Password Managers

Keeping track of online, password-protected login information has become burdensome and unsecure.  Rather than keeping digital access instructions written and stored in a desk drawer or in a file on a computer’s desktop, there now exists a utility called a password manager.  A password manager can “securely store and recognize passwords, login credentials, credit card information, bank account information, IDs…and any other information you might need” (Illinois Bar Journal, Vol. 106 No. 3, pp. 48).  It keeps all credentials and personal information in one place, automatically fills web forms, generates strong passwords, recommends when weak passwords should be changed, notifies you of any security breaches of your online accounts, and can add an extra layer of security on top of username and password (i.e. two-step authentication).

      A password manager is not affected by getting a new computer, clearing cookies, or using another browser and is a valuable tool for passing along digital access information to fiduciaries as will be needed for estate administration after incapacity or death.  In sum, getting a password manager can be a valuable tool to both your estate plan, as well as the management of your personal and business affairs. The Illinois Bar Journal offers a password manager comparison at: https://acgcompares.com/isba-password-managers-comparison-chart/.

Power of Attorney for Health Care (Illinois)

By Matthew A. Quick Effective January 1, 2015, the Power of Attorney Act relating to health care powers of attorney will change and a new form will be prescribed that includes a different notice and some different contents and directives.

Please note: if you currently have a valid power of attorney for health care, the savings clause of the new law provides that existing powers of attorney for health care will remain valid.

I am happy to help with any questions.

Quit Claim Deeds and Continuation of Title Insurance

By Matthew A. Quick Title insurance coverage is dictated by the terms of the policy issued by the title insurance company. In most, if not all, policies for title insurance there is a provision for "Continuation of Coverage" or "Continuation of Insurance." Typically, this provision provides that the insurance will continue only so long as the insured holds an interest in the land or has liability by reason of warranties given in any transfer of the title.

It is common for real estate to be conveyed with quit claim deeds and/or no title insurance. Perhaps the informality is due to estate planning or the relationship between the grantor and grantee, nonetheless the conveyance is without warranties, thus, could discontinue title insurance coverage.

To address this issue there usually exists a policy modification endorsement that can be purchased from the title insurance company when any deed modifies the current vesting. However, this endorsement does not cover a quit claim deed to a completely unrelated third-party. It will typically cover a spouse that is added or removed from title, or if property is moved into trust.

In addition, consider using warranty deeds to effectuate property transfers rather than quit claim deeds. If a warranty deed is the proper convincing method, it may be useful in continuing the insurance coverage. That is to say, if a title problem arises, the grantees may be able to look back to the grantor for title coverage.

The lesson: Before transferring real estate, talk with an attorney to avoid unintended consequences.

Trusts and Doctrine of Election (Illinois)

By Matthew A. Quick The court in the case of In re Estate of Boyar stated that the doctrine of election applies to testamentary trusts and because the petitioner accepted property under the trust, thus ratifying it, the petitioner is barred from maintaining action to contest last amendment to the trust. The court opined that the rules of will construction apply to testamentary trusts that differ from wills in form but not in purpose or substance. The doctrine of election applies regardless of value of property taken under trust. By taking and retaining property, despite repeated requests for its return, the beneficiary makes a binding election which cannot be negated by later attempting to return the property.

Trusts and Equitable Deviation (Illinois)

By Matthew A. Quick In the case of Church of the Little Flower v US Bank the Court was asked to reform a trust based upon the doctrine of equitable deviation. The Court held that this doctrine did not apply and the trust could not be reformed. The Court stated that the doctrine of equitable deviation should not apply for the sole reason of further rewarding the beneficiaries, but only in situations where the trust is so inefficient that its continuation would necessarily interfere with the trust's purpose.

The lesson: before executing a trust, ensure the provisions of the trust will properly distribute funds to the beneficiaries.

