Death and Taxes Blog

It may seem weird, but if your decedent died testate (i.e. with a Will), you'll need to file a Copy of Will form with -- wait for it -- a copy of the Will attached. I don't really know why this is, since the Judge should already have the original Will in the court file. But, that's the way it is, at least in Cook County.

One note: if your original Will is on legal-sized paper, shrink the copy down to regular size for attachment to the Copy of Will form.

In order to be appointed, a fiduciary needs to agree to undertake the job of executor or administrator. In the case where a corporate fiduciary (like a bank trust company) is acting, this is done via an Acceptance of Office.

Individual executors or administrators have a different form to fill out. An executor appointed under a Will stating something to the effect that "no surety or bond shall be required of my executor" uses the Oath and Bond - No Surety form. Any other executor (and all administrators) use the Oath and Bond - Surety form.

If the first executor named in a Will doesn't wish to act, you will need to have him or her sign a Declination of Office form, so that the Court knows it is appointing the correct person.

This week I want to go through the different forms that need to be completed in order to open a probate estate in Illinois. (My focus is on Cook County, but the forms don't vary much by county, as they are mostly based on the same law: The Illinois Probate Act.) These forms fall into a few different categories, although it's hard to notice this given the way the forms are typically shown on county websites (for instance, see here -- ugh).

In Part 1 I want to focus on the Petition, whereby you ask the court to do something. What that something is depends on the facts in your situation.

If the decedent died with a Will (i.e. testate), the petitioner is asking the court to (a) admit the decedent's Will to probate (that is, find that the Will is valid) and (b) appoint the executor nominated in the Will. The proper form is Petition for Probate of Will and for Letters Testamentary. (The "Letters Testamentary" show the formal appointment of the executor.)

If the decedent died without a Will (i.e. intestate), the petitioner is asking the court to appoint an administrator to handle the decedent's estate. (Obviously there's no request to find a Will to be valid, since there is no Will.) The proper form is Petition for Letters of Administration.

The above are the two main petitions, but there are others reserved for specific situations:

Petition for Letters of Administration to Collect. Use this petition when there's been a delay in going to court under the regular petition and there's a danger that the estate will incur "waste, loss or embezzlement" unless someone is appointed immediately.

Petition for Probate of Will and for Letters of Administration with Will Annexed. This petition is used when the decedent had a valid Will but no executor nominated under the Will is willing and able to act. For instance, maybe all nominated executors are dead or just don't want to act.

I've talked previously about the FlashPoints e-mail newsletters offered free of charge by the Illinois Institute for Continuing Legal Education (IICLE). You can sign up here for the newsletters.

The July 2007 Ethics & Professional Responsibility newsletter (authored by Terrence P. McAvoy and Thomas P. Sukowicz) cites an interesting disciplinary case from Montana (In the Matter of Steven T. Potts). Mr. Potts was hired by a decedent's daughter ("Evon") to represent her, her son Tyson, and her other children with respect to her mother's estate. The estate featured litigation -- a Will contest, and allegations that Evon misappropriated her mother's assets during her mother's life when she acted as a conservator (like a guardian).

A settlement was reached, but it was unclear whether the settlement extended to certain accounts owned jointly by Evon and her mother (Evon's mother had added Evon to these accounts). Here's problem #1, and it relates to settlement negotiations generally: it's imperative that EVERYONE know and agree about the nature and extent of the settlement. That wasn't the case here -- from FlashPoints:

Following the mediation, one of the opposing attorneys contacted Mr. Potts to seek clarification on whether the agreed to settlement included the joint accounts. In a letter, counsel asked Mr. Potts to let the attorney know whether there was a dispute on this issue. Tyson told Mr. Potts not to answer and so Mr. Potts did not do so. Later, Mr. Potts circulated a stipulation that was filed with the court stating that the settlement was to resolve "all disputes" regarding "the estate" and dismissed both the will contest and the conservatorship proceeding.

I've added emphasis to the above to point out Mr. Potts' big problem. Apparently, Mr. Potts' clients were attempting to perpetuate a fraud on the Court. What could Mr. Potts do? Could he reveal what his clients were plotting? Not if he wanted to risk violating his duty of confidentiality. (Note that if Mr. Potts was an Illinois attorney, the question is a much more close one. In Montana, the duty of confidentiality may be violated "to prevent reasonably certain death or substantial bodily harm" -- the Illinois rule (Supreme Court Rule 1.6) features an exception "to the extent it appears necessary to prevent the client from committing an act that would result in death or serious bodily harm," but a lawyer may also reveal "the intention of a client to commit a crime" other than an act that would result in death or serious bodily harm. Were Evon and Tyson intending to commit a crime?)

