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DHJJ Financial Advisors offers insight on a variety of topics. From current market events to our perspective on timeless financial topics, you will find that our articles provide information that will help you to navigate your own financial landscape.


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How Does the Illinois Estate Tax Affect You?

Given recent increases to the Illinois personal and corporate income tax rates, it is important to review how your family may be impacted by another Illinois tax that does not receive as much media attention: the Illinois estate tax. Illinois is one of eighteen states to have its own estate tax separate from the federal estate tax. Estates that are exempt from the federal estate tax may still owe Illinois estate tax.

What is the Illinois estate tax?

It is a tax assessed on the assets you own at the time of your death less the debts and expenses related to your estate  

Who does the Illinois estate tax apply to?

  • Residents of Illinois with estates over $4 million
  • Nonresidents of Illinois with real or physical property located in Illinois that is valued over $4 million

How does the Illinois estate tax differ from the federal estate tax?

  • Threshold and Rate:
    • Federal → Estates above $5.49 million are taxed at 40%
    • Illinois → Estates above $4 million are taxed at variable rates up to 28.5%
       
  • Portability:
    • Federal → Estates that do not use the full $5.49 million exclusion can elect to transfer the unused amount to the surviving spouse
    • Illinois → Not Applicable

What is included in an Illinois estate?

  • Bank accounts
  • Investment property such as stocks, bonds, CDs
  • Retirement accounts
  • Real estate
  • Interests in family businesses
  • Interests in other businesses
  • Life insurance proceeds from policies you owned
  • Personal property (cars, antiques, jewelry, art, etc.)

It will be the executor of your estate’s responsibility to locate all the assets that make up your estate and add up their value. The value of your estate will be reduced by any debts that you owe and expenses of the estate. If the assets of your estate are worth more than $4 million, the executor will need to file an Illinois estate tax return and pay any tax due within nine months of your death, even if a federal estate tax return isn’t required.  If you think your estate many be at risk of this tax, there are action steps you can take now to lessen the impact.

Ways to Reduce or Eliminate the Illinois estate tax:

  • Make annual exclusion gifts: You can give up to $14,000 to any one person during the year and not create a federal gift tax issue (Illinois does not have a gift tax).  If you are married you may combine your gifts, referred to as “gift-splitting”, to transfer gifts valued at up to $28,000 to a single person each year
  • Use advanced gift and estate planning techniques
  • Life insurance planning
  • Assets left to a surviving spouse or civil union partner are exempt from the Illinois estate tax.
  • Assets left to charity are exempt from the Illinois estate tax
  • Spend your assets during your lifetime
  • Move to a state without an estate tax and sell your Illinois real estate and business interests/property located in Illinois

How DHJJ Financial Advisors Can Help

Estate plans should be reviewed every few years to make sure your goals and objectives will be achieved and that the tax impact is minimized.   Whether you are in the beginning stages of estate planning or already have a plan in place, please contact your DHJJ Financial Advisor at 630-420-1360 or Kathy Byrne at This email address is being protected from spambots. You need JavaScript enabled to view it. for more assistance. 

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Estate Planning Basics and Avoiding Probate with a Living Trust

Estate Planning Basics and Avoiding Probate with a Living Trust

One of the most important parts of the financial planning process is estate planning.  Many people mistakenly believe that estate planning is only necessary for the wealthy.  In reality, a basic estate plan is essential for everyone in order reduce uncertainty, eliminate unnecessary costs, and reduce stress for loved ones after a death.

Estate Planning Basics

The first step in the estate planning process is creating a list of your assets. Take a look at (1) what assets you have, and (2) review how your assets are titled.  Once you have this foundation laid out, ask yourself what you want to happen to your assets after you are no longer here. 

