October 26, 2009

The QTIP, Part 2

Let me add a little bit of a wrinkle to the discussion in my last post, by introducing the concept of the state estate tax. This is extremely relevant to the new Illinois QTIP statute.

Yes, most states (including Illinois) have an estate tax. But, in the past, this tax was hard to spot. Why? Because, on the federal estate tax return, you would get something called a "state death tax credit" (essentially, a credit for state estate taxes paid). And most states (again, including Illinois) had what was known as a "pick-up tax" or "sponge tax," meaning that their estate tax was equal to the state death tax credit. That made the state estate tax look almost invisible. If you owe a federal estate tax of $6 million, that's what you pay in total, but instead of all $6 million going to the federal government, a portion (equal to the state death tax credit) goes to Illinois.

Then things got even trickier. In 2001, legislation was passed raising the (federal) exemption amount over time. (Allow me to sound old: when I started practicing law, in 1996, the exemption amount was $600,000. In 2001 it was $675,000. Now it's $3.5 million.) That meant less estate tax revenue for the states with a sponge tax. To makes matters even worse, the state death tax credit was phased out. These two changes meant much less estate tax revenue for most states, so most of them hit upon a solution: change their estate tax from a pick-up tax to a real, bona fide estate tax.

That's what Illinois did, but the state set its exemption amount (also called the "exclusion amount") at $2 million instead of $3.5 million. You can imagine the problem that that causes -- most estate plans are drafted to minimize the federal estate tax. So, as I explained previously, if you are married and have a $5 million estate, it's easy to pay no estate tax upon your death:

$3.5 million to family trust (no estate tax on this, ever, because it equals the exemption amount)
$1.5 million to marital trust (no estate tax on this because of marital deduction; will be taxable in surviving spouse's estate)

But if you set up your trusts like this, then you will owe Illinois estate tax, since $3.5 million exceeds the Illinois exclusion amount.

Next time: the Illinois QTIP.

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October 26, 2009

The QTIP, Part 1

I'd like to spend a few posts talking about QTIPs. No, I'm not talking about the cotton swabs you aren't supposed to stick in your ear but do. Nor am I talking about the rapper from A Tribe Called Quest who is best known for his guest spot on Deee-Lite's single "Groove Is In The Heart." Rather, I'm talking about Qualified Terminable Interest Property.

To talk about QTIPs in this last sense, we need to talk about how the estate tax works. I'll try to be brief, and simplify (maybe over-simplify). The idea of the estate tax is, roughly, as follows:

1. There's no estate tax on property left to a surviving spouse.

2. There's no estate tax on property left to charity.

3. There's no estate tax on property left to anyone else, unless its value exceeds what we'll call the "exemption amount." (Currently it's $3.5 million.)

In most cases involving married couples, the goal is to defer the payment of estate tax until the death of the surviving spouse. This can be done in a couple of ways. One way is by setting up (at the death of the first spouse to die) two trusts:

A Family Trust or Exemption Amount Trust, holding property equal in value to the exemption amount. This trust will NEVER be subject to estate tax.

A Marital Trust, holding the rest of the property of the first to die. This trust will be subject to estate tax in the estate of the surviving spouse.

If you draft the main trust document correctly, you create a situation where no estate tax will be due when the first spouse dies, no matter how much property the first spouse to die owns, and no matter what the exemption amount at the time of death. For instance: if the exemption amount is $3 million and I die with $100 million, then the Family Trust gets $3 million (no estate tax, ever) and the Marital Trust gets the remaining $97 million (no estate tax now, but subject to estate tax in the surviving spouse's estate).

Alternatively, you can just create one trust (let's call it the "Family Trust"), but then -- once you determine the exemption amount and the value of the property of the first to die -- you make what's known as a "QTIP election." That is, you elect to treat part of the trust (the part over and above the exemption amount) as "qualified terminable interest property," for which you receive a marital deduction. So, again, no estate tax due at the death of the first to die.

One cite: "qualified terminable interest property" is defined in IRC Section 2056(b)(7).

Next time: what's an Illinois QTIP election?

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October 21, 2009

Inheritance Laws and the EU

The Economist's Charlemagne blog has a really interesting article this week about the European Commission's guidelines for inheritance involving assets in more than one EU country. The link is here.

As the article indicates, this is really a dispute between Britain (England and Wales) and the other 26 EU countries. Most EU countries have some form of forced heirship -- that is, the decedent's children must inherit a portion of the estate (in equal shares), and -- with some rare exceptions -- cannot be disinherited. Such a concept of "forced heirship" is totally alien to people in Britain and in the US (and, obviously, our concept of total testamentary freedom is foreign to the other 26 EU countries).

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October 20, 2009

More on Will Filing in Cook County

I previously wrote about how to file a Will in Cook County at Avvo.com.

Recently I had a question from an attorney who watched my free "Probate" video at MentorCLE. He was completing the forms to open a Cook County probate estate, and was perplexed when it asked for the Will number, written as ___ W ___. What did this mean? What was he supposed to fill in?

When you file a Will in Cook County, the clerk records the date of filing in a big book, and assigns it a number (like 2009 W 000001, for the first Will filed in Cook County in 2009). Sometimes the clerk will stamp this number on your receipt for the Will; sometimes they forget. You can ask them to do it, or ask them for the number, when you file. Or, if you forgot to do that, you can check online at the clerk's website, here. Here's what you do:

1. Click on "Online Case Info."

2. Click on "Probate Wills Docket Search."

3. Input the name you want to search, and it will give you the Will number. (For example, Mike Royko's Will is 1997 W 004517.)

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October 1, 2009

Will Depository, and Private Vs. Public

Earlier this year, I decided to try and start a side business. The business related to my law practice, and the goal was to solve a problem: so-called "orphan" Wills. Some attorneys retain their clients' original Wills and other estate planning documents. But what happens if the attorney loses contact with the client, or the attorney dies and the documents pass to some other attorney? Destroying old documents isn't really an option, since you run the risk of destroying a valid Will. But Illinois didn't have an official Will Depository (as some other states do).

My business idea was to set up a private Will Depository. I did my research, hired a web designer, put together procedures, and started to work on www.IllinoisWillVault.com. But I made (at least) one big mistake: I guessed (incorrectly) that our current recession -- and Illinois's deficit problem -- would make legislation in this area unlikely. I was wrong, as we now have Public Act 096-137, which becomes effective on 1/1/2010. This act allows for the filing of an "orphan" Will (the creator of which cannot be located) with the Illinois Secretary of State's office.

Oh well.

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