Donation of Home and Tax Deduction

By Matthew A. Quick In the case of Rolfs v. Commissioner of Internal Revenue, the Court stated that the donation of a house to a fire department for the purpose of burning the building for fire department training did not result in the ability of the taxpayers to realize a deduction of the entire value of the building. In fact, the Court stated that the taxpayers received a benefit from the free demolition of the home.

Self-Settled Trusts and Fraudulent Transfers (Illinois)

By Matthew A. Quick The case of Rush University Medical Center v Sessions opined that a decedent's transfer of assets to his self-settled spendthrift trust may be set aside and a creditor may reach trust assets under the Fraudulent Transfer Act, 740 ILCS 160/1, et seq., which requires a creditor to satisfy conditions of intent, thus, the common law rule that self-settled trusts are per se fraudulent requires the additional intent element to satisfy an action under the Fraudulent Transfer Act. In addition to an action under the Fraudulent Transfer Act, a creditor may maintain an action under common law that seeks to set aside self-settled trusts in all instances with respect to existing or future creditors.

Medicaid Liens and Estate Recovery

By Matthew A. Quick There are two main ways a state can, and in some circumstances must, reclaim expenses paid on behalf of a Medicaid recipient. The first is a Medicaid Lien, which gives states the ability to recover the expenses of long-term care of a Medicaid recipient by placing a lien on the home of the Medicaid recipient. The second is Estate Recovery, which is the process employed by states to recover the expenses of long-term care paid on behalf of a Medicaid recipient where the state acts as a creditor against the Medicaid recipients estate, post-death.

MEDICAID LIENS

Medicaid Liens typically apply only to the homes of permanently institutionalized individuals. A permanently institutionalized individual is one who cannot reasonably be expected to return home. A Medicaid Lien has priority over other people who claim an interest to a Medicaid recipient's home and its priority over other liens is determined by state law.

There are restrictions on the placement of Medicaid Liens. These restrictions are intended to protect homes when they are needed by Medicaid recipients or certain close family members. The restrictions follow: The Medicaid recipient must be deemed permanently institutionalized; and No lien may be placed if any of the following relatives of the Medicaid recipient live in the home: 1. A spouse; 2. A child under 21, or a blind or permanently disabled child of any age; and 3. A sibling with an equity interest in the home who has lawfully resided in the home for at least one year before the Medicaid recipient’s admission to a medical institution.

A Medicaid Lien does not interfere with the Medicaid recipient’s use of the home. However, if a Medicaid recipient attempts to transfer the home that has a Medicaid Lien, states can require the Medicaid recipient's equity in the home be used to pay the expense of the state's Medicaid expenditures.

ESTATE RECOVERY

Estate Recovery occurs after a Medicaid recipient's death, during the settlement of the deceased Medicaid recipient's estate. Estate Recovery can apply to personal property or real estate, but most commonly it involves the Medicaid recipient's home.

There are restrictions on Estate Recovery, which are again intended to protect homes when they are needed by certain close family members. The restrictions follow: 1. When there exists a surviving child who is under age 21, or a blind or disabled child, no matter where he or she lives (Estate Recovery may take place when the child no longer meets these criteria); 2. When a sibling with an equity interest lives in the home who has lawfully resided in the home for at least one year before the Medicaid recipient’s admission to a medical institution and continuously since; 3. When an adult child lives in the home who has lawfully resided in the home for at least two years before the Medicaid recipient’s admission to a medical institution and continuously since and can establish that he or she provided care that may have delayed the recipient’s admission to the nursing home or other medical institution; and 4. During the lifetime of the surviving spouse, no matter where he or she lives.

In these restricted instances, the survivor can typically inherit the home and other assets to use as they wish. However, the state may place a lien or file a claim against the survivor for payment of the Medicaid expenditures upon the death of the survivor.

