June 30

Closing Small Estates

Ordinarily, when someone dies, the method to pay off creditors and distribute the remainder of the estate is a court-supervised process called probate.  However, when someone dies with relatively few assets, many states allow simplified procedures to close out the estate. 
Some states allow surviving family members to settle a small estate using an out-of-court “small estate affidavit.”  Other states offer an in-court “simplified probate” procedure, which is more involved than the affidavit process.  Some states (like Illinois) offer a choice between the two.  This article will describe the benefits and drawbacks of closing out estates using a small estate affidavit.

Unpopular Probate

In today’s world, probate is often viewed like dental surgery—something that is painful, expensive, and that should be avoided unless absolutely necessary.  But unlike dental surgery which ends after a few hours, probate lasts for months, or even years! 
For the unfamiliar, probate is a public court process where the will (if any) is proven, the deceased’s assets are accounted for, creditors are given an opportunity to file claims against the estate, payment of claims is made, and any remainder is distributed in accordance with directions in the will or by state law.  An uncomplicated case might take eight months to a year, and a complicated case could be much longer.  Expect at least several thousand dollars in legal fees, and possibly much more.
As painful as probate sounds, there are some benefits.  During probate, notice of court proceedings is published in a newspaper to all unknown creditors (like unknown credit card companies, other unsecured lenders, etc).  Those creditors are given a limited period of time to file any claims against the estate.   Once that period is over, they are forever barred from filing claims.  After probate, family members can receive property certain that they have free and clear title, and that nobody from the deceased’s past can try to lay claim to the property.

Benefits of Small Estate Affidavit

As mentioned above, some states allow small estates to be closed out without any court supervision.  In Illinois, estates worth under $100,000, and not containing any realestate can be settled with a small estate affidavit.
The benefits of a small estate affidavit are obvious.  In Illinois, the process is simple:  First, if there is a will, it must be filed with the Circuit Clerk for the county of the deceased’s residence.  After that, one must simply attach a certified copy of the death certificate and a certified copy of the will (if any) to a small estate affidavit, and sign it in the presence of a notary public.  Once those steps are accomplished, the affidavit becomes valid. 
The affidavit can be presented to banks, brokerages, creditors, etc.  Under Illinois law, these entities must respect the power of the holder of the affidavit to act to close out the estate.  The affidavit can be used to draw out funds, close accounts, pay off debts, and pay out remaining funds to heirs or legatees (people named in a will).
If the estate is insolvent (there are not enough funds in the estate to pay off all creditors), Illinois law prioritizes the levels of creditors into seven classes, and (as of 1 January 2015) allows the holder of the affidavit to pay off the claims from the highest priority to the lowest priority where there are still funds remaining to pay off claims.  If the estate is solvent (there are enough funds to pay off all creditors), the holder of the affidavit pays out any remainder to the appropriate heirs or legatees.
Once the holder of a small estate affidavit has completed his or her job (which could be just a few weeks), there is no need to report back to a court.  The family just moves on.  Sounds great, right?


Traditional probate can certainly be slow and painful, and a small estate affidavit seems like a good bypass.  But remember also that probate has benefits.  Most importantly, creditors get one shot to file their claims.  They either do so, or forever hold their peace. 
The small estate affidavit law does not offer similar protection against creditors.  Imagine if your father died with $10,000 in cash and a mountain of debt, and you transferred all his assets to yourself using a small estate affidavit, without ever notifying creditors.  For obvious reasons, the state would not offer you the same protection as if you had gone through probate and provided fair notice to creditors to file their claims.  In this situation, your father’s creditors would likely come after you for your father’s debts.  Not only would they have the right to do so, in Illinois, they could be entitled to recover their attorney fees from you!  This law gives you an incentive to be sure you find all unknown creditors when using a small estate affidavit. 

By using a small estate affidavit, you trade away the protection from liability to creditors that you would ordinarily receive in probate, in exchange for the convenience of settling the case more quickly.  It may be appropriate for relatively simple, clearly solvent estates, with no family disputes.  However, consider traditional probate if there are likely to be unknown creditors, family disputes, or any other complications.
Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

Source: Tailored Estate Planning

June 30

Caring for Special Needs Relatives with a Supplemental Needs Trust

Courtesy Kari Reine
In common usage, “special needs” often refers to conditions first recognized in childhood, such as Down Syndrome, autism, or cerebral palsy.  In estate planning, “special needs” encompasses a broader range of conditions including developmental disabilities, but also age-related conditions, physical disabilities, mental illness, diseases, and any other conditions that could qualify a family member for current or future government benefits.  It is absolutely crucial that people who have special needs family members obtain an estate plan tailored to their unique needs.  Below is an example of how a failure to plan for special needs children could be disastrous for a family’s financial future (and how better planning could have prevented the situation):


