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Estate Tax Relief. Some in Congress and have claimed to have repealed the estate tax. However, the new tax repeals the estate tax for only one year- 2010. Due to budgetary restrictions, the new law allows the current estate tax rules, rates and exemptions to come back in force in 2011. Thus, under the new law, estate taxes continue- but with an increasing exemption from $1 million to $3.5 million through 2009- until 2010 when it is repealed for only that one year. Planning Note: Estate tax repeal has now become estate tax complexity and uncertainty under this legislation. The prospect of the automatic reinstatement of 2001 estate tax rules in 2011 will force Congress to face the entire issue again, under perhaps entirely different political circumstances, and certainly a different President. This means that most Americans may face an even larger estate tax burden unless Congress takes further action. Phase-out schedule. The phase out of the estate tax will follow a slow timetable:
Year Top Estate Estate Tax Gift Tax
Tax Rate Exemption Amount Exemption Amount
2001 55% $675,000 $675,000
2002 50% $1 Million $1 Million
2003 49% $1 Million $1 Million
2004 48% $1.5 Million $1 Million
2005 47% $1.5 Million $1 Million
2006 46% $2 Million $1 Million
2007 45% $2 Million $1 Million
2008 45% $2 Million $1 Million
2009 45% $3.5 Million $1 Million
2010 Repealed n/a $1 Million
2011 55% $1,000,000 $1,000,000 *
*combined with estate
Modified Carryover Basis. To complicate matters further, once estate taxes are fully repealed in 2010, a modified carryover basis rule immediately goes into effect. At that time, death becomes an income tax problem. The basis of assets received from a decedent will carry over from the decedent, rather than be stepped up to fair market value at the date of death or alternate valuation date as is now the law. With proper planning, two exemptions will save many estates: 6. $1.3 million of basis will be allowed to be added to certain assets; and 7. $3 million of basis will be permitted to be added to assets transferred to a surviving spouse. Not all property is eligible for an increase in basis. Property acquired by a decedent by gift from a non-spouse less than three years before death is excluded (to prevent “gifts” of low basis assets in anticipation of stepped-up bequests). Consider: Real estate or other assets that remain in the family for generations will require generations of accurate records of basis. But without accurate basis records kept over decades, the IRS will win on the burden of proof issue, thereby keeping basis low and taxing those assets “artificially” high. Gift tax remains in effect. To prevent significant use of gifts to transfer income-laden property from higher to lower rate taxpayers, the new law retains a modified gift tax. In 2002 the gift tax exemption becomes $1,000,000. Starting in 2010, gifts in excess of a lifetime $1 million exemption would be subject to a gift tax equal the top individual income tax rate at that time. copyright 2002, The Law Offices of Anthony B. Ferraro, LLC

On June 7, 2001, President Bush signed into law the new 2001 Tax Act.

copyright 2002, The Law Offices of Anthony B. Ferraro, LLC Since we understand the importance to prospective clients of being up-to-date about these changes we have attached our Summary of the New Estate Tax Law, showing changes in rates and exemptions. Because the new tax law was written with changes in exemption amounts and tax rates occurring almost annually over the next nine (9) years, we are faced with a new kind of complexity in planning to avoid estate tax. The sweeping changes to the tax laws will require almost everyone’s wills and trusts to be reviewed and revised. Specifically, the effect Estate and Gift Tax sections of this new Tax Act on you is summarized in the following five points:
1. The relief afforded by the new tax act is temporary. The estate tax (but not the gift tax) is repealed for one year in 2010. In 2011 the estate tax law will change back to the way it was in 2002, with the exemption amount going back to $1,000,000. Thus, unless one is sure that the year 2010 will be the year of their death, (which is impossible) the most sound estate planning method is to plan for the tax structure that will be in effect for the 2011 and thereafter, which include most of the planning techniques we now rely on and the new ones required by the passing of this new Tax Act. 2. As the attached exhibit explains, the tax rates and exemptions are periodically changing, and this will require you to do new planning in order to craft a plan that will reflect the new tax phase-out provisions. The reason: your estate tax free exemptions are now “moving targets”. 3. You now have to adjust your wills and trusts more frequently to stay on top of the changes. If not, unintended results can occur (i.e., very large Family Trust but no Marital Trust for spouse). 4. Most clients need to re-title assets to take advantage of the increases in the exemption amounts. 5. In order to accommodate the changes in the tax laws that are going to take place during the transition period over the next ten years, it is essential thatflexibility be built into your wills and trusts. This flexibility was not necessary prior to the passage of the new tax act because we knew that the estate tax exemptions were going to be in the range of $675,000 to $1,000,000. Now, the range of exemptions is $675,000 to $3,500,000, and you can’t know now which amount will apply at your death.
Also, due to changes made in the income tax, you should begin to keep all recordsconcerning the income tax basis (i.e. purchase price) of all assets purchased in order to minimize income taxes imposed on the beneficiaries in your estate plan. This is because in the year 2011 assets will no longer be inherited with an income tax basis equal to date of death value, but rather equal to the original purchase price paid by the deceased person. Thus, the need for you to keep good records. With these issues in mind, I suggest you contact Estate Counsel to discuss the ramifications of the new Act as pertaining to your existing wills and trusts to determine if they will still meet your goals or if immediate changes are needed. Since the changes that we discussed in this letter are now law and can change your tax and distribution provisions as early as December 31st of this year, you should contact Estate Counsel now to set a time when you can discuss these matters. As is customary, we bill hourly for consultation and also re-drafting of documents (if you conclude, based on our discussions with each other, that such re-drafting is needed). We handle all clients on a first come- first serve basis, except for emergencies. Please call our offices to set your appointment, if our firm can be of assistance. By: Anthony B. Ferraro Attorney – CPA **This document is for discussion purposes only and is not intended to be construed as legal advice. You should never attempt estate planning without the advice of competent legal counsel. Please feel free to contact our offices if we may assist you.** Copyright 2002 THE LAW OFFICES OF ANTHONY B. FERRARO, Rosemont, Il.

