ESTATE PLANNING UPDATE

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1 LAW OFFICES OF ROLLIN J. SOSKIN & ASSOCIATES, LTD. A Full Service Law Firm Protecting Your Assets Now and for Future Generations 300 Knightsbridge Parkway, Suite 100 Lincolnshire, Illinois Phone (847) Fax (847) ESTATE PLANNING UPDATE September 2008 The following tax and estate planning news may be of interest to you in your business or personal pursuits. If you have questions about any of these items or if we may be of assistance with any legal matter, please call or us at rjsalnewsletter@ameritech.net. In This Issue - Message from Rollin J. Soskin "Getting Down to it/getting Around to it" - Asset Protection Planning - The Jewish Clause: Illinois Court Overturns Marriage Restriction in Trust - About Our Firm

2 Message from Rollin J. Soskin Getting Down to It You have worked hard your entire life to build up the assets which constitute your current estate. If you are like most people, you want to leave your children (and hopefully their children) better off as a result of your hard work. The last thing you want is for the money you leave to be squandered by your children, or worse yet, taken away from them by predators or creditors, including a former spouse for alimony or child support. In general, you cannot take your own money and place it beyond the reach of your own creditors. You cannot make transfers which defraud your creditors, but for a valid purpose, such as estate planning, you can make transfers as long as you retain sufficient assets to cover your known liabilities at the time of the transfer. The real key, however, is that while you cannot place your own assets beyond the reach of your own creditors, you can place any strings that you want on money that you leave to other people. This means you can create a trust for your children and their descendants which is essentially untouchable by their creditors. This means that if they have medical expenses, business failures, or other financial catastrophes which wipe them out personally, they can still have the money you left for them available for their needs. If they have judgments, their creditors cannot attach the assets of a properly created trust for their benefit. If a creditor were in a position to seize money that the trust paid to your child after your child deposited it in their own bank account, the trust can be set up in such a way that the trustee can pay your child s expenses directly so that your child never has anything for the creditor to attach. Similarly, if your child has a substantial judgment against them, for example $150,000, the trustee could use the trust funds to negotiate a substantially reduced settlement with the creditor by offering for example $50,000 to the creditor for complete release of your child. Getting Around To It If you are interested in discussing asset protection opportunities, there is no excuse not to do it right away. Not to decide is to decide. We make it as easy as anyone possibly could for you to move forward. All you need to do is call us for a no obligation appointment. We will review your prior estate plan documents, meet with you to learn about your current circumstances, including your asset protection needs, and tell you what we believe would be an appropriate estate plan for you and how much it would cost. You would then have the option to proceed or not to proceed. Anyone who quotes you a price without getting all the information necessary to know what you actually need is either intending to sell you the same documents that they sell to everyone else, with the same terms, and/or is not really interested in finding out what is really best for you and your family. For further information about asset protection planning, please read the information below and call us to set up your free no obligation appointment. Asset Protection Planning In our litigious society, asset protection has become a concern for many people. The goal of any asset protection plan is to protect you from a future legal liability. A high quality asset protection plan can prevent or discourage litigation against you, or at least present you with the opportunity to settle for a much lower amount than might be claimed. Once a lawsuit is threatened or filed against you, it is usually too late to begin any type of asset protection planning that would withstand legal scrutiny. No single asset