 

A basic estate plan contains a will which states where you want your property to go after your death.  Your will is filed with the courts after you pass, and the executor distributes your assets according to the terms of the will.  Using a will to distribute your assets requires that assets you held individually during your life go through probate. Here are some things you may want to know about probate:

  • What is Probate?  A legal process where the courts determine how to distribute assets titled in your name among your heirs.  Probate records are public records that anyone can access.  The process takes approximately 6 months at a minimum, often longer.
  • When does Probate apply?  Probate is often necessary in Illinois if the total value of the probate assets exceeds $100,000 or if there is any real estate.
  •    
  • Do all assets go through Probate?  No, not all assets go through probate.
    • Assets held individually with no named beneficiary will go through probate.
    • Assets that are “qualified” assets (i.e. life insurance, annuities, IRA, 401(k)) with named beneficiaries will go directly to the named beneficiary(s) and avoid probate.
    •  
    • Assets that have a Payable on Death or Transfer on Death designation will pass directly to the named beneficiary(s) and avoid probate.
    • Assets that are held jointly with rights of survivorship will go to the survivor without having to go through probate.
    •  

Estate Planning with a Living Trust

If you want to keep your wishes private and have your assets pass to the intended beneficiaries without the use of the courts, you may want to use a living trust as part of your estate plan.  Your living trust, like your will, is a document that states where you want your assets to go after you pass.  Here are some benefits of setting up a living trust:

  • Keeps assets out of the probate process and your affairs remain private.
  • A family member, friend, or corporate trustee can assist in the distribution of your assets after you pass instead of having the courts distribute your property.
  • Well-written trusts can save time, money, and hassles when it is time to distribute assets after you pass.
  • The trust functions as you during your lifetime -- there are no additional tax filing requirements while you are living.

 

Any assets you want to pass through your living trust need to be titled to the name of your trust – simply having the trust does not mean all of your assets will go through your trust.  Listing out your assets and reviewing how they are titled will ensure that your assets are part of your living trust if that is your intention.  Work with your financial advisor to review or create your estate plan to ensure your wishes are met.

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Trust Planning Opportunity and the 65 Day Rule

It’s not too late to take advantage of planning opportunities for certain trusts for 2016 tax filings. Irrevocable Trusts that do not require the trustee make distributions of income and principal to the beneficiaries can take advantage of the “65 Day Rule”. This Rule allows trustees to make distributions within 65 days of the new tax year and elect to treat the distribution as though it was made on the last day of the previous tax year. Taking advantage of this rule could provide significant tax savings to the trust, but the 65 days are up on March 6, 2017.

Similar to individuals, trusts are taxed via a graduated tax rate. Trusts reach the highest tax rate of 39.6% at $12,400 of taxable income compared to single individuals who reach the 39.6% tax rate at $415,050. The additional 3.8% Medicare surtax applies to investment income for trusts and individuals at these taxable income levels as well. Distributing income from the trust to a beneficiary who is not in the highest tax bracket can pull income from a high tax rate environment to a lower tax rate environment.

 

Reasons to Make a 65 Day Rule Distribution


• Gives the tax and estate planner the ability to look back at the prior year’s income and make an exact calculation to decide how much to distribute versus using estimated data at year end.
• Can pull items of income taxed at higher rates (interest, ordinary income, royalties) from the trust and distribute it to beneficiaries who may be taxed at lower rates.
• Can pull items of dividend income out of the trust where it may be taxed at a 20% rate and distribute it to beneficiaries where it may be taxed at a preferential 15% rate.
• May save on the 3.8% Medicare surtax by pulling investment income from the trust and distributing it to the beneficiaries.
• Capital gains typically cannot be distributed. Check with you tax advisor to see if this applies to your trust. If it does, further tax savings can be achieved.
 

How DHJJ Financial Advisors Can Help

Trustees should consult their tax and estate planners to determine if this is the right strategy to use for their particular trust. Trustees should also work with the trust beneficiaries to understand how the trust distributions will affect their tax posture. It’s not too late to take advantage of this opportunity. Please contact Kathy Byrne at This email address is being protected from spambots. You need JavaScript enabled to view it. '; document.write(''); document.write(addy_text5961); document.write('<\/a>'); //-->\n This email address is being protected from spambots. You need JavaScript enabled to view it. to learn more.

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Estate Planning: Take Advantage of Potential Valuation Discounts

Estate Planning: Take Advantage of Potential Valuation Discounts

Have you considered making gifts or selling interests of your family limited partnership as part of your overall estate plan? If you are considering making these types of transfers to family members and/or trusts for the benefit of family members, this could be the ideal time to act in order to take advantage of potential valuation discounts currently available. The IRS is speculated to issue new guidance this fall that could negatively impact the way in which these interests are valued from an estate and gift perspective.

