Mary was a widow with two grown children—Fred and Jane. Her only significant asset was her home, which had no mortgage and was valued at $350,000. Fred lived in Wheaton. Mary had heard horror stories about how much probate could cost, and wanted to avoid that. Without telling her children, Mary created and recorded a Quit Claim Deed that transferred her home to herself, Fred, and Jane as joint tenants. Unbeknownst to Mary, Fred had significant IRS and business debt. His creditors received a judgment against him, and searched the DuPage County Recorder’s database to see if his house was mortgaged. In the process, they discovered the Quit Claim Deed and proceeded to execute the judgment against Mary’s home.
Unfortunately, Mary’s home has now become one of Fred’s assets even though he never knew about the Quit Claim Deed. Mary could be forced to sell her home to cover her son’s debts. Additionally, if the IRS learns about the Quit Claim Deed, it may treat the transfer of the home as a gift of $116,666 from Mary to each of Fred and Jane. Because the annual gift-tax exclusion is currently only $14,000 Mary may also be on the hook for paying gift taxes to the IRS for the significant transfer to her children.
Mary’s better option to avoid probate would have been to create a trust and transfer the home to it, thus taking it outside her estate and allowing it to pass to Fred and Jane without probate. And if she knew about Fred’s debts, she could include spendthrift language that might shield Fred’s half of the house from his creditors.
If you’re thinking about how to pass your home or other assets to your children (or anyone else), or if you have family members who might be trying to pass them on to you, give us a call to discuss the best and most cost-effective way of reaching your goals.
Molly and Michael were married for 57 years. They operated an upholstery shop in Villa Park that provided a modest living for their family. Over the years, they saved enough money to buy a cabin on a lake in Wisconsin where they could take their family. Trying to do things correctly, they hired an attorney to set up a living revocable trust which they funded with the cottage and their remaining savings. Their three children—Tom, Dick, and Harry—were the co-trustees.
Tom and Dick moved out of state after college, and thus did not use the cabin very often. This precipitated many disputes between them and Harry (who did use it) regarding who would care for the cabin and pay for its upkeep since the cash in the trust was depleted shortly after Molly and Michael died.
Harry’s daughter came to us asking if we could work with the family to help resolve the dispute. In the process of reviewing the trust, we realized that the section regarding beneficiaries had been poorly drafted.
Often when one beneficiary dies, that person’s interest is left to his or her descendants (the settlor’s grandchildren). This provision in Molly and Michael’s trust was written such that, if any of Tom, Dick, or Harry died, the entire trust went to that person’s children. In other words, if Harry died first, Tom and Dick would receive nothing because all of the trust assets would go to Harry’s children.
Can Molly and Michael’s trust be amended to address this possibility?Voting Trusts can be used to protect both your business and your family.
Ted and James owned were the only two shareholders of a company. Ted owned 75% and James owned 25% of the outstanding shares. Ted was significantly older than James, who he was training to take over the business.
Ted had done his estate planning and left his entire estate to his son, Rex. Although Rex was bright, Ted worried that he did not understand the industry as well as James and that the company would not last long under Rex’s control.
Can Ted leave his economic interest in the business to Rex without giving him control of the company?
Yes. If Ted and James establish a voting trust, they can pass the economic interests in their business on to their respective families, but leave the voting power over their shares to each other.
In addition, the powers of the voting trustee (for example, James if Ted dies first) can be limited in the trust document. For example, Ted could protect his family’s interests by not allowing James to amend his employment agreement with the business (which should be created at the time of the voting trust), or amend the articles of incorporation and bylaws. And the trust could direct James to only take such actions that would be in the “best interests” of all the shareholders. Doing these things can protect the value of Ted’s shares (and thus Rex’s inheritance), even though he is putting all of the control into James’ hands.
April and Tim had a son, Alan, who had Autism. April was a doctor, so they had many assets. Nonetheless, Alan’s situation was a significant burden—emotionally and financially—on the family.
Over the years, Tim’s mother had given Alan various savings bonds that were in his individual name. Tim and April kept them in their safe deposit box at the bank where Alan could not access them. They would occasionally let Alan use “his own money” to buy toys and video games.
As Alan grew older, he became more and more difficult to deal with. While in high school, Alan became violent and April and Tim decided to put him full time into a residential facility that could better address his needs.
During the intake process, the facility’s staff helped Tim and April fill out a Medicaid application to help pay the costs of Alan’s residency. They asked if Alan had “access” to any funds. Tim explained about the savings bonds, which totaled a few thousand dollars, but said that they were in the safe deposit box and he could not access them. The staff member told them this was fine.
Things seemed to be going well until, one day, Tim received a letter from the Social Security Administration saying that, according to its records, Alan owned multiple federal savings bonds that gave him more assets that he could hold and still qualify for Medicaid. The agency said that Alan’s payments would be cut off, and that he would have to pay back any benefits he had received.
The problem here was the staff member’s understanding of the word “access.” The issue is not whether Alan could physically get a hold of the savings bonds. Rather it is whether they are his—does he own them. Because he did, he did not qualify for Medicaid.
Tim and April needed to set up a Special Needs Trust for Alan. That trust could hold assets for him (including anything he might inherit from them), but that he would not have control over. It would need to be revocable, and would need to limit the use of the assets to anything for which any state or federal benefits would not cover. This would allow Alan to have some assets to use for other activities, while not jeopardizing his government benefits.
Call us today to discuss how to set up a special needs trust for you or a family member.