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How Is Exculpation of Trustees Addressed Under the New Illinois Trust Code?

Web Admin - Monday, December 30, 2019
Mount Prospect estate planning lawyer Illinois Trust CodeAs the new year begins, many trust owners (grantors) and trustees are familiarizing themselves with the Illinois Trust Code. As of January 1st, 2020, Illinois has adopted a new set of governing rules over trusts that will be linked to the Uniform Trust Code (UTC). This law involves many changes and updates to the rules surrounding trusts, and one area that has been affected is the modification of exculpation clauses. Moving forward, both grantors and trustees should consult a legal professional to either create, adjust, or better understand their trusts. 

What Does Exculpation of a Trustee Mean?


An exculpatory clause is a provision that can be added to a trust that would relieve a designated individual from responsibility for certain actions. Under the Illinois Trust Code, the exculpation of a trustee would relieve him or her of any liability for a breach of the trust. However, trust relieving will be unenforceable if it is determined that the exculpatory term:

- Absolves a trustee of liability that is committed with deceitful intentions or with carelessness to the purpose of the trust or the interests of the beneficiaries.
- Was inserted because of a trustee’s abuse of a legal or confidential relationship with the grantor. 

Unless the trustee can prove that the exculpatory term was justified under the current situation and that it was adequately communicated to the grantor, the term will be found invalid. For example, if a trustee purposefully acted in a way that was determined to be against the trust in an effort to benefit themselves, that trustee could be responsible for his or her actions.

What Is Changing?


Under previous Illinois law, a grantor of a trust was able to exonerate a trustee from personal liability by including an exculpatory clause into the trust. Although exculpatory clauses can still be used under the Illinois Trust Code, there is now a presumption that they will be found invalid if the trustee created or forced the clause to be added. In order to prove that an exculpatory clause is legitimate, a trust maker should be represented by a third-party counsel during the drafting of the trust.

Contact a Riverwoods Estate Planning Attorney


Due to the significant changes that have been implemented under the Illinois Trust Code, it is important for trust makers and trustees to understand the new policies. If you wish to add an exculpatory clause, or if there has been a breach in your trust, you should work with an attorney to determine your legal options. At Drost, Gilbert, Andrew & Apicella, LLC, our experienced Barrington trust lawyers can work with you to ensure your trust meets the requirements of Illinois law. For a free consultation, call our office today at 847-934-6000.

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.


Sources:
http://www.ilga.gov/legislation/ilcs/ilcs5.asp?ActID=4001&ChapterID=61

What Is a Nonjudicial Settlement Agreement in Relation to the ITC?

Web Admin - Thursday, November 07, 2019
Riverwoods estate planning lawyer trustsA trust can provide a person with the ability to protect and manage their assets and distribute them to beneficiaries either before or after their death. When a person creates a trust, they will name a trustee who will be responsible for controlling and managing the property or assets held in the trust. These appointed agents are legally required by the Illinois Trust Code (ITC) to fulfill the duties authorized to them, such as distributing possessions or managing an estate. If disputes arise between a trust’s beneficiaries, a trustee, or any other interested persons, the parties may enter into a nonjudicial settlement agreement to modify the terms of the trust. Before any actions or alterations are enacted, it is important to speak to an experienced trust attorney.  

What Can Be Resolved By a Nonjudicial Settlement Agreement 


Under the ITC, a nonjudicial settlement agreement can address the following subjects:
- The lawfulness and clarification of the terms attached to a trust.
- Approval of a designated agent’s actions.
- The powers which can or cannot be exercised by a trustee, as long as they do not conflict with the purpose of the trust.
- Concerns relating to property held by the trust if the settlement does not conflict with the purpose of the trust.
- The act of removing or appointing a trustee, advisor, or any other delegated representative of financial or nonfinancial powers. This may also include choosing a new successor trustee. 
- The financial compensation that can be provided to a trustee.
- The transfer of a trust’s principal place of administration.
- Accountability of a designated agent for his or her actions relating to the trust.
- The actions taken to resolve disputes related to the administration of the trust, the distribution of assets, or other relevant issues.
- A modification of the terms that relate to the administration of the trust. 
- If a trust is severed into two or more trusts, determination of whether the aggregate interests of each beneficiary are equivalent to their interests before severance.
- The termination of a trust, which can only occur if a court finds that the continuance of the trust is not necessary to achieve the trust’s purpose.

