Your Pet and Estate Planning

You may be one of the millions of people who considers their pet to be a part of the family. It is this way of thinking that leads pet owners to spend a combined $60 billion annually on their pets in the United States. There should be no surprise then that people often wish to make arrangements for their pets in estate planning documents so that their pets continue to be cared for even after the death of their human. While most of us cannot leave our pets a fortune (or a mansion as the case may be) we can make sure that they are provided for to the best of our abilities. 

It is important to remember however, in the eye of the law, pets are considered property of an individual like a piece of furniture. Unfortunately, this means that if people pass away without proper estate planning, pets may be left without a home and end up in shelters. Luckily, in Illinois, and most other states, you can make arrangements for your pets in your estate plan to ensure that they are taken care of for the rest of their lives.

There are a few different options when making arrangements for your pet.

·     Will: Allows you to name a caretaker for your pets after you have passed away. You can also bequest a one-time payment of funds to the individual for the pet’s care. This is a common planning technique as it is done in the same document and with similar considerations to naming a guardian for a child.

·      Pet Trust: Recognized by Illinois law, a Pet Trust allows you to name an individual to care for your pet in the event that you become incapacitated or pass away. You will choose a trustee who will oversee the assets to be distributed for the pet’s care. This document allows you provide funds over the life of your pet and plan for your pet’s final arrangements. This may be a good option for pets that come with special considerations such as long life-span, breeds that are prone to health issues, or those that need extra care (i.e. horses). Once the pet named in the trust is no longer living, the trust will terminate and any remaining funds will be distributed as you state in the trust.

If you have any questions about preparing a pet-friendly estate plan, please feel free to contact Glick and Trostin, LLC at 312-346-8258. To read more about essential estate planning documents, please click here.

Disclaimer: The materials on this website are provided for informational purposes only and do not constitute legal advice.  Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between any attorney and any other person, group or entity. No representations or warranties whatsoever, express or implied are given as to the accuracy or applicability of the information contained herein.  No one should rely upon the information contained herein as constituting legal advice.  The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances.

Do I Owe Taxes on an Inheritance or Gift?

People receive assets from their loved ones all the time in the form of an outright gift or an inheritance under a will. Many individuals question whether there is a tax on the gift or inheritance, and the simple answer is no (unless you live in Maryland or New Jersey). 

But what happens when the asset you received is sold by you? It is important to understand your cost basis in the transferred asset. How the asset is passed to you determines the cost basis you will take in the asset for tax purposes.

Cost basis is the value that is assigned to the asset when it changes hands. Knowing the cost basis is important for the purposes of calculating your gain or loss when you eventually decide to sell the asset. The gain or loss resulting from the sale of the asset has to be reported on your income tax return. The gain or loss is equal to the difference between the cost basis and selling price of the asset.

When an individual gifts an asset to you during their lifetime, it is an outright gift, and your cost basis in the asset is equal to the giver’s (the individual giving the gift) cost basis. In other words, your cost basis is the amount the giver paid for the asset* when the giver bought it or acquired it. If the asset has appreciated in value before it was gifted to you, there is no recognition of any gain when the asset changes hand. Gain will be recognized and taxable upon the sale or other disposition of the appreciated asset.

For example, if A has stock that he bought for $100 in 2010 and gives it to his daughter B in 2017 when it is worth $200, B’s cost basis in the stock for tax purposes is $100. Since she received this as a gift she takes her father’s basis in the stock. She is not taxed on the appreciation in value when the stock changes hands. Years later when she sells it and the fair market value of the stock is $250, her capital gain will be $250 - $100 = $150. B will be taxed on capital gain of $150 when she sells the stock.

Alternatively, if you receive the asset as an inheritance, you receive a cost basis in the asset equal to the fair market value of the asset on the date of the person’s death. Thus, you will receive what is called a stepped-up basis or increased cost basis in the asset.

For example, C has stock that he bought for $100 in 2010 and leaves it to his daughter D in his will. C dies in 2017 when the stock is worth $200 and D inherits the stock. D’s cost basis in the stock for tax purposes is $200, the fair market value at the date of death. This is what we call a stepped-up basis because the cost basis increased from $100 to $200. Again D is not taxed on the appreciation in value when the stock changes hands. Years later when D sells it and the fair market value of the stock is $250, her capital gain will be $250 - $200 = $50. D will only be taxed on capital gain of $50 when she sells the stock.

