Why Do Estate Planning?
Estate planning involves creating a plan to indicate how your property and healthcare will be managed in the event of a disability, how your estate will be administered at death through a trust you create during your lifetime, or by probating a will where your property will go upon death and how to avoid death taxes if applicable. Here are some estate planning issues to consider:
- Who do I trust to manage my property and assets and pay my bills if I become disabled?
- Who will make healthcare decisions for me if I am alive but unable to make those decisions for myself, including terminating life support?
- What powers should my agent under the property power of appointment have that are not covered in the powers granted by law?
- Should I have a buy-sell agreement with my business partner and/or a succession plan for a family business?
- Who should get my money and property when I die?
- Can I prevent my minor child from receiving the entire inheritance at age 18? Can I postpone it or prevent it altogether?
- What if my child has a health condition, addiction, or spendthrift tendencies that make distribution problematic?
- Can my minor child's inheritance be paid out over time as the child matures?
- Who should manage and administer my estate when I die?
- Do I need to provide for management of assets after my death for minor children, disabled child or disabled adult, or is immediate distribution best?
- How do I treat my children from a prior marriage and my surviving spouse?
- How does my property settlement agreement or prenuptial agreement with my former spouse impact my estate?
- How should my business or farm be managed and how should ownership or control be transferred?
- Will my estate be subject to a death tax? Is tax planning advisable? How will the death taxes on my estate be paid?
When objectives have been defined, documents are prepared and property transferred to put the plan into effect.
Important Considerations in Estate Planning
Estate Planning Documents
Estate planning documents include wills, trust agreements, beneficiary designations for life insurance, 401(K) plans and IRAs, powers of attorney for healthcare and property, buy-sell agreements , and living wills. They may also include deeds to transfer real estate to a living trust and changes of ownership of financial assets to the trustee. Some may also elect to utilize a transfer on death designation for bank or investment accounts and a transfer of death deed for real estate. Sometimes the basic structure of a business will be altered through corporate recapitalizations, the creation of partnerships, or the establishment of a pension or profit-sharing plan as well as documents to effect change in control and ownership.
With important exceptions, a will is a document that controls the disposition of a person's property at death. In Illinois:
- The maker of a will must be 18 years old and be of sound mind and memory.
- The will must be in writing.
- The will must be signed by the maker and must be witnessed by two witnesses in the special manner provided by law. Persons who are beneficiaries under the will cannot serve as witnesses.
- After death, the will is presented in court and, after being proven valid, is put into effect and its provisions are carried out. The proof of the will may be made by a properly acknowledged affidavit as part of the will so the witnesses do not actually need to testify in court.
A will may be revoked or changed at any time before death so long as the maker is legally competent. Changing a will also requires two witnesses.
What Are Some Important Considerations in Making or Reviewing a Will?
- Who should receive your property, and, if children, at what age?
- Who should be named executor?
- Who should be named as guardians of minor children, and what are their duties?
- Should a trust be created for your spouse, children or others? If a trust is created, you must name a competent individual or trust company to manage the trust.
- Should charitable gifts be made?
- Should life insurance proceeds be payable to a trustee or executor named in your will or to individuals directly?
- Can taxes be saved?
- Has your marital status changed since you made your last will?
- Have any beneficiaries of your estate died or have you had important changes in circumstances or assets?
What Property Does a Will Not Generally Control?
A will generally does not control the disposition of the following properties:
- Property held in joint tenancy.
- Property payable to a designated beneficiary.
- Property subject to a transfer on death deed or payable on death designation on a bank or other investment account.
- Property held in trust.
Does a Will Make for More Court Expense?
No. In fact, a will can save expense by eliminating the need for sureties on bonds, expediting the sale of property, avoiding guardianship for minors where not really necessary, and otherwise providing the executor of the will with clear directions on handling of the estate.
If there is no will the court appoints an administrator to settle the estate and make distributions as provided by law, after all debts and expenses have been paid.
An individual without a Will has no voice in the selection of the administrator. If there is a will, the executor nominated by the maker of the will takes the place of an administrator and is the one who handles the estate. A person making the will may nominate as executor any individual in whom he or she has confidence provided the executor meets statutory requirements. A bank or trust company also may be named as executor.
Why Write a Will?
