Then there is the prevalent problem of some large insurance companies failing to pay out unclaimed life insurance policies to beneficiaries, claiming that under the insurance contracts they are obligated to do so only when the beneficiaries come forward. When the beneficiaries are not even aware of the existence of the policies, obviously they do not come forward, and years of premiums may have been paid for nothing.

The take-away lesson is that it is just as important to keep estate planning documents well organized and in a safe place, known to and accessible by your heirs, as it is to properly execute the documents in the first place. Any virtue can become a vice if taken to extremes, so this does not mean holding on to every scrap of paper that could conceivably be of interest to those you leave behind. Nonetheless, to possibly save your heirs a significant amount of money, time, and stress, at least the essential documents should be kept together, such as with your attorney, in a safe-deposit box, and/or at home in a fireproof safe that someone can access when the time comes. Instructions on how to dispose of your estate will not mean much if you have not left instructions on how to find the controlling documents.

Essential Documents to Organize
So what are these essential documents that you should have well organized and accessible? Individual circumstances vary, but the first document for most people is an original will. Dying without a will means leaving the determination up to the state as to how your assets will be distributed, and if there is some writing, but not an original document, probate proceedings could become needlessly contentious and drawn out.

In addition to a will (and any trust documents), what follows is a nonexhaustive, but reasonably comprehensive, list of other important documents, the existence and location of which should be known to your heirs:

• Marriage license–A surviving spouse is likely to need it to prove that he or she was married to the deceased before being able to claim anything based on the marriage;
• Divorce papers;
• Durable health-care power of attorney (for health-care decisions if you are incapacitated), a living will, any do-not-resuscitate order, and an authorization to release health-care information;
• Durable financial power of attorney (for financial decisions if you are incapacitated);
• Documentation of ownership of property, including housing, land, cemetery plots, vehicles, stocks, bonds, etc.;
• Proof of loans made and debts owed;
• List of bank and brokerage accounts, with account numbers, and any safe-deposit boxes with the location of corresponding keys;
• Tax returns for the most recent three years;
• Life insurance policies and 401(k), pension, annuity, and IRA documents; and
• List of user names and passwords for Internet accounts.

With a little bit of foresight and planning, you can greatly reduce the administrative burden on your family and heirs after you pass.

A major health services company with thousands of employees overhauled its pension plan some years ago. As it explained to the employees at the time, their
then-existing benefits would all be converted into a hypothetical lump sum, which would constitute the opening account balance for the new plan. That amount
would then grow by a percentage of the employee’s pay each year. It all sounded as though there was nothing to which the employees could object.

But what was not explained to the employees, and what eventually led a class of employees to sue under the federal Employee Retirement Income Security Act
(ERISA), was that the beginning balance for many employees with long tenures at the company would be as little as 50% to 70% of the amounts built up under
the old pension plan. Calculated in such a manner, the pension balances for such employees could take years just to get back to the levels of the old plan.

The now illegal practice that led to the litigation has happened often enough that it has a name: “wear-away.” The employer’s creation of “underwater”
beginning balances effectively tells employees that prior pensions were overpaid and that before they can receive compensation under a new pension plan, they
effectively must work off a debt, or “wear it away.”

When the case ultimately reached the U.S. Supreme Court, a majority of the Justices agreed with the plaintiffs that if the company had deliberately provided
misleading and incomplete information to its employees, in violation of ERISA, a monetary remedy was appropriate. This was a resounding win for the
employees, given some earlier case precedents making it difficult to recover monetary awards for employment benefits lost due to employer violations of their
duties.

For some people, life insurance may not spring to mind immediately as an effective estate planning tool. A life insurance policy remaining in the estate of the
insured is subject to federal estate taxes. However, when carefully crafted and put in place with the guidance of an appropriate professional, there is a way both
to obtain the familiar benefits of a life insurance policy–providing a measure of financial security for the beneficiaries–and to remove the policy’s proceeds
from exposure to the estate tax. The vehicle is called an Irrevocable Life Insurance Trust (ILIT).

Here is how an ILIT works. At the core of the trust is the life insurance policy itself. The “grantor” of the trust makes annual gifts of sufficient money to pay the
premiums on the policy and to cover administrative costs, unless the trust is funded by other assets.

The legal owner of the policy is the trust, not the grantor, which explains how the insurance policy is treated as being outside of the grantor’s estate. The insured
cannot personally benefit financially. Another plus arising from the fact that the trust owns the policy is that this protects the funds from possible claims by the
beneficiary’s creditors.

As with any trust, an ILIT must have a designated trustee to manage and administer it. Typically, the trustee is a bank or a trust company, but practically any
person or entity other than the grantor can serve in that role. The trustee establishes a bank account into which the gifts will be deposited for use in paying the
premiums. The trustee is also responsible for a variety of administrative duties, including giving notifications to the beneficiaries under the policy and filing the
ILIT’s tax return.

Upon the death of the grantor, it is also the trustee who oversees distribution of the policy’s proceeds, in accordance with the grantor’s wishes as expressed in the
trust. This distribution can be all at once or spread out over time.

