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.
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.
Real Estate Tax Proration Cook County (Illinois)
By Matthew A. Quick
For a more general article on real estate tax proration go here.
Real estate taxes in Cook County are annually paid in two installments (typically due about March 1st and August 1st) and are paid in arrears, which means the taxes paid in 2018 are for taxes accrued in 2017. Cook County has adopted an accelerated billing method, which means the first installment of taxes is 55% of the previous year's total tax amount. It is considered accelerated billing because a tax is levied on real estate without the County ascertaining the tax rates (in other words, a portion of the tax is paid before the actual amount of tax is calculated). Therefore, the first installment of taxes alone cannot be used to determine the entire year's tax obligation, because the entire year's tax obligation has not yet been calculated.
To prorate Cook County taxes for a home sale, look to the last ascertainable full tax year. For example, if a home sale occurred in May of 2018, at a time when the taxes for 2017 were being paid, then 2016 will be the last fully ascertainable tax year, because the 2017 taxes had not yet been calculated (bills are typically published in June showing the full year tax less the March payment). Once the most recent full tax year has been found, look to the real estate contract to determine the proration rate (typically between 105% and 110%). Finally, determine the closing date and count the number of days into the year the date represents (June 15th is 166 days). Let's prorate!
Assume that the closing date was set for June 15, 2018. The last fully ascertainable tax year was 2016 and the total tax for that year was $10,000. We will assume a proration rate of 110%. We know the March 2018 payment was in the amount of $5,500 (55% of the last full ascertainable tax year).
Second Installment for 2018 is determined by multiplying the last fully ascertainable tax year ($10,000) by the 110% proration factor (10,000 x 1.10 = 11,000) and subtracting the amount already paid in March payment (11,000 - 5,500 = 5,500). Thus, the tax proration credit for the 2nd installment of 2017 taxes (paid in 2018) would be $5,500.
The proration for the days leading up to closing is determined by again multiplying the last fully ascertainable tax year ($10,000) by the 110% proration factor (10,000 x 1.10 = 11,000). Determine the amount of days from January 1, 2018, to June 15, 2018 (166 days). Reduce the amount of the total prorated tax ($11,000) to the amount of tax owed per day ($11,000/365 = 30.137). Multiply the amount of days by the amount of tax per day (166 x 30.137 = $5,002.74). Thus, the prorated amount for the days spent at the property for 2018 (to be paid in 2019) would be $5,002.74.
The total amount of tax based upon this proration would be $10,502.74 ($5,500 + $5,002.74).
The tax proration is credited from the seller to the buyer at closing, because, as noted above, the taxes will not become due until a later date.
Appropriate Business Organizations to Own Real Estate
By Matthew A. Quick For those that have real estate that they wish to be owned by an entity (a good idea for the sake of liability, tax and succession planning), the most beneficial entities to consider are generally neither S Corporations, nor C Corporations. Only a Partnerships or LLCs have the benefit of making a 754 Election, which provides a step up in basis upon the death of an owner. A step up in basis reduces the taxable gain on a future sale, thus reducing the eventual tax.
Deed Restriction Prohibition (Illinois)
By Matthew A. Quick The Property Tax Code has been amended to prohibit a deed restriction, restrictive covenant or similar provision from waiving or restricting the statutory rights to notice of a public hearing or the right to object, oppose or challenge (1) the creation of a special-service area; (2) the levy of any tax of a special-service area; or (3) the issuance of bonds of a special service area. This law became effective on August 23, 2011, and is codified at 35 ILCS 200/27-55a.
IRS's 10 Tax Tips for Home Sellers
By Matthew A. Quick Here are the IRS's top 10 tax tips for home sellers:
1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
4. If you can exclude all of the gain, you do not need to report the sale on your tax return.
5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
6. You cannot deduct a loss from the sale of your main home.
7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
9. If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year's tax return.
10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.
Probate and Taxes (Illinois)
By Matthew A. Quick In a recent decision, the court in the case of In re Estate of Matthews, Deceased (1-10-1427; March 24, 2011; Cook County) ruled when a testator bequeaths real estate, the will must specifically provide for the estate to assume responsibility for real estate tax obligations, including delinquent taxes from years prior to testator's death, if the testator intends to give the real estate free of encumbrances. Although a testator need not use the precise statutory language of Section 20-19 of Probate Act, the testator must still include an express provision directing estate to assume responsibility for real estate taxes to shift tax obligation from a beneficiary to the estate.
Exempt Transactions and Forms (Illinois)
By Matthew A. Quick When filing a Deed of an Exempt Transaction (typically involving consideration of less than $100 pursuant to 35 ILCS 200/31-45 Paragraph (e)) certain forms are required to be filed along with it. In the City of Chicago, the Deed must be accompanied by a Statement by Grantor and Grantee, as well as a City of Chicago Property Transfer Tax Declaration. Outside of the City of Chicago, but within the County of Cook, the Deed must only be accompanied by a Statement by Grantor and Grantee, and comply with any local requirements (e.g. In Westchester there is a transfer stamp requirement, even on Exempt Transactions). A Cook County Transfer Declaration is not required in Exempt Transactions in the County of Cook. In addition, a PTAX Form is not required throughout the State of Illinois in Exempt Transactions.
No Federal Tax Deduction for Loss on a Personal Residence
By Matthew A. Quick Although a gain on the sale of a personal residence over the exclusion ($250,000 for an individual; $500,000 for a couple) is taxed as a capital gain, a deduction cannot be taken if there is a loss on the sale of a personal residence. However, losses on investment property (a rental home) may be deducted.
For more on taxes on the sale of a primary residence/main home, click here.
The Estate, Issue Nine
By Matthew A. Quick Probate
Probate is the legal process of settling the estate of a deceased person. Settling a decedent’s estate involves making claims on behalf of the estate (collecting money owed to the decedent, bringing medical malpractice claims, etc.), resolving all claims against the estate (paying creditors, responding to lawsuits, etc.), distributing the property in the estate after all claims are made and resolved (distributions are made pursuant to a Will or the statutory rules of intestate succession), and addressing the guardianship of any minor children or other dependents (guardians are appointed in a Will or determined by statutory rules of guardianship).
Probate can be costly and time consuming, but it is not the same process with all decedent’s estates. Some estates do not require probate if there is no property to be distributed. An estate can be left with no property to be distributed, thus avoid probate, if the decedent’s property is not owned solely by the decedent upon his or her passing. Instead of the deceased owning property solely, he or she could hold property in a trust, jointly with another person, or provide a pay-on-death (referred to as “P.O.D.”) or transfer-on-death (referred to as “T.O.D.”) designation.
To own property in a trust, the person setting up the trust (referred to as the “Settlor”) transfers ownership of property to a Trustee based upon certain terms and conditions that are listed in a Trust Declaration. The terms and conditions of a Trust Declaration are instructions that the Trustee is bound to follow in maintaining or investing the Trust Property. One of the terms of the Trust Declaration is how the property that is being held in the Trust is distributed after the Settlor’s passing. Since the Trustee, not the Settlor, owns the property when the Settlor passes, the Settlor will have no property to be distributed through probate, thus negating the need for probate.
Joint ownership is another effective way to avoid probate. Joint ownership occurs when more than one person owns property at the same time, but each has a right of survivorship. Therefore, when one of the owners passes the other owners continue to own the property without the need for probate. Typically, we see joint ownership with real estate and deposit accounts (checking accounts, savings account, etc.).
Probate can also be avoided by setting up P.O.D. or T.O.D. designations on bank accounts, shares of stock, brokerage accounts, 401ks, IRAs, automobiles and life insurance. Any property that has a P.O.D. or T.O.D. designation will pass automatically to designated beneficiaries upon the passing of the owner of the property. P.O.D and T.O.D. designations differ from joint ownership because once someone is made a joint owner they are an owner and have equal right to control the property. Conversely, if P.O.D. and T.O.D. designations are used, the owner of the property retains control of the property until the date of his or her demise, at which time the property is transferred.
