Death and Taxes - The Blog

The "Get a Will" Express Leaves the Tracks

As most of my readers know, I'm a big proponent of having a Will, for reasons I've set forth in this blog and elsewhere.  But I sometimes wonder whether all of the "get a Will" articles I read actually serve an important function.  Here are two examples of what I mean:

1. "A Harsh Lesson About The Important Of A Will", from KOMO in Washington State

Where do I begin with this story?  Let's see:

• Husband stores some property in a local Self-Storage Center (Husband's name only is on the lease)
• Husband then dies without a Will
• Two-and-a-half years after Husband's death, Wife decides to take property out of storage
• Self-Storage Center refuses to release property to Wife because Husband died without a Will, and Wife can't prove she is Husband's heir
• Upon the advice of an attorney, Wife stops paying rent to Self-Storage Center, hoping that the property will be sold at auction and that she can buy it back
• Property is sold at auction, but Wife isn't told about auction in advance, so most of the property is sold to other people

To begin with, we have an extremely specific (and, I would guess, extremely rare) situation.  Out of all the reasons why you should have a Will, "to allow my spouse to have access to the property I placed in self-storage" figures to be pretty low on the list. 

In addition, the real problem wasn't Husband's failure to have a Will (although that didn't help matters much) -- the real problem was the auction debacle, starting with the "advice" from the attorney.  On a related note, a representative of the self-storage center states that, in the absence of a legal document saying Wife is Husband's heir, the center "could not legally let her into the unit."  I'm not a Washington attorney, but could this really be the case?  Washington (like Illinois) has a small estate affidavit allowing collection of a decedent's personal property without the need to (a) formally prove heirship, (b) produce a Will or (c) open a probate estate. (Washington's law can be found here)  Maybe I'm missing something, but why couldn't that affidavit be used in this situation?

2. "All it takes is will power", from The Grand Rapids Press

One of my pet peeves about personal finance articles is that they often attempt to be all things to all people.  This article is a prime example -- it spends a fair amount of time talking about estate tax avoidance, and even more time extolling the virtues of the dirt-cheap Will.  I would suggest that these discussions are mutually exclusive -- people who have to be concerned about estate taxes may not be well-served by a "one-size-fits-all will," and people who can make do with a $99 Will probably don't need to know much of anything about estate taxes.

Frankly, I prefer advice that's more focused and more pragmatic.  Instead of engaging in the whole "on the one hand, on the other hand" exercise, which tends to cause a lot of uncertainty (do I need a Will or don't I?), I think some basic questions need to be asked and answered:

1. Is a $99 Will worth the paper on which it's written?  Who is the best candidate for such a Will?

2. Do the Will preparation software programs really work?  If so, for whom do they work best?

3. What are the advantages and disadvantages of involving an attorney in the estate planning process, and what are the issues that should cause you to hire one (potential litigation, estate tax issues, etc. etc.)?

I probably can't speak about these questions in an unbiased manner, but it sure seems like someone in the media should be able to do so.

Powers of Attorney and Real Estate Closings

Q: Do I need to attend my real estate closing?

A: That depends on whether you are buying or selling the real estate.

If you are a seller, you don't need to attend if (1) you execute a power of attorney for property, and (2) your agent under that power is present at the closing and signs all of the sale documents (deed, bill of sale, etc.) on your behalf.  It's fairly common for married couples to use a power of attorney for this purpose, with one spouse attending the closing and signing documents for both spouses, and the other spouse dealing with the movers or watching the kids.  In addition, it's somewhat common for sellers (whether married or single) to avoid the closing altogether, by appointing their attorney as their agent. 

While powers of attorney work fine, I usually like to have sellers who don't plan to attend the closing sign all of the sale documents in advance.  That way, the sellers will be able to avoid having to record their power of attorney with the county recorder's office (saving a recording fee of perhaps $50).  The power of attorney will still be necessary to sign ancillary documents at closing (such as the settlement statement), but shouldn't need to be recorded.

If you are a buyer, you will need to check with your lender, to see if you can (1) have the loan documents signed by an agent under a power of attorney or (2) sign the loan documents prior to closing.  If your lender says no to both of these requests, you'll have to attend the closing (or find another lender).