Contact a Long Grove Trusts Attorney


Before the ITC is enacted on January 1st, 2020, it is critical for trust settlors, trustees, and beneficiaries to discuss any possible changes that may need to take place. In order to make sure that your rights are protected, you should work with an experienced attorney who understands the laws regarding trusts in Illinois. At Drost, Gilbert, Andrew & Apicella, our Kenilworth estate planning lawyers can provide clarification in your specific situation. To schedule a free consultation, contact our office today at 847-934-6000.  

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.


Sources:

http://www.ilga.gov/legislation/ilcs/ilcs5.asp?ActID=4001&ChapterID=61

What Types of Charitable Trusts Can I Use in My Estate Plan?

Web Admin - Friday, May 31, 2019
Kenilworth charitable trusts attorneyA trust is a legal agreement created by the owner of assets or property that designates an individual (a trustee) to manage the assets and distribute them to the beneficiaries named in the trust. Assets can be distributed either during the life of the person who creates the trust (known as the grantor) or after their death. In many cases, a grantor chooses to pass their assets to relatives or close friends; however, some may also wish to support a cause they believe in by naming a charity as a beneficiary. In these cases, charitable trusts can be used, and they typically fall into one of two categories: charitable lead trusts and charitable remainder trusts.

Charitable Lead Trusts


This type of charitable trust has a time limit tied to the funding that is provided to one or more charities. Once the time period ends, the rest of the assets are given to non-charitable beneficiaries. The process begins with an initial donation to fund the trust. Charitable lead trusts do not require a minimum or maximum charitable payment amount, and a grantor may prefer to make a cash contribution to be eligible for immediate tax deductions. The payments will then be sent to at least one charity of the grantor’s choosing. This must be done at least once a year for a specific number of years or for the remainder of the lifespan of the grantor. Once the trust’s term has ended, the rest of the funds are given to the beneficiaries chosen by the grantor.

Charitable Remainder Trusts


Many will choose charitable remainder trusts because they can provide regular income for the grantor or their beneficiaries in addition to donating assets to charity. This type of trust is almost the exact opposite of a lead trust, with assets being distributed to beneficiaries during the term of the trust, and any remaining assets being donated to charity after the grantor’s death. 

The first step in creating a charitable remainder trust is making a partially tax-deductible donation. This can include cash, stocks, real estate, or private business interests. During the term of the trust or the remainder of the grantor’s life, assets held in the trust may be distributed to beneficiaries, such as the grantor’s loved ones or even the grantor themselves. Beneficiaries can receive income only once per year or as frequently as every month. After the grantor’s death, the selected charity or charities will receive the remainder of the assets. 

Contact an Arlington Heights Charitable Trusts Lawyer


Estate planning is an extremely complicated process that requires extensive attention to detail. While charitable trusts can provide a number of benefits, it is important to ensure that the correct steps are followed when creating this type of trust. At Drost, Gilbert, Andrew & Apicella, LLC, we can help you determine which trusts will be best for you and your beneficiaries. Contact a Long Grove estate planning attorney at 847-934-6000 for a free consultation.

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.


Sources: 
https://www.fidelitycharitable.org/philanthropy/charitable-lead-trusts.shtml
https://www.fidelitycharitable.org/philanthropy/charitable-remainder-trusts.shtml 


3 Reasons Why a Living Trust Is More Beneficial Than Just a Will

Web Admin - Wednesday, January 23, 2019
Des Plaines living trust lawyerIf you wish to leave a legacy to your children or other beneficiaries after your death, it is imperative that you have an estate plan that will ensure prompt and accurate distribution of your assets. Many people think that writing a will is the best way to do this. However, while a will is important, putting your assets into a revocable living trust can provide several additional benefits.

Avoid the Illinois Probate Process 


In order to distribute assets according to the terms of a will, the will must go through the probate process. This involves filing various court documents required by law to establish the value of each asset and to re-title each asset from the deceased’s name to the recipient’s name. This can be a long, drawn-out process.