Note: In its original format, this article was published in January, 2000 in the Rosemont Chamber of Commerce Communique.

Things You Need To Know If You Are Named Executor Of A Will Or Trustee Of An Estate

copyright 2002, The Law Offices of Anthony B. Ferraro, LLC Overview. Quite often a good friend or a member of your family will have a will or trust drawn up and ask you to act as the executor or trustee. While this may make you feel you have been honored, people feel compelled to accept this office. This situation can also arise when someone has passed away and you must assume duties as executor or administrator of the estate. Quite often people wonder what the extent of their obligations will be and how to fulfill them. This article is intended to provided a very basic overview of the estate administration process dealing with responsibilities regarding the gathering of estate data, payment of debts, expenses, and taxes, and the distribution of the estate in accordance with the provisions left behind by the deceased. This is not intended to provide legal advice. It is hoped however that this information will enable one to understand what it is that they do not know and therefore seek professional advice. As the personal representative, you are primarily responsible for settling the affairs of the decedent.
  1. Any property that the decedent held jointly with another person, such as a checking account, passed to the surviving joint tenant by operation of law upon the decedent’s death. Property that listed a beneficiary, such as the decedent’s life insurance contract, also passed automatically at death.
  2. Jointly-held property and property that listed a beneficiary designation are “non-probate” property and passed automatically to you or the designated beneficiary upon the decedent’s death.
  3. Any property that was titled solely in the decedent’s name is “probate” property and passed in accordance with the terms of the decedent’s will.
Terminology. Probate refers to a series of procedures by which a state or county government attempts to ensure that the debts, taxes and expenses of the deceased will be paid and that any remaining assets are distributed to those people that are legally entitled to such assets as heirs or legatees. Probate usually takes place in a Probate Court in the county in which the decedent resided. The term “executor” means one who performs or carries out some act. For example, a person named by a testator to carry out the provisions in a testator’s will. Administrator is defined as “a person appointed by the court to manage the assets and liabilities of an intestate decedent”. This means that the decedent died without a will. A trustee is one that, having legal title to property, holds it is trust for the benefit of another and has a fiduciary duty to that beneficiary. A successor trustee is a trustee that succeeds an earlier trustee, as provided in the trust agreement. Fiduciary is defined as “one who owes to another the duties of good faith, trust, confidence, and candor.” It is one who must exercise a high standard of care in managing another’s property. Probate Objectives. Having defined probate above, the purpose of post-death probate proceedings is to provide a judicial forum in which: (1) the rights of an estate’s beneficiaries are protected by a court; (2) claims against the decedent’s estate are barred if not timely filed; and (3) the right to contest the decedent’s will is barred if a will contest is not timely filed. Non-Probate Assets. Non-probate assets are those types of assets that generally pass to certain persons without the need to seek the assistance of the court. Examples of non-probate assets are as follows:
  1. Trusts;
  2. Pay-on-death accounts (POD);
  3. Transfer-on-death accounts (TOD);
  4. IRA’s;
  5. 401(k)’s;
  6. Joint tenancy property;
  7. Life insurance policies;
  8. Land trust agreements;
  9. Annuities; and
  10. Small Estate Affidavit (if less than $50,000 of personal property).
One exception to this broad statement is that if any of the assets described above are payable to the decedent’s estate, then probate will be necessary. Thus, it is necessary to make the above assets payable to someone other than the decedent’s estate in order to avoid probate. Probate Assets. Probate assets consist of those assets are subject to the probate court. Generally this means that someone who is deceased and in whose name an asset is titled, this will generally result in probate. More specifically, a decedent’s asset that by law is subject to the claims of creditors or legacies. A legacy is a promise in a will or a trust to distribute an asset to a person after the death of the decedent. Taxable Assets. Taxable assets are those that are determined to be taxable for federal estate tax purposes under the Internal Revenue Code. This is governed by federal tax law and not Illinois property law. Probate assets are determined by Illinois property law. Federally taxable assets are determined by federal tax law. Generally speaking, under the federal tax code, everything you own is taxable for federal estate tax purposes unless excluded under some specific provision of the Internal Revenue Code. First Meeting With Attorney. The following documents should be gathered prior to the first meeting with the attorney.
  1. Copy of Will (and codicils);
  2. Copies of Death Certificate;
  3. Copy of funeral bill;
  4. Documents concerning previous divorce or separation of decedent, if applicable;
  5. Documents concerning armed services record of decedent, if applicable;
  6. Copies of any will or trust agreement under which the decedent was a beneficiary;
