LAW NOTES

SPRING 2011

ESTATE TAX CHANGES STILL LEAVE PLANNING CHALLENGES FOR MANY

          On December 17, 2010, the U.S. Congress raised the level of estates subject to the federal estate tax by enacting an exemption of $5 million which benefited many local families, especially farmers and small businessmen.  The bad news is that these changes are effective only for persons who die in the years 2010, 2011 and 2012.  Further, on January 13, 2011, the Illinois General Assembly set an exemption level for estates subject to the Illinois Estate Tax at $2 million with no stated end date, which causes Illinois estate tax liability for many of the same families.

          Under prior law, which expired in 2010, the exemption equivalent for the federal estate tax steadily increased to $3.5 million for 2009 with a tax rate of 55%.  The new law imposes a threshold on taxable estates of $5 million with a tax rate of 35% and is applicable for years 2010, 2011 and 2012.  The new law also allows a step up in basis for inherited assets.  In other words, a person receiving an inheritance takes a taxable basis in the assets equal to the fair market value on the date of death.  This means that the individual would only be taxed on the difference in the sale price of the assets and their value on the date of death.  Taxable estates in excess of $5 million for persons who die in 2010 can elect to have no estate tax but be subject to what in some cases is less favorable basis treatment.  The provision for stepped up basis is especially important in our region for those inheriting farm land from persons who might have paid a much smaller amount per acre many years ago.  The new law also has a provision to allow a husband and wife to have a total estate of up to $10 million without incurring the federal estate tax.  This new law is not effective for persons who die after 2012.

          However, the Illinois Estate Tax Law provides that persons who die in years 2011 and later will be subject to the Illinois Estate Tax if they have a taxable estate of $2 million or greater.  Since Illinois did not act until 2011, there is no Illinois Estate Tax for persons who die in 2010.  This means that families, small businessmen and farmers who are likely to have estates of $2 million or greater still need to plan for the Illinois Estate Tax.

          Planning for the Estate Tax can be accomplished through a number of means including provisions in Wills and Living Trusts.  Use of a properly funded Living Trust, regardless of the asset levels, can avoid a formal probate proceeding before the court and also organizes your estate in advance for the benefit of those who survive you.  Such provisions can also include some level of asset protection from creditors for those who survive.  As you can see, the laws in this area are complex and ever changing.  You should consult your attorney regarding the level and type of estate planning which is appropriate for your situation.

POWERS OF ATTORNEY: ENSURING YOUR AFFAIRS ARE MANAGED PROPERLY

          Using a power of attorney is a recommended way to manage a person’s affairs if they are unable to do so, such as in the event of illness, accident or extended age.  However, the agent acting under a power of attorney is subject to strict rules which require any transactions to be for the benefit of the disabled person and not for the personal benefit of the agent.

          Two recent Illinois cases have highlighted situations in which an agent acting as power of attorney took action to re-title an asset for the benefit of the agent.

          In one case, a daughter acting as power of attorney for her mother had her mother execute a transfer-on-death agreement for her mother’s investment account naming the daughter as the sole beneficiary of the account. In the other case, a mother whose son was acting as power of attorney for her re-titled several certificates of deposit into joint tenancy between herself and son. The question addressed in both cases was whether the asset (the investment account and the CDs) belonged to the estate or to the agent after the principal’s death.

          The relationship between a person and his or her power of attorney is a fiduciary relationship, meaning that the agent (the person holding the power of attorney) must be loyal to and act in the best interest of the principal. Under Illinois law, if there is a fiduciary relationship, it is presumed that any action taken by a principal for the benefit of the agent is the result of undue influence by the agent and is, therefore, fraudulent.

          In cases where an action is taken that benefits the agent, the agent can present evidence to show that he or she did not exert undue influence on the principal and that the action taken was lawful. In both of these cases, however, the court determined that the agents did not present enough evidence to prove that they had acted lawfully and in accordance with their fiduciary duties.  The courts decided that the assets (the investment account and the CDs, respectively) belonged to the estate and were not owned by the agents.

          In choosing a power of attorney, it is important to choose a trustworthy person who will be loyal to you and to communicate your preferences about distribution of your property with that person before you become incapacitated. It is also important that any person who has been nominated as a power of attorney educate themselves about the responsibilities of the role to avoid any appearances of acting fraudulently. Your attorney can help you understand those responsibilities and can assist you in cases where an agent may be acting fraudulently.

ADOPTION ACT UNDERGOES SEVERAL CHANGES

           Whether to begin a search for one’s biological parent or child can depend on the availability of information about the adoption.  As of May 21, 2010, Illinois’ Adoption Act has undergone significant amendments regarding adopted adults’ access to their original birth certificates.  The new law makes it easier for adopted adults to get information about their birth.  Prior to the amendments, the adopted person, adopted family and the birth family all had to consent to the release of the birth certificate before the adopted person could get a copy.  The new law allows adopted persons to get a copy of their original birth certificates simply by filing a form called a Request for a Non-Certified Copy of an Original Birth Certificate.  People born before January 1, 1946, can immediately enjoy the benefits of the new law.  However, people born after that date must wait until November 15, 2011, to take advantage of the amendments.

