e- NEWSLETTER

February/March 2006

Jessica M. Kirsch
Editor-in-Chief

Family Law

MOVING WITH CHILDREN AFTER DIVORCE

By Julie M. Dombrosky

    After a couple with children divorces, after the difficult issues of child custody and visitation have been determined, the parties must still work together to carry out the parenting arrangement. One problem after a divorce judgment has been entered arises when the person who has residential custody of the children wants to move. The move may be for the custodial parent's career, for his or her new spouse's career, to be closer to family, or for any other reason. But after a divorce, the custodial parent cannot move from Illinois unless he or she has obtained the agreement of the non-custodial parent or a court order permitting the move.

    To the custodial parent, this rule may seem restrictive and unfair, but to the non-custodial parent, the rule is necessary and reasonable. If custodial parents could move around based solely on their own discretion, non-custodial parents would see a lot less of their children.

    The Illinois removal statute (750 ILCS 5/609) states that the court may grant the custodial parent leave to remove the minor child or children from Illinois "whenever such approval is in the best interests of the child or children." Factors the court will consider in determining whether the move is in the best interests of the child are: (1) the likelihood that the proposed move will enhance the general quality of life for both the custodial parent and the child, (2) the motives of the custodial parent in seeking the move, (3) the motives of the non-custodial parents in resisting the removal, (4) the visitation rights of the non-custodial parent, and (5) whether a realistic and reasonable visitation schedule can be reached if the move is allowed. Courts will look at the unique facts of each case to make a determination about what is best for the child or children involved.

    The court cannot prevent a custodial parent from moving anywhere within the state of Illinois; thus, a parent not permitted to move to St. Louis, Missouri, could move to a town on the Illinois side of the Mississippi without violating the removal statute, but he or she would still have to comply with the visitation arrangement already in place.

    If you have any questions about this article or any other issue related to divorce or family law matters, please feel free to contact jdombrosky@lavellelaw.com.

Taxation

CHANGE OF LIFE EVENT: MARRIAGE, DIVORCE, NEW DEPENDENT OR SPOUSE PASSING ON, TAXPAYERS SHOULD PREPARE THEIR TAX RETURN CAREFULLY

By Tim M. Hughes

     Recently married couples, as well as, recently divorced individuals should ensure that the name they put on their tax return matches the name registered with the Social Security Administration ("SSA"). A mismatch between IRS records and SSA records could increase a tax bill or reduce the size of any refund. And at a minimum delay the processing of your return.
   
    For the newly married bride who takes her husband's last name, but doesn't tell the SSA about the name change, a complication may result. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the Social Security Number. Similarly when a woman who had taken her husband's name divorces him and resumes using her maiden name without making that name change known to the SSA that could also complicate the IRS' processing of the return.

    To inform the SSA of a name change, one only needs to file a Form SS-5 at your local SSA office. The SSA usually takes about two weeks to process the change. The form is available on the SSA's Web site, www.ssa.gov, or by calling 1-800-772-1213 or at your local office. The SSA Web site and toll free phone number can provide the addresses of local offices.

    A newborn child or recently adopted child should also have his name and social security number correct with the SSA and IRS. Their information needs to be correct to claim them as dependents to lower your tax burden. The information also has to be accurate to ensure that your filing status (Head of Household, or Qualifying Widow(er) with Dependent Child) is able to be processed by the IRS.  If you have any questions related to this article, please contact me at thughes@lavellelaw.com.
 

State Laws

NEW ILLINOIS LAWS FOR 2006

By Cameron R. Monti

    More often than not, people ring in the New Year with the usual resolutions to lose weight, exercise more, reduce their debt, to name a few. How about a change this year by versing yourself in a few of the new laws of Illinois for 2006? Unbeknownst to many, a number of new laws went into effect as of January 1, 2006, in the State of Illinois. Below is short summary of just a few that you may want to keep in mind, or if nothing else, you may find interesting:

