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1. Property Ownership:
The State of Illinois has adopted "tenancy by the entirety"
as a method of a husband and wife holding title to their homestead
property. Only a husband and wife can hold title to their home as
tenants by the entirety. Many husbands and wives own their home
as joint tenants. However, joint tenancy does not provide the extra
protection against possible creditors that tenancy by the entirety
does. For example, should the husband incur a debt for which only
he is liable, the creditor cannot take homestead property because
the wife is a tenant by the entirety. A simple quitclaim deed from
the husband and wife to themselves will accomplish the transfer.
The deed should read as follows: "John Smith and Mary Smith,
not as joint tenants or tenants in common but as tenants by the
entirety." This transfer is exempt as a taxable transfer Illinois
and other states. Missouri also is a state that allows tenancy by
the entirety.
The following is the most common ways title to real estate can be
held.
Ownership of property and how it is titled is very important to
protecting your assets from creditors, lawsuits, income and estate
taxes. Here are some of the most common ways to title property that
can protect your family assets:
When two or more individuals or entities purchase property there
are several choices available:
Joint tenancy--- Title is vested in a unit made up of two
or more people. On the death of one joint tenant, the remaining
joint tenant receives the interest of the deceased tenant by "
right of survivorship." The words "Joint Tenancy"
will appear on the deed at closing.
Tenancy in common--- This type of ownership results in an
undivided interest. Each owner can sell, convey, mortgage, or transfer
his or her undivided interest without the consent of the other co-owners.
Upon the death of a tenant in common, his or her undivided interest
passes to his or her heirs or devisee according to his or her will.
Tenancy by the entirety--- This is a special joint tenancy
between husband and wife. Similar to joint tenancy, each party has
the right of survivorship. The main difference for this joint tenancy
is that during the marriage, title can be conveyed only by a deed
signed by both partners. It also provides some protection against
creditors. Some states do not have this form of ownership. Illinois
and Missouri are two states that do have this type of ownership.
Community property--- Community property originated under Spanish
law and was adopted by eight western and southwestern states. This
ownership considers both spouses as owning the property jointly
even if names do not appear on the deed. Neither spouse can sell
the property without the other's consent. In some states the property
goes to the survivor. In others, it is divided and 50 percent would
go to the surviving spouse while the other half goes to the deceased
spouse's estate to pass under a will or the state's rules for descent
and distribution. (Not available in Illinois)
Trusts-- Title can be taken in a trust and held under the
terms of the trust. Some states have what is called "Land Trusts"
that specifically are to hold land for one or more beneficiaries.
This trust allows the transfer of fractional interests without requiring
the filing of additional deeds. Ask your lawyer if your state has
the land trusts statute and if it should be used in your specific
case.
2. Family Limited Partnerships;
A family limited partnership is a financial planning device that
is often used in a family to provide lawsuit protection, income
tax protection and/or allocation and estate tax protection.
The establishment of the limited partnership takes time and costs
more than forming a general partnership. It may be worth the extra
cost for professionals such as doctors as additional malpractice
protection.
Limited partnerships really are in fact, the diamond among the
gems of advanced financial planning because of their inherent advantages
such as:
Law suit Protection-- As a general rule, a limited partnership
may not be broken up or dissolved simply because one limited partner
is sued. Under most limited partnership statutes, a separate provision
protects the assets of the partnership from the individual creditor
of a limited partner.
Income Tax Protection-- Income may be spread to individual
limited partners such as children or grandchildren age 14 or older
who are presumably in a lower income tax bracket simply by such children holding ownership interests in the partnership.
Income is then allocated, generally, in proportion to the ownership
interest of the various partners.
Estate Tax Protection-- Millions of dollars in estate and
inheritance taxes are saved each year by the "Informed"
who do, in fact, use limited partnerships. Remember, the general
partner "controls" the partnership regardless of his percentage
of ownership -- but estate and inheritance taxes are normally levied
in proportion to the ownership in interests of the deceased. For
example, if father has a 10 percent ownership interest in the $1,000,000
valued partnership, normally his estate would only include $100,000
even though during his lifetime he actually controlled the full
$1 million dollar of assets held in the limited partnership.
For more details request our Asset Protection Planning Guide.
3. Things you should know about bankruptcy:
Bankruptcy should be the last alternative to disposing of creditor
claims. It is only when the creditor's claims greatly exceed the
assets that bankruptcy should be reviewed as a serious method of
disposing of these claims.
There are two main bankruptcy chapters used by businesses and individuals.
These are Chapter 7 and Chapter 11. Chapter 7 allows the individual
to liquidate all personal debt and to allow businesses to liquidate
the business. Chapter 11, allows a business to reorganize and start
over without all the prior debt.
4. Irrevocable Insurance Trusts and Living Trusts:
A) Irrevocable Insurance Trust:
This trust has limited use. It is used mainly with life insurance
policies in which the policies' ownership is transferred to a trust
for the benefit of a spouse and children. When properly drafted
and funded it can:
> Protect the life insurance from creditors.
> Provide an integral part of an overall
family estate plan. Remember, once established, this trust cannot
be revoked other than by not paying the insurance premiums which
may cause the policies to be canceled. It is IRREVOCABLE!