If property is owned solely by the decedent upon his or her passing, then the property must be distributed through probate. Estates that must endure probate will follow one of three general processes: (1) that of a testate estate; (2) that of an intestate estate; or (3) that of a small estate. A testate estate is one that follows directions of a valid Will when being administered. An intestate estate is one that does not follow the directions of a Will, but follows statutory rules of administration. A small estate is one that the legislature considers small enough to administer through a summary proceeding, which typically involves very limited, if any, contact with a court. In Michigan, the threshold for a small estate is $15,000 remaining in the estate after debts and expenses have been paid. In Illinois, the threshold for a small estate is $100,000.
The first step to probate a testate estate is to start a case with the Probate Court, which has special jurisdiction over cases involving estates and guardianship. The Probate Court will determine the validity of the Will and appoint a Personal Representative for the estate. The Personal Representative is typically nominated in the Will (when dealing with a testate estate the personal representative is also called an executor (male) or executrix (female)). Through, and with the power of, the Probate Court, the Personal Representative collects and inventories all of the property in the estate, pays any debts, taxes and expenses, follows the instructions of the Will regarding guardianship of any dependents and distribution of property, and adjudicates the interests of interested parties who may have claims for or against the estate.
The first step to probate an intestate estate is to also start a case with the Probate Court, but instead of determining the validity of a Will (since there isn’t one) the Probate Court will nominate and appoint a Personal Representative for the estate (when dealing with an intestate estate the personal representative is also called an administrator (male) or administratrix (female)). Like testate estates, the Personal Representative will act through and with the power of the Probate Court, however, rather than following the instructions of a Will, the Personal Representative must administer the estate in accordance with the laws of the state where the decedent resided at his or her death. This means that the estate must be distributed to the heirs named by the laws regardless of their relationship or kinship to the decedent. In sum, the intestate process takes all control out of the hands of the decedent’s family to distribute property or decide which person should be named guardian of minor children.
After all of the claims against the estate are paid, the claims for the estate are made, and the property that made up the estate is distributed, the case involving the estate is closed. From opening the case to closing the case, probate generally lasts several months, in some instances over a year, and incurs substantial court and attorney costs. To avoid the time, cost and publicity involved with probate it is imperative to organize an estate in a manner that will not require a lengthy court case, but will allow for a seamless transfer of ownership.
The Estate, Issue Eight
By Matthew A. Quick Real Estate Closings
A real estate closing (also referred to as a “settlement” or “escrow”) is the culmination of a real estate transfer. The real estate closing is simply the meeting at which the buyer of a piece of property pays the amount promised in the purchase agreement and is deeded the real estate. However, the process leading up to the closing, as well as the events that occur at the closing, tend to complicate the process.
The purchase agreement initiates the closing process. It is the document that outlines the understanding between the buyer and the seller that typically regards the following items, some of which are explained in further detail below: the date of the closing; the fixtures and personal property that will be sold with the real estate; the purchase price of the real estate; a schedule for depositing earnest money; a mortgage contingency (if not a cash sale); inspection of the real estate and modification of the purchase agreement; how proration of taxes and assessments will be handled; the time allowed to complete a title inspection and the party that is obligated to pay for title insurance; the time allowed to provide a survey and the party that is obligated to pay for the survey; the payment of transfer taxes; and any required disclosures.
Closing Date. The closing date is chosen by the buyer and seller approximately four to six weeks from the date of the purchase agreement with the understanding that the date may be changed if the parties so wish. The period between the execution of the purchase agreement and the date set for closing is intended to allow enough time for the parties to complete the items that comprise the balance of this article.
Fixtures and Personal Property. Fixtures are best understood by first considering the difference between real property and personal property. Generally speaking, real property is land and all of the rights, privileges and improvements to the land, such as buildings, crops and underlying mineral rights. On the other hand, any movable, tangible object is considered personal property, such as a wooden board, a chandelier or a kitchen appliance. A fixture is a piece of personal property that is fixed to real property to a degree that it is intended to become real property. Therefore, if the wooden board is used to make a shelf, the chandelier is attached to the ceiling, or the kitchen appliance is installed, it could become part of the real property as a fixture depending on the extent of the attachment. Rather than debate whether each piece of personal property is a fixture during every real estate sale, the purchase agreement details the items of personal property and the fixtures that will be transferred to the buyer. Typically, the personal property transferred includes kitchen appliances, washer, dryer, lighting fixtures, smoke detectors, window treatments, carpeting and built-in shelving or cabinetry; however, there is no limit to what may be included with the home may it be a stereo system or hot tub. Of most importance is to note in the purchase agreement the items of personal property that will be sold with the real estate so there is no misunderstanding.
Earnest Money. Earnest money is an amount agreed upon by the parties to be deposited by the buyer to bind the parties to the purchase agreement. Earnest money is usually placed in an escrow account and held until the closing date, at which time the funds are used to settle the sale. The deposit of the earnest money may be made all at once or over a period of time, in any instance the initial deposit is required upon the execution of the purchase agreement. If the earnest money deposit is a significant amount, the parties may agree to have the deposit placed in an interest bearing account with the interest paid to the buyer.
Mortgage Contingency. A mortgage contingency is a condition that requires the buyer to secure appropriate financing before the purchase agreement is given effect. It is a critical protection for the buyer, because if the buyer cannot secure appropriate financing the earnest money is returned and the purchase agreement is null and void. What is considered appropriate financing involves an agreement between the parties regarding the amount of financing, the annual percentage rate to be charged by the lender and the period allowed for repayment. By way of example, a mortgage contingency clause may provide “This purchase agreement is contingent upon buyer securing, within 40 days, a firm written mortgage commitment for a fixed rate mortgage in the amount of $300,000, the interest rate not to exceed 5% per year, amortized over 30 years.”
Inspection and Modification of the Purchase Agreement. The purchase agreement will contain an inspection provision that gives the buyer the ability to have the real estate inspected for any defects. The inspection period typically lasts five to seven business days. After the buyer has had the real estate inspected, the inspector will provide an inspection report detailing all of the property’s defects. The buyer and seller may then renegotiate the purchase price or repair of the real estate based upon the inspection report. The time allowed to renegotiate the purchase agreement is called the modification period, or more specifically the attorney modification period, because of an attorney’s role in renegotiating the purchase agreement. The attorney modification period is relatively short, typically no longer than the inspection period.
Title Inspection and Title Insurance. A title inspection is a review of the history of ownership of real estate to ensure that the seller owns and can sell the property he or she is offering. A clear title inspection is required if title insurance is to be purchased. Title insurance is an insurance policy to protect a buyer against loss based upon a seller’s lack of ownership, which could include an encumbrance or lien that was not noticed prior to the sale. In most transactions, the seller purchases the title insurance for the buyer.
Closing and Escrow. Prior to the closing date the parties, or their attorneys, will receive a settlement statement (also called a HUD-1) from the closing agent (who is typically from the title company—the company that issues the title insurance policy). The settlement statement is a balance sheet that details how the funds involved in the transaction will flow. This is an important document to review to ensure that all of the fees, costs and payouts are accurate. In addition, the settlement statement will let the parties know how much money they will need to bring to, or will be getting from, the closing.
On the closing date, the parties meet at the title company. The buyer will need to deliver a cashier’s check or have the funds wired from his or her bank for the balance owed on the purchase price after deducting the deposited earnest money and the amount of the home loan. The seller may also be required to bring funds to the closing to cover costs, fees or liens, such as a loan payoff.
In sum, at the closing, the closing agent will accept and disburse all of the funds pursuant to the settlement statement and the seller will transfer the deed for the home to the buyer. Both the buyer and the seller will be responsible for signing various documents at the closing. All of the documents signed at the closing involve either the transfer of the property being purchased or the funds being borrowed for the purchase.