Medical Records and Deceased Family Members (Illinois)

By Matthew A. Quick A new law, which took effect November 23, 2011, and is codified at 735 ILCS 5/8-2001.5, creates a procedure and a form to allow certain family members access to the medical records of a family member who has passed without being forced to initiate a court proceeding. The new law allows a surviving spouse to make a request for the records or, if there is no surviving spouse, then an adult child, a parent, or an adult sibling may make the request.

Federal Tax on Sale of Main Home

By Matthew A. Quick We seek to save, even while spending. With a little estate planning, we can continue this trend by saving on the tax imposed on the sale of our main home. It is understood that most of us do not currently pay taxes when our homes are sold, which is due to an exclusion that is given by the government. This exclusion is limited, though, and without some attention we, or our loved ones, could inadvertantly pay a significant tax on something that could have easily been avoided.

The Absolute Basics

The amount of federal tax on the sale of someone's primary residence is determined by taking the amount realized (the proceeds from the sale of the home) and reducing it by the adjusted basis (the cost of the home). If the difference is a positive number, then there is a gain and a gain is treated as income, which can be taxed.

On the other hand, if the difference is a negative number, then there is a loss. Typically, losses can be deducted from taxable income, which reduces the amount of income taxed. However, a loss taken on the sale of a primary residence cannot be deducted from taxable income. For this reason, this article will not further contemplate losses.

Due to a gain exclusion (which will be covered below), tax is normally not paid on the sale of a primary residence. In order to talk about a gain exclusion, we have to talk about gain and in order to figure gain, we have to talk about adjusted basis.

Determining Adjusted Basis

Adjusted basis is the benchmark of an investment. It is the point of reference when determining the cost of an investment, which is further used to determine whether the value of the investment went up or down.

The first factor in the adjusted basis calculation is to determine how the owner got the home. If the owner bought it or built it, then the adjusted basis is the cost of the purchase (down payment and loans) or build (cost of construction). If the owner got it as a gift, typically, the adjusted basis is the same as the previous owner's. If the owner got it as inheritance, typically, the adjusted basis is the fair market value of the home on the date of the decedent's death.

NOTE: If you owned your home jointly with your spouse and your spouse has passed, your basis in the home will change. The new basis for the half interest that you receive from the deceased spouse will be one-half of the fair market value on the date of death. The basis in your half will remain one-half of the adjusted basis determined from the initial adjusted basis. Your new basis in the home is the total of these two amounts. An example from the IRS website follows:

Your jointly owned home had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).

NOTE: Some basis situations are not contemplated in this article, such as adjusted basis when receiving property in a divorce settlement, adjusted basis when a home is built using insurance proceeds, etc. If you have a question about a certain basis situation, please contact an attorney.

The second factor is to add to the adjusted basis the costs of getting the home, called settlement fees or closing costs. These costs include installation of utilities, abstract of title fees, legal fees, recording fees, survey fees, transfer taxes, title insurance, certain real estate taxes, any amounts the seller owes that the buyer agrees to pay, etc. NOTE: not all settlement fees or closing costs may be used to adjust basis. If you have a question about a certain fee, please contact an attorney.

The third factor is to add to the adjusted basis additions and improvements to the home. In order to qualify as an addition or improvement that can be added to the adjusted basis, the addition or improvement must have a useful life of more than one year. This can include basic additions and improvements (new or improved bathroom, new or improved deck, new or improved kitchen, etc.), funds expended for special assessments for local improvements (a condo special assessment for a new roof), as well as amounts spent after a casualty to restore damaged property.

NOTE: there are several factors that decrease the adjusted basis that are not contemplated in this article, which may lead to greater gain (discharge of some or all of the debt incurred for purchase or development of the home, insurance payments for casualty losses, residential energy credits claimed, etc.). If you have a question about a certain deduction in adjusted basis, please contact an attorney.

Determining Gain

Again, to determine the amount of gain, take the amount realized and reduce it by the adjusted basis. To calculate the amount realized, take the selling price and subtract any selling expenses and personal property that was sold with the home. Selling expenses can include real estate broker commissions, advertising fees, legal fees, etc. If you have a question about selling expenses, please contact an attorney.