o Trigger-lock mechanisms are required to be included with the sale of any gun. Thank goodness for those tigger locks.
o Stun guns and Tasers cannot be purchased unless the buyer has a Firearm Owners ID card.
o Cold medicines that can be used to make methamphetamine must be kept behind the counter and sold only to people who show ID and sign a log. Nyquil addicts beware!
o The oh-so-dangerous "Yo-yo waterball" toys are banned.
o School districts must teach athletes about the dangers of steroid abuse.
o People who commit domestic battery in the presence of a child must pay the child's counseling bills.
o Parents may take their children into the voting booth.
o Nursing mothers may be excused from jury duty.
o The legal age for getting a tattoo becomes 18, rather than 21. A parent's nightmare come true.
o Drivers may not have a television or DVD player in the front seat. How in the world are we supposed to watch Oprah?
o After five previous convictions, drunken driving convictions become a Class X felony, punishable by 6-30 years.
o Use of devices that jam police lasers and radar's used to detect speeders are barred in all vehicles - not just commercial vehicles.
o Makes drunken driving a more serious crime if a child under 16 is in the car.
o Companies doing business in Illinois must notify consumers if their personal information may have been viewed by potential identity thieves.
o Job and housing discrimination based on sexual orientation is illegal.
o Drugstores must disclose the price of medicine to people who call to do comparison shopping
o People in jail awaiting trial may not be barred from voting. I suspect this may be the last thing on the mind of an incarcerated individual.
o A new law creates an organ-donor registry so that person's decision to donate cannot be reversed by grieving relatives. No, Aunt Betty you cannot have my kidney when I die.

Last but certainly not least...

o The Eastern Tiger Salamander the official state amphibian, and the Painted Turtle the official State of Illinois reptile.

    If you have any questions concerning this, or other new law for 2006, please contact Cameron at cmonti@lavellelaw.com.

Estate Planning

WHEN IS AN IRREVOCABLE INSURANCE TRUST RIGHT FOR YOU?
By Lauren E. Schaaf

     An individual may need to consider transferring his life insurance policies to an irrevocable trust when the individual's estate, at the time of his death, may exceed the then existing unified credit amount. The unified credit amount is the amount an individual may transfer upon his death to his beneficiaries tax free. Currently, an individual may pass 2 million dollars upon his death tax free. That amount is scheduled to increase to 3.5 million in 2009. There will be no estate tax in the year 2010 and from the year 2011 forward the unified credit amount will be 1 million dollars. When property is placed in an irrevocable trust, the grantor is giving the property away permanently. Since the grantor no longer owns the property, it will not become part of the gross estate and will not be subject to federal estate tax. If you anticipate your estate being larger than this at your death, then you may want to consider transferring your life insurance policy to an irrevocable insurance trust.

     In order to transfer your life insurance to an irrevocable insurance trust, ideally the trust
should be established before the life insurance is purchased. The trust is named the owner and beneficiary of the life insurance contract. The trust will purchase the policy, rather than the estate owner or insured gifting the policy to the trust after purchase. This is important since insurance that is gifted within 3 years of an estate owner's death, including to an irrevocable trust, will be brought back into the estate and be subject to federal estate tax.

     For gift tax purposes, an individual may transfer $11,000 to another individual or entity each year without incurring a gift tax. The initial transfer of an existing insurance policy to an irrevocable trust is a gift equal to the fair market value of the policy; essentially the cash surrender value plus unearned premium. Unless the policy is paid up, someone will have to pay premiums each year to keep the policy in force. Generally, irrevocable insurance trusts are drafted to allow the insured to contribute additional funds to the trust each year in order to enable the trustee to make the premium payments. The initial transfer to a trust and the additions each year will not be gifts of future interests if the trust beneficiaries have the right to withdraw the addition. See Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). Generally, the trustee must notify the trust beneficiaries of their right to withdraw the additions, i.e. the premiums, each year and the beneficiaries must refuse so that the insurance policy will always be paid up, thus providing the beneficiaries with the intended benefit of the life insurance upon the death of the grantor.