The typical documents that relate to the transfer of the property are the following:
Warranty Deed. The warranty deed is the conveying document that transfers ownership of the property from the seller to the buyer. This document will immediately be filed with the county recorder of deeds (or register of deeds) to put the world on notice of the conveyance and the rightful owner.
Bill of Sale. The bill of sale is a receipt for purchase of all the personal property and fixtures that were sold with the real estate.
The typical documents that relate to the funds being borrowed for the purchase are the following:
Payoff Letter. The seller will bring a payoff letter for each outstanding loan on the property to give to the closing agent to certify that the funds being paid to the seller’s lender(s) are in an appropriate amount to clear the loans and give the buyer clear title.
Truth in Lending Statement (also known as “Regulation Z” or “TIL”). The TIL discloses to the buyer the interest rate, annual percentage rate, amount financed and the total cost of the loan over its life. It is important to review this document carefully to ensure that the rates are appropriate.
Monthly Payment Letter. The monthly payment letter reveals the break down of the buyer’s monthly payment into principal, interest, taxes, insurance and any other monthly escrows. Again, this document should be carefully reviewed to ensure that all amounts are correct.
Note. The note is the contract with the lender to payback any amounts borrowed.
Mortgage. The mortgage is a lien on the property as security for the loan. This document will be immediately filed with the county recorder of deeds (or register of deeds) to put the world on notice of the security interest in the property.
Although the real estate closing process may seem daunting, with close attention and the help of others the process can be easily managed.
-Real Estate Transfer Taxes-
Real estate transfer taxes are taxes imposed when property is transferred. In Illinois and Michigan the tax is assessed by an ad valorem (according to worth) tax that is based on the value of the property transferred. In some states, however, such as Vermont, a transfer tax is only imposed on gain from the sale; and in other states, such as Indiana, there is no transfer tax.
In Illinois and Michigan, the transfer tax is stated as a fee. For example, in Michigan the state fee for transfer is $3.75 for every $500 of the purchase price, which is equivalent to .75% of the purchase price. Therefore, to calculate the fee, take the purchase price and divide by $500, then multiply the quotient by $3.75 (or simply multiply the purchase price by .0075).
State and local laws may or may not stipulate which party is responsible for paying the tax. In addition, both Illinois and Michigan provide a number of exempted transfers that are not taxed, such as transfers where the consideration is less than $100.
Real estate transfer taxes involve basic mathematics, but the rates and responsibility for such can get confusing and require attention. If any questions arise, please consult a real estate professional.
-Conclusion-
I hope this issue of The Estate has been helpful. Please feel free to contact me with any questions or concerns, or to schedule a complimentary consultation. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding estate planning are provided free to groups of any size. Please let me know if there is any way I can help.
Property Tax Appeals (Illinois)
By Matthew A. Quick In light of the decision in Cook County Board of Review v Property Tax Appeal Board, if a violation of uniformity (an unfair assessment when considering the value of comparable properties) is proven by clear and convincing evidence to a property tax appeal board, then property is not equitably assessed for levying tax thereon and a new assessment must be given. This is true regardless of whether two condominium buildings have the same physical characteristics and percentage of ownership in the common elements. The assessments of the condominiums should not rest merely on these factors. Rather, the assessments of the condominiums should differ depending the means by which they had been subdivided or any other characteristics.
The Estate, Issue Seven
By Matthew A. Quick Real Estate Taxes
Real estate taxes are the main source of revenue for local municipalities, which are used to provide benefits and services such as schools, community colleges, police and fire departments, health care facilities, museums, water and sewer, roads and sidewalks, parks, libraries and so forth. Real estate taxes are calculated using the value of the property, which is called an ad valorem (according to worth) tax. Once the value of a parcel is established, a tax rate is applied, thus yielding the property tax owed. Determining the value of a piece of land (also referred to as a “parcel” or “tract”) and levying the appropriate tax is a process that involves several factors.
For administrative purposes, a property identification number (referred to as a “PIN”) is initially given to each piece of land (usually a 10 to 14 digit number), allowing land and tax records to be easily identified and transferred between municipal departments. Then, to figure the value of the parcel, an assessment is performed by the county or city assessor, who is a public official that appraises the property. The property assessment may be according to one or more appraisal methods, such as market value, replacement cost or income value. In Illinois, parcels are assessed every three to four years; in Michigan, parcels are assessed upon transfer and the assessed values are increased annually by an appreciation factor (the lesser of either the rate of inflation or 5%).
While some municipalities assess the property at its full value, others determine the taxable value of a parcel based upon a percentage. The determination of the assessor as to the taxable value of a parcel of property may be appealed by the property owner, typically within a limited timeframe.
In Michigan, after the property is assessed, there are no further calculations to determine the taxable value. However, after the property is assessed in Illinois, the calculations can get tricky by including such figures as an established assessment rate and state equalization factor, which are set by the county and state (basically, a means to manipulate property taxes without changing the property’s assessed value).
When the taxable value of the property is determined, the tax rate is then applied to determine the amount of tax owed. In Michigan, the taxes are levied as a millage rate, which is equal to 1/1000th of a dollar. Thus, to figure tax on a millage rate of 4.19, simply multiply .00419 by the taxable value of the property. On the other hand, Illinois property taxes are computed on a percentage basis of the taxable value of the property. Additionally, some exemptions are available to homeowners, seniors, veterans and the like, which are dollar for dollar reductions in the amount of tax owed.
When buying or selling property, prorating property taxes is an issue. In Illinois, property taxes are paid in arrears, which means that 2009 taxes are due this year. Therefore, the seller will pay the buyer for the days the seller spent occupying the property that have not yet been paid. In Michigan, however, taxes are paid in advance, which means the buyer will pay the seller for the days the buyer will spend occupying the property that have already been paid.
Property taxes vary in each municipality, be it by tax rate or mode of assessment. Because property taxes represent a substantial expense for property owners, each property tax bill should be independently examined to ensure it is accurate. If there are any questions regarding the accuracy of a tax bill, do not hesitate to contact the assessor, treasurer or a property tax professional.
-IRAs-
Regardless of age or proximity to retirement, one of the most important decisions to be made regarding one’s financial future is the source of retirement income. The federal government and many individual workplace organizations have retirement programs that are offered to employees, such as 401(k) (private sector retirement plan), 403(b) (non-profit sector retirement plan) and 457 (government retirement plan) plans. However, many questions have surfaced as to the reliability and security of these programs in the years to come. Also, many individuals are seeking investment options in addition to workplace plans, which has prompted an interest in individual retirement arrangements (referred to as “IRAs”). IRAs are a great way to diversify investments and secure retirement resources with beneficial tax treatment. IRAs come in many different varieties, thus allowing an IRA to easily be tailored to an individual’s investment and estate plan.
Introduced in 1974, an IRA is a specific retirement plan that can be built to one’s needs. Even though IRAs have developed significantly over the years and have taken several different forms, the traditional IRA and the Roth IRA illustrate the greatest difference that remains among the several types; that is, the method by which each is taxed.
The government has provided beneficial tax treatment for IRAs. Instead of taxing each transaction that occurs within an IRA, which is typical of a common investment, such as buying and selling stock, all transactions within an IRA have no tax impact. With a traditional IRA, a contribution is tax deductible, which means that no income tax is paid on the contribution. Instead, withdrawals are taxed as income. On the other hand, with a Roth IRA, a contribution is not tax deductible, which means income tax is paid on the contribution and withdrawals are not typically taxed.
Currently, the government allows a $5,000.00 per year maximum contribution for those under the age of 50 and a $6,000.00 per year maximum contribution for those over the age of 50. A contributor will be allowed to fund a traditional IRA over the annual contribution limit, but will not be allowed to make a tax deduction of any amount contributed over the annual limit. Alternatively, a contributor is altogether barred from funding a Roth IRA beyond the annual maximum contribution.
In addition to contribution limits, an IRA investor must also fall under an income threshold to enjoy the tax benefits of an IRA. For instance, to make a tax deductible contribution under a traditional IRA, a contributor who is married and filing jointly cannot have a modified adjusted gross income (referred to as “MAGI”) over $177,000.00. To contribute to a Roth IRA at all, a contributor who is married and filing jointly cannot have a MAGI over $177,000.00.
