Property Taxes:
TWO ITEMS THAT MAY LOWER YOUR PROPERTY TAXES

Two possible methods of lowering property taxes which should not be overlooked by homeowners are: l) the Homeowner Exemption; and 2) a Home Improvement Exemption. The Homeowner Exemption is available to all property owners who live in their own single family home, townhome, condominium, co-op or apartment building (up to six units). This Exemption is claimed by filing an application which is sent by the Assessor's Office every year.

The Homeowner Exemption is currently $4,500. To determine your home's adjusted equalized value, subtract $4,500 from the equalized value of your property. This difference is then multiplied by the tax rate to determine your tax liability, i.e., if your tax rate is ten percent, your tax savings would be $450.

The second method of lowering your property taxes is through obtaining a Home Improvement Exemption. Once again, homeowners living in their own single family homes, condos, co-ops and apartment buildings (up to six units) are eligible. However, unlike the annual Homeowner Exemption, the Home Improvement Exemption will be provided to a taxpayer for only four years. Moreover, the Home Improvement Exemption should be provided to the taxpayer automatically after the Assessor's Office receives a notice of the building permit for your improvement.

The Home Improvement Exemption will exempt up to $30,000 of home improvements which would normally increase the assessed valuation of your home, ultimately resulting in a higher assessed valuation and correspondingly higher taxes. This exemption is useful for reducing your taxes if your home or building has suffered substantial structural damages as a result of severe weather conditions (i.e., flooding).

When you receive your next property tax bill, you should check that the information on the bill is correct and, if you qualify for a Homeowner's Exemption, that the Exemption is provided to you on the bill. Also, if you qualify for the Home Improvement Exemption, you should verify that your property tax bill has not increased by the amount of the work you had done to your home.

Remember, beginning this fall, residential and commercial property owners in the City of Chicago will begin receiving the triennial assessment notice. You will have 30 days in which to file a timely protest.

Estate Planning:
MIDDLE AMERICA ESTATE PLANNING -- QUALIFYING FOR MEDICAID BENEFITS

Medicaid is a joint federal and state program that pays for the intermediate or custodial nursing home care for the "impoverished" elderly, blind and disabled. Generally, this is care not covered by Medicare.

A married individual is financially eligible for Medicaid assistance when:

1. the couple's combined accountable resources (excluding certain exempt assets) do not exceed $72,660;
2. the applicant's monthly income is less than his or her monthly nursing home costs; and
3. neither the applicant nor the applicant's spouse has made prohibitive gift-type transfers to others.

The new law has made it more difficult, but not impossible, for individuals to establish trusts and transfer assets in order to qualify for Medicaid benefits.

Probate:
WHAT DOES IT MEAN TO BE THE EXECUTOR OF A WILL?

The designation of executor is more than an honorary title. Being appointed as an executor carries with it considerable responsibilities. The executor of a will has four basic duties: locating and valuing assets of the estate, paying creditors of the estate, settling taxes, and distributing the assets.

The Executor's first order of business is to file the will with the Probate Court so that he may be formally appointed executor of the estate. The Court will provide the Executor with Letters of Office which will facilitate the Executor's ability to manage the estate. An estate must remain open (unsettled) for six months to allow creditors an opportunity to file claims against the estate.

While locating and valuing assets of the estate, the executor should maintain detailed records of what the decedent had at the time of his or her death. This inventory of assets will allow the executor to account for the decedent's assets and answer questions that heirs or creditors may raise regarding the estate.

When paying creditors of the estate, the executor again should keep records of the payments since distributions from the estate are always potential points of dispute in administering an estate. Creditors have six months in which to file a claim with the Court. Accordingly, the executor should not distribute all of the assets of the decedent immediately, but should allow for late claims.

The executor is also responsible for the taxes of the estate. This includes both federal and state income taxes for the decedent as well as federal and state taxes for the estate. Additionally, if the assets of the estate are over $600,000, the executor may have to pay federal estate taxes within nine months after the date of death. Also, if the decedent owned property in another state, the executor may be required to file a state tax return, and to open probate proceedings in that state, as well.

One of the last major duties of the executor is the distribution of assets. When the executor is the only beneficiary of the will, this causes no problem. However, when there is more than one beneficiary, the executor must be conscious of the other beneficiaries' interest in their shares of the decedent's estate.

Other beneficiaries should be informed of the six month period during which the estate must be open, as well as the potential liabilities (creditors, executor's costs and taxes) of the estate. Regular communication with the beneficiaries should prevent tension between the executor and beneficiaries.

The executor of a will can retain attorneys and accountants to facilitate the probate process. Also, the executor should be mindful that his appointment may last many months and he should consider his acceptance as executor accordingly when he is named in the Will.

Business Restructuring:
NEW ILLINOIS BUSINESS FORM

Effective January 1, 1994, Illinois enacted legislation which recognized Limited Liability Companies ("LLCs"). An LLC is a hybrid form of business that attempts to combine the advantages of a partnership's tax treatment and operating flexibility with a corporation's limited liability. While LLCs provide those significant benefits, there are certain costs related to an LLC, i.e., a $500.00 filing fee for filing the Articles of Organization with the Secretary of State, and a $300.00 annual fee to be paid to the Secretary of State with the annual report. Additionally, since LLCs are new entities there is no Illinois case law to guide potential investors. Also, since LLCs are not recognized in some 20 states, questions arise as to their legal status should a business operating as an LLC expand to other states.

In deciding to operate his business as an LLC, the investor will have to weigh the above costs against an LLC's significant benefits. One important benefit of the LLC is the pass through tax treatment to its owners. An owner of an LLC is called a member under the Illinois Limited Liability Company Act. Unlike an S Corporation, an LLC may have more than 35 shareholders, and members may include corporations, nonresident aliens and partnerships.

LLCs also provide their investors with greater operating flexibility than either a C Corporation or an S Corporation. The Act provides that many of the key provisions regarding management of an LLC can be subject to change by agreement among the members. This freedom to contract rights and duties between the members can allow greater flexibility between the members in structuring the division of profits and losses between members at percentages different from the members' ownership interests. Unlike a C Corporation, an LLC does not require the creation of a board of directors to run the business.

While LLCs have many characteristics similar to a partnership (pass through tax treatment, differing allocation of profits, etc.), the LLC has one significant characteristic of a corporation: the limited liability of its members. Under the Act, members' personal liabilities for the debts, obligations or liability of an LLC or of another member or manager, are the same as that of a shareholder of an Illinois Corporation. Further, unlike a partnership, resignation of a member from an LLC does not dissolve the LLC. The resigning member simply acquires the status of a creditor of the LLC with respect to any distribution that he is entitled to per the Articles of Organization. Also, a member can assign his membership interest in a fashion similar to a shareholder being able to sell his shares.

As with any business decision, an investor should carefully review all the information that he has in determining a course of action. Before proceeding with an LLC, the investor should determine his specific goals and requirements and determine if an LLC best matches those goals.

Federal Tax Planning:
DIVORCE CAN BE TAXING IN MORE WAYS THAN ONE

One of the most commonly overlooked areas in federal tax planning for divorce is the IRC SS1034 rollover of the capital gains from a principal residence into a new principal residence within two years before or two years after the sale. Generally, the owners of the home, after their marital split, may be able to claim a deferral of the capital gain from their previous home by buying a new home that costs at least as much as his or her share of the sold home within the appropriate time period. However, in order to qualify for the deferral, the home that was sold must have been the principal residence. If the taxpayer moved out of the home prior to the divorce and did not buy a home less than two years after he moved out, the taxpayer would not qualify for the rollover treatment.