A will allows you to state to whom property will be transferred after your death. But if there is no will, the property is transferred to your heirs pursuant to the state statute . For example, if there is a surviving spouse and one or more children, the surviving spouse gets half and the children share equally in the other half. This is so even if the children are infants, and a parent or custodian has to manage the assets for them until they reach the age of majority at which time they must receive full control over the assets regardless of maturity level or other influences. A will lets you give your property to the people of your choice.
A will also allows you the opportunity to nominate the individual or individuals whom you would like the court to appoint as guardian of your children .
Putting Off Making a Will
A will should be prepared while you are in good health and in a position to carefully consider its provisions. Putting off making a will can have disastrous results when you do not want your property distributed to your heirs as set out in the state statute.
You should seek legal help when creating your estate plan including a will. An experienced attorney is skilled in drafting estate planning documents that are precise and clear.
In addition to an attorney, many other people can be involved in the estate planning process, including accountants, life insurance agents, trust officers, and financial planners. Your advisors should remain in contact with the family and review the estate plan from time to time.
Changes in your life can create a reason to change your estate plan. Changes in the law can also create a need to update your estate plan.
The various fees and costs for an estate plan should be discussed with your attorney.
There are many sources for estate planning offered on the internet or by various organizations, and the incentive to avoid attorneys’ fees is often a motivating factor. However, the advantages of spending some money up front to have a well thought out and drafted plan, which is properly executed so as to be enforceable after death, cannot be overstated. Some problems often encountered in self-d rafted documents that have not been at least reviewed by an attorney include:
- Not having enough witnesses, improper execution of the documents by witnesses, failure to properly authenticate the signatures and failing to include the necessary acknowledgements by the witnesses such as finding the signer to be of sound mind.
- Not adopting the best law to govern the administration of the will or trust and failing to utilize the form required by the state where the will or trust is administered.
- Not waiving the surety on the required bond for the executor, causing a trusted spouse or child to have to obtain otherwise unnecessary expensive insurance.
- Failing to include essential provisions that require the executor/trustee to seek an order from a court, with attendant attorneys’ fees and costs.
A Word About Taxes
An Illinois resident who dies with property located in Illinois may be subject to income tax, the federal estate and gift tax, and the Illinois estate tax.
In 2020, the federal estate tax exemption amount is $11,580,000, but the exemption expires in 2025 unless extended by Congress. It is also possible that it will be changed as a result of the change of administration in 2020. The Illinois estate tax threshold amount is $4,000,000 and an estate with even $1 over that amount is subject to tax on the entire amount. A person whose estate exceeds these exemption or threshold levels needs to do some additional estate planning to minimize or eliminate death taxes.
The applicable federal exemption is now "portable," meaning that the amount of the exemption that is not used by the first spouse to die may be usable by the surviving spouse if certain necessary steps are taken. However, the Illinois estate tax threshold is not portable.
Generally, a gift of property from a person to his or her spouse who is a U.S. citizen is not subject to a gift tax or an estate tax. Gifts to anyone else is a taxable gift, but is subject to an annual exclusion (discussed below) and the same lifetime exemption as for federal estate tax. Illinois does not tax gifts.
Gifts During Life
Some estate plans may include lifetime gifts. In 2020, a person could give up to $15,000 a year to any person without a gift tax. In addition, under certain circumstances, a person could make gifts for medical expenses and tuition expenses above the $15,000 a year limit if the medical payments and tuition payments were made directly to the medical provider or the education provider.
What Is Joint Tenancy?
Joint tenancy is a common form of ownership for property. Husbands and wives often have residences and bank accounts in joint tenancy . It is used less frequently with nonspouses for a variety of reasons.
Each joint tenant, regardless of which one purchased or originally owned the property, has the right to use the jointly owned property. When two people own property in joint tenancy and one of them dies, the survivor becomes the 100 percent owner of that property and the deceased joint tenant's interest terminates. The surviving joint tenant then owns the property free of any claims by the heirs of the joint tenant who died, unless certain limited exceptions apply.
Joint tenancy shouldn't be relied on as a substitute for a will. It doesn't cover unanticipated contingencies nor does it provide a comprehensive plan for the disposition of one's entire estate as does a will.