Conversions from a traditional IRA to a Roth IRA have gained substantial popularity this year because there is no income limitation on who can convert. Anyone with any MAGI can make a conversion. While a contributor continues to be barred from directly funding a Roth IRA with a MAGI that exceeds the income limitation, a traditional IRA may still be converted to a Roth IRA. There are several benefits of converting a traditional IRA to a Roth IRA, which include, but are not limited to, tax-free growth, tax-free withdrawals, and no minimum distribution requirements. Taxes would have to be paid on a conversion to a Roth IRA; however, so long as the conversion is done in 2010, the taxes on the conversion may be spread out over the 2011 and 2012 tax years.
Due to the income limitation, some contributors may not qualify to make a tax deductible contribution to a traditional IRA or any contribution to a Roth IRA; however, setting up a traditional IRA that is non-deductible would allow a contributor to convert to a Roth IRA in the future. If the laws remain unchanged in years to come, a contributor that is above the income limitation would be allowed to contribute to a traditional IRA that is non-deductible every year, then convert it to a Roth IRA.
An IRA can only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA, such as collectibles (art, baseball cards and rare coins) and life insurance, is a prohibited transaction and disqualifies the fund from its beneficial tax treatment. Once a contribution is made to an IRA, the IRA owner can direct the institution that is holding the IRA to use the contribution to purchase most types of securities and investment products.
Although funds can be distributed from an IRA at any time, there are limited circumstances when money can be distributed or withdrawn from the account without penalties. In most situations, to avoid penalty, funds cannot be withdrawn before two circumstances exist: the contributor reaches 59 and a half years of age and a five year period has lapsed since the contribution was made. There are additional exceptions that apply to early withdrawals, such as disability, a distribution to a beneficiary after the contributor’s death and when the funds are used to buy, build or rebuild a first home.
IRAs can be included in several investment arrangements that may be used to achieve sufficient retirement resources. If you have any questions, please be sure to consult a financial professional for more information on IRA eligibility, conversions, contribution limits, when the funds must be used, and what type of IRA would best suit a particular financial profile.
-Update-
Michigan Enacts E-mail and Text Message Prohibition while Driving. As of July 1st, there is a ban on sending, typing or receiving text messages or e-mails while driving (MCL 257.602b). A first offense is punishable by a $100.00 fine; a second or subsequent offense is punishable by a $200.00 fine. There are no points assessed to the driver’s record for violation of this statute.
Illinois Modifies the Process by which a Red-Light Camera Issues Tickets. Effective January 1, 2011, Public Act 96-1016 changes the use of red-light cameras that give tickets automatically as follows: (1) a law-enforcement officer must review and approve all determinations that a car committed a red-light camera violation; (2) additional fees cannot be charged to an alleged violator for exercising his or her right to an administrative hearing; (3) the motorist must be given at least 25 days after an administrative hearing to pay any penalties; (4) governments must produce a recorded image of a red-light camera violation and make the images available on the internet; and (5) a red-light violation cannot be given if the motorist moves past the stop line or cross walk and the vehicle comes to a complete stop, but does not enter the intersection.
Illinois Increases the Surviving Spouse Award in Probate. Public Act 96-968 increases the minimum surviving spouse award from $10,000.00 to $20,000.00 and increases the minimum award for a surviving minor child or an adult dependent child from $5,000.00 to $10,000.00 in estates in which the decedent passed after July 2, 2010.
-Conclusion-
I hope this issue of The Estate has been helpful. Please feel free to contact me with any questions or concerns, or to schedule a complimentary consultation. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding special needs planning and estate planning are provided free to groups of any size. Please let me know if there is any way I can help.
The Estate, Issue Six
By Matthew A. Quick HIPAA
The Health Insurance Portability and Accountability Act of 1996 (referred to as “HIPAA”) was enacted as federal law to address two main issues: (1) health care insurance coverage of employees and their families when the employees change or lose their jobs; and (2) the establishment of a national standardized means of transferring health care information. When creating the standards regarding the transfer of health care information, privacy rules evolved concerning the dissemination of certain health information. These privacy rules regulate the use and disclosure of Protected Health Information that is held or transferred by Covered Entities. Protected Health Information is considered any information held by a Covered Entity which concerns health status, any provisions of health care, or payment for health care that can be linked to an individual. Protected Health Information has been interpreted rather broadly and, in practice, includes any part of an individual's medical record or payment history. Covered Entities include hospitals, health care professionals, mental health care professionals, health care clearinghouses (billing services, health information management services, etc.), health insurance providers, and any other entity that processes or facilitates the processing of Protected Health Information.
Generally speaking, Covered Entities must keep Protected Health Information confidential, with the exception of a few limited circumstances: (1) Covered Entities must disclose Protected Health Information to the individual upon request and when required to do so by law, such as reporting suspected child abuse; (2) Covered Entities may disclose Protected Health Information to facilitate treatment, payment or health care operations regarding the individual; and (3) most relevant to this article, Covered Entities may disclose Protected Health Information to identified agents if authorization is obtained from the individual.
It is important to address the HIPAA privacy rules when planning one’s estate in order to allow health care attorneys-in-fact (agents or patient advocates that make health care decisions for another) to lawfully receive protected health care information so that the attorney-in-fact can make educated and informed health care decisions. The authorization required to allow Covered Entities to disclose Protected Health Information to health care attorneys-in-fact is called a HIPAA Waiver. A HIPAA Waiver (also referred to as an “Authorization for Use and Disclosure of Protected Health Information”) waives the privacy rules of HIPAA as to Protected Health Information disclosed to certain, identified individuals (health care attorneys-in-fact).
The people who make health care decisions for us when we are unable need to be given broad access to our medical information to make the most informed decisions possible concerning our health care. For that reason a HIPAA Waiver is required for every estate plan.
-Educational Savings Programs-
On March 30, 2010, the Education Reconciliation Act was signed into law, which changes the repayment schedules for student loans. Students who borrow money starting in July 2014 will be allowed to limit payments to 10% of their income and, after 20 years, any remaining balance will be forgiven. Those who enter public service (military, teachers, nurses, and the like) will have any balance forgiven after 10 years.
The costs associated with this new legislation will not be the burden of the taxpayers. The savings associated with ending government subsidies to banks and other financial agencies that have been making and maintaining student loans will absorb the cost and allow a large increase in funds available for grants (money that does not need to be repaid). For example, the new law makes an additional $40 billion available for the need-based Pell Grants, which do not have to be repaid. In other words, by cutting the unnecessary middleman out of the process, the federal government is making the rising higher-education costs more bearable. Even while accounting for the savings associated with this new student loan policy, students will still have to bear significant education costs that continue to rise. In the interest of making the costs a bit more tolerable, there are a few saving techniques that have become quite popular over conventional savings or the use of funds earmarked for retirement. Of note, beginning in 2010, those financing a student’s education will be eligible for tax credits up to $10,000 over 4 years (a tax credit is a dollar for dollar reduction of the amount of tax owed, as opposed to a deduction that just reduces the amount of taxable income). The ability to take the tax credits has an adjusted gross income ceiling of $80,000 ($160,000 for joint filers).
The three main educational savings programs are Section 529 prepaid tuition plans, Section 529 college savings plans, and Coverdell education savings accounts (Section 529 refers to the Internal Revenue Code). A Section 529 prepaid tuition plan is state run and only available in a limited number of states (Michigan has the Michigan Education Trust and Illinois has the College Illinois! 529 Prepaid Tuition Program). A prepaid tuition plan typically locks in the current tuition rate for the amount deposited. For example, if an amount deposited today is equal to 50% of a year of tuition, then 50% of a year of tuition will be credited regardless of the future cost of tuition (even if the tuition has sincedoubled). This plan is simple and does not involve choosing investments or building a portfolio. Locking in the current tuition rate usually offers a better return on investment than a certificate of deposit, money market account or conventional savings account and the funds deposited are tax deductible, with some limitations. If, however, a contributor wishes to make investments rather than lock in the tuition rate, thus potentially resulting in more money over time, a Section 529 college savings plan or Coverdell education savings account may be preferable.