Secure Adult Heirs’ Immediate Access to the Estate


One of probate’s most serious drawbacks is the freezing of assets. Specifically, any assets that are held solely in the name of the deceased are frozen upon their death. Imagine a married couple who amassed several large investment and retirement accounts and multiple pieces of real estate during their lifetime. Upon the death of both spouses, their children cannot touch any of the assets until a probate court judge approves the will and appoints a Personal Representative to handle the estate. Leaving large investment accounts without active management can be risky.

By comparison, imagine that all of the couple’s assets had been placed in a living trust, meaning that the assets are titled in the name of the trust rather than in the name of any individual. Upon the death of the trust-maker, their designated successor has immediate access to the assets of the trust.

Secure Assets for the Long-Term Benefit of the Family


Imagine our married couple has three children and has a will. Upon the death of both spouses and probate action, the assets of the estate must be divided amongst the named heirs. Assuming the estate is to be divided equally among the three children, the inherited assets are now at risk to creditors, bankruptcy, a lawsuit, or a divorce. 

Creditors. If the married couple had all of their assets in a trust, ownership of those assets can remain titled in the name of the trust indefinitely. Because the assets are not titled in the individual children’s names, the assets are protected from creditors, even if one child files for bankruptcy or gets divorced. The beneficiaries named in the trust will have access to the assets in accordance with the directions specified in the trust documents. 

Heirs with disabilities. Upon the death of the spouses, one child (or an objective third party such as a bank) could be named as the successor trustee with directions to manage the trust in a certain way. This approach can be used to ensure that the use of the assets is prioritized in some way, such as to meet the basic needs of a child or grandchild with a disability. Keeping the assets in the trust can also serve to protect the right of a disabled heir to receive needs-based government benefits.

Underage heirs. Keeping the trust open with a successor trustee can also be beneficial for heirs who have not yet reached adulthood. When a will leaves assets to a minor, the probate court must appoint a conservator to manage the minor’s assets. Once our fictional married couple has died, there is no telling who that conservator might be and what decisions they might make. In contrast, assets left in a trust can be managed according to specific directions written into the trust. Thus, the maker of the trust can dictate when and for what purposes a youthful (or even as-yet unborn) heir can access their inheritance.

Consult a Palatine Revocable Living Trust Lawyer


A well-thought-out living trust can give you greater peace of mind and benefit your heirs in the long run. To discuss options for writing or updating a living trust, call an experienced Schaumburg living trust attorney at Drost, Gilbert, Andrew & Apicella, LLC. We have prepared living trusts for many high-asset families with complex issues of inheritance. To set up a free initial consultation, call 847-934-6000.

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.


Sources:
https://www.isba.org/public/guide/livingtrust

Are Holiday Gifts Subject to Federal Gift Tax?

Web Admin - Thursday, December 21, 2017
Barrington estate planning and tax lawyerThe holiday season is a time of giving, but as you celebrate this time with your family and friends, you may need to be aware of a certain omnipresent aspect of American life: taxes. While it will likely only apply to people who earn a high income or have large financial assets, it is still a good idea to understand the Federal gift tax and the impact it may have on the gifts you give and your estate.

What Is the Gift Tax?

When a person transfers property to someone else without receiving something of equal value in return, this is considered a gift by the Internal Revenue Service (IRS), and it may be subject to gift taxes. The person who gives the gift to someone else (known as the donor) is responsible for filing tax forms for the gift and paying the gift tax.

Gift Tax Exclusions

Certain types of gifts are excluded from taxes, including gifts given to one’s spouse, gifts given to a political organization, and tuition or medical expenses paid on someone’s behalf. For other gifts, an annual exclusion threshold applies. That threshold is $14,000 for 2017, and the threshold for 2018 will be $15,000.

The annual exclusion applies to gifts given to an individual person, so if a donor gives multiple people gifts of less than $14,000 each, they will not owe any gift taxes. For spouses, the exclusion is doubled, so a married couple can give a gift of up to $28,000 without owing gift taxes.