How about a few examples?

Example One: Home Was Purchased Take the amount realized (let's say the selling price was $505,000 and the amount of selling expenses and the personal property that was sold with the home is $5,000 ($505,000 - $5,000 = $500,000)), which is $500,000, and reduce it by the adjusted basis from the purchase (let's say the house was purchased for $130,000, the settlement fees and closing fees total $3,000, and there was an extra room added for $17,000 ($130,000 + $3,000 + $17,000 = $150,000)), which is $150,000. The total gain on the home would be $350,000.

Example Two: Home Was Gifted During the Original Owner's Life Assume the same amount realized from Example One ($500,000) and reduce it by the adjusted basis from the original owner, since the property was given during the original owner's life (let's say the original owner's adjusted basis was $50,000 and there was an extra room added by the subsequent owner for $20,000 ($50,000 + $20,000 = $70,000)). The total gain on the home would be $430,000.

Example Three: Home Was Inherited Assume the same amount realized from Example One ($500,000) and reduce it by the adjusted basis, which would be the fair market value on the date of the previous owner's death (let's say the fair market value on the date of the previous owner's death is $420,000 and there was an extra room added by the subsequent owner for $20,000 ($420,000 + $20,000 = $440,000)). The total gain on the home would be $60,000.

The Gain Exclusion

After calculating the gain, let's explore the gain exclusion. To qualify for the gain exclusion, an owner must have owned the home for at least two years and lived in the home as the owner's main home for at least two years during the previous five years. If the owner meets the exclusion, then the owner can exclude up to $250,000 if filing a single return, and $500,000 if married and filing a joint return.

Calculating the Tax

Let's determine the tax of the previous examples for a single person and a married couple assuming a 15% long term capital gains tax:

Example One Gain was $350,000. A single person using the exclusion would have a gain of $100,000 and a tax of $15,000. A married couple using the exclusion would have a gain of $0 and a tax of $0.

Example Two Gain was $430,000. A single person using the exclusion would have a gain of $180,000 and a tax of $27,000. A married couple using the exclusion would have a gain of $0 and a tax of $0.

Example Three Gain was $60,000. A single person using the exclusion would have a gain of $0 and a tax of $0. A married couple using the exclusion would have a gain of $0 and a tax of $0.

Taking from The Examples

A quick analysis of the amount of tax in each example would yield the understanding that a higher adjusted basis, thus a lower gain, is key to minimizing tax. People will gift their property during their lives, which can be a big mistake (they are also gifting their assumably low basis). There are so many other easy ways to gift property, than just outright, that would carry the benefit of a stepped up basis and reduction of tax. A reduction that could possibly be several thousand dollars.

Please feel free to contact me for any further explanation of this article or to answer any questions; I am always happy to help.

Transfer on Death Instrument (Illinois)

By Matthew A. Quick A very effective and efficient estate planning tool has been made available in Illinois as of January 1, 2012, especially suited for people who want to make an outright distribution of their property without the protections of a trust. A new Illinois law, called the Illinois Residential Real Property Transfer on Death Instrument Act, at 755 ILCS 27/1, et seq., allows owners to transfer their Illinois residential real estate outside of probate using a prerecorded instrument, which is akin to a deed, but referred to in the new law as a "Transfer on Death Instrument." Practically speaking, this law allows an owner to indicate who should be the beneficiary of certain real estate before the owner's passing. Upon the death of the owner, the property will simply pass to the beneficiary with minimal administration (basically all that is required is the filing of an executed form, there is no requirement of probate and no requirement of a trust arrangement).

Highlights of the new act: The real estate must be residential (a building with less than 4 units, a condo, etc.); The instrument will always be revocable, even if contrary language is contained in the instrument; The beneficiaries, but not creators of the instruments, can be business entities; and The owner may deal with his or her residential real estate during his or her life without restriction.