Gifts of Real Property and the $250,000 Capital Gains Exclusion

Robert J. Bruss makes some interesting points in his recent "Real Estate Mailbag" column, found in the Washington Post (and here).   Some background: §121 of the Internal Revenue Code excludes real estate from capital gains tax under certain circumstances.  Basically, you can exclude from taxation up to $250,000 in gains on the sale of real estate, so long as you have owned and occupied the real estate as your principal residence for at least 2 of the previous 5 years.  With that in mind, Mr. Bruss considers a case where a woman transferred her home to her child as a gift (the child now wishes to sell the home).  Mr. Bruss concludes that the transfer was a big mistake, at least for tax purposes -- the child doesn't meet the requirements under §121, and will owe taxes on his or her gain (the difference between the sales price for the home and the child's basis in the home).

A similar question involves a parent who places his or her child on the title to the parent's home as a joint tenant.  I've previously talked about how such an arrangement is a bad one from an estate planning and property perspective.  It also seems to me that, under this scenario, the child would not be eligible for the $250,000 exclusion from capital gains for his or her one-half interest (unless, of course, the child owned and lived in the home for the time period set forth in §121).  The parent, of course, would still have his or her $250,000 exclusion, to apply to his or her one-half interest.

Just Say No - To Acting as Executor or Trustee?

This morning's Wall Street Journal has an article by Karen Hube which I can't yet locate online -- its subject is acting (or not acting) as executor or trustee of the estate of a parent.  The article, which should be required reading for anyone named as executor or trustee in a parent's estate plan, is entitled "When Duty Calls: You agreed to handle your parents' estate -- but do you really know what you're in for?"

In most cases, if a parent asks a child to act as executor or trustee, the child will say "yes" -- out of a sense of pride, or a sense of duty, or both.  But as the article points out, these jobs are not for everyone.  To begin with, we have the question of skills.  In the case of an ongoing trust, the trustee may need to be able to function in two entirely different worlds:

-the financial world, where the trustee collects and manages the trust's assets via sale and investment; and

-the beneficiary world, where the trustee has to exercise tact and discretion in deciding when and how to make distributions, as well as how to address other beneficiary-related issues.

We also have the question of how much time will be consumed in acting as a fiduciary for your parent.  There are simple estates, and there are complex estates, and it's important to realize which you are dealing with before you accept an executor or trustee position.  Some factors:

1. Is your parent organized with respect to their assets, or are you going to have to spend a lot of time figuring out what your parent owns after he or she dies?

2. Is there a chance that litigation will erupt at some point during your time as executor or trustee?  Litigation may be more common in situations where (a) the decedent leaves a surviving spouse and children of a prior marriage, or (b) property passes unequally to the decedent's children (either because some children receive more property than others, or because some children have their share of property held in trust for them).

3. Does your parent have a good team of advisors (accountant, financial planner, attorney) to help you during the administration process?  If not, can you put together such a team?  When it comes to acting as executor or trustee, "doing it yourself" can be dangerous -- it's important to understand what you must do (like keep good records of all of your actions) and what you mustn't do (commingle estate or trust assets with your personal assets, among other things).

Two final points:

●You'll note that simplicity or complexity is not determined by the size of the estate or trust at issue.  I've administered $250,000 estates that took much more time and energy to handle -- because of a disorganized decedent, or family squabbles -- than a $5,000,000 trust.  Don't assume that things will be easy just because your parent doesn't have much property.

●If, after considering what the job will entail, you don't want to act as fiduciary for your parent, tell him or her of your decision.  This will allow your parent to make other arrangements.  One arrangement that seems to be increasingly popular involves using a corporation (bank or trust company) to act as executor or trustee -- that can be a good choice, especially if the estate or trust is large and/or may be subject to litigation.

