Estate Planning

Passing on Passwords: Your Online Legacy

If you manage your financial assets online, pay bills online, bank online, use photo sites, participate in virtual communities or simply use email, it is important that you consider how your family will access those accounts should you become incapacitated or upon death.   Many popular Internet services have policies barring access, short of a court order, unless someone has the password.

Your estate plan is not complete unless you begin to think about what happens to all your online data.    Legacy Locker is one of many companies that offer a secure way to pass online accounts to loved ones.  As an alternative consider keeping a portable flash drive with usernames and passwords and let a family member or friend know its whereabouts.

Are Inherited IRAs Protected from Creditors?

Illinois as well as Federal Bankruptcy Law protects IRAs from creditors.  With the advent of inherited IRAs, whether creditor protection extends to these assets is far from clear.  There continue to be conflicting cases throughout the nation.  In a recent Texas case, the bankruptcy court determined that the IRA inherited by the debtor from his mother was not the equivalent of an IRA and consequently not creditor protected. In re Chilton, No. 08-43414 (Bankr. E. D. Tax. Mar. 5, 2010)    A Minnesota bankruptcy court found the opposite-that inherited IRAs were protected from the debtor’s creditors.   In re Nessa, No. BKY 09-60081 (Bankr. D. Minn. Jan 11, 2010)

Proposed SB3613 creates “Presumed Consent” for Organ Donation

 Illinois Senator Dale Risinger has introduced a bill that would reverse the current approach to organ donation.  SB3613 would amend the Illinois Anatomical Gift Act to provide that each competent resident of Illinois over age 18 would be presumed, by operation of law… “to have given all of his or her body for any for organ donation purposes”… without the need for consent of any survivor.  Under current practices, an Illinois resident can exhibit his or her consent for organ donation a number of ways: (a) by joining the Illinois First-Person Consent Organ/Tissue Donor Registry ( or 1-800-210-2106) maintained by the Illinois Secretary of State, (b) by so indicating on a valid Illinois Durable Power of Attorney for Health Care form; (c) by otherwise affirmatively complying with the Illinois Anatomical Gift Act.  If the resident has not indicated his or her consent or disagreement regarding organ donation, organ donation could still occur with family consent.  Under the proposed bill, an individual would have to affirmatively opt out of the statutory presumed consent for organ donation.  SB 3613, if passed, would be effective on or after July 1, 2012.  To check on the bill’s status, go to

Charitable Gift Annuities

A charitable gift annuity (CGA) is a contract between you and your designated charity.  For some clients, the CGA can increase retirement income while also supporting a favorite charity.  Simply, you make an irrevocable gift of cash or stock to the charity, and in return, the charity makes regular fixed payments, often at fairly attractive rates, to you, you and your spouse, or someone you name, for life.   Among other benefits, the donor receives a tax deduction in the year of the gift and there can be capital gain savings on appreciated donated property.   The charity receives what is left of the gift after lifetime.

Durable Powers of Attorney for Health Care and Property Pending Legislation

HB6477, which is making its way through the General Assembly, makes numerous substantive changes to the Illinois Durable Power of Attorney Act.  Among them, provisions relating to an agent’s record keeping and disclosures, and remedies when agents abuse his or her duties.  In addition, more and more institutions require a certification that the document is in effect. The pending legislation provides an agent  certification form for that purpose.  The changes would also confirm that the agent under the Health Care Power of Attorney, as an authorized representative under HIPAA, would be authorized to disclose confidential health information.

Tenants by the Entirety Pending Legislation

Tenants by the entirety is a form of ownership available to spouses on their primary residence.  Holding title as tenants by the entirety provides spouses greater creditor protection for their home.  This creditor protection is lost when spouses convey their primary residence into revocable living trusts for estate planning purposes.  HB5282, if passed, would continue the creditor protection when the primary residence is conveyed to a revocable living trust where both the husband and wife are the primary beneficiaries of the trust(s) and the document specifically states that the interests of the husband and in the primary residence is held as tenants by the entirety.

Should a Trust either Own or be a Beneficiary Of a Non-Qualified Annuity

Non-qualified annuities look very much like IRAs, in that they are composed of a deferral phase (where the investment builds tax deferred) and a payout phase, but it is unclear whether the IRA Treasury Regulations for IRAs can be used to supercede the annuity contract settlement options when problems arise.

There can be a many unplanned adverse tax results or unintended payees, so it is critical that the client understand the type of non-qualified annuity contract he or she owns. In a conventional revocable trust plan, a client may be advised to transfer all assets, other than IRAs or qualified plans, to his revocable trust or to designate the trust as the beneficiary of the non-qualified annuities. These instructions may lead to adverse income tax results or to an unplanned party controlling the contract.