The instrument: It must meet the requirements of a properly recordable deed and be witnessed (witnessed in the same way as a last will and testament, which is different from the execution of a deed); It must state that the transfer is to occur at the owner's death; and It must be recorded with the recorder before the owner's death.

Since the statute did not dictate any forms for use, please consult an attorney to draft an instrument if you are interested. When utilized correctly, a Transfer on Death Instrument can be an extremely efficient means of transferring property without the use of a trust arrangement or the probate process and would make a great addition to a basic estate plan.

Ensuring Trust Terms Are Followed Regarding Real Estate (Michigan)

By Matthew A. Quick When inspecting the deed to property, the buyer may find the word "Trustee" following the name of the person purported to be the trustee of a trust managing the property, but if the deed contains no other reference to a trust or trust powers, it does not itself constitute notice of a trust. Michigan Land Title Standard 8.2.

Michigan law provides that when an express trust is created, but is not contained or declared in the deed to the trustees, and the trustees then convey the property to a purchaser (for valuable consideration and without notice of the trust) the title to the property shall vest in the purchaser for value. MCL 555.20.

In sum, more than just the word "Trustee" after the name of the trustee in the deed is required to give notice that the subject property may only be conveyed pursuant to the rules of a trust.

Avoid Probate without a Trust (Michigan)

By Matthew A. Quick Avoiding probate seems to be the goal in everyone's mind and, most often, for good reason. Although probate may be necessary at times, it can be time consuming, public and costly (with probate court fees and costs and publication fees alone averaging approximately $800 for an estate with property worth $200,000).

Remember, probate is the court process of distributing the property of someone's estate (what someone owns at death). If there is a will, the probate process distributes property pursuant to it. If there is not a will, the probate process distributes property pursuant to state law. A common misconception is that a will allows an estate to avoid probate. In fact, the opposite is true. In order for a will to be used, it MUST go through the probate process.

There are two main alternatives to relying on probate (that is relying on only a will or nothing at all). The first is the use of a trust, which is an agreement that requires a trustee to hold property for the use and benefit of someone else. Trusts are a great utility for families with loved ones that have special needs or minor children, because of certain protections and distribution provisions that are offered. However, sometimes a trust is not necessary.

If someone has basic wishes for distribution of his or her estate, designating beneficiaries on the titles of the property he or she wish to distribute is the effective and efficient alternative. Beneficiary designation works in the following way: as for a deposit account (checking, savings, investment), a "Transfer on Death" provision can be added allowing the owner of the account to give the funds of the account to another upon his or her death; as for a house, a deed can be written to create an interest for someone else upon death by use of a Lady Bird provision (a provision that states the owner shall own the real estate for his or her life and do with it whatever he or she pleases, but if the owner continues to own the real estate upon death, the real estate shall be transferred to certain beneficiaries); as for vehicles, a form can be filed with the Secretary of State by a spouse or heir (for more info on this click here); and personal property may be transferred before death or entrusted to someone to help distribute it after death.

Ask your attorney to help because beneficiary designation can be a bit daunting, but, if done correctly, it can save time and money.

NOTE: a will should always be prepared as a safety net, even if a trust or beneficiary designation exists. If an estate is planned to avoid probate, and organized appropriately, the will is not used.

Transfer of Vehicle Outside of Probate at Death of Owner (Illinois)

By Matthew A. Quick If you are looking for easy, how about property automatically transferring to a beneficiary upon the owner's death, without probate or any other administration. Deposit accounts (checking, savings) can have transfer on death provisions, so too can individual retirement accounts and life insurance. When it comes to vehicles, state law provides an opportunity to designate a beneficiary right on the title in the event the owner dies. 625 ILCS 5/3-104 provides:

The Secretary of State shall designate on the prescribed application form a space where the owner of a vehicle may designate a beneficiary, to whom ownership of the vehicle shall pass in the event of the owner's death.