One of the appealing features of an ILIT is that it can be closely tailored to fit the wishes of the grantor regarding the conditions and circumstances for paying
out the proceeds of the ILIT. There are almost as many possibilities as there are individual grantors. For example, if the grantor is in a second marriage, the ILIT
proceeds might go to any children from the first marriage, with the rest of the estate going to the second spouse and the children from the second marriage. It is
also possible for the grantor to specify and achieve very specific purposes for the ILIT proceeds, with strings attached if desired. Think carrots and sticks: A
beneficiary might be in store for proceeds from the ILIT only if he or she satisfies certain conditions or meets certain goals. On the more negative side,
misconduct by a beneficiary could be used as an effective disqualification.

Bear in mind that an ILIT must comply with certain government rules and regulations if it is to achieve the desired results. Thus, aside from the potential
complexities of the instrument itself, the assistance of a professional is a must in navigating the government’s requirements for an effective ILIT.

Franchising is a time-tested alternative for expansion that, at least over the long run, should involve less of your own time and money. If all goes well, and the odds of that are certainly enhanced by getting good professional advice at each step in the process, you can expand using someone else’s money, your risks will be reduced because the franchisees will take on most of the responsibilities and risks that come with opening new stores, and expansion should occur more rapidly than if you go it alone.

Franchising entails opening additional outlets by selling franchise rights to independent investors who will use your name and operating system. The franchisee will pay you, the franchisor, an initial franchise fee in exchange for the rights to open and operate a business under the franchise trademark, for training in how to operate the business, and for any other startup services. Once a franchise is up and running, the franchisee will usually also pay you a periodic royalty fee, generally 4% to 10% of the sales, for continued support, training, and other services. A critical attribute from the franchisor’s vantage point is that the franchisee must provide the capital required to start the business and must assume practically all of the risks of success or failure.

Questions

Before taking the plunge into franchising, however, you should be able to answer the following questions in the affirmative; otherwise, making the best of your single location makes the most sense.

• Will your business, however well it may have done in its original location, be well received in the broader marketplace?
• It is undoubtedly true that any business that you started yourself is special to you, but does it have a special, unique quality that will appeal to the “new” public that will be introduced to the business for the first time?
• Is your business concept, including processes that will have to be taught to the franchisees, one that can be easily duplicated elsewhere?
• Succinctly put, will your business idea sell well to potential franchisees?

Ingredients for Success

You need more than an appealing business idea for a franchising plan to be successful. Here are some of the ingredients. First, you need a proven, i.e., profitable, prototype upon which the new franchises can be modeled. Second, you should have a comprehensive set of written procedures, based on how the prototype is run, that will serve as a valuable training manual for new franchisees. Third, you should have a protected trademark that will identify in the marketplace the niche that you have created for the franchises (it can take some time and expense, but it is worth the trouble). Fourth, perhaps with the help of an experienced consultant, you should create marketing materials and a marketing plan for use in securing new franchisees. In the same vein, whoever actually sells the franchises must be aware of the usually strict regulations on such sales.

Finally, and crucially, you will need a Franchise Disclosure Document (FDD) that must be prepared in accordance with the regulations in the states where the franchises will operate and that must be approved by the state agencies that regulate franchises. A typical FDD will include an outline of the offering, information on the history and résumés of the principal franchisor officers, a report on the financial preparations for the franchising, and copies of the actual franchise agreement that will be used.

Devising and implementing a plan for franchising a business is in some respects a daunting prospect. On the other hand, if you have what it takes to establish a successful business in the first place, those qualities, plus advice from experienced professionals, may allow you to cast a much wider net for your business through the franchising process. After all, practically all of the most well-known franchises spread out from a single, original location.

Among the significant pieces of the new federal tax law that was passed in December 2010 were very substantial, albeit temporary, increases in the lifetime gift tax exemptions for individuals and couples. For 2011 and 2012, these exemptions have increased five-fold, from $1 million to $5 million for individuals, and from $2 million to $10 million for couples. There will be no gift tax imposed on gifts that do not exceed those totals. The same law reduces the tax rate for gifts above the exemptions to 35% from a scheduled rate of 55%, thus benefiting individuals wealthy enough to make gifts that exceed the exemption levels.

Last year, Congress also raised the exemption for federal estate taxes to $5 million, and lowered the estate tax rate to 35%, also for a two-year period, so that, taken together, the new federal estate and gift tax rates are more favorable for taxpayers than they have been for approximately 80 years.

This is an area of the law for which sophisticated professional help is especially appropriate, but there are some general considerations to bear in mind when devising a plan for gift-giving. For example, making a gift now, tax-free, makes good sense, especially for assets that are appreciating rapidly, so that future appreciation can be shielded from taxes. It is conceivable that Congress in the future could “claw back” gifts that are greater than the exemption at the time the donor dies, but, even in that event, any income or appreciation occurring after the gift date should be tax-exempt.