  7. Copies of any will or trust agreement under which the decedent was acting as a fiduciary; and
  8. Copies of any trust agreements created by the decedent.
Opening the Estate. Assuming that probate is necessary, opening the estate consists of preparation of the following types of documentation for the probate court:
  1. Filing the will with the Clerk of the Court;
  2. Petition for Probate of Will and for Letters Testamentary;
  3. Evidence to the effect that the facsimile of the will is a true and correct copy of the will;
  4. Executor’s Oath and/or Bond;
  5. Affidavit of Heirship;
  6. Order Admitting Will to Probate and Appointing Personal Representative;
  7. Order Declaring Heirship;
  8. In Cook County, Designation Newspaper in which notices are to be published;
  9. Notice to Heirs and Legatees and Unknown Heirs of Their Rights to Require Formal Proof of Will.
The estate is usually opened by filing the Petition for Probate of the Will with the Clerk of the Court and paying the clerk fees. Administration of the Estate Once Opened:
  1. Create an inventory of assets;
  2. Gather information;
  3. Establish an estate checking account;
  4. Discuss banking procedures;
  5. Conduct a safety deposit box examination. Have access affidavit prepared beforehand;
  6. Consider ancillary administration and local counsel if property exists outside of the State of Illinois;
  7. Start a claims register and send notice to creditors in the register;
  8. Obtain appraisals of property;
  9. Make necessary tax elections if the estate is taxable;
  10. Establish the surviving spouse’s award;
  11. Consider disclaimers (This means considering the fact that somebody may wish not to receive what they are entitled to receive under the estate);
  12. Consider the sale of assets if necessary and consider the usage of auctioneers and brokers;
  13. File SS-4 to obtain FEI number;
  14. File final 1040 and 1041’s.The decedent’s estate is a taxable entity from the date of his death until all estate assets are distributed. The income earned by the property during this period must be reported on Form 1041. Every domestic estate with gross income of $600 or more during a tax year must file a Form 1041. Gross income of an estate includes dividends, interest, rents, royalties, gain from the sale of property and income from businesses, partnerships, trusts, and other sources. If the estate’s accounting period is a calendar year, Form 1041 must be filed by April 15th following the end of the tax year. You might want to consult an estate attorney on this matter.
  15. Be aware of capital gain tax savings;
  16. Obtain investment advice.
Closing the Estate.
  1. Consider partial distributions.
  2. Consider the requirement to file a full and complete accounting to all of the beneficiaries.
  3. Obtain an estate tax closing letter, if necessary, from IRS;
  4. Obtain the distributees refunding bonds;
  5. Obtain Final Report of Independent Representative;
  6. Obtain Discharge of the Executor on Delivery of Receipts and Final Report to presiding Judge.
  7. Make final distributions.
Filing of the Estate Tax Form 706 (if assets are more than $1 million) Form 706 is used to determine the estate tax due on the decedent’s taxable estate. Form 706 must be filed within nine months of the date of death by the Personal Representative for the estate for every US citizen whose gross estate is greater than $1 million for deaths occurring in 1999. The decedent’s gross estate includes all property in which they had an interest, including:
  1. property held in the decedent’s name only;
  2. company and individual entities;
  3. one-half of property held jointly with right of survivorship;
  4. one-half of property held as tenants by the entirety;
  5. life insurance death benefit of policies in which the decedent was owner and insured; and
  6. life insurance cash value of policies in which the decedent was owner and someone else is the insured.
Proceed With the Proper Professional Advice! If you have not retained an attorney to assist you with the settlement of the decedent’s estate, you should consider doing so. An attorney who specializes in estate settlement will be able to assist you with your duties as Personal Representative and explain how to proceed. Because of the complexity of some tax situations, you should consider hiring a professional to prepare your tax returns. You should request that someone provide you with some investment planning information. Again, this article is intended to provided a very basic overview of the estate administration process dealing with responsibilities regarding the gathering of estate data, payment of debts, expenses, and taxes, and the distribution of the estate in accordance with the provisions left behind by the deceased. This is not intended to provide legal advice. It is hoped however that this information will enable one to understand what it is that they do not know and therefore seek professional advice. REMEMBER, YOU ARE A FIDUCIARY! This article was prepared by: Anthony B. Ferraro, Attorney/CPA The Law Offices of Anthony B. Ferraro, LLC 5600 N. River Road, Suite 764 Rosemont, IL 60018 PH (847) 563-4887 Mr. Ferraro, both an Attorney and CPA, has been in practice for over 20 years. Mr. Ferraro’s law practice is concentrated exclusively in Wills, Trusts, Estate Planning, Estate Taxation, Probate, Estate & Trust Administration, Medicaid and Elder Law. copyright 2002, The Law Offices of Anthony B. Ferraro, LLC

Note: In its original format, this article was published in January, 1999 in the Rosemount Chamber of Commerce Communique.