3 protection technique can unconditionally protect all of your assets, nor is it usually cost effective to ensure that 100 percent of your assets are protected. Rather, a strategy involving several commonly used vehicles is usually employed. The combined strategies will revolve around your net worth and objectives, as well as the nature and location of your assets. Although developing an asset protection plan can be a difficult undertaking, there are many techniques that we can help you employ for protecting your assets from potential creditors. Insurance. Insurance, expecially casualty and umbrella liability, is probably the most common form of asset protection. Even life insurance, long-term care, health, and disability insurance could be labeled as asset protectors since their benefit payments defer the need to use other resources. Insurance can also be a magnet for creditors' claims. The more often a wealthy client solves liability exposure through insurance, the more attractive a target the client becomes (and the higher insurance premiums become). Consequently, the wisest asset protection strategies for particularly vulnerable clients combine the use of insurance with other tactics. IRAs and Retirement Plans. Assets in qualified retirement plans such as 401(k), profit sharing, and pension plans, including IRAs, are shielded from creditors under the anti-alienation provisions of the tax code and the ERISA provisions governing qualified plans. Until recently, IRA protection was covered only by state laws, which varied on the coverage provided. In April 2005, the U.S. Supreme Court ruled that IRAs should receive the same protection under federal bankruptcy law and cannot be seized in bankruptcy proceedings. The one caveat to this is that the federal bankruptcy code has a provision stating that assets must be "reasonably necessary" to support the debtor and his/her family, which raises a question whether very large IRA accounts for otherwise wealthy clients would be protected. In any event, the Supreme Court decision will make it more difficult for creditors to seize IRAs. Business Entities. Many clients face the issue of identifying the appropriate entity under which to conduct business, own property or with which to manage the sharing and transfer of wealth among family members and across generations. Usually, the key motivations are effectiveness in the operation of the business and minimizing exposure to income and transfer taxes. However, many business entities have the additional characteristic of being able to limit liability. Consequently, asset protection potential is often a key factor in selecting a particular format for conducting business. Corporations. The most classic structure for limiting liability is to conduct business in the form of a corporation. The liabilities of a corporation are limited to its own assets while the assets of shareholders are shielded from the risks created by the corporation's activities. However, this shield only works to the extent that courts would view the corporation as appropriately capitalized for the risks it is likely to run. If a corporation has far too few assets relative to its risks, while its owners have substantial assets outside the corporate entity, courts have been willing to "pierce the corporate veil" and look to the asset-rich owners to bear the actual liability burden. Further, unless the corporation's independent finances are quite sturdy, lenders to the corporation are likely to also require major shareholders' personal guarantees to back any loans. Limited Partnership. Like shareholders of a corporation, limited partners are only at risk to the extent of their investment in the partnership. The limited characteristics of a limited partner's interest can serve as an asset protection device. Still, the applicability of a limited partnership for asset protection is constrained by the requirement that limited partners have no management control over the enterprise, while every limited partnership is required to have at least one general partner who does have management control and bears unlimited liability. A client who wishes to shed unlimited liability exposure must, consequently, relinquish control in a limited partnership format and find someone, or another entity, to accept those responsibilities. Notably, the general partner can be a corporation, which is its own limited liability environment. However, as discussed above, the adequacy of that corporation's capitalization may be crucial to win the protection of the courts. Nevertheless, a potential creditor in this scenario must overcome two hurdles to actually collect.

4 LLPs and LLCs. Limited liability partnerships (LLPs) and limited liability companies (LLCs) are specifically created to limit the liability of the entity's participants. In an LLP, every partner's liability is limited to the extent of their investment in the partnership and does not extend to the errors or omissions of other partners or employees unless the specific partner is found to be supervising the activity that generates the liability or directly involved in such activity. In such cases, the liability risk is not limited. Consequently, this format is used to protect a client from the negligence or misdeeds of that client's business or professional partners. It cannot be relied upon to protect the client from his or her own failings. LLCs combine the structural and tax characteristics of partnerships and corporations. LLCs provide limited liability to their members and free transferability of ownership interests, like a corporation, but permit flexible allocation of management responsibility and sharing of firm profits while passing through tax consequences to owners, like a partnership. Transfers in Trust. A very well established feature of trust planning is to include "spendthrift" provisions designed to protect beneficiaries from creditor claims. So long as beneficiaries have access to trust assets only in the discretion of independent trustees, courts have shielded those assets from the creditors of beneficiaries. If the beneficiary has any right of withdrawal, or once assets or income are distributed to the beneficiary, those assets, of course, can be reached. Further, to the extent that the creditor can characterize the debt as relating to the necessaries of the beneficiary's lifestyle, courts have been sympathetic to the creditor. Historically, in the United States, these spendthrift provisions have not applied where the settlor of the trust is beneficiary. The policy underlying protection from creditors' claims did not extend to permitting one to put one's own assets beyond creditors' reach. Nevertheless, in order to achieve the benefit of asset protection, several requirements generally come into play: a) the trust must be irrevocable; b) access to trust assets or income must be at the discretion of an independent trustee; and c) the asset protection features will not apply to any existing creditors, nor, realistically, to any claims that are threatened or even likely at the time the trust is created or at the time assets are transferred to such trust. We would be happy to meet with you to discuss the different types of asset protection vehicles, including the effectiveness of each technique and their corresponding benefits and risks. After comparing your goals with the various options available to you, we can then develop a plan that will provide optimal protection of your assets. If you interested in developing a plan to protect your assets, please contact our office. The Jewish Clause: Illinois Court Overturns Marriage Restriction in Trust Max and Erla Feinberg died in 1986 and 2003, respectively, leaving sizable estates in trust for their two children and five grandchildren. One of Max and Erla s grandchildren, Michele Trull, filed a lawsuit against executors and trustees claiming they violated their duties by allegedly conspiring to evade estate taxes and misappropriating millions of dollars from Max and Erla s estates. A recent Illinois Court of Appeals decision does not resolve those allegations, but instead, deals with one clause of Max Feinberg s trust. That provision attempts to control who his grandchildren could marry: "A descendant of mine other than a child of mine who marries outside the Jewish faith (unless the spouse of such descendant has converted or converts within one year of the marriage to the Jewish faith) and his or her descendants shall be deemed to be deceased for all purposes of this instrument as of the date of such marriage." Max and Erla s trustees and executors raised an argument that if this trust provision is valid, Ms. Trull s marriage to someone who was not Jewish and did not convert within one year meant that she and her children would be treated as if they had died. That would mean that she had no standing to complain about the administration of the trust, and at least that part of her complaint would be dismissed. The Illinois trial judge, held that the "Jewish clause" is unenforceable, and the Illinois Court of Appeals agreed. According to the judges, Max Feinberg s attempt to control who his grandchildren might marry was invalid because it violated public policy. It would be just as offensive, according to the judges, as including a provision encouraging a child or grandchild to divorce a spouse the decedent did not like or approve of,