Jonathan and Carrie live in Lisle, IL, with their eighteen year-old son, Braden, who has autism.  Braden just graduated from high school, a major accomplishment in his life.  However, his condition requires him to be constantly supervised, and he needs expensive weekly occupational therapy.  He will never be able to have a job.
Jonathan and Carrie have provided a loving environment for Braden, and he is happy and doing well.  His aunts and uncles (who live in Hinsdale and Downers Grove) frequently visit and help care for him.
Jonathan and Carrie are both data analysts at a corporation in Naperville.  They have accumulated $200,000 each in their 401(k) plans, and have $100,000 in other savings.  They worry about what will happen to Braden when they die.  They have foregone taking vacations, purchasing a larger house, and always purchased clothing at thrift stores, all to save enough so that Braden will have a comfortable life.
Jonathan and Carrie (correctly) assume a guardian will be appointed to hold Braden’s property for his benefit after his death.  However, they incorrectly assume that this guardianship will solve the problems with transferring money to Braden.
Jonathan and Carrie die suddenly in a car accident, leaving Braden dependent on his extended family.  Soon after the tragedy, the extended family begins to realize what an enormous mistake Jonathan and Carrie made.
Braden’s condition had previously qualified him for Supplemental Security Income (SSI) and Medicaid.  However, with an inheritance from his parents, Braden now exceeds the asset limits for these programs.  He will now be forced to pay out-of-pocket for his expenses until he becomes impoverished, and can then obtain the benefits he once had.  Given the severity of his condition and his need for constant care, his $500,000 inheritance will quickly be depleted.
Once his inheritance is gone and he is again on Medicaid and SSI, his uncles and aunts will constantly have to purchase goods and services for him to maintain his comfort and standard of living.

A Better Plan

Braden’s parents spent their working careers saving to provide him a comfortable life after they passed away.  The last thing they would have wanted would be for him to lose medical and SSI benefits as a result of their plan, and to become a burden on their family. 
Had Braden’s parents consulted a reputable attorney who specialized in estate planning, they likely would have decided to set up a supplemental needs trust for Braden. 
Here is an example of how Jonathan and Carrie’s estate plan could have been structured:  During Jonathan and Carrie’s lives, their 401(k) accounts would stay titled in their names, with a designation that after both of their deaths, the money go into their supplemental needs trust.   Their $100,000 in savings could be retitled into a living trust, with instructions that the money would be transferred into the supplemental needs trust after the death of the second parent.  During their lives, Jonathan and Carrie would both have full access to the money in their living trust.  It is only after their deaths that the benefits of the trust would kick in.
After both parents die, all of Jonathan and Carrie’s money would flow into the supplemental needs trust.  Once the supplemental needs trust is funded, the money will be held for Braden’s benefit by a third party (a trustee). 
The trustee purchases services or items to help Braden feel comfortable.  This could be food, housing, clothing, books, movies, or even travel tickets to visit family.  However, the trust funds could not be used for medical services that would otherwise be covered by government benefits. 
Because the trustee, not Braden, decides when money is to be spent on Braden (he has full discretion), and Braden does not own the money, the Government does not consider the assets to be Braden’s.  Therefore, he qualifies for Medicaid and SSI, but still benefits from the quality of life for which his parents had worked so hard to save.  Further, Braden is not a financial burden on his extended family because his parents planned ahead for him with a well-drafted supplemental needs trust. 

Administering the Trust

The trustee of the supplemental needs trust needs to be careful to follow the instructions in the trust.  The trust money does not directly belong to Braden, and if the trustee begins to treat it that way (for example, by writing a $20,000 check directly to Braden’s bank account), the trustee may disqualify Braden for benefits.  If the trustee is unsure about how to properly do his job, he should seek help from a qualified wills, trusts, and estates attorney.
Another option is for the trustee to contact a nonprofit agency, like Life’s Plan in Braden’s hometown of Lisle, that specializes in special needs trust management.  Agencies like this can even take smaller trust funds and consolidate them into a pooled trust, to reduce administrative expenses for running the trust.


Families show their love to special needs relatives in amazing ways, often through a lifetime of dedicated service, patience, and kindness.  Many families also make great sacrifices to save money to help their disabled loved ones maintain a good quality of life, even after the deaths of the non-disabled family members.  Supplemental needs trusts can help secure a family’s goal to care for a disabled family member into the future.
Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you should hire an attorney to assist you with your individual legal needs.  

