if the inheriting spouse is a U.S. citizen.

The new law makes permanent “portability”, a change that went into effect in 2010.  Portability enables a surviving spouse to add any unused exemption of the spouse who died most recently to their own unused exemption. In essence, a surviving spouse could transfer up to $10,500,000 federal estate tax free.

Nevertheless, while the unused exemption might be portable, it does not adjust for inflation nor is it automatic.  The fiduciary of the estate of the spouse who died must transfer the unused exemption to the surviving spouse by filing a federal estate tax return.  Further for some couples, relying on portability may not be the solution since portability is not recognized by the State of Illinois.

As of January 1, 2011, there was no Illinois estate tax; however, as part of the legislation that Governor Quinn signed which increased the state income tax, the Illinois estate tax was reinstated.  Effective January 1, 2013, the Illinois estate tax exemption is now $4,000,000.  There is no portability for unused Illinois exemption.

One simple way you can reduce estate taxes and, in limited circumstances, shelter assets to achieve Medicaid eligibility, is to give some or all of your estate to your children (or anyone else) during your life in the form of gifts.  Certain rules apply, however.  There is no actual limit on how much you may give during your lifetime.  But if you give any individual more than $14,000 (increased from the $13,000 available in 2012), you must file a gift tax return reporting the gift to the IRS and use your available exemption to offset gift tax due.

The $14,000 figure is an exclusion from the gift tax reporting requirement.  You may give $14,000 to each of your children, their spouses, and your grandchildren (or to anyone else you choose) each year without reporting these gifts to the IRS.  In addition, if you’re married, your spouse can likewise make exclusion gifts.  For example, in 2013, a married couple with four children could gift up to $112,000 to their children with no gift tax implications.  In addition, the gifts will not count as taxable income to your children (although the earnings on the gifts if they are invested will be taxed).

In addition to the annual gift tax exclusion, payments directly to an institution for tuition or to a provider for medical expenses on someone else’s behalf, such as your child, are not treated as taxable gifts.