Spousal Rights in Probate, Part 1

Under Illinois law, when a married person dies, the person's surviving spouse has certain rights relating to the married person's probate estate.  These rights apply so long as they were not waived pursuant to a valid prenuptial or postnuptial agreement, and include (but are not limited to) the following:

Right to Inherit Via Intestacy.  If a decedent dies without a Will (i.e. dies intestate), the decedent's spouse will inherit some or all of the decedent's probate property.  ("Probate property" is property that the decedent owned in his or her own name at the decedent's death.)  How much of the decedent's probate property will be inherited by the spouse depends on whether the decedent also had descendants (such as children or grandchildren).  Under the Illinois statute of descent and distribution, a surviving spouse will receive either one-half of the decedent's probate property (if the decedent had descendants) or all of the decedent's probate property (if the decedent did not).

Right to a Spouse's Award.  In the "olden days," there was a concern that probate tied up the decedent's property for an extended period of time, preventing the decedent's spouse from having enough money for living expenses.  One solution is the spousal award, which is given as follows:

The surviving spouse of a deceased resident of this State... shall be allowed ... a sum of money that the court deems reasonable for the proper support of the surviving spouse for the period of 9 months after the death of the decedent in a manner suited to the condition in life of the surviving spouse and to the condition of the estate.... The award may in no case be less than $10,000....

The statute also allows the surviving spouse "an additional sum of money that the court deems reasonable for the proper support, during that period, of minor and adult dependent children of the decedent who reside with the surviving spouse at the time of decedent's death."

Two notes on the spousal award:

1. Notice the reference to "in a manner suited to the condition in life of the surviving spouse."  If the surviving spouse can produce evidence that he or she can't possibly live on less than $10,000 a month, and the estate can afford it, then that's what the surviving spouse will receive.

2. The spousal award is available regardless of whether the decedent died with a Will.  However, unless the surviving spouse renounces the decedent's Will (which I'll discuss tomorrow), a surviving spouse can't seek a spousal award if the decedent's Will (a) makes a gift of property to the surviving spouse and (b) states that such gift is specifically made in lieu of a spousal award.

States Recouping Medicaid Costs

Yesterday's Wall Street Journal had an interesting article by Sarah Lueck, entitled "Some Heirs Find A Costly Surprise: Bill From Medicaid"  (the article is available here, but registration is required).  Because of budget crunches, some states are becoming more diligent about seeking reimbursement from the estates of individuals who received Medicaid during their life.  Medicaid (which is funded by both the federal government and state governments) is meant to be a health care program for the poor.  However, there is a concern -- in the Bush administration and elsewhere -- that a growing number of older Americans are abusing the system by retaining only those assets that don't count against a person's eligibility for Medicaid (like a residence), and then seeking to transfer such assets to family members upon death.

It's hard to argue with the states in these cases.  The Medicaid eligibility rules are meant to protect the person receiving Medicaid and, in some cases, the person's spouse during their lives.  The rules are not meant to provide a "free ride" for the person's beneficiaries following the person's death, no matter how sympathetic their individual cases might be. 

Ms. Lueck even mentions how some critics consider the seeking of Medicaid reimbursement to be another "death tax," which is just plain ridiculous.  Why shouldn't a governmental entity that spends money for an individual's health care -- because the individual pled poverty -- have the right to seek reimbursement of such money if it discovers that the individual's estate has the ability to pay?  In this sense, the government is acting no differently than any other creditor of a deceased estate.  And, while it might be nice to pass on the family home to your children or grandchildren, I can think of no good reason why anyone should be allowed to rip up their valid debts in order to do so. 

Scooped! Illinois' New Rule 1.17 (Sale of a Law Practice)

I haven't considered myself a journalist since 1987-88, when I was the co-editor of the Marshall (Michigan) High School Interchange.  Even so, I can't believe that Professor Gerry W. Beyer scooped me (here) on the Illinois Supreme Court's adoption of Rule 1.17!  Well done, Professor.

The new rule (the full text of which can be found here) allows a retiring attorney (or the representative of the estate of a deceased or disabled attorney) to sell the attorney's law practice.  The Illinois Supreme Court had previously declined to allow such sales on the grounds that a lawyer's clients are not a commodity to be bought or sold.