Is Joint Tenancy the Only Way to Hold Title to Property With Another Person?
No. Two or more persons may also own property as tenants-in-common or tenants by the entirety. Tenants-in-common, like joint tenants, each have the right to use and share in the income from the property. But there is no right of survivorship with tenants-incommon. When a tenant-in-common dies, his or her interest passes to his or her estate and not to the surviving co-tenant. The property passes, instead, as part of the estate to the heirs, or the beneficiaries under a will.
Tenancy by the entirety allows spouses to hold their primary residence free of claims against only one spouse. Creditors of both spouses, like the holder of a mortgage, can enforce the claim against the property. As with joint tenancy with the right of survivorship, in the case of tenancy by the entirety, at the death of the first spouse/owner, the surviving spouse/owner automatically becomes the sole owner.
Payable on Death
If an asset is registered to "A payable on death (‘POD’) to B," the asset is not owned in joint tenancy. Rather, the asset is payable to B on A's death, but B has no rights during A's lifetime.
Illinois has adopted a statute that allows financial accounts, such as with a brokerage firm, to be registered as transfer on death ("TOD"). These are similar to a payable on death account. At the death of the owner, the assets in the account are transferred to the designated beneficiary.
Transfer on Death Instrument
Illinois has recently adopted a statute that allows certain real estate to be transferred on death through a transfer on death instrument. It is similar to a POD designation described above. The beneficiary of the transfer on death instrument has no interest in the real estate until the death of the owner.
What Are Some Other Features of Joint Tenancy to Be Considered?
- All joint tenants must agree to the sale or mortgage of the property.
- Any one joint tenant may withdraw all or a part of the funds in a joint bank account.
- The creation of a joint tenancy has important legal consequences. Estate, gift, or income taxes may be affected.
Joint tenancy may have other consequences. For example: (1) if property of any kind is held in joint tenancy with a relative who receives welfare or other benefits (such as social security benefits) the relative's entitlement to these benefits may be jeopardized; (2) if you place your residence in joint tenancy, you may lose your right to advantageous senior citizen real estate tax treatment; and (3) if you create a joint tenancy with a child (or anyone else) the child's creditors may seek to collect your child's debt from the property or from the proceeds of a judicial sale.
Is Joint Tenancy a Good or Bad Idea?
Joint tenancy is useful in the right cases. However, joint tenancies are not a simple solution to estate problems but can, in fact, create problems where none existed. The costs of preparing a will, tax planning, and probate may be of little significance compared with the unintended problems that can arise from using joint tenancies indiscriminately. For a full explanation of the advantages and disadvantages of joint tenancy in your particular situation, you should consult a lawyer. With his or her advice, you will be able to make an informed choice of the best way to accomplish your objectives.
What Is Probate?
In most cases, the estate of someone who dies owning property must be probated. This is the court supervised process by which a decedent's property is transferred to those who are to receive it. The process typically begins with the court naming a "personal representative" who takes charge and reports to the court as the decedent's wishes are fulfilled.
Advantages of Probate
The major advantage is that creditors and taxing bodies must assert a claim for what they believe is owed within six months after publication of the death and claim notice in a newspaper and notification of any known creditors or those reasonably believed to be creditors, or the claim is barred. Without probate, the claim can be brought within two years from the date of death. This includes filing a lawsuit to determine liability for a claim. It also provides a forum for settling disputes, interpreting the will or compelling performance by the executor/administrator.
Much expense of probate is avoided by utilizing independent administration of the estate. Supervised administration may be imposed at the request of any interested party, which then requires court approval for many things, like authority to sell an asset , that are not required under independent administration, thus increasing attorneys’ fees and requiring attendance at hearings on otherwise routine acts and functions.
What Is a Personal Representative?
A personal representative manages the decedent's estate. Executors and administrators are personal representatives.
If the decedent left a will (referred to as dying "testate"), the person who manages the estate is called the executor. If the decedent had no will (referred to as dying "intestate"), the person managing the estate is called the administrator.
Who Serves as Personal Representative?
An executor is nominated by the decedent in the will. If there is no will, an administrator is nominated, generally by the decedent's family. Individuals, banks, and trust companies can serve as executors or administrators. An administrator must be a resident of Illinois. An executor must be a resident of the United States but does not have to be an Illinois resident. Each executor or administrator must be approved and appointed by the court.
