Death and Taxes Blog

An interesting question was posted on the Illinois State Bar Association transactional law discussion grouplist yesterday.  The fact scenario was something like this:

Minor (let's call him Greg) has a guardianship in Cook County Probate Court.  The assets in Greg's guardianship estate are pretty substantial (let's say $1 million).  Greg, who may have some emotional problems, turns 18 next month -- this is the age when, under Illinois law, the assets in the guardianship estate must be released to the ward.  Greg's guardian doesn't believe Greg is mature enough to handle the money. 

Can anything be done to stop the assets from being released to Greg next month, when he turns 18? I think the short answer is "no," unless you can somehow make the argument that Greg is mentally disabled, and succeed in opening a guardianship estate for him.  Another possibility would be to encourage Greg to place his assets in a trust that restricts his own access to the funds.  Why would Greg want to do this?  The main reason is that the adults in Greg's life could make it worthwhile for Greg to do it, either by wielding a carrot (set up a trust and we'll buy you a car) or a stick (if you don't set up a trust, we'll cut you out of our Wills).  Is that fair?  Maybe not, but in my experience it happens fairly often.

It's great to see big companies putting estate planning information on the internet.  However, Christopher Bahn from The Onion's AV Club Blog makes a pretty funny observation:

[H]ere's my all-time favorite official Peanuts tie-in: Charlie Brown and his friends are the corporate mascots of Metropolitan Life Insurance, and their images are festooned all over the company's website—which leads to this unintentionally bizarre and disquieting juxtaposition. Who do you suppose he's grieving for? Based on the available evidence, possibly Sally.

I recently came across two interesting articles that talk about probate and Wills from the perspective of "do it yourselfers."

1. This post, from Deirdre R. Wheatley-Liss's You and Yours Blawg, talks about two cases where individuals took the Home Depot approach to estate planning, and prepared their own (faulty) Wills.

2. This Lynn Bremer column about a probate-obsessed do it yourselfer. 

To my mind, the thread that ties these articles together is efficiency (the efficiency of good estate planning, the inefficiency of bad or incomplete estate planning).  Efficiency requires some type of quantification, asking questions like:

-What, specifically, are the costs of probate?  The man is Ms. Bremer's column is spending a lot of time, and creating a lot of problems, to avoid a situation (probate) that may be neither expensive nor time-consuming.

-What, specifically, are the costs of doing an estate plan correctly when compared to the costs of fixing a defective estate plan tomorrow?  Perhaps where your money goes after your death isn't a concern of yours -- in that case, it's probably fine if you go the "as cheap as possible" route in planning your estate.  But if you do want to control your property upon death or take care of your spouse and/or descendants, wouldn't you at least check out the costs of hiring a good estate planning attorney, and compare those costs to what must be paid if you make a mess of things?

One ancillary benefit of estate planning is that it affords you and your attorney the chance to review the beneficiary designations on your 401(k) accounts, IRAs, insurance, and other beneficiary assets.  If you're establishing a trust, you may be changing these designations; even if you aren't, it's a good idea to make sure the designations accurately reflect your current wishes.  In my time reviewing beneficiary designations, I've seen the following designated as beneficiary:

-Client's ex-wife

-Client's ex-girlfriend

-Client's deceased mother

-One of Client's three children.  This was on a large life insurance policy, and the client's idea was that the beneficiary would take care of his two siblings with the proceeds.  That strikes me as a recipe for disaster, since the beneficiary has only a moral (as opposed to a legal) obligation to share the proceeds with the others.

I met with a new client last week, one whose situation is all too common.  My client's mother is generous -- to a fault.  Mom has enough money to live comfortably, but she never says no to anyone, especially my client's siblings.  She is paying the mortgages for three of her children (all adults, all unemployed), and the children have become increasingly aggressive in asking for money and property.  Mom even deeded her house to one of the children, and then took out a home equity line of credit for the child!

My client wants to make sure Mom is taken care of, but he's not interested in a scenario where Mom receives an inheritance, and then gives all of it to his siblings.

I offered two pieces of advice to my client:

1. Consider leaving money to Mom in trust.  While she is not really a "spendthrift" as that word is usually defined, her situation is such that she may not benefit from any direct gift you make to her.  The trust should be entirely discretionary (income and principal to Mom for her health and support in reasonable comfort as determined by the trustee); upon Mom's death, the trust can pass to other beneficiaries.