Summary Of Estate Planning Issues

copyright 2002, The Law Offices of Anthony B. Ferraro, LLC The purpose of this article is to provide a brief overview concerning both tax and non-tax issues that should be considered in doing estate planning. I. What is Estate Planning? Estate planning is the process of arranging one’s affairs so that the transfer of assets at the time of incapacity, illness or death is accomplished in a most efficient manner. In achieving this efficiency, one has to try to control both tax and non-tax factors. Non-tax factors consist of unnecessary expenses such as guardianship proceedings and probate proceedings. Tax factors consist of matters such as federal gift tax issues and federal estate tax issues. The easiest approach to estate planning is to sit down with a qualified professional for an initial interview and discuss matters pertaining to your objectives and your assets. A typical estate plan for most clients will consist of the following:
  1. “Pour Over” type Will
  2. Revocable Living Trust
  3. Power of attorney Health Care
  4. Power of Attorney for Property.
Depending on the circumstances, there are many other types of documents that may be required, such as insurance trusts, gift trusts, etc. II. Which is better: a Will or a Trust? In answering this question, one must understand the three phases that we as human beings go through:
  1. The present phase, where we are able to manage our own affairs.
  2. A phase in which we are alive but incapacitated due to illness, old age, or trauma.
  3. Death.
In determining whether a will or a trust is better, one must understand that a will only deals with the death phase. The will does not even take effect until you are deceased. Thus, if you are looking to do estate planning for yourself you must consider all three phases. A revocable living trust is more suitable to caring for all three phases. During the present phase a revocable living trust is, for all practical purposes, transparent. It will not affect the way you use your assets. During phases two and three however the revocable living trust can be critical. During phase two in which you are alive but incapacitated, guardianship proceedings are often necessary in order to have a court appointed individual manage your assets for the rest of your life. This should be avoided if possible. You have no control over who will be selected as a guardian. In the final phase of death, the trust acts much like a will, however the assets will pass pursuant to the instructions set forth in your trust and avoid probate. A will on the other hand must be subject to probate in the probate court, thus incurring additional expenses, somewhat similar to those incurred in a guardianship proceeding. Thus for most clients a revocable living trust is preferable. However, it is not recommended for all clients. III. How are Estates Taxed? Estates are taxed once your assets exceed $1,000,000.00 under present law. However, you must understand that in computing whether or not you reach the threshold you must add everything that you own together, such as the value of your home, personal possessions, the face value of life insurance policies, the face value of your IRA’s and 401k’s, etc. Many people are surprised when they add these amounts together and they find themselves in a taxable estate position. Once the gross estate have been computed, you are allowed to subtract your $1 million free amount from this number. You are also entitled to subtract certain deductions such as charitable deductions, administrative expenses, and the marital deduction. The marital deduction represents anything that you leave to your spouse through a will, a trust, joint tenancy, etc. Once these subtractions are made, you are left with your taxable estate, and at that point you are taxed at rates beginning at 37½%, going all the way to 50%. These taxes must be paid within nine months of your death. IV. Estate Planning Strategies. There are two particular strategies that are employed to minimize estate taxes. First of all, we try to plan so that each spouse can fully utilize a $1 million (soon to be $1 million.00) free amount. If both spouses correctly use these free amounts then that means that they together can have $$2 million of assets free. But this is where most estate planning breaks down and most clients fail to seek the appropriate counsel concerning how to structure their assets so that these two free amounts may be used. The second estate planning strategy is to defer any taxes that cannot otherwise be avoided until the death of the second spouse, assuming there is marriage. This is done through the use of the marital deduction. Again however, this is where most clients make mistakes. If not used in an optimal manner, the marital deduction can be overused, thus causing more taxes to be paid at the death of the second spouse than would have otherwise been required to have been paid had both spouses prudently used the marital deduction. Again, this requires the advice of counsel. Other estate planning strategies consist of trust planning with life insurance, gifting to members of the family, and usage of other more sophisticated techniques. V. Advance Directives- Caring for an Ill or Incompetent Person. Advance directives represent the usage of documents that are prepared by yourself in advance of an illness or incompetence so that your wishes can be understood during such a period with incapacity. Specifically, powers of attorney for Healthcare and powers of attorney for property are advance directives. These are documents wherein you describe who you would like to manage your health or financial affairs during your period of incapacity. You also describe when this document is to take effect and under what circumstances it may be executed. This is a very important part of estate planning. Here you have the ability to choose who will handle certain of your affairs. VI. Types of Ownership. Assets can be held in many different forms of ownership. Many people readily recognize trust ownership, joint tenancy, and tenancy in common as the most readily used forms of ownership. However, there are many other forms of ownership. Many of these forms of ownership accomplish other objectives, such as creditor protection. Tenancy by the entirety, which is available for usage by a husband and wife and only with regard to their personal residence is a type of ownership form that can provide some insulation from creditor claims against the personal residence. This is not available at all times, but is available to spouses quite often. Again, the advice of counsel is required in order to determine whether this is available and appropriate for you. As mentioned above, joint tenancy is a readily recognized form of ownership. In this writer’s opinion however it is the most overused form of ownership in the United States. It can result in unintended tax and non-tax consequences that are very negative and harmful. Joint tenancy should be used sparingly. Again, the advice of counsel is necessary in titling assets. VII. Other Related Legal Considerations. In talking about estate planning, there are three other areas that must be taken into consideration. The first area is Medicaid planning. Medicaid planning is fraught with danger because certain transfers that are made in contemplation of a nursing home stay can result in more harm than good. If done early enough and with the appropriate advice, Medicaid planning however is a viable means of protecting one’s assets from being totally lost in an extended nursing home stay. Asset protection planning as briefly discussed above is another area of estate planning that must be addressed. Asset protection planning is the subject of another article. IRA and 401k usage is the yet another estate planning consideration. In doing estate planning, sometimes adjustments must be made to the beneficiary designations of your IRA’s and 401k’s so that the disbursement of these accounts is consistent with your overall estate plan. Quite often people assume that your IRA’s and 401k’s will pass pursuant to the terms set out in your will or your trust. This is not true. The beneficiary designations as stated in your IRA will control the disposition of such an account and therefore careful attention and advice must be obtained in the appropriate titling of such beneficiary designations. I hope that this article has served as an overview of what some of the issues are that you face in the estate planning process. Everyone’s estate planning is different. For some people it is very simple and for other people it is more complex. You will not know what your concerns and requirements are until you sit down and begin the process. I encourage you to do so. You have our best wishes for a happy and healthy and prosperous New Year. Note: This article is not intended to provide tax or legal advice, but rather should serve as a background for more in-depth discussion with your financial advisors and estate planning counsel. If you have any questions, or if we can be of any assistance, please contact us. Anthony B. Ferraro, Attorney/CPA, is the Principal of the Law Offices of Anthony B. Ferraro, concentrating in Wills, Trusts, Probate, Estate Planning, Elder Law and Business Taxation. Mr. Ferraro’s main office is located in Rosemont, Illinois. For more information, call 847.563.4887. Copyright 2002, The Law Offices of Anthony B. Ferraro, LLC