But Mr. Potts could have withdrawn from the case. By staying silent, Mr. Potts was invoking another rule of professional responsibility. In Illinois, that rule (Supreme Court Rule 3.3) is titled "Conduct Before a Tribunal," and it states that in relevant part that "a lawyer shall not... make a statement of material fact or law to a tribunal which the lawyer knows or reasonably should know is false... [or] fail to disclose to a tribunal a material fact known to the lawyer when disclosure is necessary to avoid assisting a criminal or fraudulent act by the client."

I blogged about the HBO series "Big Love" and estate planning last year, here. The show -- about polygamists -- is back for a second season, and it's really reaching a creative peak. I don't know of too many television programs that can deftly blend drama and comedy like it does.

On this week's episode, the mother of Margene (aka Wife #3) pays a visit. During the course of the episode, Margene's mother learns that her daughter is a polygamist, and Margene's husband Bill tries to address her concerns. Are Margene -- who obviously doesn't have rights as Bill's spouse under the law -- and her sons protected if something happens to Bill? The answer is "yes," as Bill indicates that he has set up irrevocable trusts for Margene and the boys, and makes gifts to the trusts each month. (That's sort of a pain since, as I discussed here, each beneficiary would need to receive notice whenever a contribution is made to the trust.) I wonder who is acting as trustee?

"Money for Nothing" is one of my favorite Dire Straits songs, so why wouldn't I want to become a farmer? Who wouldn't want to get paid for not planting crops, and made the subject of estate tax relief (even though nobody can actually find farmers who NEED estate tax relief). The latest farmer-related boondoggle was chronicled in Monday's Washington Post (here), and the first paragraph says it all:

The U.S. Department of Agriculture distributed $1.1 billion over seven years to the estates or companies of deceased farmers and routinely failed to conduct reviews required to ensure that the payments were properly made, according to a government report.

This was a Harry Potter weekend for my family -- taking our daughter to the festivities in and around Oak Park's Magic Tree Bookstore on Friday evening, and reading all 759 pages of Harry Potter and the Deathly Hallows.

When I last wrote about Harry Potter and probate, almost exactly two years ago (here), I disguised the identity of the decedent. I think by now everyone at all interested in the books knows that Hogwarts headmaster Albus Dumbledore died in Book 6, so I don't feel like I'm revealing too much by sharing that Chapter 7 of the Deathly Hallows is entitled "The Will of Albus Dumbledore." I won't disclose who the beneficiaries of Dumbledore's Will are, or what they inherit, but I do note the existence of the "Decree for Justifiable Confiscation," which gives "the Ministry [of Magic] the power to confiscate the contents of a [wizard's] will" in order to determine whether the wizard was attempting to pass on so-called "Dark artifacts." Apparently, the confiscation may only be done if there is "powerful" evidence that the deceased's possessions are illegal, and if the Ministry cannot produce such evidence within 30 days of the decedent's death, then the possessions must be turned over to the beneficiaries.

When I was a young associate, we used to talk about how a new (or even an experienced) probate attorney could learn a lot from just sitting in Cook County probate court, listening to what the judge says. I think that's still true, and the fact that the probate judges are so overburdened right now means all attorneys have a lot of time to sit and listen.

Editorial comment aside, I was in court today and Judge Malak was presented with a citation to discover information case. (I've blogged about this strange action previously, here.) The party that was responding to the citation attempted to file a motion to quash, which is a typical response in regular civil discovery. Judge Malak's comments were interesting (I'm paraphrasing from my notes -- my apologies to the Judge if I misquote him):

-The Judge said a motion to quash can't be filed in response to a citation. This isn't "regular" discovery, it's probate discovery. It's a statutorily-created fishing expedition, and there's nothing that can be used to stop it.

-But the Judge added that the person who filed the citation also can't treat it as regular discovery -- no interrogatories or requests to produce documents.

-Essentially, the party who filed the citation can request as many documents as he or she wishes, and the respondent has to provide them at his or her deposition. "But the documents will fill up a truck!" noted the respondent's attorney. "Then you better bring the truck," said the Judge. The Judge also noted that there is no time limitation on the discovery proceeding -- the respondent could literally be deposed all day.

A final word...

16. I've tried to give a number of practical hints on gifting over the years, focusing on things that can be done without an attorney. That being said, there are a lot of gifting situations that simply require the assistance of a professional, and maybe more than one professional:

-you are making gifts of a future interest

-you are making gifts that exceed the $12,000 annual exclusion amount

-you are involved in non-traditional gifting relationships -- loaning money to a child, selling property to a child for less than its fair market value, naming a child as a joint tenant, etc.

-the property being gifted has valuation issues. Obviously it's easy to figure out the value of a gift of $10,000 in cash -- it's $10,000. But what about assets like real estate, or a painting, or a minority interest in a partnership? These are far trickier, and the IRS is far more diligent about auditing in these cases.