 To understand how unplanned events can arise, it is first important to understand the parties to the annuity contract:

 “Owner” – The “owner” possesses the contract rights: the right to surrender the contract for a cash lump-sum; the right to elect annuitized payouts; the right to designate and change beneficiaries; and the right to sell or give away the contract.

 “Annuitant” – The “annuitant” is the measuring life of the annuity contract.  It is the age of the annuitant that forces the contract to mature.  If payout if based on life or life expectancy, the annuitant’s life may be used to measure the duration of the payout.

 “Payee” – The “payee” refers to the person who receives the payments under the contract.  A payee may have control of the payment (as in “owner”) or may be a mere payee (as in “beneficiary”).  Usually one person fulfills all three roles, owner, annuitant, and payee, but these roles can be filled by three different persons and/or entities.  It is when the roles are filled by different persons that unintended tax consequences might arise.

 “Successor Owners” – Successor owners succeed to the contract rights at the owner’s death.  Depending on the contract, “beneficiary” and “successor owner” may be used interchangeably although that is not always the case.  What is important is to look at the underlying rights of the named or described party to the annuity contract.

 Internal Revenue Code (IRC) Section 72 requires payout after the owner’s death.  How quickly payout must occur depends on the “designated beneficiary.”  (IRC Section 72(s))  The IRS is concerned with who controls the cash value after the death of the original owner.    Who controls the contract will depend on the annuity contract.   When the annuity contract has a successor owner feature, the successor owner only becomes the new owner if the original owner dies when the original owner is not also the annuitant.  If the original owner dies while the original owner is also the annuitant, then the contract looks to the beneficiary as the person who controls the proceeds and succeeds to the death distribution.   Thus, if the owner dies, but the owner is not the annuitant, the successor owner becomes the new owner, the annuitant remains unchanged, and the “beneficiary” is irrelevant.

 The IRS does not require distributions on the death of the annuitant. Nevertheless there are many annuity contracts that force the contract to mature on the death of the annuitant so the owner (or other payee) is then forced to take distributions, be subject to income tax, and possibly be subject to the 10% penalty for early withdrawal if under age 59 ½.  

 The fact that there are many non-qualified annuity contacts that trigger distributions on either the death of the owner or the death of the annuitant creates issues that must be addressed when the annuity contact is structured.  To consider this issue, non-qualified annuities are sometimes categorized as Owner Driven or Annuitant Driven.  Under an Owner Driven annuity, payout occurs on the death of the owner.   Under the Annuitant Driven annuity, the contract will pay out upon death of either the owner or the annuitant.  The amount paid out differs.

 More importantly, under Annuity Driven contracts, unintended results can arise when different persons fill the roles of owner, annuitant, and beneficiary as the following illustrations show: 

Illustration #1   Annuitant Driven Contract

Owner – Husband

Annuitant – Wife

Beneficiary – Husband and Wife

 Wife dies first.  Husband becomes sole beneficiary, but he cannot continue the contract under the spousal continuation rules (Code Section 72(s)).  The spousal continuation rules permit the surviving spouse of a deceased owner to continue the contract tax deferred.  In this case there is no deceased owner because Husband continues as owner, so the death distributions must still be made.

 Illustration #2   Annuitant Driven Contract

 Owner – Husband and Wife

Annuitant – Husband

Beneficiary – Child

 Husband dies first.  The Wife, as co-owner, only becomes the new owner if the original owner dies when the original owner is not also the annuitant.  If the original owner dies while the original owner is also the annuitant, then the contract looks to the beneficiary as the person who controls the proceeds and succeeds to the death distribution.  In this case, a death payout occurs to the child. The Wife will not be able to elect spousal continuation.  The child now controls the contract and must take the death distribution and reckon with the income tax.   Further complicating this picture is whether the Wife, who was a joint owner, will be deemed as making a taxable gift to the child of her 50% interest in the contract.

 Illustration #3   Annuitant Driven Contract

 Owner – Father

Annuitant – Son

Beneficiary – Mother

Son dies first.  Mother as beneficiary must take proceeds.  No spousal continuation would be available since owner spouse did not die first.       

 Unanticipated problems can also arise when a trust is named as the owner or the beneficiary of a non-qualified annuity.  Not every non-qualified annuity is eligible for tax deferral.  IRC Section 72(u) provides that an annuity owned by a person who is not a natural person will not qualify for tax deferral.  Trusts, corporations, partnerships, and LLCs are non-natural persons.  There are several exceptions and the one relevant to trust ownership provides that when the annuity is held by an agent for a natural person, deferral will still be allowed.   There have been a series of private letter rulings that seem to make clear that a trust taxed as a grantor trust under Code sections 671-678 will meet this exception.  Typically, the standard revocable living trust converts to an irrevocable non-grantor trust upon the death of the Grantor which will take the trust out of the exception described above.    