Joint returns also become cumbersome for the divorced or separated individual. Individuals who are divorced or separated by a court decree, even one dated as late as December 31st, usually must claim "single" filing status on their income tax returns for the full year. Married couples cannot file "single" status. Moreover, filing jointly usually results in the lowest tax bill for the soon-to-be-divorced individuals. An individual must understand his liability once he files a joint return. Each taxpayer becomes individually liable for all of the tax due on the joint return. Even a divorce settlement agreement stating that one spouse will be liable for the taxes will not stop the Internal Revenue Service from proceeding in collection activities against the spouse that has been indemnified under the divorce settlement. The IRS will not recognize, for collection purposes, divorce settlements that purport to indemnify one spouse.

This exposure also comes into play when a joint tax return is filed with a Form 2119 setting forth the sale of the taxpayer's home. If both taxpayers agree to roll over the capital gain from the sale of their jointly held property into a new home and one taxpayer fails to do so, the innocent taxpayer will become liable on the capital gain that will result because of the failure of the rollover.

Further, clients should be well advised that the "innocent spouse" defense is very difficult to prove and only applies to a very narrow set of circumstances. Usually, couples contemplating divorce are best suited to file "married filing separately" (even though the tax liability is higher), or, if the circumstances allow, "head of household" in order to minimize the future unknown liabilities.

Alimony is deductible to the person who pays it, and is considered taxable income to the person who receives it. To qualify, the payments must be in cash, they must end when the recipient dies, and they cannot be disguised child support payments. Most importantly, the divorcing couple may not frontload the alimony payments to disguise a property settlement agreement. Under certain circumstances, the IRS may force the spouse who paid otherwise deductible alimony in the first three years after divorcing, to pay a portion of it in the later year. In general, the recapture rules trigger tax on annual payments greater than about $15,000 in the first three years after a divorce if the size of the payments decreases significantly during that three year period.

Generally, child support payments are not deductible. Again, if child support payments are disguised as deductible alimony, the IRS will re-characterize the payments and issue a tax bill to the payor and allow a tax deduction to the receiving party. Furthermore, alimony payments must not be tied to a triggering event in the child's life. For example, if the alimony payment stop when a child turns 18, the alimony payments will be re-characterized as non-deductible child support payments.

Lastly, do not rely on the language of a divorce decree to allow you to take an interest in your former spouse's 401(k), pension plan or other qualified plan. The Plan administrator is only required to pay your share under a Qualified Domestic Relations Order (QDRO) from the Court. This document acts as a lien to stop a divorced employee from dissipating all of the pension plan that was awarded to the former spouse.

In summary, there are many complicated tax issues regarding divorce. Such actions must be handled carefully and with adequate planning.

Debt Restructuring:
BANKRUPTCY REFORM DRAWS NEAR

The United States Bankruptcy Code should soon be receiving its first major overhaul since its 1978 revisions. The legal community is debating whether Senate Bill 540 provides the necessary streamlining of the Bankruptcy Code, or if the Bill is simply political window dressing for various special interest groups.

The most important structural changes to the current Code would be to increase the debt limits for Chapter 13 reorganizations to one million dollars of debt. This would encourage individuals to repay large portions of their debt under a Chapter 13 Plan, as opposed to filing for Chapter 7 liquidation. Currently, individuals who own a home and have over $350,000 worth of debt would be forced to file a Chapter 7 liquidation, thus potentially losing their home.

Changes for the small business owner are also planned: a new chapter specifically for small business bankruptcies will be created. The new small business "Chapter 10" would be a pilot program implemented in a limited number of judicial districts that would require debtors (businesses) to file three to five year reorganization plans within ninety days of the bankruptcy filing.

Other changes to the Code include:

• Provisions to provide greater protection for children and former spouses who receive child support and alimony from the debtor.
• Increased sanctions and penalties regarding bankruptcy fraud.
• Establishment of a specific criteria for determining court awarded attorneys' fees.
• Imposition of greater penalties for damages caused by law firms that process petitions on a volume basis, often without regard to a client's particular needs.

Even if passage of the reform bill is delayed, it is evident that the tide is turning on bankruptcy reform.

This newsletter is a publication of Lavelle Legal Services, LTD. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.