2. Be careful about getting involved in Mom's affairs.  From the facts described above, it's clear that Mom has made a mess of things.  In addition to the fact that Mom transferred her home to her child and THEN took out a loan on it, I'm willing to bet that no gift tax return was ever filed, and that Mom didn't consider that her child can now kick her out of her home.  But this isn't my client's mess, and I believe he should only get involved if Mom asks for his help.  My client also should be circumspect about preventing Mom from making gifts to her children in the future.  The big black-and-white question -- are my client's siblings taking advantage of Mom? -- is a hard one to answer in real life, with its varying shades of gray.  If Mom is incapacitated, or is being bullied into making the gifts, that's one thing; but what if Mom just wants to give some assistance to her children?  My client may consider this unwise and misguided, but should allow Mom to make her own mistakes, like any other adult.

Next year the annual gift tax exclusion will increase from $11,000 to $12,000.  The gift tax exclusion is the amount that you can give to as many people as you wish, per year, without paying gift tax or even needing to file a gift tax return. 

If you are in a situation where you'd like to make gifts, the end of the year (and the start of the next year) is a good time to do it.  Three quick, easy scenarios:

1. You and your spouse have three grown children.  (Each child is married and has one child of his or her own.)  You and your spouse each give $11,000 to each child on December 31, 2005 and $12,000 to each child on January 1, 2006.  You have just given away $138,000 without having to pay gift tax or even file a return.

2. Same facts as in 1., but you also make the same gifts to each child's spouse.  That's another $138,000 that you've given away without having to pay gift tax or even file a return.

3. Same facts as in 2., but you also make the same gifts to your three grandchildren.  That's another $138,000 that you've given away without having to pay gift tax or even file a return.

At its heart, an agreement for the purchase and sale of real estate is just a contract.  As such, the agreement needs to conform to the requirements of a valid contract under state law.  A key aspect of a valid contract is the "meeting of the minds" -- the parties need to agree on the actual terms of the contract.  This is the law -- it's also common sense.

Let me present a (slightly altered) timeline for a transaction on which I'm currently working:

November 4: Buyers offer to purchase real estate for $210,000, with a $5,000 inspection credit (in other words, $205,000 net offer)

November 5: Sellers make a verbal counter-offer of $215,000 with $5,000 inspection credit ($210,000 net offer)

November 6: Buyers present a signed contract to Sellers offering $215,000 with $6,000 inspection credit ($209,000 net offer)

November 7: Sellers cross out the purchase price and inspection credit amount on the Buyers' contract, write in $216,000 with $5,000 inspection credit, and sign the contract ($211,000 net offer)

We now have a contract signed by both parties, but the contract isn't valid.  The Sellers have agreed to a $216,000 purchase price with a $5,000 inspection credit, but the Buyers haven't.  We're pretty close to an agreement ($209,000 net offer vs. $211,000 net offer), but we aren't there yet.

A separate issue arises when the parties have entered into a valid contract, one that includes an attorney review provision.  (This provision, which is very typical in residential real estate contracts, allows each party's attorney to propose modifications to the contract.)  Let's suppose that the buyer's attorney sends a letter to the seller's attorney, asking that certain provisions in the contract be modified.  The question then becomes whether or not this modification request constitutes a rejection of the original contract and a counter-offer.  As Helen W. Gunnarrson explains in this very insightful article from the Illinois Bar Journal, practitioners differ in their take on the effect of an attorney modification letter.  Some attorneys do indeed view the modification request as a rejection of the original contract and a counter-offer, while others simply think of the modification request as a proposal of some kind.

The recent Second District decision in Bauer v. Giannis has opened some eyes among Illinois real estate attorneys.  The facts are as follows (this synopsis comes from Steven B. Bashaw's "Real Estate Law Flash Points" for November 2005, available online here -- the Bauer case is point #4):

In executing the Residential Real Property Disclosure Act Report at the time of the contract with Bauer, the sellers misrepresented that they were not aware of flooding or recurring leakage problems and concealed the fact that the property had flooded the year before and sustained $425,000 damage due to flooding. The home was on the market at the time of the flooding, and taken off for repairs by a civil engineer, including constructing a berm and a comprehensive grading plant. When a contract was prepared between the parties, and after a number of inspections (at least six) by the Bauers (during which time the Bauers testified Giannis never advised them about the flooding or repairs, but Giannis testified otherwise), an "As Is" Rider was added to the contract by their attorneys.

The Court found that, because the sellers did not make the appropriate disclosure on the Residential Real Property Disclosure Act Report, the "As Is" rider was not a defense against a fraud action by the buyers. 

