Convenience bank accounts may cause probates

Starting January 1, “convenience accounts” will be able to be set up at your bank. These are alternatives to joint bank accounts. This development is good and bad.

It’s good because we have endless problems with joint bank accounts. Many times, clients add a joint tenant, usually a family member — but sometimes a non-family member, to a bank account. Upon the client’s death, the funds in the joint account snap automatically to the surviving joint tenant. Most clients don’t realize that this will happen. They think that their will or trust will control the bank account, but it doesn’t control it at all. Many times (about 50% of the time) the joint tenant keeps the funds because he thought he was owed something or did more for the deceased than the other heirs. I’ve seen some pretty nasty family rumbles over this issue.

The new convenience accounts will allow the additional party to make deposits and withdrawals on the account. Upon the client’s death, the convenience account will NOT snap to the convenience signer, but will be controlled by the deceased’s client’s will or trust.

The bad part of this: If the convenience account is $100,000.00 or more, it will cause a probate estate to be opened.  I think that there will be quite a few probates down the line from this new law. Many clients are “advised” by the bank representative on how to title accounts and we already have POD, TOD, in trust for, living trust and joint accounts. It is hard to clients to digest all of this and I think that clients will assume, wrongly,  that the convenience account avoids probate.

The other bad part: The convenience account can be cleaned out by the convenience signer, much like a joint account. Many clients do not realize that a joint signer on a bank account can help themselves to the entire account at any time. It’s rare, but occasionally the joint tenant (who didn’t furnish any $ to the account)  can make off with all the cash in the account and they don’t have to repay it. The convenience signer can withdraw some or all of the funds from a convenience account, but there would be a strong presumption that the funds were the account owners since and it might be easier to get the funds back than if a joint account were raided.

Supreme court gives retirement plan to ex-spouse

Couple is married and Mr. makes Mrs. the primary beneficiary of his retirement account.

Mr. & Mrs. get divorced.

Mr. does not change his beneficiary and then dies.

The U.S. Supreme court recently ruled in Kennedy Estate vs. Plan Administrator for DuPont Savings that the ex-spouse gets 100% of the retirement plan because the beneficiary designation trumps the divorce decree .

Moral of story: Always update your beneficiary designations for retirement plans, especially after a divorce.

Illinois 09 inheritance tax trap may be no more

The Illinois House passed, and the Senate is reviewing, a bill that would prevent estate tax from being owed on the first to die of a husband and wife with a large estate. It looks like it will pass the Senate easily.

Technically, the bill does this:

“Amends the Illinois Estate and Generation-Skipping Transfer Tax. Provides that the State tax credit for the estates of persons dying after December 31, 2005 and on or before December 31, 2009 includes a reduction for qualified terminal interest property. Effective immediately.”

That’s a mouthful, but it means that there would be no estate tax due on the first death of a married couple. The history of the bill is here. I previously wrote about this problem and advised couples with large estates to amend their trusts to include a state marital trust.

I’m glad to see that they are patching up this mess before tax is paid by too many widows/widowers.

Obama aims for $3.5 million estate tax exemption

Word is that the new president will try to lock in the estate tax exemption amount at $3.5 million.

Large trusts may owe IL inheritance tax in 09

(4/9/09  Update: There is a bill pending in the Legislature that would eliminate this problem.)

For 2009, the amount that is free of estate tax under federal law is $3.5 million.

For 2009, the amount that is free of estate tax under Illinois law is $2.0 million. Illinois has “decoupled” from the federal estate tax system for 2009 (this only applies to 2009; after that we don’t have to worry about this problem).

This creates a potential inheritance tax time bomb for married couples with large estates. (This problem does not affect single, divorced or widowed people. They would, however, be wise to considering gifting to reduce their estate under $2.0 million to avoid the Illinois inheritance tax).

Who should worry about this? Married couples, who have A/B living trust and who have large estates.

How large of an estate? You should check into this if your estate is over $2 million. If your assets are under $2.0 million you don’t have to worry about it. For the most part it will affect couples with estates of about $3.0 million or so

What is the problem? The problem will occur on the first to die of a married couple, where the living trust of the deceased person contains more than $2.0 million.

Estate taxes may have to be paid on the first death. This is bad. No one wants to pay estate taxes, especially on the first death. The problem is the “funding formula” used in so called A-B living trusts that sets up the family and marital trusts. It says to put up to the federal exemption amount of $3.5 million in the family trust when the first spouse dies. Illinois will tax any amount over $2.0 million that goes into the family trust.

Unless the funding formula is amended to minimize inheritance taxes, it will trigger estate tax on the death of the first spouse.

How much would the tax be? If the trust of the deceased person has $3.5 million, then $2.0 million going to the family trust is not taxed by Illinois, but $1.5 million is taxed by Illinois. If the full $3.5 million goes into the family trust, the surviving spouse pays $229,200.00 in taxes to the state of Illinois. That’s no drop in the bucket.

What can I do to avoid paying this? The living trust has to be amended to add a third trust, so the client will have an A-B-C trust. The C trust is a “state marital trust” that prevents Illinois estate tax from be due on the first death in a married couple. It lets the backup trustee decide how much to put in the family trust and how much to put in the state marital trust and thereby avoids any tax on the first death.

IRAs: No required distribution for 2009

Update: 12/27/08  

The House and Senate have passed a bill (and it is expected that the president will soon sign it) (and the president signed it)that allows IRA owners to skip their required IRA distribution for 2009.

This applies to those over 70.5 AND to those who have inherited IRAs. Both categories will not have to take 2009 distributions.

It was hoped that there would be relief from taking 2008 required distributions, since those are based on 12/31/07 values, but it appears that will not happen.

FDIC limits rise for living trusts

The FDIC limits were increased recently to $250,000 for each beneficiary named in a living trust. So if you have three kids and your bank account is titled in your living trust, the FDIC protection is $750,000.

This protection bonus expires at the end of 2009. If you don’t believe me you can read it on the FDIC’s site.

FDIC limits of living trusts from FDIC site

How to create an Illinois Series LLC

A few years ago, Illinois authorized the Series Limited Liability Company (LLC).

A Series LLC is used primarily by real estate investors to hold title to multiple parcels of real estate. This presentation explains how to set up a series LLC in Illinois.

Living Trust Dinner Seminars

A client called to say he got a direct mail invite to a living trust dinner seminar.

At the seminar, act 2 would be some awesome chicken vesuvio. But, in act 1, the presenter promised to reveal several important provisions that should be in every trust, so the trust didn’t “fail.”

My client wanted to know if the trust I did for him a few weeks ago had “the 11esssential things” that the mailer said were needed in all living trusts.  I reassured my client that it had these provisions. My client said he could go to a living trust dinner once every week, if he had the fortitude to suffer through the presentation.

The worst living trust seminars are put on by annuity sales guys.  They will try to get you to invest every spare cent you have, including all IRA money, in annuities.  You never meet with an attorney. These are called “trust mills” and you want to avoid them.  Some trust mills get sued.

Attorneys put on living trust seminars too.  Most seminars like to use the words “nursing home,” “medicaid” and “probate” a lot.  Most attorney seminars are average at best. The seminar attorneys tend to charge quite a bit for their trusts. That’s because they have to factor the cost of feeding dinner to 40 people into it.

Can I get a copy of my uncle’s will?

I get quite a few calls from people who suspect they were mentioned (or not) in a relative’s will, and to confirm their suspicion, they want a copy of the will.

In Cook County, the clerk of court’s website has a handy search tool that tells if a will was filed in a probate estate. Click here to search for a will.