What Are the Responsibilities of a Personal Representative?
The duties and responsibilities of a personal representative, either an executor or administrator, can be generally described as gathering and protecting the assets, paying the legitimate creditors, and distributing the remaining assets pursuant to the terms of the will, or, if there is no will, to the heirs pursuant to the state statute.
Opening the Estate
Once a person dies, the person in possession of the will is required by law to file the will with the circuit clerk within 30 days of the date of death. Then the person nominated as executor is responsible for asking the court to probate the will.
Duties With the Court
Executors and administrators have certain duties to the court:
- To send out legal notices.
- To inventory the estate's assets.
- To resolve the claims of creditors .
- To petition the court as necessary in the management of the estate's assets.
- To provide accountings and receipts as needed.
- To make disbursements and distributions.
Duties as to Property
Executors and administrators have certain duties as to estate property:
- Collect and inventory all assets of the estate (including assets in a safe deposit box).
- Preserve, manage, and insure assets during the probate administration.
- Manage the decedent's business as needed.
- Obtain valuations and appraisals of assets .
- Sell or otherwise dispose of property that is not distributed in kind.
- Collect life insurance benefits as needed.
- Pursue claims in favor of the estate.
- Defend claims against the estate.
- Transfer assets as needed (like stocks, bonds, and bank accounts).
- Distribute the estate in accordance with the terms of the Will or, if there is no Will, distribute to the heirs pursuant to the state statute .
- Defend the Will if challenged as not being enforceable due to improper execution, being created under undue influence or by a person not of sound mind or other deficiencies.
- Keep records of money coming in and all money going out.
- File the decedent's final income tax return.
- File the necessary income tax returns as fiduciary for income and expenses generated during the course of administration.
- File gift tax returns as needed.
- File an Illinois estate tax return if required.
- File a federal estate tax return if required.
- Provide for the payment of all taxes.
- Provide beneficiaries with appropriate tax information.
In some situations , due to an intent to shift those duties to a person or entity not subject to direct court supervision, the assets will be transferred during life to a trustee of a revocable living trust (see below) and avoid the expense of probate.
It may also be possible to avoid probate by utilizing joint tenancy or transfer on death provisions for bank and investment accounts or for real estate. See the preceding discussion.
When the decedent has less than $100,000 in financial and personal property assets at death, a small estate affidavit may be used to induce the necessary party, like the Secretary of State for a vehicle title, to issue a new title to the recipient under a will, trust, or operation of law without a probate proceeding.
A trust, generally, is an agreement in which one or more persons (the trustee or trustees) holds and manages property for beneficiaries of the trust. The person who creates the trust is known as the "grantor," "settlor," or "trustor." If you create a trust while you are alive, it's called a living or inter vivos trust. If such trust provides that you retain the power to amend or revoke it while you are alive, it is a revocable living trust. An irrevocable trust, in contrast, is a trust that cannot be amended or revoked. A trust created under your will is called a testamentary trust and does not exist until your will is probated .
The revocable living trust is primarily a vehicle for managing your property during your lifetime, including even if you become incapacitated, and might also allow you to pass your property on to your beneficiaries at death without probate. While you (as grantor of a revocable living trust) are alive, income on the property in the revocable living trust is reported on the grantor's income tax return. (If you are not the trustee, the trustee must file an annual fiduciary income tax return as an information return.) In contrast, an irrevocable trust requires the filing of separate fiduciary income tax returns based on income earned on the property held in such a trust each year after the irrevocable trust is created until its termination. Further, the property put into an irrevocable trust, if properly done, is no longer considered part of the grantor's estate and not subject to estate tax at the grantor's death.
To set up a living trust, first, your lawyer prepares a trust agreement that names the trustee and the beneficiaries and defines everyone's rights and duties. The agreement usually says that you retain power to amend or revoke it whenever you want (making it revocable). The trustee or trustees may be one or more individuals you trust to handle your financial affairs (or it could be yourself during your lifetime) or a bank or trust company. You transfer property (real estate, securities, cash, etc.) into the trust by placing it in the trustee's name as trustee of the trust. The trustee has management responsibility for the trust property.