The moral of the story for sellers?  Disclose disclose disclose.

I'm a huge Jane Austen fan (must be the English major in me), and took in the latest version of Pride and Prejudice (with Keira Knightley and, for some reason, an ampersand in the title) over the weekend. 

Perhaps I love the story for its mix of real estate and estate planning?  One of its main elements involves an "entail," which prevents Mr. Bennet from bequeathing his home to one of his five daughters.  Upon Mr. Bennet's death, the property will instead pass to a distant relative, Mr. Collins (who of course shows up and attempts to woo Elizabeth Bennet).  Luckily, Elizabeth and her sister Jane are able to find true love with men whose money can save their sisters and mother from destitution.

This page has a great introduction to the entail (and inheritance) issues in Pride and Prejudice.

If litigation erupts over the care of a disabled person, you can almost be certain that fighting will begin anew when the disabled person dies.  According to this article in today's Detroit Free Press, that scenario appears likely in the case of Rosa Parks.  The fight could pit Mrs. Parks' heirs against the two individuals chosen by her in 1998 to handle her affairs (who are now seeking to be named as the personal representatives for her estate). 

Near the end of Mrs. Parks' life, she was involved in litigation with the hip-hop group Outkast over their song entitled "Rosa Parks."  Because of questions regarding whether Mrs. Parks' interests were being represented in such litigation, former Detroit Mayor Dennis Archer was appointed as her guardian.

This note brings up the interesting differences between states in their handling of probate fees for attorneys.  According to the authors, "[p]robate lawyer fees [in California] are set by state law and are based on a percentage of the gross value of the decedent's estate."  That isn't how it works in Illinois -- there is no statutory fee schedule here, and attorneys either bill a fixed fee for working on an estate, or bill by the hour.  (I do the latter, since it's almost impossible to guess what issues will crop up in the administration of an estate.)  Maybe there are some arguments I'm missing, but a fee schedule doesn't strike me as all that fair -- I've had some small estates that took a lot of time and trouble to administer, and some big estates that were fairly easy to handle.

On Tuesday, I talked about the traditional way of structuring trust distributions (in terms of income and principal).  Because of the tension this creates between income beneficiaries and remaindermen (and the resultant headaches for trustees), practitioners and others in the estate planning community proposed a new idea: the total return trust.  Illinois' Trusts and Trustees Act now includes a provision for a total return trust (760 ILCS 5/5.3), including a procedure for converting a traditional "income and principal" trust into a total return trust.

How does a total return trust work? Essentially, income is deemed to be a percentage of the net fair market value of the trust's assets (for example, 4%).  If a trust contains $1,000,000, then the income beneficiary would be entitled to $40,000 per year from the trust (regardless of whether the "income" of the trust for purposes of the Principal and Income Act is $4,000 or $100,000).

The major benefit of the total return trust is that the trustee is no longer conflicted about investments -- he or she has the clear task of investing trust assets in a way that maximizes the fair market value of the trust assets, since this maximization will benefit all beneficiaries.

I've talked about mortgage fraud on a couple of occasions (here and here).  This issue is finally getting some mainstream media attention, in the form of a series of articles in the Chicago Tribune.   The articles and related information are consolidated in this superb presentation (Flash and registration required but worth it, I think). 

Most ongoing trusts contain language that allows beneficiaries to obtain money from the trust based on certain criteria.  Historically, trust property (and a beneficiary's right to it) has been described in terms of income and principal.  For instance, a beneficiary might have the right to all income from the trust; upon this beneficiary's death, a remainder beneficiary may receive the entire principal of the trust.

Because of the above, it's important to understand what is meant when we talk about income and principal.  The Illinois Principal and Income Act (755 ILCS 15/1 et seq.) (the "Act") defines these terms as follows:

Principal is the property which has been set aside by the owner or the person legally empowered so that it is held in trust eventually to be delivered to a remainderman, while the income is in the meantime taken or received by or held for accumulation for an income beneficiary.

Income is the return in money or property derived from the use of principal....

The Act goes on to explain which types of property constitute income and which constitute principal.  For instance, stock dividends are considered principal, while cash dividends and interest received are considered income.  The trustee is also obligated to distinguish between income and principal in the handling of trust expenses (some expenses are allocated to income, and some to principal).