I have clients, most of them elderly, who may require a long term stay in a nursing home facility due to senility, Alzheimer’s Disease, dementia, etc. Quite often this results in a spend down of all of the assets that the elderly have accumulated throughout their lifetime before a client can qualify for subsidy through Medicaid (not Medicare). There are strategies that can be used to minimize a mandatory spend down of all of the assets that the elderly may have. This article assumes no long term care insurance is available to the client and the client is bound for a nursing home or retirement home. Some very broad strategy concepts that can be applied for a single person are as follows:
  1. Making gifts and/or transfers to a child who is disabled, blind, or a minor.
  2. Making gifts or transfers of the principal residence to a child who has lived with the parent for two or more years and has provided care and support to the parent. Watch the income tax impact.
  3. Gifts and/or transfers to children or other loved ones.
  4. Prepaying funeral expenses.
  5. Paying off debts.
  6. Cashing in cash surrender value on life insurance policies.
  7. Cashing in IRAs (although this should be a last case scenario so that earnings on deferred income taxes can continue to compound).
  8. Cashing in annuities or converting assets to Medicaid type qualified annuities.
When the nursing home resident has a spouse living in the community, in addition to the above broad strategies, the following can be considered:
  1. Transfers to the community spouse of the nursing home resident’s spouse’s interest in the residence.
  2. Transfer the vehicle to the community spouse.
  3. Converting excess resources into allowable income (but this may require a court order).
All of this planning is complicated by a 36 month look back to the period prior to the Medicaid application date, resulting in a possible penalty period. At the present time a single person can maintain $2,000 of assets and $30/month in income if they are going to qualify for Medicaid. In 2002 a married couple with one spouse qualifying for Medicaid can maintain $89,280 of assets and approximately $2,200 of income. There are some additional income and asset allowances, but by and large they are minimal. A long term nursing home stay can result in dissipation of a lifetime’s accumulation of assets. For those who fail to plan for a possible nursing home stay in the future, they do at their own peril and the peril of those to whom they wish to leave their assets. By: Anthony B. Ferraro Attorney – CPA **This document is for discussion purposes only and is not intended to be construed as legal advice. You should never attempt estate planning without the advice of competent legal counsel. Please feel free to contact our offices if we may assist you.** Copyright 2002 THE LAW OFFICES OF ANTHONY B. FERRARO, Rosemont, Il.