Similar to Section 529 prepaid tuition plans, Section 529 college savings plans are tax-exempt college savings utilities. Unlike Section 529 prepaid tuition plans, there is no lock on tuition rates and no guarantee of return on investment, because a Section 529 savings plan is an investment in a portfolio, which is subject to the market. The investment allocation under a Section 529 college savings plan can only be changed twice per year and must be invested through a money manager. Withdrawals from a college savings plan may only be used for qualified higher education expenses (college and up) in order to be withdrawn tax free. However, unlike the Coverdell education savings accounts, as discussed below, there is no age limit for contributions to a Section 529 savings plan and no income limit for contributors.
Similar to Section 529 college savings plans, Coverdell education savings accounts are funded through investment portfolios and are subject to the market, however, no money manager is required and there is no limit on investment allocation changes—investments may be controlled by the contributor. The student must be under the age of 18 to receive contributions and under the age of 30 to make withdrawals. The current maximum annual contribution amount is $2,000 and the current adjusted gross income limit is $95,000 for single filers and $190,000 for joint filers. Contributions to the Coverdell education savings account are generally not tax deductible, but the withdrawn funds are tax-free if used for qualified education expenses. Coverdell education savings withdrawals may be used for any level of education (K-12 and higher), as opposed to the Section 529 college savings plans that can only be used for post-secondary education.
Each of the programs discussed can be used together to effect the greatest possible outcome. Because this article could only consider the basics of each program, be sure to consult a financial professional for more information on eligibility for student loans, transferability of the plans, contribution limits, and when and how the funds must be used.
The Estate, Issue Five
By Matthew A. Quick Trusts
A Trust is a legal arrangement where one person (the “Settlor” or “Grantor”) gives legal title of property to another (the “Trustee”) to hold for the use and benefit of a third-person (the “Beneficiary”). The Settlor is the owner of the property that is to be placed into the Trust, thus becoming Trust Property. Trust Property can be money, stock, real estate or any other form of real or personal property. The Trustee is the person or entity (such as a bank) that agrees to maintain or invest the Trust Property for the use and benefit of the Beneficiary. It is common for a Settlor to also be the Trustee, meaning the person who creates the Trust maintains or invests the Trust Property for the use and benefit of the Beneficiary (so no one else needs to be nominated or hired as Trustee so long as the Settlor/Trustee is able to act). The Beneficiary is the person or entity for whom the Trust is created.
To create a Trust, the Settlor transfers ownership of property to a Trustee based upon certain terms and conditions that are listed in a Trust Declaration. The terms and conditions of a Trust Declaration are instructions that the Trustee is bound to follow in maintaining or investing the Trust Property.
In practice, when a Settlor is also going to be the Trustee, the Settlor will transfer property to himself as Trustee and select a person or entity to succeed him. Upon death or disability of the Settlor/Trustee, his successor will then become Trustee and follow the terms and conditions of the Trust.
There are three main reasons to employ the use of a Trust. First, a Trust keeps the Settlor’s estate from having to endure probate, as a Trust outlives the Settlor and can distribute the Settlor’s estate after his death. Second, a Trust can be used to gain significant tax-saving advantages by reducing the taxable portion of an estate. Last, a Trust can shelter property from creditors, loved-ones who cannot handle large amounts of money, and the government. Consider a Trust that regulates the amount of funds children receive or a Supplemental Needs Trust, which is a Trust used when one needs to retain eligibility for government benefits (specific trust arrangements will be discussed in future issues).
Trusts are a great tool to achieve one’s future planning objectives. If you seek greater control and protection of your property and its distribution, a Trust is the ideal utility to include in your estate plan.
-Seasonal Affective Disorder-
Now that the holidays have come and gone it can be hard to believe there is still a stretch of winter yet to endure—the cold, the snow and the bleak skyline. Referred to as the “winter blues,” it is common to feel the effects of the winter season on an emotional level. Moods may decline, frustration levels may rise, and a general sense of sadness may seem to set in. Symptoms of the winter blues tend to persist during the cold, dark months and dissipate with the arrival of the spring season. As with most aspects of mental health, it is important to differentiate between the experience of one or two symptoms during a brief period of time, and several signs and symptoms that persist on a more long-term basis. While some may experience a lighter level of the winter blues, others may be coping with a more serious condition known as Seasonal Affective Disorder (referred to as “SAD”).
According to the National Mental Health Association, SAD affects more than half a million people who live in environments of variable climate change. Common factors linked to the onset of SAD include sunlight depravation that alters our circadian rhythms (or internal biological clock) and an increase in the hormone melatonin (which is tied to symptoms of depression and actually rises during long-term exposure to darker environments). Also, a family history of depression may lead to a genetic predisposition for SAD and other depression-related symptoms.
Common signs and symptoms of SAD include frequent changes in mood, feelings of fatigue or apathy, and an overall decline in self-esteem. There can also be shifts in sleeping and eating habits, as well as a decline in social interest. Previously enjoyed activities that do not inspire the same sense of happiness can also be a noticeable symptom of SAD. Differentiating itself from other depression-related concerns, symptoms of SAD are relieved with the change in season and tend to return around the same time the following year.
Treatments for SAD include light-exposure therapy, melatonin-suppressing medications, and talk therapy with a qualified mental health professional. For anyone experiencing mild symptoms of SAD or winter blues, there are several ways to alleviate your symptoms at home. By taking a long walk once a day, you are exposed to fresh air and daylight that are key factors to the biological components of your symptoms. Also, increasing the levels of light in your home (via windows or additional light sources) can be extremely helpful. Talking to a trusted family member or friend can be very beneficial in creating an understanding of your thoughts, feelings and actions, which is important for both yourself and those who are close to you. In addition, setting time aside once a day to do something you enjoy, whether it is reading a book or going to the gym, can be crucial to increasing your overall sense of well-being during these long, dreary months.
If you observe significant signs and symptoms of SAD over the course of several winter seasons, it is recommended to discuss these findings with your doctor. Given that our mental health is equally as important as our physical health, awareness and appropriate decision-making in this area can greatly impact your friends, your family, and your future.
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Carly Quick is a licensed clinical social worker who practices at Lake Bluff Middle School in the northern Chicago suburbs and invites any questions or comments via email at carlyjacks@hotmail.com. More information on SAD can be found at www.nmha.org.
-Update-
Federal Deposit Insurance Coverage (“FDIC”) Has Been Extended. The standard insurance amount for FDIC of $250,000 was set to expire January 1, 2010, but has been extended until December 31, 2013. On January 1, 2014, the amount will return to $100,000 for standard insurance. The $250,000 amount is permanent, thus will remain viable after January 1, 2014, for certain retirement accounts, which includes IRAs. For more information on the amount and applicability of Federal Deposit Insurance Coverage, please visit www.fdic.gov.
Michigan Enacts Smoking Prohibition. Beginning May 1, 2010, it will be unlawful to burn any matter or substance that contains a tobacco product in an enclosed, indoor public area. The new Act, which can be found after it takes effect at MCL 333.12601, et seq., and MCL 333.12905, et seq., will continue to allow smoking at cigar bars, tobacco specialty retail stores, and the gaming area of casinos, but only if these entities are in existence at the time the law takes effect.
-Conclusion-
I hope this issue of The Estate has been helpful. Please feel free to contact me with any questions or concerns, or to schedule a complimentary consultation. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding special needs planning and estate planning are provided free to groups of any size. Please let me know if there is any way I can help.
Real Estate Tax Proration
By Matthew A. Quick For an article more specific to Cook County tax proration go here.
