What is a 1031 Exchange?

Section 1031 of the Internal Revenue Code allows capital gains taxes to be deferred rather than realized when selling investment properties and properties used in a trade or business. Generally, the production of business or rental income is a hallmark of investment property or property used in a trade or business, as opposed to property held for personal use.

Section 1031 does not apply to property held for personal use. Therefore, it does not apply to the sale of a principal residence.

To qualify, the property being sold must be replaced by another “like-kind” property, and the transaction must be structured as an exchange and completed within a certain period of time. Possible replacement properties must be identified within 45 days, and the acquisition of the replacement property closed within 180 days.

How can this help?

By deferring the realization of capital gains, the 1031 exchange may afford the owner greater purchasing power for the acquisition-side of the transaction. In contrast, in a non-1031 transaction, the proceeds of the first sale would be received and subject to tax. Then, the second transaction would be made from the remaining proceeds.

Maximizing the benefit of the tax deferment generally requires that the acquired asset be worth more than the exchanged asset, and that the proceeds of the sale of the first parcel be used in the acquisition of the second parcel and not withdrawn, and that all other applicable rules be observed.

How indecisiveness can destroy an estate plan

“Joe” had filled in a form will and provided that, after he passed away, his executor would be someone appointed by his sister “Jane,” and his property would be distributed in a manner also to be decided by Jane.

Although Joe had properly executed the will, his intent was not declared in a definite manner. Instead of making several important decisions, his delegation of them left patent ambiguities in the will. If the will is admitted to probate at all, the ambiguity is likely to cause any gifts of property to lapse.

The result will be intestacy (if the will is not admitted to probate) or the default distribution scheme contained in the Probate Act for intestate estates (if the will is admitted, but all of the gifts lapse).

Being selective in choosing executors and beneficiaries, and taking steps to prepare them for those roles, can result in a more smooth transition. And being definite in describing the components of the estate and the people who will be involved with the estate can avoid the ambiguities and disputes that lead to delays, costs, litigation, and hurt feelings that can last for years.

Both to avoid a lapse in the will and also to take steps to preserve one’s legacy, then, it is important to undertake estate planning in a thoughtful and definitive manner.


What is a step up in basis?

Sometimes people want to sell part or all of an inheritance. Fortunately, they may benefit from a step up in basis.

The “basis” of property is the value it had when you acquired it. If the property appreciates in value over time, the difference in the value from when you acquired it to the time when you sell or dispose of it is the amount of the gain, upon which you may have to pay capital gains tax.

Property that was owned by a decedent when he died, and inherited by a beneficiary, is eligible for a step up in basis. The basis for the beneficiary is measured from the fair market value at the time of the decedent’s death. If the beneficiary sells an inherited asset, any capital gains would be measured from the value at the prior owner’s death, not from the time the deceased owner first acquired the property.

This matters because the beneficiary usually will be able to sell the assets quickly without creating a large tax burden, and because a step up in basis often greatly reduces the tax that would be owed.

The step up in basis can be a tremendous value to heirs and beneficiaries who inherit real estate or certain financial assets that had grown substantially over the years or decades since they were first acquired. If contemplating whether to transfer assets while alive or through an estate plan, it can be a factor that preserves significant value.

Why the federal tax legislation does not diminish the need for estate planning

One of the features of the tax reform legislation has been to double the federal estate tax exemption to over $10 million. Regardless of whether this becomes law, undertaking an appropriate level of estate planning remains important.

First, there is still a need to take care of family, to take steps to protect children, and to make sure a plan is in place to protect your home and the assets that you have accumulated. In that sense, estate planning is very much about taking care of those who are close to you. This should remain a priority regardless of when the estate tax kicks in.

Second, health care planning remains critical to ensure that your wishes will be carried out and values upheld, if you are in a situation where you are unable to articulate them.

Third, estate planning remains a mechanism to work towards life time goals, and to prepare beneficiaries to both receive assets and the knowledge, experiences, and values that are needed to preserve them.

Fourth, without estate planning, the assets that one does accumulate likely will be subject to probate. Estate planning can sometimes provide alternatives to probate, so that assets are transferred without the delay, expense, and stress that can accompany probate proceedings.

Finally, tax planning still may be necessary. The federal estate tax threshold does not affect the Illinois estate tax. That remains at $4 million. Therefore, it is possible for some families or individuals to have an estate that is exempt from the federal tax but still subject to Illinois estate tax.