THE ISSUE IN A NUTSHELL If you have a small retirement account and all of your beneficiaries are close in age then this is not a significant issue. If however you have a sizeable retirement account and there is a great difference in the ages of your beneficiaries (i.e. beneficiaries who are ten years of age and beneficiaries who are forty years of age), then this could have a significant income tax effect for your beneficiaries. This would mean that the required minimum distribution from each account will be based on the life of the oldest beneficiary, rather than each beneficiary using his own life expectancy. RECENT LAW CREATED SEVERAL PROBLEMS IRS regulations issues in the year 2002 made required minimum distribution rules for IRAs and qualified retirement plans simpler and more favorable to taxpayers in every instance except one: When trusts are beneficiaries of retirement plans and separate account treatment is desired for each beneficiary. Problem 1. In 2003, a series of taxpayer-adverse private letter rulings made things even worse for trusts, holding that beneficiaries who receive their interests through a trust could not use the separate accounts rule. The separate accounts rules of the IRS permit a retirement account to be divided into separate accounts, one for each beneficiary after the participant’s death. Certain 2003 IRS private letter rulings held that beneficiaries who receive their interests through a trustcould not use the taxpayer friendly separate accounts rule to determine their respective distribution periods, even if the trust terminated immediately upon the death of the participant. This would mean that the required minimum distribution from each account will be based on the life of the oldest beneficiary, rather than each beneficiary using his own life expectancy. Problem 2. Before the final minimum distribution regulations (in 2002) and PLR 2002-28025 were issued, many practitioners believed that a remainder beneficiary could be ignored when applying the minimum distribution trust rules, if the trust terms required distribution of the entire trust corpus to the income beneficiary at an age that was well within that beneficiary’s life expectancy. For example, we thought we could safely ignore the contingent remainder beneficiary of a typical minor’s trust that would terminate when the minor reached age 25, 30, or 35, with all trust assets then distributed outright to him. We now know that the IRS does not share this view. Problem 3. If the participant’s estate is a beneficiary of the trust, that trust will flunk the rule that “all beneficiaries must be individuals” because an estate is not an individual. The typical trust provision requiring or permitting the trustee to make payments to the participant’s estate to cover debts, expenses or taxes can cause a trust to violate this rule. THE SOLUTIONS Solution to Problem 1. If the separate accounts treatment is desired for any group of multiple beneficiaries, then you will need to modify the retirement plan beneficiary designation forms to include certain wording. Merely leaving benefits to a funding trust (such as your revocable living trust) that splits up into separate shares or trusts will not achieve the desired result. Solution to Problem 2. If you want your retirement benefits to be payable to your trust over the life expectancy of the income beneficiary, you must be sure that the remainder beneficiary of the trust (whether vested or contingent) is younger than the income beneficiary. Solution to Problem 3. The easy way to avoid this problem is to specify in the appropriate documents that retirement benefits cannot be used for debts, expenses or taxes. WHAT TO DO In view of the significant changes discussed above, all persons would be well advised to review your trusts and your beneficiary designations. You likewise should periodically check back with the retirement plan custodian to make sure that they have not misplaced your beneficiary designation form. By: Anthony B. Ferraro Attorney – CPA *This document is for discussion purposes only and is not intended to be construed as legal advice. You should never attempt estate planning without the advice of competent legal counsel. Please feel free to contact our offices if we may assist you.** Copyright 2007 THE LAW OFFICES OF ANTHONY B. FERRARO, Rosemont, Il.

An increasing number of clients express concerns to us about long term nursing home stays. Long term nursing home stays can be a result of a failure in health, a gradual decline in the ability to live independently or both. Some client’s have lost their home and savings in a matter of several years You may be unaware of Illinois law which holds that you must “spend down” all your assets (meaning no assets are left) before any state aid is available. Until you reach spend down you are required to pay for a nursing home stay out of your own pocket. Payments can be in the range of $4,000-$7,000 per month in the Chicagoland area. This results in a loss to you of $60,000-$84,000 per year. If this continues for several years the results can be devastating. Consequently, our clients are now asking us to help them in the type of estate planning that emphasizes Medicaid planning so that they can protect their home and saving from a complete Medicaid spend down if they go into a nursing home. We are happy to provide such services to our clientele, but it must be emphasized that this planning is best done early on before any mental incapacity occurs. If you are a son or daughter that is caring for elderly parents, and your parents do not have estate planning documents that permit any sort of Medicaid planning, then such Medicaid planning and document preparation is crucial. Therefore, I encourage the children of elderly persons to come into our office and discuss their parents’ concerns and to take advantage of opportunities that prevent assets from being lost to long term nursing home stays. Remember, just because you have a will, trust, and powers of attorney, this doesnot mean that such documents were drafted with Medicaid planning in mind. Therefore, if it is your intention to have your documents protect against a long term nursing home stay, then it is our recommendation that you contact me to discuss this now. By: Anthony B. Ferraro Attorney – CPA *This document is for discussion purposes only and is not intended to be construed as legal advice. You should never attempt estate planning without the advice of competent legal counsel. Please feel free to contact our offices if we may assist you.** Copyright 2007 THE LAW OFFICES OF ANTHONY B. FERRARO, Rosemont, Il.