In sum, in the case of inheritances you need to know the value at the date-of-death and in the case of gifts you need to know the giver’s cost or what the giver paid for the asset. Thus, although you may not be taxed on the receipt of an inheritance or gift, it is important to learn about the cost-basis in the asset so that when you eventually sell it, you will know how to properly report the sale for tax purposes and pay the appropriate tax. If you have any questions about tax and estate planning, please feel free to contact Glick and Trostin, LLC at 312-346-8258.

*The giver may also have acquired the asset by gift or inheritance which would establish the basis. Cost basis may also be adjusted by other factors, such as depreciation, improvement, etc.

Disclaimer: The materials on this website are provided for informational purposes only and do not constitute legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between any attorney and any other person, group or entity. No representations or warranties whatsoever, express or implied are given as to the accuracy or applicability of the information contained herein. No one should rely upon the information contained herein as constituting legal advice. The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances.

New Parent Series Part V - Creating an Estate Plan

As a new parent, I imagine all of the things that my son will see and do as he grows up. Rarely do I think that I may not be around during all the wonderful milestones in life. For most people, planning for the time when you are not able to care for yourself or your family is something that you would rather not think about. Perhaps this is part of the reason why only 36% of parents with children under the age of 18 have a will according to Caring.com. Making your wishes known often provides people with peace of mind and will help your family know how to proceed. 

Creating an estate plan allows you to convey your wishes through the use of legal documents. These documents will speak for you regarding medical care for you and your children if you are unable to due to disability, what will be done with your finances, and how your estate should be distributed once you pass away. Additionally and perhaps most importantly for new parents, these documents allow you to name a guardian for your children. You are able to make amendments to your estate plan when needed as your family's needs generally change over time. The following are basic documents that should be included in a (new) parent's estate plan. 

• A Basic Will. A Will makes sure that your assets are passed on according to your wishes and allows an individual with children to name Guardians. If an individual does not have a Will, the laws of the state will control the distribution of the estate and the courts will decide who will raise the children. To help avoid court proceedings known as probate, you may also consider a Declaration of Trust which is a private document that functions similarly to a will but does not need to be filed with the Court.

• A Power of Attorney (POA) for Property. This document names a person as "agent" to act on your behalf in case of disability. The document covers financial matters (e.g., banking, bill paying, etc.) and can be broadly drafted or be quite limited.

• A Health Care Power of Attorney. The health care POA designates an individual to make important health care decisions on your behalf, when you are unable, due to a temporary or permanent disability. This document can also be used to name someone to make health care decisions for your children in the event that you are unable to do so. Individuals may also consider creating a Living Will which specifically directs end-of-life instructions.

• Beneficiary Designations. You should make sure appropriate beneficiaries are listed for all of your retirement accounts such as IRAs, 401(k) and life insurance policies. These assets go directly to named beneficiaries. If you do not have named beneficiaries, the assets will generally be distributed through your estate. Be sure to check older plans that may still name parents or ex-spouses that you may wish to update. (NOTE: When naming a minor, a guardianship proceeding may be required if the minor inherits, unless there is a trust.)

It is important to discuss these matters with your loved ones. An attorney can help answer questions that you may have, advise you on the best plan for your situation, and ensure that the documents are executed (signed) correctly. Creating your first estate plan can be an emotional process, yet the peace of mind in knowing that you have a plan in place can be reassuring. If you have any questions about preparing an estate planning or would like to begin the process, please feel free to contact Glick and Trostin, LLC at 312-346-8258.

To read the other posts in the New Parent Series, simply follow these links:

New Parent Series Part I - Dependent Issues and Tax Filing Status For You to Consider
New Parent Series Part II - Healthcare FSA's and HSA's
New Parent Series Part III - Child and Care Tax Credits
New Parent Series Part IV - Adoption Tax Credit and Benefits

Disclaimer: The materials on this website are provided for informational purposes only and do not constitute legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between any attorney and any other person, group or entity. No representations or warranties whatsoever, express or implied are given as to the accuracy or applicability of the information contained herein. No one should rely upon the information contained herein as constituting legal advice. The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances.