This article discusses recent changes in Illinois estate planning law and what to expect in 2021. We will discuss the following questions:
- What is probate?
- What is estate planning?
- When is estate planning necessary?
- What will Illinois estate planning look like in 2021?
What Is Probate?
Probate is a court process that manages the collection and disbursement of the decedent's (the person that died) assets. While the probate process follows the same legal guidelines for every deceased individual, no two cases are the same. Those that fail to generate an estate plan will see their assets first used to cover outstanding debt and then distributed to their heirs via intestate succession.
If the decedent had a valid will naming someone to manage their estate, the court would appoint that person as the estate executor, as long as the court finds that person fit for the responsibility. If no will or trust exists, the court will appoint an administrator to see the probate process to its end. Before a probate case can be closed, the decedent's entire estate should be accounted for, debts paid, and any leftover property and funds distributed per the deceased's wishes.
What Is Estate Planning?
Estate planning is the process by which a person protects their assets during life and after death, ensures a swift and orderly probate process, avoids unnecessary taxes, and puts in writing their post-life wishes and desires.
Much of the estate planning process involves organizing assets and placing them into a trust that optimizes tax advantages and allows them to pass through probate. Estate plans are tailored to the grantor (the person who creates the trust) and thus differ widely based on wealth, debt, property, beneficiaries, and many more factors. Without an estate plan, all of a decedent's estate will be included in probate, wrapping up property and funds that could have immediately passed to beneficiaries upon the death of the grantor.
When Is Estate Planning Necessary?
It's difficult to make a case for not going through the estate planning process. If someone has absolutely no interest in what happens to their assets after they die, then perhaps estate planning isn't for them. However, if you want to protect your assets and make sure they transfer to your beneficiaries with little resistance, estate planning is a must. There are many other reasons to start estate planning sooner than later; including:
- Naming guardians who would care for your children;
- Naming your representative;
- Setting up a durable power of attorney;
- Choosing the person who will make decisions for you if you become incapacitated;
- Set how much access your children will have to your inheritance;
- Protect your estate from creditors, divorce, and estate taxes;
- Ensure your assets stay with your children in the event of a divorce; and
- Avoid bitter family feuds.
What Will Illinois Estate Planning Look Like In 2021
With the Biden administration officially starting their term, everyone should expect changes to estate planning law in 2021. President-elect Joe Biden expressed his desire to lower the estate and GST tax exemptions to $3.5 million —an amount currently set to revert to $5 million in 2025— and lower the lifetime gift tax exemption to $1 million per individual, a reduction of just over %1000. No matter what happens, we are likely to see reductions in yearly and lifetime limits, leading to more significant tax bills for wealthy individuals. The question then becomes, "How can I set up my estate plan now to best prepare for an inevitable reduction in exemption limits and an increase in taxes?"
One option is to consider more niche trusts like a spousal lifetime access trust (SLAT). A SLAT allows the grantor to take advantage of the current estate and gift tax exemptions but keeps the trust assets available to the beneficiary-spouse if needed.
A SLAT is a type of irrevocable trust that can lock in the current transfer tax benefit of the increased exemption amount while maintaining a degree of access and liquidity in the estate plan. A SLAT is somewhat unique in that it is created by one spouse for the benefit of the other and the couple's children. While it's not unusual to list the surviving spouse as the primary beneficiary, it's almost a formality because many married couple's assets are already jointly owned. A SLAT requires that the donor spouse (the grantor) fund the trust with separate property.
A SLAT should not be considered a protected ATM, whereby the grantor-spouse can effectively make a tax-advantaged bank account that the beneficiary-spouse uses to pay for items typically jointly used by the couple. This activity will result in the trust assets being included in the grantor spouse's assets for estate tax purposes, nullifying the trust benefits.
There's no way to predict how quickly reductions in estate and gift tax exemptions will come or if we will see increases in any other estate planning related taxes. Those seriously concerned about preserving the current level of exemptions within their estate plan should act swiftly.
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