In addition to the annual exclusion, everyone is entitled to a lifetime exemption known as the basic tax exemption. For people who die in 2017, that exemption is $5,490,000, and in 2018, the exemption will increase to $5,600,000. The taxable amount of gifts greater than the annual gift tax exclusion threshold can be applied toward this lifetime exemption, and taxes will not be owed on these gifts. However, any amount of the basic exemption used during one’s lifetime will be deducted from the amount of their estate that is exempt from estate taxes upon their death.

Contact a Schaumburg Estate Planning Attorney

Determining how gift taxes will affect your finances and your estate can be a complex undertaking. If you want to make sure you are protecting yourself and providing for your family’s financial security, the skilled attorneys at Drost, Gilbert, Andrew & Apicella, LLC can work with you to ensure you have met your legal requirements and have the financial resources in place that your family needs. Contact our Rolling Meadows estate planning attorneys today at 847-934-6000 to schedule a personalized consultation.

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.



Source:
https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes

Forcible Entry and Detainer Actions

Web Admin - Friday, October 09, 2015

Illinois real estate attorney, forcible entry, eviction noticeIn some disputes involving a rental of property, it is possible for a landlord to evict a tenant. In order to successfully evict a tenant, the landlord must comply with the laws governing eviction proceedings. These laws are intended to provide for a means of obtaining evictions, while simultaneously protecting tenants from unjustified eviction attempts. 

Eviction Process 

Pursuant to Illinois law, under certain circumstances, it is possible for a landlord to file a claim, known as a forcible entry and detainer lawsuit, to evict a tenant. Some of the reasons a landlord may be justified in seeking eviction include, but are not limited to, the following: 

1. Failure to pay rent;

2. Violation of the lease terms; or

3. Remaining in the property after the agreed upon lease term has passed. 

In some cases when issues arise, the tenant may voluntarily leave the property. However, if the tenant refuses to relinquish the property, the landlord may be forced to file a forcible entry and detainer lawsuit to initiate eviction proceedings. The first step in the process is to serve notice on the tenant of the intention to terminate the lease. The best way to satisfy the service requirement is to personally hand the tenant the notice. Alternatively, it can be left with someone that lives in the property who is at least 13 years of age. The notice requirement is not satisfied if the notice is left with a guest or visitor to the property. 

If personal notice is not possible, constructive notice is also sufficient. Constructive notice can be accomplished by mailing it by certified or registered mail, return receipt requested. If there is no one in actual possession of the property, the notice can be attached to the property. After notice has been properly served and the issue has not been corrected or the tenant has not moved out, the lawsuit to evict can be filed.

A forcible entry and detainer claim seeks to obtain an “Order for Possession” from the court, which grants the landlord the right to take possession of the property. If the Order for Possession is granted, in most cases, the court will also grant a “stay of enforcement” in order to give the tenant time to find a new place to live. After the stay expires, the Sheriff’s Department will assist the landlord in removing the tenant from the property. 

In addition to the claim for the property, the landlord can join a claim to obtain rent due. However, if constructive notice was used to satisfy the service requirement and the tenant does not appear, the court can only rule on the possession claim and not whether any rent should be paid to the landlord. If the possession claim is decided, it is final, enforceable, and appealable. If the landlord wishes to continue with the rent claim, it remains pending. 

Real Estate Attorneys

Unfortunately, disputes between landlords and tenants do arise. When those issues are significant enough, eviction of the tenant may be sought. If you have questions about the rental of property, contact an experienced Illinois real estate attorney today. Our firm provides representation for individuals located throughout the northwest suburbs, including the communities of Long Grove, Arlington Heights, Schaumburg, Palatine, Inverness, Kenilworth, Riverwoods, Barrington, South Barrington, and Mount Prospect. 

About the Author: Founding partner of Drost, Gilbert, Andrew & Apicella, LLC, Colin Gilbert, received his J.D. from Chicago-Kent College of law in 2005. Colin argues cases across many practice areas including criminal defense, collections, civil litigation, real estate law, and corporate law. Colin is an active member of the Board of Governors of the Northwest Suburban Bar Association and the Illinois Creditors Bar Association. He is currently Vice President of the Arlington Heights Chamber of Commerce, and is a Commissioner for the Village of Arlington Heights. Colin has a 10.0 Attorney rating on Avvo, and was named one of the 2014 “Top 40 Under 40” Trial Lawyers in Illinois by the National Trial Lawyers Association.