A few thoughts on and highlights of Rule 1.17 (the "Rule"):

-From a professional perspective, the Rule is long overdue.  I don't see why a retiring attorney or his or her estate shouldn't be able to unlock value from the attorney's practice, and there's a real benefit to clients as well.  If an attorney dies and his practice is sold, his files obviously go to the purchasing attorney; if an attorney dies and his practice isn't (or can't be) sold, who knows where his files will wind up?

-The Rule states that a law practice may be sold, and that such a sale may include the law practice's "goodwill."  But how should goodwill be valued?  More generally, how is any legal practice to be valued?  I have to presume that most sales will take place in installments, and be based on the buyer's (continuing) success in getting the seller's client to retain the buyer.

-Note that the Rule requires the sale of the attorney's entire practice.  For example, I can't sell my probate practice to another attorney and continue to practice in the areas of estate planning and residential real estate -- it's all or nothing.  That being said, so long as you sell your entire practice, the sale can be made to more than one lawyer or law firm.

-The Rule as finally passed is based closely on a recommendation submitted by the Illinois State Bar Association and the Chicago Bar Association.  One change from that recommendation relates to the written notice that the seller must provide.  In the recommendation, notice had to be given to "each of the seller's clients," but the final version of the Rule alters this language to "each of the seller's current clients." (emphasis added)

-In my opinion, a fundamental issue still exists regarding how to treat former clients.  On the one hand, it's important (from a liability perspective) for me to terminate my representation of a client when I complete work for the client (their estate plan gets executed, their real estate deal goes through, a decedent's estate is closed).  I simply can't be on the hook for informing every client I've ever had of all changes in the law regarding estate planning, real estate, and probate.

On the other hand, I view the Rule as allowing the sale of access to potential clients (rather than the sale of clients), and my lengthy list of previously-represented clients would presumably be of great interest to a potential buyer of my practice.  But is it inconsistent -- or a violation of privacy -- to say that, while I don't currently represent these people (for liability purposes, or for notice purposes under the Rule), I am including their contact information in the sale of my practice?   

-Paragraph (d) of the Rule strikes me as a little too vague.  It states that "[t]he fees charged clients shall not be increased by reason of the sale."  As an example, presumably buying attorney couldn't buy seller's criminal law practice and then announce to seller's former clients that she expected them to pay her $200 per hour (if seller charged $150 per hour).  But is it acceptable to bring seller's clients into the fold and raise the fees you charge them at some time in the future?

-It's interesting that paragraph (f) of the Rule still subjects a lawyer to a number of ethical rules, including the rule requiring competence.  In other words, both seller and buyer must do their due diligence; if the seller sells his practice to an incompetence attorney, and a former client of seller is injured by this incompetence, the seller could be subject to disciplinary action (or, presumably, sued for malpractice).

Estate Planning for Same-Sex Couples

Pride Month is here, culminating with this weekend's Pride Parade in Lakeview (the details are here), so it seems like a good time to talk about three keys to effective estate planning for same-sex couples:

1. As a starting point, gay and lesbian couples need to speak openly with each other about their expectations for estate planning.  We still live in a country where gays and lesbians cannot marry, so in a sense, gay and lesbian couples need to create their own ways of partnering (including financial partnering).  More specifically, gay and lesbian couples must address the question of how each partner's estate plan will be structured.  Will the plan be set up like the plan of a typical married couple, with each partner leaving all of his or her property to the other (either outright or in trust)?  Or, do the partners view their assets as separate from each other?

2. If the couple desires an arrangement where much or all of the property of the first to die is distributed to (or held for the benefit of) the survivor, then in-depth estate planning is key.  Married couples can sometimes muddle through without having a proper estate plan -- they may own most of their property jointly, and even if one spouse dies intestate, the other will still be able to inherit some probate property via intestacy.  Gay and lesbian couples do not (or may not) have these advantages.  As a result, everything should be spelled out very clearly, whether we're talking about probate property (covered by a Will) or non-probate property (beneficiary designations for insurance and retirement benefits, etc.). 

It's also important to think about the potential for probate litigation, particularly in cases where a partner's family hasn't come to terms with his or her sexuality.  In situations like this, it's important that an attorney assist the couple in documenting all estate planning decisions, so that a decedent's family members (parents and/or siblings) don't attempt to contest the decedent's Will or trust on the grounds of undue influence by the partner.