 Several private letter rulings give some guidance that as long as the current and remainder beneficiaries are natural persons (i.e. not a charity), then tax deferral will be permitted.  While it may be that all the beneficiaries under an irrevocable non-grantor trust will be deemed natural persons, unless the trust elects to annuitize the payout, amounts withdrawn by the trustee will be taxed as ordinary income at the trust’s compressed income tax rates until all the growth is withdrawn.

 When an individual is named as the beneficiary of a non-qualified annuity, depending on the contract, he or she would have two options for distributions:  complete distribution within five years of the death that triggers the payout or distributions over the beneficiary’s life expectancy (similar to the “stretch” IRA).  If the deceased owner’s spouse is the designated beneficiary, continued tax deferral would also be available. (Code Section 72(s))

 If a trust is the beneficiary of the non-qualified annuity, the trust must receive the balance within 5 years of the death that triggers the payout.  It cannot stretch out the distributions over the life expectancy of one or more trust beneficiaries.   If the spouse is the trust beneficiary, it is not clear that the spouse can take advantage of settlement options normally available to the spouse under Code Section 72(s).

 Generally, when the trust as opposed to an individual is the designated beneficiary the ability to stretch out payments or continue deferral will likely be lost.  

Careful structuring of the annuity contract is critical to obtain the intended tax and beneficiary result.   This is especially so when different persons will fill the roles of owner, annuitant and payee.   Disclaimer may not be available if successor payees are not named and even in cases where successor owners are named, under an annuitant driven nonqualified annuity, the beneficiary succeeds to the contract payout, not the successor owner.  Relying on private letter rulings after the fact may not correct an adverse result.


 Advanced Planning Library, “The Northwestern Mutual Guide to Nonqualified Annuities,”  2007

 Tannahill, Bruce, “Are Non-Qualified Annuities Trustworthy?”  Probate & Property,  July/Aug, 2006, p.23.

Illinois House Bill 5282 – Creditor Protection

Currently pending in the Illinois House is a bill (H.B. 5282, 96th Gen.Assem. (2010)) that would extend the creditor protection available to spouses who hold title to their primary residence as tenants by the entirety to spouses who convey their primary residence to a joint revocable living trust of which they are the grantors and beneficiaries.

No Federal Estate Tax for Decedents dying in 2010

As of January 1, 2010, there is no federal estate tax for decedents dying in 2010. Congress could reinstate the federal estate tax retroactively in 2010, perhaps as part of broader tax reform, or take no action, in which case the federal estate tax will be reinstated in 2011 but with a reduced exemption of $1,000,000 from the 2009 $3,500,000 exemption.

It may be uncertain how the provisions of your estate planning documents will be interpreted if there is no estate tax. This is because common provisions in estate plan documents are phrased in terms of tax concepts, such as the estate tax exemption, marital deduction and generation-skipping tax. These tax concepts are not in the law this year. For most clients who have reviewed and updated their estate plans in the last several years, this may not be an issue, but for those who have not reviewed their documents in many years, there may be some question as to what your documents mean and how the property is disposed of. That in turn may cause tax questions to arise.

Another change that is in effect for 2010 relates to the income tax basis of inherited assets. Income tax basis is the value from which gain or loss on assets sold is measured. Under the law in effect through December 31, 2009, the general rule provided that the income tax basis of an asset was changed to the decedent’s date of death value, the so-called “step up in basis.” This automatic change in basis will not occur in 2010. Rather, with some exceptions, the deceased owner’s income tax basis will “carry over” to the persons who inherit the assets. It may be appropriate for your documents to be revised in order to take into account the possibility of carry over basis.

New Rules for Roth IRA Conversions

Beginning in 2010, most investors will be eligible to convert their traditional IRAs to Roth IRAs, regardless of how much money they make. There is also a special rule in place for 2010 only that will allow you to recognize all of the conversion income in 2010 or split it equally between the next two tax years (2011 and 2012).

Money put into a traditional IRA is tax –deductible no matter how much money you make, unless you are covered by an employer-sponsored plan, in which case you may receive a reduced or no deduction for the contribution to the IRA. With a Roth, contributions are not tax-deductible, but earnings can be withdrawn income tax free if you’re at least 59 ½ and have had the Roth at least 5 years. Additionally, you are not required to take required minimum distributions beginning at age 70 ½.

Roth conversions may be appropriate if you think you will be in the same or higher tax bracket when you withdraw the funds and you have sufficient funds outside of the IRA to pay the conversion tax.