Real estate tax proration is an issue that is normally addressed when transferring real property. Tax proration involves calculating the amount of tax owed on real estate for the time the real estate was owned.
In general, property taxes are for payment of government services. Property taxes are either paid in advance or in arrears and can be subject to different due dates. When property taxes are paid in advance that means government services are being purchased before they are used. An example is when taxes are paid on the first date of a fiscal year for the entire year. When property taxes are paid in arrears, government services have already been expended and the property taxes are intended to reimburse the government. An example is when taxes are paid on the last date of a fiscal year for the preceding year.
If the transfer of a home, thus the transfer of government services, occurs in the middle of a fiscal year, the transferor (the seller) only utilized the government services until the point of transfer and the transferee (the buyer) only utilizes the government services after the point of transfer. Fairness dictates that the transferor and the transferee only pay for government services while owning the property.
Prorating the proper amount of tax involves figuring whether the tax to be prorated is paid in advance or in arrears, then figure the start of the fiscal period. Count the number of days from the start of the fiscal period to the date of transfer (the closing date). Multiply the daily tax rate by the number of days. If the property tax was paid in advance, then the amount yielded is paid to the transferor. If the property tax is to be paid in arrears, then the amount yielded is paid to the transferee.
The Estate, Issue Four
By Matthew A. Quick Wills
A Will (also known as a “Last Will and Testament”) is a legally-binding instrument that, in the event of death, directs property and the care and custody of minor children. A Will does not direct all property in a person’s estate while they are living, only the property that remains titled solely in the name of the deceased. For example, a Will does not direct property that is transferred to a beneficiary at death (as is usually the case with life insurance); a Will does not direct property or accounts that are held jointly and remain with the survivor (such as jointly held real estate or bank accounts); nor does a Will direct property that has been placed in a trust during the decedent’s lifetime.
Regarding the care and custody of minor children, a Will can propose a guardian. In most instances, a Guardianship Information Form or Letter of Intent Information Form is incorporated into the Will, thus giving the proposed guardian information regarding the minor children that includes medical and educational history, religious preference, special needs, recreational activities and other helpful information.
Furthermore, a Will makes arrangements for the payment of debts, taxes, expenses and costs, and elects a person to take the necessary legal steps to carry out the instructions put into the Will (referred to as a “Personal Representative” or “Executor/Executrix”).
In order for a Will to function it must be given power by a court through a process referred to as probate. During the probate process, the Will is authenticated; creditors, fees, costs and taxes are paid; and the directions of the Will are followed. Probate can be costly and time consuming, thus an educated analysis of one’s estate should be completed to determine whether probate should and could be avoided. CAVEAT: consult an estate planning professional before changing ownership of property to avoid probate; the consequences of changing ownership could be unintended and detrimental without appropriate consideration.
Regardless of how complex or simple the estate, a Will is always included in an estate plan, whether it is used to dispose of someone’s entire estate, direct the care and custody of minor children or act as a safety-net for property that was accidentally not included in a trust or other arrangement. Rather than a simple form that can be purchased online or at an office supply store, a Will is a document that requires significant thought to include proper detailed instructions and avoid improper taxes and fees.
-Dental Insurance-
This article unfortunately cannot contemplate all types of dental insurance; however, let us consider the two primary dental insurance models: managed care plans and fee-for-service plans. Managed care plans, according to the American Dental Association (www.ada.org), are cost containment systems that direct the utilization of health care. In other words, a managed care plan controls medical costs by (a) restricting the type, level and frequency of treatment; (b) limiting the access to care; and (c) controlling the level of reimbursement for services.
Two main divisions of managed care plans have emerged: a Dental Preferred Provider Organization (referred to as a “Dental PPO”) and a Dental Health Maintenance Organization (referred to as a “DHMO”). A Dental PPO allows the patient to choose a dentist regardless of whether the dentist is in-network or out of network. An in-network dentist under a Dental PPO is contracted by the insurance company to receive a discounted fee for services. Alternatively, an out of network dentist under a Dental PPO does not have a contract with the insurance company; thus, the patient would then likely have to co-pay for services.
According to the American Dental Association, a DHMO is a capitation plan that pays contracted dentists a fixed amount (usually on a monthly basis) per enrolled family or individual, regardless of utilization. In other words, in exchange for a fee, a patient would have access to dentists that are paid by the insurance company. In return, the dentists agree to provide specific types of treatment to the patient at no charge (for other treatments, a co-payment is required). Theoretically, the DHMO rewards dentists who keep patients in good health, thereby keeping future costs low. DHMO models typically offer the least expensive dental plans.
A fee-for-service plan (known as a “dental reimbursement plan” or “DR Plan”) is typically a freedom-of-choice arrangement under which a dentist is paid for each service rendered; and is the insurance plan recommended by the American Dental Association. A DR Plan differs from a managed care plan because the patient pays the dentist directly for each service provided rather than the dentist receiving payment from an insurance company. A patient is reimbursed for the cost of the service by an arrangement with the patient’s employer. The patient can seek service from any dentist under this type of insurance plan and does not have to worry about whether the dentist is in a specific network. Ultimately, a DR Plan offers the patient great freedom and offers both the patient and the dentist broad authority to make decisions that are most beneficial to the patient.
Please visit the American Dental Association’s website, as referenced above, for a list of items to consider before choosing an appropriate insurance plan.
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Adam Winckler, D.D.S., enjoys a general dentistry practice with The Waters Dental Group in Sandwich, Illinois, and Geneva Family Dental in Geneva, Illinois. Dr. Winckler invites any questions or comments via the website of The Waters Dental Group (www.watersdentalgroup.com); the website of Geneva Family Dental (www.genevafamilydental.com); or by phone at 815.786.2146.
-Update-
Illinois has enacted the Banking Convenience Account for Depositors Act. Much like its Michigan counterpart, the Illinois Act permits a convenience account holder to be added to a bank account. In practice, the financial institution may deal with the person that is a convenience account holder as though they were an owner of the account. However, the convenience account holder does not hold title to the money in the account, thus would not be given the money upon the owner’s death. The convenience account holder is not considered to be a joint owner in the deposit account, simply someone that is helping.
The Illinois Secretary of State will act as a depository for wills and trust documents that a lawyer is safekeeping. In order to deposit the Will or trust, however, the attorney must certify that the person who created the documents cannot be located after a diligent search.
Illinois Real Estate Methamphetamine Disclosure. A seller of real estate in Illinois must now disclose whether the property for sale has been used for methamphetamine manufacture.
-Conclusion-
I hope this issue of The Estate has been helpful. Please feel free to contact me with any questions or concerns, or to schedule a complimentary consultation. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding special needs planning and estate planning are provided free to groups of any size. Please let me know if there is any way I can help.
The Estate, Issue Three
By Matthew A. Quick Living Wills and Medical Orders
Living wills and medical orders communicate a patient’s wishes regarding health care when the patient is unable. If a person does not have a power of attorney for health care, a living will may be used to inform of the care one wishes to receive. Alternatively, a medical order (referred to as a “Do-Not-Resuscitate Order” or “DNR”) is a document that expresses a terminally ill patient’s wish to not be resuscitated if his or her heart or breathing should stop.
In practical terms, a power of attorney may be more flexible because an attorney-in-fact can respond to unexpected circumstances, but a living will or medical order can be honored without the presence of an attorney-in-fact to make the actual decision. If one does not wish to give the power to make decisions regarding care to someone else, living wills and medical orders are ideal estate planning instruments to communicate wishes regarding care—remember: wishes cannot be honored if they are not known.
-Reverse Mortgages-
A reverse mortgage (also referred to as a “lifetime mortgage”) is a way to utilize the equity of a home without having to sell it. Reverse mortgages were created about twenty years ago by the Department of Housing & Urban Development (referred to as “HUD”) as a tool to save seniors from having to sell their homes in order to pay living expenses, which often led to sales at distressed prices.