For these reasons, estate planning remains an important thing to do and to keep current. Regardless of what happens with the federal legislation, neither the needs of families nor applicable state tax rates appear likely to change in the foreseeable future.

Five ways a real estate attorney helps Sellers get to closing

1. The contract
Whether you receive one offer or many, your attorney can help you interpret the strength of the offers. Also, since Buyers write up the offers, sometimes they include errors or unreasonable terms. We will find them before they become problematic. Need a special provision that the offer did not address? We can take care of that too.

2. Issues raised by the Buyer
What is the real reason that a Buyer is asking for a particular term or extension of time? Is it incidental and likely to go away shortly, or does it signal a potential problem that will cause the closing to drag out for months or potentially fall apart? We can help you understand Buyer requests as they arise.

3. Disclosures and documents required of sellers
All Sellers will have to make some disclosures, but which ones apply depend on the location, age, and type of property being sold. We can tell you which are required, and can assist in obtaining water, zoning, municipal, and condominium documents and certifications where required, to minimize the amount of bureaucracy that you have to attend to.

4. Advise you on any underlying problems with the property
Sometimes there are underlying issues with properties, such as an unpaid tax bill or other lien. We can help you assess such matters and work with you to clear them as quickly as possible, so that they are out of the way for closing.

5. Prepare the documents required for you to close
The list of documents to transfer the property to the Buyers is lengthy, especially if the property is held by a trust, LLC, or an estate. Fortunately, we make it as easy as possible to get through any of these scenarios, and complete the sale.

Five ways a real estate attorney helps Buyers before closing

1. Tailoring the contract
The contract needs to be accurate and should address the Buyers’ needs. Mistakes in the timing of deadlines, loan terms, or other provisions can cause problems. Inappropriate tax prorations can inadvertently shortchange Buyers. A careful review can prevent these types of pitfalls.

2. Deadlines
Buyers have a lot to do to get ready for closing. There is an inspection of the property, one or more deadlines for mortgage applications, and timing for review of any condominium or homeowner association disclosures. A real estate attorney will monitor the deadlines relevant to the transaction, and make sure the Buyers are informed of the steps to take and the timing to meet them. This can alleviate the stress of the transaction so that Buyers can focus on preparing for closing, arranging the move, and maintaining their professional and personal lives.

3. What to look for in HOA disclosures
The concept of condominium and homeowner associations is that the association as a whole provides more than what would be available to the unit owners individually for a comparable price. Buyers need to make sure that this will be true for the unit they intend to purchase, and that the rules of the association are compatible for how the Buyers intend to use the property. A real estate attorney can assist the Buyers in reading and understanding the association disclosures, so that they can make their determination with confidence.

4. Check for underlying legal problems with the property
Most of the time, Buyers do not want to take on pre-existing legal problems with the property. To the extent that code violations, title problems, and unpaid taxes can be uncovered early in the transaction, they can be dealt with, or if insurmountable, the transaction brought to a quick conclusion without wasting time and resources.

5. Lending
Not all mortgage loans are the same. Not all lenders are alike, either in terms of the types of loans or their risk tolerance. When Buyers need financing, their experience with the loan application process will often depend on whether their type of transaction is a good fit for their lender. A real estate attorney often can assist Buyers in identifying suitable lenders – thereby providing a smoother path to closing.

Is my estate plan from out of state still good in Illinois?

What happens to an estate plan done in another state? Here are a few areas of concern.

1. Adequate execution of documents
The documents that make up most estate plans are subject to state law requirements, including the requirements for how documents are executed. This includes the number of persons who must witness the signing of a document, and whether such signatures must be notarized. Written instructions prepared by an individual that are not properly incorporated into a will are another potential problem. Documents and attachments that are not fully and properly executed may be given no effect, which can have potentially costly and far-reaching consequences.

2. Tax thresholds
State-level estate tax is another potential problem. To the extent that an estate plan contemplates tax thresholds that are higher than those of Illinois, the plan may be exposed to more taxation than otherwise may be required.

3. Real estate
What happened to the real estate owned in the previous state? If it was sold, the distribution scheme in the prior estate plan may now be unbalanced, particularly if intended for only certain beneficiaries. If the real estate is still owned, the manner in which it was held may or may not be optimal from the standpoint of Illinois residency. For example, if owned outright rather than through a trust or business entity, then it may be subject to a probate or an ancillary probate proceeding on the death of the owner.