    The irrevocable insurance trust process can be complicated. There are many issues to be considered before deciding to use one. Are you unsure whether your taxable estate will exceed the unified credit amount upon your death? Could your estate gain tax savings if you transfer your life insurance policies to an irrevocable life insurance trust? For the answers to these and other estate planning questions, contact attorney Lauren Schaaf at lschaaf@lavellelaw.com.

Estate Planning

ESTATE PLANNING GIFTS ARE FAR MORE COMPLEX THAN CHRISTMAS GIFTS

By Kerry M. Lavelle

    Oftentimes we are asked, in the estate planning process, how to provide for young children, who are, frequently, the client's children or grandchildren. If the client is willing to make a lifetime gift for the benefit of the child, then the client can make use of the Federal Gift Tax Annual Exclusion to transfer substantial sums to the child free of gift or estate tax.

    The Federal Gift Tax Annual Exclusion allows a donor to give up to $11,000 to any individual in any calendar year free of tax. IRC § 2503(b). If the donor is married and the spouse consents to the splitting of the gift, then $22,000 may be transferred, free of gift tax each year. IRC § 2513.

     The problem arises because of the Federal Gift Tax Exclusion is not available if the gift is of a "future interest". To make an annual exclusion qualify the donor must give a present interest of the property, which is outright ownership.

     But who wants to make a gift of outright ownership of $11,000 to a three-year old?

    There are basically three ways in which to consummate these gifts to make them qualify for the $11,000 annual exclusion. First, under the Illinois Uniform Transfers to Minor Acts ("UTMA") 760 ILCS 20/1 et seq., which allows for a gift of a present interest to a child that will be held by a "custodian" which often is the parents.

    Simply stated UTMA gifts are, in many ways, statutory trusts.

    On a historical note, the Illinois UTMA succeeded a prior uniform statue known as the Uniform Gift to Minors Act. However, now the Illinois UTMA has been expanded to include property that was previously not allowed to be transferred, such as real estate and intangible property rights such as patents and trademarks. In Illinois, the UTMA account terminates when the minor attains the age of 21 with respect to most property transfers. Some UTMA accounts could terminate once the minor turns the age of 18.

    A second method to transfer a present interest of property to a minor is through an IRC § 2503(c) trust. This trust must permit the trustee to expend the trust assets for the benefit of the minor. The trust will meet this requirement if the trust instrument allows the trustee to make wholly discretionary distributions to or for the benefit of the minor. The second requirement is that if the minor dies before the age of 21, then the trustee must pay the trust assets to the minor's estate or as the minor appoints pursuant to a general power of appointment.

    The third, and most problematic requirement is that the principal of the trust must pass to the minor once the minor attains the age of 21. As you can guess, many clients hesitate to transfer substantial assets to a IRC § 2503(c) trust in that the assets would be distributed to the minor when he or she reaches the age of 21.

    Gifts to trusts other than a IRC § 2503(c) trust generally do not qualify for the federal gift tax exclusion since they are gifts of a future interest. However, through the creation of a "Crummey" trust, based on a famous case decided by the Ninth Circuit in Crummey v. Commissioner, 397 F 2nd 82 (Ninth Cir. 1968), so long as the beneficiary has the right, not the obligation, to withdraw the deposit into the trust by the donor, that deposit into the trust will be considered a gift of a present interest and qualify for the annual exclusion. This right to withdraw the deposit by the beneficiary is known as a "Crummey Power".

    An important advantage of Crummey trusts over the IRC § 2503(c) trust custodianships is their versatility. After the Crummey Power lapses the trust may continue as long as the donor wishes, subject only to an applicable rule against perpetuities. The donor also has great flexibility regarding the other terms of the trusts.

    As you can see, there are many viable options still available for funding gifts to children. If you have any further questions on this subject matter, please do not hesitate to contact me at klavelle@lavellelaw.com for questions on this and other estate planning matters.

Business Law

GET IT IN WRITING

By Matthew J. Sheahin

    Your company enters into a myriad of different transactions every year. Most companies will have a few large and complicated transactions that they may put into writing. However, other “routine” business transactions may remain oral business deals with no writing to memorialize the terms of the agreement. It is very important to put virtually every business transaction in writing to avoid confusion and, possibly, expensive litigation.