B) Revocable Living Trust:
This trust is sometimes called a "Loving" trust. Unlike
the IRREVOCABLE Trust, it can be CHANGED.
Since this is the most common type of trust used today by planners
here are ten question about "Living Trusts" asked by clients
today.
Q. Can a Living Trust completely replace a will?
A. If the living trust is properly drafted and funded it
can replace the portion of your will that indicates who is to inherit
the estate. However, the appointment of a guardian for children
and the disposition of non-trust assets are still important functions
of a will.
Q. If there is a Living Trust in existence at death, will probate
be avoided?
A. Yes, it can be avoided. But you must be careful to transfer
all of your assets into the trust. This means titles should be deeded
to the trust and bank accounts should be changed to reflect the
trust. Also, personal property that does not have a formal title
may be covered in the trust instrument with careful planning. Any
non trust assets existing at death, even if they are handed over
to your trust, must enter probate. Any gifts made from the living
trust within three years of death will be counted as part of the
estate.
Q. Is a Living Trust more expensive than a Will?
A. That depends on what you want to put into the trust.
It may be just as economical to hold property jointly. Probate can
be expensive and use up a big part of the estate. To set up a trust,
assets must be reviewed and title transferred. This cost is not
found in setting up wills, but is part of the cost of probate administration.
Q. Can I be the trustee to my own Living Trust?
A. Yes, you may be the trustee. It is advisable to have
a trustee that can make sound financial decisions. A co-trustee
is also recommended in case the trustee is unable to manage the
trust. The trustee can be a beneficiary (in which case you should
consider a co-trustee), a friend or relative, or a professional
such as an attorney, accountant or financial planner.
Q. Does a Living Trust prevent challenges to my distribution
plan?
A. In most cases it will. However, many states have adopted
the model that allows spouses to elect an "augmented estate,"
that includes the living trust assets. Other states have ruled that
the trust is fictitious and the assets belong in the estate. In
both cases, the trust will be subject to the spouse's forced share.
Q. Does this trust act as an income tax shelter?
A. No. If you are earning income from the trust and have
kept the power to revoke the trust or change the beneficiaries,
that income will be taxed under federal law.
Q. Can my creditors receive any of my trust assets?
A. That depends on the state. Some states claim that any
transfer to the trust is ineffective against claims of creditors.
Other states will look at the financial situation when the transfer
was made. You should consult your professional advisor regarding
this issue.
Q. What about my beneficiaries' creditors?
A. Generally, creditors of your beneficiaries cannot receive
money from your trust until it is paid to the beneficiary.
Q. What about estate and gift taxes?
A. Property held in a living trust at the time of your death
is included in your gross estate and is subject to estate taxes.
Gifts made by the trust will not be taxed up to the gift tax exclusion
of $12,000 per donee per year. These gifts will reduce the size
of the estate to be taxed. However, any gifts from the trust made
three years prior to death will be included as part of the estate.
Q. Is a Living Trust always the best alternative?
A. That may depend on laws within your state. It will also
depend on what you want to accomplish and the costs involved. Consultation
with an attorney, accountant, financial consultant or other professionals
could help in making your choice.
5. Retirement Plan Terminations: With
the Supreme Court protecting retirement plans from creditors, the
termination of a retirement plan (including IRA's) can make the
proceeds available to creditors. This should be considered before
a plan termination takes place .
6. Buy-Sell Agreements: Every professional
practice or other closely held business should have a buy-sell agreement
with the other owners for the following reasons:
> Establish a value at the time of a buy- out.
> Provide for a buy-out in the event of
death, disability or other termination.
> To protect your family in establishing a
value for estate tax purposes.
> To provide a buy-out in the event of
bankruptcy or legal attack by creditors.
7. Protective Contract Clauses: One
of the costs involved in any dispute is litigation through our court
system. In order to protect against the cost of law suit "Arbitration"
clauses should be considered in all contracts.
An arbitration clause will, in most states, be honored by the courts
and can save substantial cost. You should consider placing these
clauses in leases, employment contracts, buy-sell agreements, patients
agreements, real estate contracts, etc.
Arbitration clauses, by avoiding litigation, will:
> Save time
> Save costs
> Save stress
One possible way of using an arbitration clause would be in the
patient agreement. When the patient comes into the office and completes
the family history, the patient could also sign an agreement to
arbitrate any disputes rather than litigate. A sample form is available
upon request.
8. Family Gifts: Transfer of funds to
family members, such as, your spouse, children, parents, etc. will
usually remove assets from the reaches of creditors. One can make
unlimited gifts to one's spouse without incurring any gift tax.
If gifts are given to children, the law taxes them unless the gift
is within the annual limits ($12,000 or $24,000 if the spouse joins
in the gift).
You may wish to set-up an education trust for your children. This
is a good vehicle to remove property from one's estate.
9. Tenancy by the Entirety. See Property
Ownership above.
10. Use of corporations: A corporation
can limit claims of creditors for acts of employees (including other
shareholder-employees) of the corporation. Your corporation does
provide protection that is very important.
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