The newsletter of the ISBA’s Section on Senior Lawyers
Over the rainbow
1939 was the year when this country could finally see the light after approximately 10 years of the “Great Depression.”
It was also the year that the movie “The Wizard of Oz” made its mass debut with the introduction of an award winning song called “Somewhere Over the Rainbow” (a/k/a “Over the Rainbow”), with lyrics by E.Y. Harburg and music by Harold Arlen. It was sung by Judy Garland, and it talked of a place where your troubles, presumably including financial ones, would smell like lemon drops. Idealistic, yes; however, it did generate hope of a better place and time for the thousands of economically depressed people seeing this movie in 1939.
This particular song seems to get revived periodically when our economy takes a hit, including a version sung by the late Israel Kamakawiwo’ole (IZ), which blended into the song “What a Wonderful World” by Bob Thiele (as George Douglas) and George David Weiss. IZ’s version gained popularity in the movie “Finding Forrester,” starring Sean Connery in 2000, which was about the time the “Dot Com” bubble was starting its free fall, and another short recession was beginning.
Since October of 2008, it has been extremely difficult for our economy, and, among other professions, our legal community, to leave our financial problems behind us.
This appears to be true not only for younger attorneys with student loan burdens, under-employment and a frozen job market, but also for “senior” attorneys who have been in practice for 25 or more years, and who are seeing, perhaps for the first time in their careers, high competition and more demands from clients, compounded by very slow fee collections, as well as a slow down in legal business.
Not only has legal business and profits been at all-time lows, but investments dwindled considerably during what we are now calling the “Great Recession,” which seems to be hanging over us with periodic ups and downs since late 2008. The idea of comfortably retiring at a preplanned age seems to be an elusive dream at this time. In addition, foreclosures, bankruptcies and creditor pursuits are becoming more common against professional people, which were rare and almost unheard of in our legal community until 2009. The financial future for all of us is becoming more and more out of our hands and control, because what takes place in Washington, the Middle East, China and, for the most part, the rest of the world impacts not only Wall Street, but all of us here on Main Street.
While we may be losing control over what our future professional and personal lives are presently experiencing, we can still take legal steps to protect our remaining assets from further economic decline, and the accompanying burdens of carrying too much debt.
What is particularly troubling is the extent to which people are now using their home equity, savings and retirement funds to meet current debts and living expenses. For those under 59 ½ years of age, a double hit takes place when they start using IRAs, 401(k)s and other such funds set aside before taxes for retirement. They not only have to pay regular income taxes on those tapped funds, but a 10% penalty for the year in which those funds are taken out.
Having practiced in the bankruptcy area for almost 50 years, and presently being a Chapter 7 bankruptcy trustee since 1995, it is extremely sad seeing individuals use fully exempt retirement funds to pay unsecured debt, including credit cards, which are usually dischargeable in bankruptcy if no fraud was committed when incurring these debts. By way of caution, however, Section 523 of the Bankruptcy Code (11 U.S.C. 523) should definitely be consulted in this regard because the last thing anyone considering bankruptcy and the burdens it carries should have to experience is a debt declared non-dischargeable.
Obviously, bankruptcy as an alternative, and its affecting a credit record for 7 years, if Chapter 13 is used, or for 10 years, if Chapter 7 is chosen, may not be a feasible option. Nor may it be considered by a debtor, who, like most debtors, prefers to pay the debts he/she has incurred, even if it means using certain protected retirement savings. Also, for people with outstanding student loans, it will not be of much benefit at this time, unless a Bankruptcy Judge can be convinced that a hardship is present. Judges, for the most part, are reluctant to find these hardships, except under dire circumstances.
The payment approach is admirable, and, at this time, because of the rough economy, many creditors are willing to work with debtors trying to pay their debts. Therefore, no inference should be made that bankruptcy is the best means for solving financial troubles. It is entirely up to a debtor to determine what fits his/her financial needs and plans at the time of a financial crisis. Unfortunately, however, the payment approach may not be an option due to lack of business or other income, illness, divorce and/or outright unemployment.
In June of 2011, this writer published an article in the Senior Lawyers’ Newsletter (Vol. 2, No.1) entitled “Protecting the Assets of a Retiring Attorney,” which might be considered in conjunction with or supplemental to this article, because it is not now necessary to repeat the various exemption statutes and discussion in that article, both under the Bankruptcy Code, particularly Section 522, as amended in 2005, and under Illinois Law, primarily 735 ILCS 5/12-901, 902 and 906 with respect to a debtor’s homestead, 735 ILCS 5/12-1001 as to personal property, and 735 ILCS 5/12-1006 concerning retirement plans, as well as 215 ILCS 5/238 with respect to life insurance and annuity cash values when the beneficiary is a spouse (including a co-debtor spouse) and/or a dependent of the debtor.
These exemptions apply to Illinois bankruptcy debtors and judgment debtors outside of bankruptcy, all of whom are limited to only the Illinois exemption statutes, because Illinois opted out of the more liberal federal bankruptcy exemptions in the early 1980s.