Other considerations for giving are more emotional than legal. Financial considerations aside, it may be a high priority for you to make sure that assets with sentimental value are preserved for future descendants, such as by putting them into a trust. Or gift-giving decisions may entail weighing some remorse over parting with assets that took so long to acquire against the desire to improve the lot of those receiving the gifts. Of course, a contrarian view might see large gifts as mainly abdicating control and risking having everything squandered. In any case, if these considerations are all reconciled in favor of making major gifts, now may well be the time to take the plunge.

Your Paycheck

Beginning in January 2011, a 2% drop in an employee’s share of the Social Security portion of the FICA tax, from 6.2% to 4.2%, will increase take-home pay for most workers. For example, this means an additional $1,600 in 2011 for someone making $80,000 a year.

There will be a two-year extension of the 2001 and 2003 income tax cuts from the Bush era. This means that, at least through 2012, the tax rates will remain at the current levels, based on income: 10%, 15%, 25%, 28%, 33%, and 35%.

The extension of certain tax benefits also means that for those making less than $90,000 a year ($180,000 for married couples), there will continue to be a $2,500 tax credit to help pay for college tuition. This American Opportunity Tax Credit had been scheduled to expire at the end of 2010. The Child Tax Credit, which had been set at $500, has been hiked to $1,000.

The new law also lifts the exemption levels for the alternative minimum tax (AMT), sparing millions of middle-income taxpayers from being subjected to the AMT.

Your Investments

Without action by Congress, 2011 tax rates on the profits of assets sold after more than a year would have increased to 20% and dividends would have reverted to being taxed at ordinary income rates. Instead, rates on long-term capital gains and for dividends on certain stocks held longer than 60 days will stay at 15% through 2012. Maintaining the status quo also means that taxpayers in the two lowest income tax brackets will continue to have a 0% capital gains rate.

Your Estate

In 2009, there was a maximum estate tax rate of 45% and a $3.5 million exemption. The estate tax temporarily disappeared in 2010. Under the new law, for 2011 and 2012 the maximum rate will be 35%, with a $5 million personal exemption. Any unused exemption may be passed to a surviving spouse, so that a married couple can exempt up to $10 million. In keeping with the short-lived nature of many parts of the new law, without further legislation there will be a 55% estate tax rate in 2013 and an exemption of just $1 million per person.

Your Retirement

The new tax law continues provisions that permit investors who are 70-1/2 or older to make a qualified distribution of up to $100,000 from an IRA directly to a qualified charity for 2010 and 2011. However, the new law did not preserve what had been a suspension of minimum required distributions (MRDs). To avoid a stiff penalty, retirees generally must take MRDs from their retirement accounts for the year in which they turn 70-1/2, and all years after that, no later than the last day of the calendar year.

Attorney Bob Ross briefly explains the purpose of various estate planning tools such as Powers of Attorney for Property or Health care, and what might motivate one to draft an estate plan.

Bob has over 30 years of experience in business law and estate planning. If you would like assistance with your Illinois legal matters, please contact us.

Your Paycheck

Beginning in January 2011, a 2% drop inan employee’s share of the Social Security portion of the FICA tax, from 6.2% to 4.2%, will increase take-home pay for most workers. For example, this means an additional $1,600 in 2011 for someone making $80,000 a year.

There will be a two-year extension of the 2001 and 2003 income tax cuts from the Bush era. This means that, at least through 2012, the tax rates will remain at the current levels, based on income: 10%, 15%, 25%, 28%, 33%, and 35%.

The extension of certain tax benefits also means that for those making less than $90,000 a year ($180,000 for married couples), there will continue to be a $2,500 tax credit to help pay for college tuition. This American Opportunity Tax Credit had been scheduled to expire at the end of 2010. The Child Tax Credit, which had been set at $500, has been hiked to $1,000.

The new law also lifts the exemption levels for the alternative minimum tax (AMT), sparing millions of middle- income taxpayers from being subjected to the AMT.

Your Investments

Without action by Congress, 2011 tax rates on the profits of assets sold after more than a year would have increased to 20% and dividends would have reverted to being taxed at ordinary income rates. Instead, rates on long-term capital gains and for dividends on certain stocks held longer than 60 days will stay at 15% through 2012. Maintaining the status quo also means that taxpayers in the two lowest income tax brackets will continue to have a 0% capital gains rate.

Your Estate

In 2009, there was a maximum estate tax rate of 45% and a $3.5 million exemption. The estate tax temporarily disappeared in 2010. Under the new law, for 2011 and 2012 the maximum rate will be 35%, with a $5 million personal exemption. Any unused exemption may be passed to a surviving spouse, so that a married couple can exempt up to $10 million. In keeping with the short-lived nature of many parts of the new law, without further legislation there will be a 55% estate tax rate in 2013 and an exemption of just $1 million per person.

Your Retirement

The new tax law continues provisions that permit investors who are 70- 1/2 or older to make a qualified distribution of up to $100,000 from an IRA directly to a qualified charity for 2010 and 2011. However, the new law did not preserve what had been a suspension of minimum required distributions (MRDs). To avoid a stiff penalty, retirees generally must take MRDs from their retirement accounts for the year in which they turn 70-1/2, and all years after that, no later than the last day of the calendar year.