As you may have guessed, there can be a fair amount of tension between a trust beneficiary with a current right to income and a remainder beneficiary.  The former wants to maximize trust income while the latter wants to grow the principal of the trust.  This tension became greater in the 1990's, with the run-up in tech stocks -- many of these stocks paid no cash dividends, but were experiencing huge jumps in share price.  As a result, tech stocks were hated by income beneficiaries and loved by remainder beneficiaries.  The opposite was true of bonds, which didn't appreciate much but which produced a fair amount of income.

Tomorrow I'll talk about a potential solution to the income beneficiary vs. remainder beneficiary fight.

Another day, another messy probate litigation case involving a sleazy attorney (in this case, Paul B. Kusbach of South Bend, Indiana -- he's now serving time for mail fraud and money laundering (crimes relating to stealing money from his clients).  The complete story can be found here.

Did Mr. Kusbach's father (Bruno) intend to disinherit some of his grandchildren and give control of his trust to his daughter-in-law, or was he tricked into changing his estate plan? At least Bruno Kusbach's attorneys have brought this case to a judge's attention before it became too late.

Frank McAdam and Charles McAdam III are the grandsons of Frank Gannett, who founded the Gannett newspaper chain.  The McAdam brothers are currently embroiled in litigation involving the estate of their father, Charles McAdam Jr. -- the story is here.  The major issue in the litigation involves whether McAdam Jr.'s attorney (Daniel Hanley) acted improperly by seeking to have another of his firm's clients, J.P. Morgan Trust Co., appointed to administer McAdam Jr.'s estate. 

Without knowing more of the facts of this case, it's difficult to tell whether Mr. Hanley acted improperly.  However, I will say that the issue of potential conflicts of interest in estate planning and probate can be a difficult one.  Estate planning and probate attorneys typically know accountants, corporate trustees, financial planners, etc., and there's always a risk that an attorney will recommend another professional for self-interested reasons.  By "self-interested," I mean that the professional will then provide some benefit to the attorney, either directly (through a payment or "kickback," which I imagine is rare) or indirectly (by referring his or her clients to the attorney -- quid pro quo -- which is much more common). 

In my practice, I try to avoid selling another professional's services to a client.  If (and only if) a client asks for a referral to a professional, I will usually give the names of two or three professionals, so long as they are people (a) with whom I've worked before and (b) who I know do good work.

Cases like Estate of Muppavarapu, a decision by the Third District Illinois Appellate Court, are important for reminding us of the extent of a trustee's duties to trust beneficiaries. 

In Muppavarapu, the trustee (who was also a beneficiary) loaned trust funds to himself.  This kind of behavior is a no-no, even though the loan was later repaid.  The relevant language from the decision is here:

[A] trustee owes a fiduciary duty to serve the interest of the beneficiaries with total loyalty, excluding all self-interest, and is prohibited from dealing with the trust's property for [his] individual benefit.

Thanks to the Illinois Bar Journal for bringing this case to my attention.

It seems like there is a growing number of cases featuring fights over a decedent's remains (for instance, the one discussed here).  The Illinois legislature has decided to try and head off potential problems in this area by passing the Disposition of Remains Act (the "Act"), which takes effect on January 1, 2006.  The full text of the Act can be found here.

Essentially, the Act allows you to execute a written instrument by which you designate a person (called an "agent") to control the disposition of your remains after you die.  You can also appoint successor agents in this instrument.  The Act also sets a priority list of people who have the power to control the disposition of your remains if you don't sign such a written instrument.

David Berek wrote a short article regarding the Act in this month's Illinois Bar Journal (not yet online).  Two points stressed by Mr. Berek:

1. The written instrument must be notarized.

2. The Act supersedes the statutory Health Care Power of Attorney (which also can grant an agent powers to dispose of remains).

I can't find it online right now, but this morning's Chicago Tribune has a follow-up article to this one.  The situation is all too common -- Mrs. McDonough (a widow with no living children) is allegedly "fleeced" by a neighbor, Alexander Pandis, who empties her bank accounts and transfers her real estate to himself.  Now Mrs. McDonough has passed away, and the responsibility for the return of her assets shifts from the Cook County Public Guardian (which handles estates for disabled people) to the Cook County Public Administrator (which handles deceased estates).

One interesting point: It appears that Mrs. McDonough died without a Will, and had no living relatives at the time of her death.  As a result, Mrs. McDonough's property will escheat to (be distributed to) the state under §2-1(h) of the Illinois Probate Act and the Escheats Act (755 ILCS 20/1 et seq.).  Probably not the result Mrs. McDonough would have wanted.