As an trust and estate attorney, I would like to share with you my experience in recent cases that I have handled where clients have made unfortunate decisions in selecting executors or trustees to handle their affairs. Remember, a trustee administers a trust, and an executor administers the terms of a will. Clients often ask, “Whom should I name as executor or trustee?” There is no one right answer. It depends on many factors, including what the executor or trustee is expected to accomplish, whether the trust is revocable or irrevocable, who the beneficiaries are, and other factors. I. Executor/ Trustee Responsibilities and Duties Here are some of the most important duties of a trustee:
  1. Legal. Seeking counsel as needed, the trustee assumes legal responsibility for proper trust administration.
  2. Bookkeeping. The trustee establishes record keeping procedures, performs ongoing accounting, submits records for review if needed, takes inventory, changes titles of assets received, and pays bills.
  3. Custody of Investments. This includes both planning and administrative duties. In addition, the trustee must collect assets and related income and maintain detailed records of all transactions. Each type must be managed appropriately. The trustee:
    • Holds securities or other property in appropriate title.
    • Recommends such investments (purchases or sales) or other transactions for the estate in the best interest of the estate, subject to the powers granted under the terms of the will or trust.
  4. Taxes. The trustee must manage investments with tax considerations in mind, and track asset acquisition dates, cost, and adjustments, keep records of taxable income, file annual trust tax returns, and provide information to beneficiaries for their tax records.
  5. Estate Distribution. The trustee must communicate regularly with beneficiaries, distribute income and principal to them as outlined in the trust terms, and provide detailed account statements. For living trusts, the trustee must settle the estate by preparing tax returns, discharging creditor obligations, determining final distributions, and arranging final asset transfers. The trustee or executor also:
    • Ascertains extent of liabilities and payment of correct amounts.
    • Raises sufficient cash to meet all estate liquidity requirements.
    • Completes division and distribution of estate assets in accordance with plan.
    • Completes cash accounting from date of plan to date of distribution.
II. Should you consider naming an individual, a trust company, or both? You need a trustee and executor with discretion, good judgment, commitment and integrity. You likely have family members or close friends with these qualities. But the trustee’s job is complex, often involving years of detailed research and record keeping, and informed decision making. That’s why many clients choose a professional trustee alone or as co-trustee with an individual trustee. A professional trustee has the necessary experience and expertise, access to resources, and time to carry out the trust terms. So do some individuals. Individuals can obtain professional advice when needed, but a professional trust company has additional advantages over an individual trustee:
  1. Continuity. An individual can be limited by health, longevity, or even a busy schedule. A trust company can ensure continuous management.
  2. Impartiality. A professional trust company CAN SAY NO! and is not swayed by self-interest in the interpretation of trust provisions or management and distribution of assets. Even if family members or other individual trustees would be impartial, others may perceive their actions as self serving.
III. When you should consider naming a professional trust company as executor or trustee
  • Your family or friends are more elderly or are not capable of handling the task.
  • This is too great a burden for family members or friends.
  • You have a long term trust that may last for many years (for example with young children).
  • Trusts with behavior incentives.
  • Where there is diversity or differences among the beneficiaries.
  • Where the trust attempts to protect beneficiaries from themselves.
  • Where beneficiaries or family members do not relate well with each other.
  • Trusts funded with marketable securities or complicated assets.
  • Supplemental needs trusts for disabled beneficiaries.
Choosing Wisely It is essential that you select a trustee or executor who can carry out the terms of the trust or will and also help you achieve your objectives. We would be glad to answer your questions about trustee and executor responsibilities. As an trust and estate lawyer, I can counsel you about trust and executor selections, as well as other choices you must make. Our office has a strong working relationship with many trustees including several professional trust companies and, we can guide you in the selection of a professional trust company if that is the approach you wish to take. Please call me if you have questions or call my paralegal Lori (847-563-4887) to set up an appointment so you and I can review your trustee or executor selections. You have the power to choose; use it wisely. *This document is for discussion purposes only and is not intended to be construed as legal advice. You should never attempt estate planning without the advice of competent legal counsel. Please feel free to contact our offices if we may assist you.** Copyright 2007 THE LAW OFFICES OF ANTHONY B. FERRARO, Rosemont, Il.