Further, 625 ILCS 5/3-107 provides:

The Secretary of State shall designate on a certificate of title a space where the owner of a vehicle may designate a beneficiary, to whom ownership of the vehicle shall pass in the event of the owner's death.

If it fits into your estate plan, visit the Secretary of State to designate a beneficiary on your title. This process provides a great alternative to placing a vehicle in trust or having joint vehicle owners (too much liability!).

If, however, a beneficiary was not designated prior to the passing of a decent, consider the use of a small estate affidavit or attorney's affidavit. More information can be found by clicking here: Vehicle Title Transfers . Here is the Illinois Secretary of State Small Estate Affidavit.

The lesson: There are easier alternatives to transferring a vehicle than opening a probate estate. Please contact me with any questions.

Waiver of Spouse's Right to Property (Michigan)

By Matthew A. Quick Michigan law provides for a waiver of certain property rights that are normally automatically afforded a surviving spouse. When considering premarital (prenuptial) or postmarital (postnuptial) planning, estate and succession planning should be a very large part of the consideration. MCL 700.2205 states the following:

The rights of the surviving spouse to a share under intestate succession, homestead allowance, election, dower, exempt property, or family allowance may be waived, wholly or partially, before or after marriage, by a written contract, agreement, or waiver signed by the party waiving after fair disclosure. Unless it provides to the contrary, a waiver of "all rights" in the property or estate of a present or prospective spouse or a complete property settlement entered into after or in anticipation of separate maintenance is a waiver of all rights to homestead allowance, election, dower, exempt property, and family allowance by the spouse in the property of the other and is an irrevocable renunciation by the spouse of all benefits that would otherwise pass to the spouse from the other spouse by intestate succession or by virtue of a will executed before the waiver or property settlement.

Living Trust and Spouse's Interest (Michigan)

By Matthew A. Quick A question that comes up frequently: If one spouse sets up a trust in his or her name only, and funds it with marital property does the other spouse have any right to the property in the trust upon death?

Upon death, the other spouse does not have an interest in the trust and there is nothing under the Estate and Protected Individuals Code (the law that controls this area) that gives him or her any rights under the trust. Not even elective rights may be made against the trust.

Deceased Joint Tenant Affidavit (Illinois)

By Matthew A. Quick If real estate is owned jointly (joint tenancy, tenancy by the entirety (husband and wife)) and one of the joint owners dies, a Deceased Joint Tenant Affidavit, along with the decedent's Death Certificate, is required to be filed with the recorder in the county in which the real estate lies in order to transfer the real estate.

The Deceased Joint Tenant Affidavit ("affidavit") is a written, sworn statement that the decedent has passed and was the joint owner of the real estate. The affidavit must be completed by a person who was acquainted with the decedent (not necessarily an owner of the property), contain certain information, and be signed and notarized.

Prohibitions of Due on Sale or Acceleration Clauses in Promissory Notes Secured by Real Estate

By Matthew A. Quick A due on sale clause, or acceleration clause, is the provision in a contract, most often a promissory note (a promise to pay), that authorizes the lender to demand payment of a sum when the property that is acting as security is sold or otherwise transferred. Federal law, specifically Title 12, Chapter 13, Section 1701j-3, restricts the ability of lenders from invoking such a provision under certain circumstances (also called Garn-St. Germain exceptions). These circumstances include, but are not limited to, the following:

The creation of a subordinate lender’s interest; The creation of a purchase money security interest for household appliances; A transfer on the death of a joint tenant; The granting of a leasehold interest of three years or less not containing an option to purchase; A transfer to a relative resulting from the death of a borrower; A transfer where the spouse or children of the borrower become an owner of the property; A transfer resulting from divorce; and A transfer to an inter vivos trust in which the borrower is and remains a beneficiary.