          Of course, there are many good reasons why birth parents would want to remain anonymous.  The legislature recognized that it must balance the wish of birth parents to remain anonymous with the right of adopted adults to access their birth records.  Therefore, birth records will be released to adopted adults upon request unless the birth parent has filed a request for anonymity called the Birth Parent Preference Form.  This form should be filed with the Illinois Adoption Registry.

          Any questions about changes in Illinois adoption law and access to records should be directed to an attorney.

ANIMALS RUNNING AT LARGE ON I-39 IS NOT A HALLOWEEN PRANK

          The driver of a pickup truck on I-39 on Halloween night was surprised to run into a cow in the middle of the interstate highway and was surprised again to find out that the owner of the cow was not liable for the damages.  In a February, 2011, decision, the court determined that the liability of the farmer who owned the cow was based on a little known law known as the Illinois Domestic Animals Running At Large Act ( the "Act").

          The Act prevents owners of livestock from allowing livestock to run at large and requires them to provide necessary restraints to prevent livestock from running at large.  Violators are subject to liability for the resulting damages. However, the law provides that a livestock owner is not liable if the animal escaped without the owner's knowledge and the owner can establish that he used reasonable care in restraining the livestock.

          The facts in this case favored the farmer in that the cattle escaped through a fence that was installed by the Illinois Department of Transportation along the interstate highway and was a woven wire fence with two strands of barbed wire at the top.  The farmer claimed that he did not know of the escape of the livestock because his family was attending a Halloween event at the time, but he had checked the fence  before moving the cattle to pasture before leaving for the Halloween event.  The farmer successfully used these facts to show that he was unaware that the cattle had escaped and he had taken reasonable care to restrain them.

          Other local cases have had different outcomes where the farmer may have been aware of the escape of the livestock and where the fences restraining the livestock were not adequate or were in poor repair.  This case illustrates the duties of owners of animals and also the fact that the liability of the owner of animals involved in a car accident depends greatly on the particular facts of how the animals were restrained and whether the owner had knowledge that they escaped.

USING VIRTUAL REPRESENTATION AGREEMENTS TO AVOID LITIGATION

          A new section was recently added to the Trusts and Trustees Act which allows for “virtual representation agreements” to be made regarding the administration of trusts without the need for court action.  These are agreements between a trustee of a trust and the primary beneficiaries of the trust that can bind other beneficiaries who would receive a distribution second in line only if the primary beneficiary died before the assets were to be distributed.  The interests of all beneficiaries under the trust must be substantially identical.

          The main benefit of this statute is that it allows a trustee, beneficiaries and remaindermen (i.e., secondary beneficiary) to execute agreements without going to court and without the need to appoint guardians ad litem for beneficiaries.  These agreements can be used to settle ambiguities or construe certain provisions in the trust document.  They can also be used to make decisions about the powers or duties of the trustee and many other issues that may arise in the course of trust administration.  These agreements promote accord and consensus among beneficiaries without having to get court approval which can be costly in terms of both time and money.

          In order for an agreement to be valid, all primary beneficiaries must be both adults and not incapacitated, that is, they must be legally competent to make decisions.  It should also be emphasized that the trustee must be a party to the agreement, not just the beneficiaries.

          There are some limitations on the use of virtual representation agreements.  While matters of trust administration may be settled by agreement, a virtual representation agreement may not be used to change the terms of a trust.

          Virtual representation agreements can serve to resolve a variety of issues relating to trust administration.  Interested persons should consult an attorney to find out more about how virtual representation agreements can benefit them.

DEALING WITH FRAUDULENT BANK TRANSACTIONS

          Anyone who has been the victim of fraudulent activity relating to his or her bank account knows how frustrating it can be to address the problem. A recent Illinois case highlighted the need to act quickly if a person believes he or she is the victim of fraud. In that case, a person stole a check belonging to Mr. X and used it to pay a third-party company. The fraudulent check was for $7,500. Mr. X’s bank debited that amount from his checking account. Although the check appeared on Mr. X’s bank statement, he didn’t do anything about it until several months later. When Mr. X demanded that the bank reimburse him the $7,500, the bank refused on the grounds that Mr. X didn’t comply with bank policy requiring its customers to notify the bank about account problems within 30 days of receiving the bank statement which showed the transaction. The court ruled that the bank did not have to reimburse Mr. X.

          If you suspect that there has been any unauthorized action taken with respect to your financial accounts, notify your financial institution immediately to avoid the risk that you will have to bear the brunt of the fraud.

OFFICE NEWS

          Attorney Bridget Trainor recently joined the Board of Directors of the Freeport Area Chamber of Commerce. She is also serving as the 2011 President of the Chamber of Commerce Ambassadors.

          Attorney Ralph E. Elliott will serve on the Board of Directors of Freeport Noon Rotary for the 2011-2012 year. He will act as head of the Community Service Lane, which organizes the club’s service projects for the local community.

          Be sure to check our firm’s Facebook page for updates about legal news and changes to the law. You can find and “like” us at http://www.facebook.com/lawofficesofralpheelliott. Information about the firm and archived issues of our newsletter can be found at http://www.reelaw.com. Visit soon!