4. Agents
Powers of attorney for healthcare and property contemplate the appointment of an agent to assist you in conducting your affairs in the event of a period of incapacity. If moving from far away, it may become very burdensome for your agent to continue to serve in that manner, particularly to the extent that travel to Illinois becomes necessary. Therefore, it is worth considering whether to designate someone more proximate as an agent.

5. Beneficiaries
Many types of accounts, including bank accounts, investment accounts, retirement plans, and life insurance policies offer or require beneficiary designations. They should be updated with any new contact information to avoid delays or other problems when a distribution becomes due.

How to take care of pets through estate planning

Any pet owner would tell you that their pet is an important part of their family and their home life. Unfortunately, the news is full of stories about animals that were cast into chaos and neglect after their owner dies, either because no one know what to do, or no one cared enough to take action.

As a general matter, trusts often provide for the health and welfare of family members or other beneficiaries. Pet trusts can be created to provide for the health, care, and welfare of family pets as well, should they outlive the person or people with whom they reside. This can protect the pet or pets from being forgotten or left to fend for themselves.

Pet trusts work by transferring an amount of money into trust to provide for food, veterinary care, recreational costs, supplies, and other expenses. A trustee of the pet trust (who may be a different person than other appointed trustees) is appointed to receive possession of the animal or animals, and will have responsibility for their care. The purpose of the pet trust is to ensure the same quality of life for the animal as the original owner would have provided. They also can appoint a third person to ensure that proper care and good living conditions are being provided, and funds are being used by the trustee appropriately.

Once funded, the pet trust will provide the animal with a safety net that ensures that proper care will continue to be available.

How to protect your estate plan in changing times

Joe wanted an evaluation of an estate plan he had done many years ago. It turned out the executor Joe named had passed away, and the alternate had moved across the world. By designating new people, Joe was confident that the plan would be carried out properly.

Joe’s story is one example of how an old estate plan can have negative effects. When agents or executors are no longer able to serve, or move away, it may be appropriate to designate new people.

Divorce is another. Although the divorced spouse is deemed to have predeceased for the purpose of interpreting a will, the same is not true for contractual agreements and investments (such as life insurance and retirement accounts) where the former spouse is a named beneficiary. Without a timely review of an estate plan and beneficiary designations, it may still be possible for the divorced spouse to receive some or all of the estate.

Changes in law and technology also have sparked a need to review old plans. For example, many older plans do not account for digital assets, online banking, social media, or cloud storage of documents and photographs. They also may not take into account current tax laws, which can have deleterious consequences.

Finally, estate planning is an opportunity to define goals and build toward them. When your goals change, the plan should reflect the new objectives.

Therefore, estate planning is not a one-time transaction. When circumstances change, the estate plan should be updated accordingly, and not left to deteriorate into something that is irrelevant or contrary to your needs and objectives.

What is probate?

What is probate? In Illinois, probate is a process in the courts that may be required after a person dies to establish the validity of any will, identify who will inherit the property of the decedent, and to pay valid debts and taxes. The executor is the person in charge of compiling the necessary information, handling the affairs of the estate, and accounting for the assets, payments, and distributions.

Probate may or may not be required, depending on what the decedent owned and how it was held.

When the deceased owned assets worth more than $100,000 in his own name, or real estate of any amount in his own name, probate is required.

Assets held in trust, held in joint tenancy with a right of survivorship, real estate held in tenancy by the entirety (if the spouse remains alive), and real estate for which a transfer-on-death instrument had been recorded, may not have to go through probate, however.

Also, accounts and contracts for which a beneficiary has been designated (such as retirement accounts, life insurance policies, and annuities) may be payable directly.

The probate estate is an entity subject to taxation on income and gains that accrue while the estate is open. In addition, Illinois estate taxes will be due if the estate has a value of $4 million, and federal estate taxes will be due if the estate has a value of $5.49 million (for the 2017 tax year).

Before the estate is closed, the executor must prepare a final accounting for the court to report the income, expenses, payments, and distributions.

If you’ve been recently named an executor or personal representative of an estate, Windy City Legal can help navigate the process with you so it’s less intimidating and more unifying for the family. Talk to us about the experience with a different kind of estate planning attorney: Windy City Legal.