11. The last major credit or exclusion from gift tax is called the "unified credit." It's found in Section 2505 of the Code.

12. The unified credit is currently $1 million, which means you can give away up to $1 million during your lifetime without owing gift tax. Note that this credit works in tandem with the annual exclusion amount. So, for instance, if you gave $100,000 to your daughter in 2007, you would get the $12,000 annual exclusion, and your unified credit would be reduced by only $88,000 (100 - 12).

13. The unified credit used to be, well, unified -- it was tied to the estate tax credit. In other words, there was one credit amount, which could be used during life or upon death.

14. In cases where you make gifts that exceed the annual exclusion, you'll still need to file a gift tax return, even if no gift tax is due. This is so the IRS can keep track of (and potentially challenge) the amount of your unified credit remaining.

15. With all this in place, would anyone ever need or WANT to pay gift tax? I don't know about "want," but in cases involving high net worth individuals, it may be better to make gifts now, and pay gift tax instead of estate tax. Obviously you lose with respect to time value of money (it's better to pay tax later rather than sooner), but you gain a couple of ways:

-You get property and its future appreciation out of the estate. The $1 million you give away today may be worth $2 million (or $3 or $10 million) when you die.

-The estate tax is calculated on the total value of the decedent's estate, including the money being used to pay the estate tax. That's not the case with the gift tax.

6. The gift tax is NOT a tax that applies on each and every gift you make. Rather, there are a number of credits or exclusions that a taxpayer can rely upon to avoid the tax.

7. One of the simplest of these can be found in Section 2503(e) of the Internal Revenue Code (the "Code"). It's the "Ed Med" exclusion, which exempts the following from gift tax:

any amount paid on behalf of an individual— (A) as tuition to an educational organization... for the education or training of such individual, or (B) to any person who provides medical care...with respect to such individual as payment for such medical care.

"Educational organization" and "medical care" are both defined elsewhere in the Code. One important point: the payments have to be made directly to the educational organization or medical care provider -- payments made to Daughter to reimburse her for these payments, or made to Grandson to be used for such payments in the future, don't count.

8. There's also an "annual exclusion" from gift tax -- you can give up to a set amount ($12,000 this year, but it changes with cost of living) to as many individuals as you want without any gift tax implications. That means 12K to each child, to each grandchild, to each niece or nephew, to each person listed in the Chicago telephone directly, all with no gift tax. You don't even have to file a gift tax return for these gifts.

9. One wrinkle to the annual exclusion discussed above (which can be found in Section 2503(b) of the Code): it only applies to gifts of a "present interest." In other words, if you give $12,000 to Grandson in a cash he can use right now, you qualify. If, instead, you give $12,000 to a trust for Grandson but he can't access the money right now, you don't get to use the annual exclusion for that gift. Obtaining the annual exclusion for gifts to a trust is what's driven the use of crummey trusts, which I blogged about here.

10. A husband and wife who both want to make gifts can elect to "split" their gifts. Let's say that my wife and I want to give $24,000 to each of our children. If I write a check for that amount from my own account, and get my wife's consent on a gift tax return we file, then the gifts will be treated as having been made one-half ($12,000) by me and one-half ($12,000) by my spouse. We both get to use our annual exclusion. The split gifts provision is in Section 2513 of the Code.

Tomorrow: More Credits and Exclusions

1. The gift tax exists as a "backup" to the estate tax, which is a tax on the value of property owned at death. If the gift tax didn't exist, for instance, you could give away all of your property before death, die with an estate of $0, and therefore owe no tax on the transfer.

2. What's a gift? A "gratuitous transfer." In other words, if you give me your house, that's a gift; if you sell me your house, that isn't. What if you sell me your house for less than fair market value -- is that a gift? It depends on intent. If you intended to make a gift of the difference between what I paid and the fair market value, then that difference is a gift. If I paid less than fair market value because I'm savvy, that's not a gift.

3. For the most part, when we talk gift tax, we're talking about federal law. More specifically, we're talking about Chapter 12 of Subtitle B of Title 26 of the U.S. Code (Title 26 of the U.S. Code is the Internal Revenue Code). Most states are like Illinois, and don't have their own gift tax (New York used to have its own gift tax, but got rid of it). North Carolina is one exception -- it still has its own gift tax.

4. The federal gift tax form is Form 709 (here is a pdf version of the 2006 form).

5. Are ALL gifts subject to gift tax? Not really. To simplify just a bit: you can give as much of your property as you want to your spouse or to charity, and those gifts won't be subject to gift tax. When we talk about the gift tax, our focus is really on gifts other than to your spouse or charity -- to kids and grandkids, nieces and nephews, etc.