    Under the Statute of Frauds, every transaction involving the sale of goods for over $500 requires a writing in order to be enforceable in Illinois. Although many businesses feel that this is a waste of time, a writing can really protect your business. A “writing” under the Statute of Frauds does not have to be a long complicated contract, but rather any writing, signed by the parties, that addresses the identity, number and price of goods sold. Many prudent businesses will make deals over the phone or with a handshake in a face-to-face meeting, but then wisely follow up that oral agreement with purchase orders and purchase acknowledgments, or other similar writings depending on the business.

    The problem arises when you, the seller or buyer, thought that you had a deal, and then the other party denies any agreement and you have no writing to demonstrate the agreed upon terms to a Court. At that point it becomes a he said / she said battle with an uncertain outcome that depends on which person the trial court judge or jury finds most credible.

    There are exceptions to the Statute of Frauds, including situations where one party has partially performed their end of the bargain or the oral agreement involves specially manufactured goods made for a certain customer and according to customers specifications, which cannot be resold in the ordinary course of business. These exceptions may help take your transaction out of the Statue of Frauds and allow you to enforce an oral contract even though the goods sold for more than $500, but why take the chance. Our office can prepare form contracts tailored to your specific business needs which you can then use to memorialize every transaction and avoid the headaches and heartache that inevitably follow oral agreements.

    We also advocate the use of written contracts for any transactional business because we can draft a writing which allows you to recover your attorney fees should you be forced to institute litigation to collect amounts due. Without a contract, your business will bear the expense of attorney fees incurred while trying to collect money you already earned. In short, when in doubt, put it in writing.  If you have any questions regarding this article please feel free to contact me at msheahin@lavellelaw.com.

Taxation

TAX CONSIDERATIONS IN THE SALE OF YOUR BUSINESS

By Theodore M. McGinn

    Parties who have met with a purchaser and have agreed upon a price, payment terms, and other issues involved with the sale of the business, must also factor in one final issue. How will the transaction be taxed to the seller? Many times, if tax considerations are not factored into the equation, a seller will not reap the entire benefit that they expected on the sale of their business.

    For the sale of any asset, the tax liability is determined by the difference between the fair market value of the assets (proceeds from the sale) and the adjusted basis at the time of the transfer. The adjusted basis is determined by the amount that the seller paid to acquire such asset or otherwise the cost. The initial cost basis then is adjusted for depreciation, allocation of profits, or allocations of losses, or other adjustments entitled pursuant to the Internal Revenue Code. The difference between the purchase price and the adjusted basis is your taxable gain. The gain is then taxed as either a short term or long-term capital gain depending upon how long the owner held such asset.

    A key consideration in structuring a transaction is whether it is structured as an asset sale or a stock sale. If an asset sale, and assets are held in a corporate entity, the price from such sale will be paid to the corporate entity. At that time, the corporate entity would then have to determine how to transfer the cash to the individual shareholder, thereby potentially having an additional tax event. If the corporate entity is a C-corporation, there could be potentially double taxation.

    If you are only transferring a portion of the business, then a determination must be made as to whether or not the corporation will issue new stock to the potential purchaser in exchange for price, or will one of the shareholders transfer a portion of their stock to the purchaser. If it is structured as a stock issuance, the price for the sale will be paid to the corporation. Again, you would be faced with the issue of getting the funds to the individual shareholder without taxation. On the other hand, a transfer of stock to the purchaser by an individual shareholder would generate payment to the individual rather than the corporate entity.

    When considering the sale of your business, tax considerations must be factored in to the decision as to how the transfer is structured. Otherwise, the seller may not reap the benefit of the sale and may incur substantial tax liabilities as a result of the transfer.  If you have any questions regarding this, or any other tax matter, please do not hesitate to contact me at tmcginn@lavellelaw.com

For past e-newsletter articles of interest, please visit the Lavelle Legal Services, Ltd. website at:  http://www.lavellelaw.com/newsletters/newsletter.htm.