A reverse mortgage works just as it sounds—the borrower receives payment from the lender instead of making payments to the lender. Payment may be received by the borrower monthly, in one lump sum, or both (e.g. a lump sum at the beginning and monthly payments thereafter). While the borrower receives payments under the reverse mortgage, the borrower is able to stay in the home. Every payment a borrower receives is added to a running balance and charged interest at an agreed-upon rate. To secure the amount of payments made to the borrower, a mortgage is executed between the borrower and the lender against the home. When the borrower permanently leaves the home, the amount lent under the reverse mortgage, plus any interest, is then repaid to the lender.
To qualify for a reverse mortgage, a borrower must be sixty-two years of age, complete financial counseling and meet any additional requirements of the lender. There are no income qualifications or minimum credit requirements for a reverse mortgage. Further, the proceeds of the reverse mortgage may be tax-free (be sure to consult your tax advisor), and there are no limits on how to use the funds.
In order for the borrower to keep a reverse mortgage in good standing, the borrower must, at least, keep current on the property taxes, maintain the home in good repair and carry insurance on the home. In addition, the lender can end a reverse mortgage and require immediate repayment if, among other things, the borrower files for bankruptcy, rents out part of the home, adds an owner to title or takes out a new loan against the property.
According to a recent study by the Employee Benefit Research Institute, seventy-six percent of workers expect to have the same or higher standard of living when they retire, but fifty percent have less than $50,000 in savings and investments. A reverse mortgage is a wonderful way of continuing one’s standard of living, but not the only way. If a reverse mortgage seems beneficial, contact your mortgage consultant to consider all of the options available.
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Brian Rozycki is a Mortgage Loan Specialist and invites questions or comments via phone at 847.721.7699.
-Life Insurance-
In the last issue of The Estate, we reviewed the basics of life insurance and potential uses. Let us now look towards the details of purchasing a policy.
The question of “How much?” is the primary issue to be addressed when purchasing a policy. In answering this question, we speak in terms of the face amount of the insurance policy, which is the amount paid upon the passing of the individual securing the policy. To come to an appropriate face amount, several factors are considered, which include payment of expenses, debts and income. To determine the appropriate face amount of a life insurance policy, the following website may be helpful: http://www.lifehappens.org/life-insurance/life-calculator.
After the face amount is determined, then we must decide who receives the benefit. Typically, the beneficiary of a life insurance policy will be the income earner’s spouse; or, in a dual income family, the spouses will name each other on their respective policies. In the alternative, the beneficiary of a life insurance policy could be a trust for the care and custody of a child or someone with special needs, or anyone else that the policy holder may designate. In certain situations, estate and tax issues may exist, thus it is wise to discuss the topic of life insurance with your estate planning attorney and financial advisor.
Regarding Term Insurance, to figure the length of the term, the policy holder should determine the amount of time he or she would need insurance. For a 40-year-old person that would need to replace his or her income until a retiring age of 60, a 20-year term would be desired. It is recommended that one initially secures the longest period of time that is needed, as premiums will likely increase if one must reapply in the future. If rates go down for any reason, a policy holder can always cancel the old policy and get a new one with the lower rate.
Life insurance policies can be purchased from several sources. Employers or associations can be great sources that can significantly reduce your rates. For example, teachers can purchase through the National Education Association, which provides life insurance in groups, thus reducing costs. The majority of insurance agents are reputable, but they operate on commission— the more insurance they can sell, the more they profit. Keep the amount of life insurance only to the level needed and only the type needed. Consider, insurance agents’ commissions increase significantly once you leave the realm of Term Insurance and move into Permanent Insurance, thus it is always helpful to get the opinion of your estate planning attorney and financial advisor before securing a policy.
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Clint Edgington invites any questions or comments via e-mail at C.Edgington@bhadvisory.com or via phone at 888.614.4625. Clint is the principal and co-founder of Beacon Hill Investment Advisory and is engaged in the practice of investment management and financial planning. Feel free to visit Beacon Hill’s web site at www.beaconhilladvisory.com.
-Update-
Michigan has enacted the Uniform Trust Code. Other than bringing Michigan into accordance with the trust laws of several other states, the advantage of adopting the Uniform Trust Code is two fold: it allows Michigan judges to easily look to the laws of other states for guidance in resolving cases and makes Michigan an attractive place to domicile trusts, thereby creating jobs of administration. The law goes into effect April, 2010. Please ensure your trust complies.
-Conclusion-
I hope this issue of The Estate has been helpful. In the event you have any questions or concerns, or would like to schedule a complimentary consultation, I am available by phone at 773.790.8058 or by e-mail at matthew@attorneymatthewquick.com. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding estate planning are provided free to groups of any size. Please let me know if there is any way I can help and feel free to contact me at any time.
The Estate, Issue Two
By Matthew A. Quick -Powers of Attorney-
Powers of Attorney are legally binding documents that designate and appoint a person (referred to as an “attorney-in-fact”) to act on behalf of the individual planning his or her estate (referred to as the “principal”). These documents may give instructions on everything from religious requests to comfort care; payment of bills to access to safe deposit boxes (referred to as “directives”).
Powers of Attorney come in two basic forms. A Power of Attorney for Health Care nominates an attorney-in-fact (referred to as a “Patient Advocate” in Michigan and an “Agent” in Illinois), to make health care decisions for the principal. An attorney-in-fact under a Power of Attorney for Health Care must accept his or her role as such after reviewing the principal’s directives. This acceptance assures the willingness of an attorney-in-fact to act on behalf of the principal, and pursuant to his or her wishes, prior to the attorney-in-fact being required to do so. The ability of the attorney-in-fact to act under a Power of Attorney for Health Care commences upon disability or incapacity of the principal. Generally speaking, a principal is deemed disabled or incapacitated if he or she is incapable of making informed decisions regarding his or her health care.
A Power of Attorney for Property appoints an attorney-in-fact (referred to as an “Agent” in both Illinois and Michigan), to direct the principal’s affairs concerning property and finances. Unlike a Power of Attorney for Health Care, an attorney-in-fact under a Power of Attorney for Property can be given the ability to act for the principal even if the principal is not disabled or incapacitated. Although not required, an attorney-in-fact should be asked to accept their role under a Power of Attorney for Property to ensure their willingness to act as directed.
Powers of Attorney do not come in any one standard form, thus are an excellent way for each of us to assure our values and wishes are honored when we are unable to communicate the same. These instruments prevent the need for a guardianship imposed through the probate court, which is a process that is time-consuming, costly and completely devoid of a principal’s appointments, values and wishes.
In sum, Powers of Attorney allow a seamless transition from principals caring for themselves, to principals receiving care.
-Life Insurance-
For most, life insurance is a necessary component of a sound financial and estate plan. Life insurance is simply a contract between a policy owner and the insurer. Under a life insurance contract, the obligation of the policy owner is to either pay the insurer a premium lump-sum payment or premium payments on a regular basis. The obligation of the insurer is to pay out a lump sum death benefit to the policy owner’s beneficiaries upon the demise of the policy owner.
There are two major types of life insurance: temporary (referred to as “term”) and permanent. Term life insurance pays out a death benefit to the beneficiaries upon the demise of the policy owner, so long as the policy owner has paid a premium lump-sum payment, or has made regular payments, pursuant to the life insurance contract and the demise of the policy owner occurs within a limited term. At the end of the initial term of a term life insurance contract, the policy owner may attempt to secure insurance for an additional term; however, the insurer is not required to renew coverage based upon the original contract.
Permanent life insurance, on the other hand, pays out a death benefit upon the demise of the policy owner, regardless of any term, so long as the policy owner has paid a premium lump-sum payment, or has made regular payments, pursuant to the life insurance contract. If the policy owner has met the payment obligations, the insurer cannot usually cancel the policy owner’s permanent policy unless fraud occurred during application for the policy. These policies build cash value for both investment purposes and for paying the premium. Typical types of permanent insurance include whole life, universal life, and variable life policies.