Source: Tailored Estate Planning

June 30

Minimize Illinois Estate Tax with a Credit Shelter Trust

Photo courtesy of Terry Johnston
Imagine Joe and Mary are a retired Naperville couple with a combined $7.5 million in Illinois assets.  Joe has $5 million in his name, and Mary has $2.5 million in her name.  Both are 85 years old and trying to maximize the amount of money that passes to their children after their deaths.
Let’s discuss how one type of estate planning tool, the credit shelter trust, can make over a $600,000 difference in their Illinois estate tax bill.  We will do this by considering two hypothetical scenarios.  First, we will consider a scenario where Joe and Mary simply have a will giving all their possessions to their spouse upon death, and if neither spouse is alive, to the children.  The second scenario is one where they set up a credit shelter trust.


Joe dies in July of 2015.  At his death, per the terms of his will, his entire $5 million passes to Mary.  Illinois has an estate tax threshold of $4 million, meaning that Joe would ordinarily owe taxes if he passed on more than $4 million at death.  However, transfers from one spouse to another are exempt from tax, no matter their size.  Therefore, there will be no taxes resulting from Joe’s death and Mary’s inheritance of $5 million.  But the family is not in the clear.
After receiving her inheritance, Mary now has $7.5 million in her own name (the $2.5 million she originally owned plus $5 million after Joe’s death).
Mary dies in November of 2015.  Her estate is well over the $4 million Illinois estate tax threshold.  And worse, she will not only owe taxes on all money over $4 million.  Illinois back-taxes the first $4 million as well.  Based on prior-year tax rates, the family can expect to pay over $622,000 in estate tax after Mary’s death.
Review the second scenario to see how this could have been avoided entirely:


Joe and Mary talk to their estate planning attorney about ways to plan around the Illinois Estate Tax.  They decide on two methods:  Equalization and a credit shelter trust. 
Equalization is simple:  During their lives, Joe gives Mary $1.25 million to put into one of her accounts.  Now they each have $3.75 million in their individual names.  
The next step is to prepare the credit shelter trusts.  There are many different ways to structure a credit shelter trust, but we will use a simple version for purposes of this hypothetical.
The estate plan says that at Joe’s death, Joe will put as much money as possible, up to the full amount of the Illinois Estate Tax exemption amount (currently $4 million), into a credit shelter trust.  A credit shelter trust is a legal device where the trust money is held by somebody (a trustee) for the benefit of whoever Joe names in his estate planning documents.  The key is that funds do not go to Mary, and therefore do not increase her wealth.
If Joe were to die with more than $4 million (which is over the Illinois estate tax exemption amount), the credit shelter trust would only be funded up to the estate tax exemption amount, and any remaining funds would pass to his wife.  This ensures that no matter what, taxes would not be owed at Joe’s death.  His wife’s plan has the exact same language, just in reverse.
At Joe’s death, he has $3.75 million of assets, which is below the Illinois exemption amount, so the full $3.75 million can go into the credit shelter trust.  The transfer is below the Illinois threshold of $4 million, so it passes tax free.  Crucially, because the money does not transfer directly to Mary, Mary’s assets do not grow in size.
However, Mary still benefits from the credit shelter trust during her life.  The trustee of the credit shelter trust (perhaps a friend or family member) makes regular payments for the health, education, maintenance, and support of Mary while she is alive, using the trust funds.  In the government’s eyes, if managed properly, the money in the trust does not belong to Mary, even though she may benefit from it.  The key is that someone else has discretion to make payments to her, and/or that there is an ascertainable standard in the trust document (health, education, maintenance, and support) for making payments.  After Mary’s death, the trust money passes to whoever Joe appointed in the trust document (let’s say Joe and Mary’s children).
Because Mary does not own the credit shelter trust funds, the only assets in her estate at her death in November are her $3.75 million.  $3.75 million is below the $4 million Illinois estate tax exemption amount, so she owes no tax.
The family saves over $622,000 in estate tax!


This article deals with the Illinois estate tax.  Federal estate tax is calculated separately, and requires a separate analysis.
The analysis above dealt with an opposite-sex married couple, but it would also apply to a same-sex married couple, both under state and federal law.


There are many different forms of credit shelter trusts, and this is a simple example.  But it shows how a little bit of planning can save a family over a half million dollars in state taxes. 
Many estate planning articles are devoted to federal estate tax, but few focus on state issues.  However, as can be seen from the analysis above, even state taxes can have a big impact on a family’s tax bill.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  
Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs.  

Source: Tailored Estate Planning