Source:

http://www.ilga.gov/legislation/ilcs/ilcs4.asp?DocName=073500050HArt%2E+IX&ActID=2017&ChapterID=56&SeqStart=66600000&SeqEnd=74400000


Importance of Funding Your Living Trust

Web Admin - Friday, September 25, 2015

funding your living trust, Illinois estate planning attorney

The creation of living trusts in order to transfer property to beneficiaries is becoming increasingly popular. One of the major benefits of using a living trust is the avoidance of probate. However, if the maker of the trust (called the grantor) does not actually fund the trust with property or other assets, the grantor’s estate will likely have to go through probate. 

Living Trusts 

A revocable living trust is a form of estate planning that allows a grantor to determine who gets his or her property upon their death. A trust that is revocable can be altered, changed, or revoked during the life of the grantor. Upon the grantor’s death, the trust becomes irrevocable. After the trust becomes irrevocable, it cannot be changed and the trustee must follow the distribution plan made by the grantor. Alternatively, an irrevocable living trust is one that cannot be revoked once it is finalized. Both of these forms of trusts are called “living” trusts because they are formed during the life of the grantor. 

Living trusts provide the benefit of the avoidance of probate, which is a court process in which a determination is made as to how property is distributed upon the death of an individual. Probate, which is governed under Illinois law by the Probate Act of 1975, is often expensive and time-consuming. Additionally, it often means that property is not divided in accordance with how the deceased individual would have desired. 

In order to avoid probate, the grantor must correctly form the trust and fund the trust. A trust is formed through the creation of a written trust document that is signed by the creator of the trust and a notary public. The trust document must include a list of the property that is covered by the trust, name a trustee, and name the beneficiaries of the property included in the trust. 

The grantor must transfer the property that is to be covered by the trust into the trust. For most property, a trust is funded simply by including a list of covered property in the trust document. However, real estate must be retitled in the name of the trust in order to be correctly transferred. A trust that has not had assets properly transferred to it is called an unfunded living trust. 

Unfortunately, it is not uncommon for grantors to fail to fund their trust. This may occur when a grantor plans to get around to it in the future but never actually does it. Alternatively, a grantor may incorrectly believe that the creation of the trust document was sufficient. For example, in the case of real estate, the creation of the trust document is not enough due to the retitling rule. If a trust is not properly funded, the goals of the estate plan will not be achieved and the estate will have to go through probate. 

Help with Estate Planning 

Planning for what will happen to your property and assets is important for you and your loved ones. If you would like more information or help in forming a living trust, contact an experienced Illinois estate planning attorney today. Our firm proudly serves the communities of Inverness, Palatine, Schaumburg, Arlington Heights, Long Grove, Kenilworth, Riverwoods, Barrington, South Barrington, and Mount Prospect.

About the Author:

Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.


Source:

http://www.ilga.gov/legislation/ilcs/ilcs5.asp?ActID=2104&ChapterID=60


'Tis the Season... for Gift Taxes

Web Admin - Tuesday, December 16, 2014

Illinois gift tax, Arlington Heights estate planning attorneyOnce again, it is that time of year, the time when families get together to exchange gifts, and spend quality time together. During this season, people do not ordinarily consider their taxes. After all, the middle of winter is almost as far away from April 15th as someone can get. Nevertheless, the gifts people give during this time of year can have a long-term impact on their tax situation thanks to the gift tax. Gift giving during a person's life is often a good way for someone to avoid estate taxes, so careful planning around this time of year can leave someone's family in a much better financial position.

What Gift Givers Should Know

Gift givers are the ones most on the hook for understanding the tax law when dealing with gifts. The most important thing for gift givers to understand is the fact that they are working under two separate but related gift giving limits. The first limit is known as the annual gift tax exclusion. This is the amount per year that any gift giver may give to any single person. The IRS has set that exclusion at $14,000 for both 2014 and 2015. If a person goes over that limit, then he or she must file a gift tax return. However, this does not necessarily mean that he or she must pay any taxes on the gift.