Estate Planning Tools

  • Family limited partnerships (FLPs) and limited liability companies (LLCs) are often created by parents who are looking to:
  • Accumulate their wealth for the benefit of their family
  • Consolidate assets
  • Provide asset protection to younger generations
  • Provide the younger generations with hands on-education in investment and income tax planning while still keeping overall control of the assets
  • Transfer wealth from one generation to another at a discounted value

Parents establish a FLP or LLC by transferring their own assets to the entity. The parents retain the controlling interests in the family entity and gift the non-controlling interests to their children, or trusts for the benefit of their children, via annual or lump-sum gifting. If structured correctly, these gifts can qualify for the annual exclusion, which currently allows you to give $14,000 to as many individuals as you wish during the calendar year.

Current Discounts

Two discounts are generally available when determining the value of the closely held family entity interests: a lack of marketability discount and a minority discount:

  1. A “Lack of Control” or “Minority Interest” Discount reflects the limited partners’ (or non-controlling member in the case of the LLC) inability to make key business and management decisions with regards to the family entity.
  2. A Lack of Marketability Discount reflects the fact that the sale or transfer of the closely held family interests is so restricted that a ready market for those interests often times doesn’t exist as it would with publicly traded assets.

Upcoming IRS Regulations Could Limit Discounts

As previously mentioned, the IRS is rumored to be issuing proposed regulations late summer/early fall that may significantly limit these discounts when valuing a closely held family entity. Actual operating companies may be exempted from the new rules; however entities that predominately hold portfolio type investments will likely be subject to these changes.

If you are considering making a gift of any type of closely-held family entity as part of your overall estate or succession plan, please contact your DHJJ tax advisor today to discuss next steps.

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Trust Planning Opportunity and the 65 Day Rule

Trust Planning Opportunity and the 65 Day Rule

For whom: Trustees and their beneficiaries

It’s not too late to take advantage of planning opportunities for certain trusts for 2015 tax filings. Irrevocable Trusts that do not require the trustee to make distributions of income to the beneficiaries can take advantage of the “65 Day Rule”. This Rule allows trustees to make distributions within 65 days of the new tax year and then elect to treat the distribution as though it was made on the last day of the previous tax year. Taking advantage of this rule could provide significant tax savings to the trust, but the 65 days are up on March 5, 2016.

Similar to individuals, trusts are taxed via a graduated tax rate. Trusts reach the highest tax rate of 39.6% at $12,300 of taxable income compared to single individuals who reach the 39.6% tax rate at $413,200. The additional 3.8% Medicare surtax applies to investment income for trusts and individuals at these taxable income levels as well. Distributing income from the trust to a beneficiary who is not in the highest tax bracket can pull income from a high tax rate environment to a lower tax rate environment.

Reasons to Consider a 65 Day Rule Distribution

  • Gives the tax and estate planner the ability to look back at the prior year’s income and make an exact calculation to decide how much to distribute versus using estimated data at year end.
  • Can pull items of income taxed at higher rates (interest, ordinary income, royalties) from the trust and distribute it to beneficiaries who may be taxed at lower rates.
  • Can pull items of dividend income out of the trust where it may be taxed at a 20% rate and distribute it to beneficiaries where it may be taxed at a preferential 15% rate or 0% rate for certain taxpayers.
  • May save on the 3.8% Medicare surtax by pulling investment income from the trust and distributing it to the beneficiaries.
  • Capital gains typically cannot be distributed. Check with you tax advisor to see if this applies to your trust. If it does, further tax savings can be achieved.

Trustees should consult their tax and estate planners to determine if this is the right strategy to use for their particular trust. Trustees should also work with the trust beneficiaries to understand how the trust distributions will affect their tax posture. 

How DHJJ Financial Advisors Can Help   It’s not too late to take advantage of this opportunity. Please contact DHJJ Financial Advisors at 630-420-1360 or email Kathy Byrne at This email address is being protected from spambots. You need JavaScript enabled to view it.  to learn more.

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NAPERVILLE
T: 630.420.1360
F: 630.420.1463
184 Shuman Blvd, Suite 200
Naperville, IL 60563

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T: 630.377.1106
F: 630.377.2294
2560 Foxfield Rd, Suite 300
St. Charles, IL 60174

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