In addition, since approximately 1990, tenancy by the entirety was re-established in Illinois, and it traditionally allowed a husband and wife (one man and one woman), who owned their own homestead as tenants by the entirety, to exempt that homestead from the claims of creditors, including a bankruptcy trustee, of just one of the spouses. Obviously, if both spouses were responsible for the debt, tenancy by the entirety would not protect the non-exempt equity in the homestead, which exemption presently is up to $15,000 per owner, but no more than $30,000 in the homestead. There can only be one homestead irrespective of the number of homes a debtor might own. The best proof of a homestead is where the debtor votes, what address shows on income tax returns, which state issued the driver’s license, etc.
The Illinois Tenancy by the Entirety Law is accepted not only in Illinois courts, but in federal courts, and in bankruptcy as well.
Although Illinois adopted civil union laws in mid 2011, civil union partners are not permitted to file joint bankruptcy petitions, joint federal income tax returns or receive federal estate tax marital deductions, just to mention a few federal prohibitions for civil union partners.
While a serious attempt was made in the 2013 Illinois General Assembly to adopt a same sex marriage law, it was never enacted. There are presently 12 states and the District of Columbia allowing same sex marriages, and it is not too much a stretch of the imagination to predict that more states, including Illinois, will allow same sex marriages in the near future.
This received some encouragement from the United States Supreme Court when it finished its 2013 agenda at the end of June by striking down the 1996 Federal Defense of Marriage Act (DOMA) by a 5 to 4 decision. Also, during this same session, the Supreme Court ruled (again 5 to 4) that the supporters of the California ban on same sex marriage (Proposition 8) had no standing to appeal a lower federal court’s ruling that Proposition 8 unconstitutionally discriminated against same sex marriage.
On the other hand, since civil unions are allowed in Illinois at this time, it is assumed that all Illinois state courts will allow homestead protection status to the two parties to a civil union, (and to same sex marriage couples should that become Illinois law) when reviewing a tenancy by the entirety homestead. It is also assumed that these same protections will be given to civil union partners (and same sex marriage couples) in Illinois with respect to life insurance and annuity cash values pursuant to 215 ILCS 5/238.
However, until Illinois, or any state for that matter, enacts laws that recognize same sex marriages, civil union partners will not be able to file joint federal income tax returns, receive marital deductions for federal estates taxes, file joint bankruptcy petitions, or receive tenancy by the entirety protection in federal or bankruptcy courts.
Of course it is beyond the scope of this article, and the skills of this author, to predict with any legal certainty the future impact the Supreme Court’s striking down of DOMA will have on future bankruptcy and other federal cases, as well as tax returns by various federal courts.
However, before making any transfers to insulate and protect assets and retirement funds, it is suggested that Sections 735 ILCS 5/12-112, 740 ILCS 160/1 through 160/12 be studied and complied with so as to avoid fraudulent conveyance accusations. In this regard, there is a four year look back with respect to conveyances alleged to be fraudulent pursuant to Illinois law. In addition, Section 548 (11 U.S.C. 548) of the Bankruptcy Code has a look back of two years as to transfers made within two years prior to a bankruptcy filing which are determined to be either fraudulent or without adequate consideration.
With reference to the above statutory outline of exemptions allowed individual debtors in Illinois, either in or outside of bankruptcy, the following is suggested for immediate action to protect assets under present economic times, and to start the running of the look back clocks:
A. Place a marital or civil union homestead into a tenancy by the entirety, and should same sex marriages be allowed in Illinois, redeed to the parties, with correct grantee wording, hopefully pursuant to the creating statute or to opinions of experienced real estate attorneys and/or title companies;
B. If any personal property assets protected pursuant to 735 ILCS 5/12-1001 are solely in an individual debtor’s name, transfer title(s) and ownership to the joint names of the debtor and spouse/civil union or legal same sex marriage partner;
C. Review all life insurance policies, endowments and annuity contracts to make sure a spouse, civil union partner, legal same sex marriage partner and/or dependent is the named beneficiary; if not, change the beneficiary(ies);
D. Make and continue to make timely and maximum 401(k) and IRA contributions; and
E. If a homestead is sold, but a new home has not been purchased after the sale, segregate the net sale proceeds until a final decision has been made concerning the purchase of a new homestead, because 735 ILCS 5/12-906 allows up to $15,000 per owner to remain exempt for one year after the sale proceeds are received. Therefore, if that $15,000 per owner (up to $30,000) is reinvested in a new homestead during that one year, exemptions will carry forward into the new homestead.
By way of caution with these transfers, and as any attorney who has ever represented parties in a divorce will verify, be very aware that transfers cannot easily be undone should there be an estrangement, a divorce, or a death that might be excluding children of the decedent. Consequently, there could be an extreme trade off of these assets, including non-marital assets, in attempting to insulate them from creditors.
By no means is this discussion meant to advocate the taking away from creditors what is owed to them. It is simply being presented to raise awareness of various alternatives for legally protecting assets in times of economic stress such as what has been experienced by attorneys as well as the general public since 2008. And, it certainly is not meant to find or give a free pot of gold at the end of a rainbow; however, it is an attempt to avoid chasing rainbows when it comes to handling and protecting one’s assets during economic hardships. ■