Filing a gift tax return triggers the second limit that gift givers are working under, the lifetime exemption. The lifetime exemption is the total amount of money that gift givers are allowed to give away over their yearly exemption before they start to owe taxes. The current lifetime exemption is $5.34 million. This means that if a person gives away $20,000 to a single person in a single year, then he or she must subtract $6,000 from his or her lifetime exemption. This is especially important because the lifetime exemption never resets and applies to estate taxes as well. For example, if a person gives away enough during his or her lifetime that he or she has used up $2.34 million of his or her lifetime exemption, then only the first $3 million of his or her estate's distributions are tax free. The rest may be subject to a tax rate of up to 40 percent.

What Receivers Should Know

Gift receivers have a much simpler set of rules to work under. Ordinarily, the gift giver pays the gift tax, and the receiver does not have to worry. If the person giving the gift does not pay the tax, then the IRS may come after the receiver, but usually people giving money in excess of the annual exclusion can also cover the gift tax. Additionally, people receiving five or six figure sums from foreign sources may also have to report that.

Tax day may come but once a year, but tax planning is a year round problem. If you have questions about how best to manage your estate, contact an Arlington Heights estate planning attorney today. The law firm of Drost, Gilbert, Andrew & Apicella, LLC serves clients in many northwest suburbs including Palatine, Schaumburg, Barrington, Inverness, Mount Prospect, Long Grove, Kenilworth, Riverwood, and South Barrington.

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.

Trust Payments and the Capital Gains Tax

Web Admin - Wednesday, August 27, 2014

capital gains tax in IllinoisThe capital gains tax exists as a way for the government to tax the income that flows to investors from certain investments. In general, the capital gains tax applies to the sale of most assets other than inventory. This includes the sale of things like stocks, bonds, and real estate. The current capital gains tax rates vary depending on a person's income bracket. According to the IRS, the capital gains tax for people in the 25 percent, 28, percent, 33 percent, and 35 percent income tax brackets would be 15 percent.

People paying taxes in the highest bracket, 39.6 percent, would pay 20 percent in capital gains tax, and people in the other, lower tax brackets do not pay capital gains tax at all for most capital gains income. Additionally, the Affordable Care Act also introduced a further 3.8 percent tax on capital gains income for people earning either $200,000 a year as single filers, or $250,000 a year as married filers, which went into effect at the start of 2013.

This capital gains tax can interact with trusts in complex ways, and trustees should be aware of the issues created by the capital gains tax and trusts. First, trustees should be aware of how capital gains affects the way that they manage K-1 tax forms. Second, trustees should keep in mind the interaction between capital gains and the income distribution tax deduction that trusts are allowed to take.

K-1 Forms

K-1 forms are a type of tax form that exists to help the owners of pass through entities fill out their personal income tax returns. Pass through entities are entities like S corporations and some LLCs that do not pay taxes themselves, but instead pass the taxes on to the owners. Trusts, strictly speaking, are not actually pass through entities since the trust is responsible for paying some taxes, but the beneficiaries may also owe taxes based on distributions to them from the trust, so they often receive a K-1 form. As far as the need to report capital gains income on a K-1 form, that depends on the specifics of the trust. As a default rule, the capital gains and losses stay with the trust itself, but the trust instrument may choose to pass those along to the beneficiaries, which would result in the trustee needing to add them to the K-1 form.

Capital Gains and the Income Distribution Deduction

Capital gains may also have an effect on the trust's income distribution deduction, a tax deduction that trusts may take for amounts paid to an income beneficiary. The income distribution deduction is equal to the lesser of either (1) the distributions minus tax-exempt income or (2) the “distributable net income” minus tax exempt income. Capital gains may affect this distribution because it figures into the calculation of distributable net income under several circumstances, most commonly if the trust requires the trustee to distribute the gains to the beneficiaries.

Managing a trust is a complex task from both a legal and financial perspective. If you have questions, seek help from an experienced Illinois estate planning attorney. Our firm's skilled lawyers serve clients in many northwest suburban towns such as Inverness, Barrington, and Kenilworth.

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.


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