“Boomer” Retirement Planning: Legal and Financial Issues

If you are a baby boomer that is approaching 55 years of age or older, the following list contains some of the issues that are important for you to begin to consider as you approach retirement:
  1. Have your estate plan reviewed. The estate tax laws have changed. Furthermore, old wills or trusts will probably not cut it for you anymore. You should review your will every two to five years, and following major life events, consider how jointly titled assets will pass. Make sure you have named beneficiaries on retirement accounts, life insurance policies, and annuity contracts, and that they don’t contradict the provisions of your will and trust.
  2. You would probably benefit from the creation of Durable Powers of Attorney for financial matters and healthcare issues. It would be helpful for you to have some advice in disability planning.
  3. A review of your existing financial resources, including life insurance and investments, would be beneficial, and it would be useful to obtain advice from someone who is not going to obtain a commission from selling you anything.
  4. You should inquire about what it will take to provide your possibly needy parents with care. A discussion of Medicare, Medicaid, and asset protection planning for aging parents is important.
  5. Discussing the benefits of long term care insurance is essential. Discussing what you should look for in a policy would again be helpful from someone who will not obtain a commission from selling you such a policy. A discussion of Medicaid spend down planning is useful for some.
  6. Developing a relationship with an estate and trust lawyer who can give you advice on all of the above-referenced issues is important. Developing this kind of relationship now will assist not only you in meeting your needs, but also your aging parents and your growing children.
Yes, retirement planning consists of all of the above issues. As the baby boomers continue to mature, demand for advice regarding the above issues will grow. You should obtain advice now. Please call our offices to set your appointment, if our firm can be of assistance. By: Anthony B. Ferraro Attorney – CPA The Law Offices of Anthony B. Ferraro, LLC 5600 N River Road, Suite 764 Rosemont, IL PH(847)292-1220 **This document is for discussion purposes only and is not intended to be construed as legal advice. You should never attempt estate planning without the advice of competent legal counsel. Please feel free to contact our offices if we may assist you.** Any tax advice contained in this communication was not intended to be used, and cannot be used, by you (Or any other taxpayer) to avoid penalties under the Internal Revenue Code. Copyright 2006 THE LAW OFFICES OF ANTHONY B. FERRARO, Rosemont, Il.

Ask Our Law Firm to Identify Errors Advisors are Making: Long Term Care and Medicaid Asset Protection Solutions Still Exist But Are Now More Complex

The Deficit Reduction Act (“DRA”) severely impacts the ability of your clients to qualify for long term care Medicaid assistance. The new law was signed by President Bush on February 8, 2006. The DRA creates a number of problems for financial advisors, as well as legal counsel. The challenge is to understand where these problems lie in administering your services to your clients. The State of Illinois has not yet adopted the federal law, but may do so during 2007. The following are some errors that we see financial professionals make with clients of moderate and substantial wealth. These errors can disqualify clients from the benefits they are entitled to, thus making them and their families unhappy:
  1. Recommending gifts or transfers to family members that violate the “new” onerous asset transfer rules. For example, under prior law if your client  gifted away $10,000 for college education your client created a 2 month penalty period and the penalty period would expire in two months. Now, if the same gift is made after February 8, 2006, you still create a two month penalty period, but the penalty period does not begin until after the client is in the nursing home and has otherwise spent down their assets to zero. This means that the penalty period does not begin until the client has no assets. Query: how does the client pay the nursing home during the 2 month penalty period without assets and without yet being qualified for Medicaid? Thus, advisors themselves must seek advice regarding gifting under the new law.
  2. Recommending to clients non-compliant Medicaid annuities.  Under the DRA, annuities need to be actuarially structured pursuant to the DRA in order for them to qualify for Medicaid.   In some cases the State of Illinois must be primary beneficiary on the death of the annuitant or ill spouse. This may unsettle a lot of existing estate and retirement planning. Seek advice on the proper annuity contract structure.
  3. Not recommending long term care insurance early enough.  A good way to finance long term care, if obtainable.
Under the DRA, there are still plenty of opportunities to protect clients from a nursing home spend down, but you need to know where to look for the opportunities. Our office will continue to work with advisors who would like to protect their clients from an asset spend down and thus help them to keep their clients’ assets under management as the client requests. If my office can ever assist you as your clients weave through the maze of opportunities and trap doors that exist under the DRA, please do not hesitate to contact us. If you would like to chat about this, please contact me at (847)292-1220. I enjoy speaking with other professionals about the impact of these massive law changes. ABF **This document is for discussion purposes only and is not intended to be construed as legal advice. You should never attempt estate planning without the advice of competent legal counsel. Please feel free to contact our offices if we may assist you.** The Illinois rules of Professional Conduct require attorneys to identify unsolicited communications to prospective clients as Advertising Material.  If the context requires, please consider this letter and the enclosed literature to be Advertising Materials. Copyright 2006 THE LAW OFFICES OF ANTHONY B. FERRARO, Rosemont, Il.