The trust agreement for a living trust usually provides that you are to receive all of the income of the trust and as much of the principal as you request. Upon your death, the trust property can be transferred to your beneficiaries without probate. Or the trust agreement might instead provide that your trustee continue to hold the trust property in trust and manage it for the beneficiaries after your death, particularly if they are minors, disabled, or need help managing funds (such as spendthrifts).
The main advantages of a living trust are these:
- If you want or need to have someone else manage your property and pay your bills in case of illness or incapacity, the living trust may be the best arrangement. Having a trust might allow you to avoid becoming subject to a guardianship, which is public; may be costly; and, because a court is involved and must usually approve decisions of the guardian, is less convenient.
- Trust assets avoid probate. Avoiding probate at death may save time and money. However, Illinois probate procedures are very simple especially when independent administration is used, and the importance of avoiding probate can be exaggerated. Virtually all of the steps outlined in the Probate Administration section above under "Duties as to Property" and "Financial Duties" need to be satisfied by the trustee.
- Because a trust is not filed in court, its provisions are private, unlike a Will, which must be filed in court at death. However, copies of the trust may be required by persons dealing with the trustee such as banks, stockbrokers, etc.
The main disadvantages are these:
- If you use a bank or professional trustee, there are fees to pay during your lifetime that will probably be much more than the potential probate cost savings .
- Even if there are no trustee's fees to pay, there will be costs and inconveniences during your life—the initial cost of setting up the trust and transferring your property into trust, inconvenience of maintaining a separate bank account and books and records for the trust, annual filing of tax returns may be required under certain circumstances.
- A trust only disposes of assets transferred to the trust. Therefore, it is incumbent on the grantor and/or trustee to ensure that the assets desired to be transferred into the trust have actually been transferred into the trust.
Powers of Attorney
There are two types of power of attorney: Property and healthcare.
A power of attorney for property provides for another person to manage a person's property and the payment of his bills during incapacity.
In a power of attorney, you name an agent (an "attorney-in-fact") and you give that agent certain powers to act on your behalf.
Some powers of attorney are limited in scope. A general power of attorney gives the agent broad power to manage your property and pay your bills. It may even empower the agent to make gifts on your behalf, and to transfer your property to a living trust if these powers are specified in the instrument. A power of attorney that deals with real estate must be acknowledged before a notary public.
In a long illness, a general power of attorney may not work as smoothly as a living trust. For this reason, many lawyers recommend living trusts for clients who are ill or elderly, and use the power of attorney for clients who are younger and healthy, as insurance against an unexpected contingency. The power of attorney may also be used to supplement a living trust.
Illinois has adopted a durable power of attorney law. This act allows the appointment of an agent and successor agent who can act for you. The power can be conditioned upon the principal's incapacity . These powers survive the incapacity of the principal.
A WORD OF CAUTION. A power of attorney may allow the agent to do anything that a principal could do. You should not provide anyone with a power of attorney unless you place the utmost trust and confidence in that person.
Death automatically cancels powers of attorney, so this device is no substitute for a Will.
A property power allows a principal to appoint an agent who can act for him or her in whatever matters are delegated. It can be as broad or narrow as the principal requires. Also matters such as successor agents, guardianship, and compensation can be specified.
A health care power allows the appointment of an agent to make health care decisions on your behalf. Illinois law allows adults the right to accept or refuse medical treatment as they see fit. A health care power allows the delegation of this right to an agent. The health care power allows specification of medical treatment desired, appointment of successor agents, and nomination of a guardian of your person. Your health care power of attorney should be consistent with any preferences you may express in a living will (see below).
Living Will Declaration
Many people also execute a living will declaration. This is a statement given directly to your doctor that makes clear one's wishes as to how he or she would want to be treated when death is imminent. Unlike the health care power of attorney that also may discuss end of life decisions, the living will declaration does not involve a third-party decision maker. The statement is given directly to the doctor, as if the patient were able to communicate his or her wishes. The living will declaration is not followed unless agents named in the healthcare power of attorney are not available. Because the language of these two documents may not be identical, it is important that care be taken to make sure that one's wishes are accurately described in both documents.
For additional information, please see Your Guide to Living Trusts.
Prepared by the Illinois State Bar Association's Trusts and Estates Section (2021)