5 or to try to prevent a marriage because the possible spouse was Jewish. Ms. Trull s lawsuit was not dismissed, and the matter was sent back to the trial court for further proceedings. In re Estate of Max Feinberg (1st Dist. 3d Div., June 30, 2008). In a vigorous dissent, one judge argued that all Max and Erla Feinberg were doing was trying to preserve their 4,000-year-old heritage. In Justice Greiman s view, discouraging a grandchild from marrying outside their religion should be permissible. The entire Feinberg dispute has caused controversy among estate planners and within religious groups. Some argue, as did Justice Greiman, that Max and Erla Feinberg should have been free to decide what restrictions they wanted to place on their inheritances, at least so long as they did not actively encourage divorce, or violate anti-discrimination laws. Others point out that a law that permits a grandparent to prohibit marriage outside of a chosen faith could just as easily be used to discourage marriage to someone of that same faith. Within the Jewish community in Illinois a significant debate has been brewing regarding the Feinberg holding, and whether it should be endorsed or reversed. An appeal is currently pending with the Illinois Supreme Court. The Supreme Court has not yet decided whether to hear the case. About Us The law firm of Rollin J. Soskin & Associates, Ltd. concentrates its practice in asset protection, estate and tax planning and preparation, estate and trust administration, probate, real estate and business transactions. With over 30 years of experience, our attorneys pride themselves in providing effective, prompt and informed services to our clients. Rollin J. Soskin, Principal, is an attorney and a CPA practicing in the areas of estate planning, asset protection planning, tax law, probate, real estate and business transactions. Rollin earned his Bachelor's degree with honors in Accountancy from the University of Illinois, Urbana-Champaign and received his Juris Doctor degree from the Loyola University Chicago School of Law. Rollin was a tax consultant at Touche, Ross & Co. (now known as Deloitte & Touche) and has been a partner at several law firms over the past 29 years after starting his own law firm in In addition to bar association and committee memberships, Rollin acts as trustee of numerous personal and charitable trusts and is a director of or counsel to numerous business entities. E:mail: rjsoskin@ameritech.net. Elena Eyber, Associate, practices in the areas of estate planning, tax law, probate and business transactions. Elena earned a Bachelor's degree with high honors in Business Administration from the University of Illinois at Chicago and went on to receive her Juris Doctor degree from the Chicago-Kent College of Law. While in law school, Elena volunteered at the Low Income Taxpayer Clinic where she assisted taxpayers who lacked the financial means to a hire a private attorney in asserting their rights before the Internal Revenue Service. Elena gained extensive estate planning and probate expertise while working at one of Chicago's top law firms and developed a strong foundation in corporate law as a legal editor at a leading publishing company. Elena has written numerous articles on estates and trusts, tax and corporate law. Elena is an active member of the Chicago Bar Association Asset Protection Committee and Estate Planning Committee and American Bar Association Real Property, Trust and Estate Law Section. E:mail: elena.eyber@ameritech.net. The majority of our business comes from referrals by satisfied clients to others who could benefit from our services. Please don't keep us a secret! This Estate Planning Update is a publication of Rollin J. Soskin & Associates, Ltd. and is intended for informational purposes only. The material in this update is based on statutes, court decisions, administrative rulings, and congressional materials, and should not be construed or relied upon as legal advice or legal opinions in any specific fact situation. One should always seek competent legal counsel for advice on any legal matter. To unsubscribe from this Estate Planning Update, please us at rjsalnewsletter@ameritech.net and type "unsubscribe" in the subject line.