Life insurance typically makes a poor investment; so, unless your situation dictates more complicated strategies, stick to term policies. They are cheaper and focus solely on what you want: life insurance. Common uses of life insurance include guarding a household’s income against the death of a breadwinner, payment of funeral and final expenses, the division of an estate into desired allocation among heirs, executing sophisticated tax strategies, performing business succession planning, implementing buy/sell agreements, etc. Please note that if your estate, including any proceeds from life insurance, is predicted to be above or close to the lifetime tax exemption (currently $3.5M), a more sophisticated analysis of your life insurance is needed than given in this article.
While death is not the most uplifting topic, a sound financial and estate plan can certainly make life feel more secure. In the next issue there will be a review of the process used to determine the amount of life insurance one should consider, probable beneficiaries, the practical length of a term life insurance policy and the most beneficial means to acquire a policy.
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Clint Edgington invites any questions or comments via email at C.Edgington@bhadvisory.com or via phone at 888.614.4625. Clint is the principal and co-founder of Beacon Hill Investment Advisory and is engaged in the practice of investment management and financial planning. Feel free to visit Beacon Hill’s web site at www.beaconhilladvisory.com.
-Update-
Recent increase in Federal Deposit Insurance Coverage (FDIC) is only temporary. Recently, the base insurance limit was raised from $100,000.00 to $250,000.00, but will return to the original $100,000.00 base insurance limit on January 1, 2010, unless the increase is extended past this date.
The Real Estate Settlement Procedures Act (RESPA) has been updated. RESPA, for the most part, directs the requirements of real estate closings. The new provisions mainly affect the disclosures required at a real estate closing, thus helping buyers make better decisions when borrowing for residential real estate purposes.
New homeowner notice required in Illinois foreclosure actions. Plaintiffs in a residential foreclosure action are required to attach a “Homeowner Notice” with a copy of the summons. The contents of the notice include rights of the homeowner, warnings of fraudulent practices and foreclosure workout options.
In Illinois, a mechanics lien complaint must be timely delivered. The Illinois Appellate Court ruled that failure to deliver a copy of a complaint within 90 days of giving notice of the lien is fatal to a lien action.
-Conclusion-
I hope this issue of The Estate has been helpful. In the event you have any questions or concerns, or would like to schedule a complimentary consultation, I am available by phone at 773.790.8058 or by e-mail at matthew@attorneymatthewquick.com. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding estate planning are provided free to groups of any size. Please let me know if there is any way I can help and feel free to contact me at any time.
The Estate, Issue One
By Matthew A. Quick Introduction to Estate Planning
-Estate Planning-
Estate planning is a process that involves the construction of a strategy to direct one’s health care and property when he or she is not able to do so. The goal of an estate plan is to provide clear and detailed instructions to those who are appointed to help. These instructions are simply the wishes of the person whose estate is being planned (referred to as the “principal”). Some wishes are assumed, such as minimizing federal and state taxes and maximizing flexibility, but all directions of the estate plan are at the discretion of the principal.
Because the process of estate planning has fallen victim to the ill-fame of complexity, many people try to avoid an estate plan. However, complexity is not the burden of the principal. To the principal, the process of estate planning is as straightforward as creating a manual for the care of his or her health and property.
There are several mechanisms available to accomplish the wishes of the principal. Those that will be introduced in this article are Powers of Attorney, Living Wills, Medical Orders, Wills and Trusts.
For many principals, Powers of Attorney are the most important estate planning instrument available. Powers of Attorney come in two basic forms: Powers of Attorney for Health Care and Powers of Attorney for Property. A Power of Attorney for Health Care nominates a person, an attorney-in-fact (referred to as a “Patient Advocate” in Michigan and an “Agent” in Illinois), to make health care decisions for the principal. It also gives the attorney-in-fact directions as to what should be done in the event the principal cannot direct his or her own medical treatment. The ability of the attorney-in-fact to act under a Power of Attorney for Health Care usually commences upon the disability or incapacity of the principal. Generally speaking, a principal is deemed disabled or incapacitated if he or she is incapable of making informed decisions regarding his or her health care.
If the attorney-in-fact needs to act for the principal, he or she must act pursuant to the directions of the Power of Attorney. These directions (referred to as “directives”) should be very detailed and thorough, and may give instructions on everything from religious requests to comfort care.
Alternatively, a Power of Attorney for Property appoints a person, an attorney-in-fact (referred to as an “Agent”), to direct the principal’s affairs concerning property and finances. Unlike a Power of Attorney for Health Care, an attorney-in-fact under a Power of Attorney for Property could be given the ability to act for the principal even if the principal is not disabled or incapacitated. Much like a Power of Attorney for Health Care, however, if the attorney-in-fact needs to act for the principal, he or she must act pursuant to the principal’s directives. Again, these directives should be very detailed and thorough, and may give limited or general power to the attorney-in-fact to conduct the principal’s property and finances.
A Living Will is another means by which a principal can direct his or her health care. A Living Will does not grant decision making power to an attorney-in-fact, instead it is a list of directions for the attending medical practitioners. A Living Will allows the principal to specify the kind of treatment he or she would want in specific situations.
Medical Orders are reserved for patients that are terminally ill. Although there are several variations of Medical Orders, the most widely used is a Do Not Resuscitate Order (referred to as a “DNR”), which specifies that if the principal’s heart stops, or if the principal stops breathing, he or she is not to be given CPR. It is standard procedure for medical care facilities to attempt to resuscitate all patients if they experience heart failure or stop breathing; a DNR would relieve the medical care facility from this duty.
A Will is a legally-binding instrument that directs the principal’s property in the event of his or her death and appoints a legal representative to perform the principal’s wishes (referred to as a “Personal Representative” or “Executor”). A Will applies only to property that passes through the probate process. There are many interests in property that pass outside of the probate process, thus are not directed by a Will. Some examples of this type of property include, but are not limited to, jointly-owned property, property that is held in a trust and property with a named beneficiary, such as life insurance proceeds, individual retirement accounts or 401(k) plans. Regardless of how complex or simple the estate, a Will should always be included in an estate plan.
Finally, a Trust is a legal arrangement in which the principal gives legal title of property to a person or entity (referred to as the “trustee”) to hold for the benefit of another person (referred to as a “beneficiary”). A Trust contains instructions that the trustee is bound to follow in safekeeping the trust property. There are three main reasons to employ the use of a trust arrangement: first, a trust, for the most part, keeps the principal’s estate from having to endure the probate process; second, a trust can be used to shelter property from people or entities such as creditors, children who are too young to handle large amounts of money, and even the government; last, a trust can have significant tax-saving advantages by reducing the taxable portion of the principal’s estate.
Each of the estate planning mechanisms noted possesses great benefits to assist all of us in the estate planning process. The combined use of some, or all, of these tools provides for a dignified means to carry out the principal’s wishes.
-Update-
Beware of a recent real estate deed copying scheme. Companies such as National Deed Service, Inc., Illinois Deed Provider, Need A Deed, LLC., and California Record Retrieval are sending unsolicited letters that are alarming people and compelling them to order a copy of the deed to their home for up to $89.95 per copy. The letter does not tell people that the same copy of their deed costs no more than $5.00 if purchased from the county clerk’s office. Be apprehensive if you receive one of these letters; and instruct others to do the same. Save some money and, if you need a copy of your deed, consult your county clerk’s office.
The Illinois Appellate Court held that a living trust (referred to as a “revocable trust”) that is amended by a non-lawyer is invalid. Practically speaking, regardless of the wishes of the principal, a court will not accept as valid a trust tailored by a non-lawyer. In the wake of this decision, please contact an estate planning professional if your estate plan needs to be changed.
-Conclusion-
I hope this issue of The Estate has given you some insight into real estate and estate planning. In the event you have any questions or concerns, or would like to schedule a complimentary consultation, I am available by phone at 773.790.8058 or by e-mail at matthew@attorneymatthewquick.com. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, estate planning seminars are provided free to groups of any size. Please let me know if there is any way I can help.