3. In cases where a gay or lesbian couple keeps their assets separate from one another, the main focus switches from estate planning specifically to more general property law.  For instance, let's say that Greg and Tom live together in a condo that they own as tenants in common.  What happens if Tom dies?  Or what happens if Greg and Tom break up?  In these cases, a co-tenancy agreement (setting out each partner's rights and responsibilities) may be a good idea.

Safekeeping for your Will

Having a Will is usually a very good thing, but a Will isn't effective unless it can be located upon your death.  Where should you keep it?  Most attorneys will no longer hold estate planning documents for their clients, which is probably a good thing -- such an arrangement can create problems for the attorney (liability if the documents are lost or destroyed) and for the client (what if you want your documents back so that you can retain another attorney?).  Safety deposit boxes and home safes are a good idea, but I would stress the need to tell your family members of your arrangement, so the box or safe can be accessed easily upon your death. 

Perhaps the best option would be a system where you could file your Will with your local clerk's office during your lifetime.  The Will wouldn't become a public record until the clerk's office received proof of your death.  Some states have such a system -- New York does, and so does Utah -- but unfortunately, Illinois does not. 

Tax Prorations and Reproration Agreements

Tax prorations are one of the most difficult things for new homebuyers to understand. Why are they needed? What do they do?

The whole concept of tax prorations exists because Illinois real estate taxes are paid in arrears – in 2005, homeowners pay real estate taxes for the 2004 calendar year; in 2006, homeowners will pay real estate taxes for the 2005 calendar year; and so on. That means, after a home sale is completed, the new owners will receive real estate tax bills for the home that are attributable to a time period when the new owners didn’t own the home.

Tax prorations attempt to solve this problem via rough justice. We take the taxes for the last ascertainable full tax year, and make assumptions about the extent to which these taxes will increase over the next year (or two).  For instance, if you buy a home in Cook County on June 30, 2005, then 2003 will be the last fully ascertainable tax year.  (In Cook County, we won't find out the 2004 taxes until the 2004 second installment tax bill comes out in the fall -- more on that tomorrow.)  If the tax proration percentage in the contract is 110%, then we're assuming that taxes will increase by 10% from 2003 to 2004 and by 10% from 2003 to 2005.  An example might help:

Let's assume that (a) the 2003 real estate taxes on a (Cook County) home were $5,000.00; (b) the first installment 2004 real estate tax bill (equal to one-half of the 2003 taxes, or $2,500.00) has been paid; and (c) the home is sold on June 30, 2005.

If the tax proration percentage is 110%, then the seller will need to pay the buyer the following credit amounts at closing:

2004 real estate tax credit: ($5,000 x 1.1) - 2,500, or $3,000.00

2005 real estate tax credit: ($5,000 x 1.1) x (181/365), or $2,727.40

That's a total real estate tax credit of $5,727.40. (Note that 181 is the number of days from 1/1/05 to 6/30/05, the day of closing.)

Of course, sometimes the buyer and the seller may not want rough justice.  While we can assume a 10% tax increase, in doing so, it's likely that one of the parties will wind up paying too much.  If the taxes increase by more than 10%, then the buyer has to pay more than his or her fair share; if the taxes increase by less than 10%, it's the seller who suffers. 

There's a solution to this problem, in the form of what's known as a reproration agreement.  When taxes are reprorated, the seller may still give the buyer a credit at closing, but the credit amount will be adjusted when the actual tax bills are made public.  To continue with the above example: what if the 2004 second installment tax bill comes out, and the taxes are actually $2,800.00?  In that case, the buyer will pay the seller $200.  Or, if the second installment tax bill is $3,300, then the seller will pay the buyer an additional $300.

Reproration agreements aren't used very often for two reasons:

1. Usually parties don't want to revisit the real estate tax issue (or any other issue) after closing.

2. The amounts in question are usually fairly small (perhaps too small for the parties to argue about).  For instance, to return to the above example, the difference in credit amount between a 105% proration percentage and a 110% proration percentage is less than $400.