Tomorrow: Credits and Exclusions

There was an interesting article (here -- registration may be required) in Friday's Wall Street Journal by Nathan Koppel. It's entitled "Partnership Is No Longer a Tenured Position," and talks about how some big law firms have begun demoting "under-achieving" partners. The article is a nice follow-up on my post about estate planning attorneys and the Sonnenschein firm (indeed, one of the estate planning partners who left that firm, Eileen Trost, is interviewed for this article).

To laymen and lawyers alike, the demotion of partners may come as a surprise. If I'm a partner in a partnership, how can my partners decide to kick me out? This is simply a part of big law firm life, where...

-individuals newly elected to the partnership are not given the chance to review the partnership agreement before they sign. (An acquaintance of mine said that, upon being elected and given a copy of his firm's partnership agreement, he jokingly asked a senior partner, "Can I take it home for review?" The senior partner, NOT joking, said, "That depends on whether you want to work here.");

-despite the partnership being very large, a small group of senior partners essentially control all facets of the partnership (including all salary and retention decisions);

-increasingly, the emphasis is on the bottom line, with partners facing demotion or even firing.

I'm wondering when the nuts and bolts of becoming a partner will begin to enter into the equation for new lawyers. I think most people entering the profession are still a little foggy about what it means to become a partner. To the extent it was addressed at all in my law school, becoming partner was viewed as The Top of the Mountain, a sign that you had made "it." But what is "it"? That can be a very difficult question to answer, and may vary greatly by firm. Unfortunately, firms are reluctant to reveal details of how their partnerships operate, even to their own people. That's going to change, of course -- eventually young lawyers are going to demand more transparency, and firms that don't respond will find themselves unable to hire good people. Young associates need to know:

1. What specifically do I need to do to succeed here?

2. What specifically do I need to do to make partner?

3. What does it mean to make partner? Am I really a partner, or an employee in partner's clothing? When I agree to join the partnership, what am I agreeing to?

4. Who really runs things at the firm?

Next week I'll be starting a series on Gift Tax, but for now, since we're still in a vacation week, a movie review:

I stumbled upon What Rats Won't Do a couple of weeks ago on IFC. The 1998 movie, which stars James Frain and Natascha McElhone, is a romantic comedy in the vein of Intolerable Cruelty (which I enjoyed) and Forces of Nature (which I didn't). Mr. Frain and Ms. McElhone are both attorneys, but unlike the above movies, which involved divorce courts, What Rats Won't Do is set in probate court. (Or, at least, the English equivalent thereof.)

The movie might seem prescient, especially in light of the Anna Nicole Smith case (the one involving her husband's death, not her own). Millionaire Gerald Burton has died, and now his son (played by Charles Dance) and his young, second wife (Parker Posey) are fighting over the inheritance. Of course, this is one of the most common probate litigation scenarios.

By the way, the film's title is based on a comment made by Mr. Frain's character, Jack Sullivan, about how scientists are now using lawyers instead of rats for their research, since the scientists get attached to the rats, and "there are some things even rats won't do." I'm not really into lame lawyer humor, and the film isn't incredibly witty, but I did like this exchange between Mr. Frain's character and a judge (they're at a bar dinner):

Judge: Ah, Sullivan. This bordeaux is like your approach to litigation -- cheeky, too much fruit, and far too buttery.

Sullivan: Really, your honor. I was just thinking it was dusty and acidic, with an unpleasant finish, just like one of your summings up.

Judge: (Cough)

Happy 4th of July! I'm taking the day off from blogging (kind of), but thought I'd share a few quotes:

My friend Julie, a former lawyer and accountant, defines the lottery as "a tax on people who can't do math."

My friends Michelle and John, on health care powers of attorney:

Michelle: If you were in a coma, I'd never pull the plug. I'd come and talk to you every day.

John: And that's why I'll never name you as my agent under my health care power of attorney.

And finally, at the risk of being one of "those" parents who shares charming quotes from their children:

Me: I bought a couple of suits to wear to court.

My daughter, Sophia: I hope you didn't buy them from a peddler!

Robert H. Brooks was the chairman of Hooters restaurant when he died on July 15, 2006. Now a dispute has arisen between Mr. Brooks' widow, Tami, and the administrators of his estate (including his son, Coby, from a prior marriage). This article has the details. Among other things, the administrators are fighting Mrs. Brooks' ability to utilize "South Carolina's elective share law, which lets people take one-third of their deceased spouse's estate instead of accepting what, if anything, that spouse left to them in a will." The article is vague on the administrators' argument -- that the elective share law violates the U.S. Constitution? -- but I presume that this case is another in a long line of cases where a married couple was considering/in the process of obtaining a divorce, but one party died before the divorce was completed. The administrators "say Tami Brooks doesn't deserve the Hooters fortune because she and Robert Brooks were not 'living together as husband and wife' at the time of his death - one of the requirements Robert Brooks specified in his will before Tami Brooks could receive any money." Obviously the elective share law contains no such "living together as husband and wife" requirement.