Estate Planning:
NEW CHANGES IN UNIFIED CREDIT REQUIRE RECONSIDERATION OF ESTATE PLANS

Under prior law, every individual is entitled to a unified credit in the amount of $192,800 against the tax assessed against his or her gross estate. This unified credit in effect protects $600,000 of assets of an estate. Under basic estate planning, this unified credit could enable a married couple to pass $1,200,000 to their children tax free. With the Taxpayer Relief Act of 1997 enacted on August 5, this unified credit was amended.

Under the new unified credit, assets valued at up to $1,000,000 will eventually be protected from estate tax. The credit increase will be phased in gradually beginning in 1998 when an exemption equivalent of $625,000 is protected, $650,000 in 1999, $675,000 from 2000 to 2001, $700,000 from 2002 to 2003, $850,000 in 2004, $950,000 in 2005, and $1,000,000 from 2006 and beyond. This change may require re-evaluation of an individual's estate plan.

In preparation of an estate plan, married individuals often divide their assets between spouses in order to maximize the benefit from the unified tax credit. To put it very simply, marital assets may be divided in such a way that each spouse has at least $600,000 worth of assets. The maximum benefit to be utilized by dividing marital assets may not be achieved under the new greater unified credit in old estate plans.

Most trusts and wills are drafted in such a way as to provide the trustee or executor flexibility needed to realize the full potential of the unified credit. Nevertheless, it is possible that changes may be needed to some estate plans due to the new unified credit. If trusts or wills are not properly drafted, the estate may be subject to more estate taxes than necessary and ultimately reduce the estate which is passed on to the heirs.

In addition, the Budget Act provides an exemption for the first $1,000,000 of a qualified family owned business from estate taxes. This exemption would be in addition to the unified credit. However, this exclusion may only be taken to the extent that the exclusion plus the amount effectively exempted by the unified credit does not exceed $1,300,000.

These provisions would provide an additional benefit to those families holding such qualified businesses and would enable them to pass that business to a succeeding generation by substantially reducing the estate tax, which sometimes requires that assets of the business be sold to meet those obligations. However, family owned businesses must be analyzed to determine whether they meet such requirements and if not, what modifications are needed.

The changes proposed by the House and Senate to the estate and gift tax code appear to provide much needed relief from the estate tax. Current estate plans must be reevaluated to ensure they maximize the benefits from the new law. Furthermore, family businesses will need to be evaluated to determine if they satisfy the statutory requirements for the exemption.

Deciding upon and signing a power of attorney for health care or a living will is meant to give you some degree of control over the medical treatment you will get if you become unable to make those decisions later, much like estate planning is designed to give some control over the disposition of your assets.

The Illinois Compiled Statutes provide two instruments that allow you to direct what life-sustaining measures are to be taken when you cannot make the decisions for yourself: the living will and the power of attorney for health care.

LIVING WILL: The Illinois Living Will Act allows you, if you are suffering from a "terminal condition", to direct that "death-delaying procedures" are not to be used to prolong your life. A "terminal condition" is defined as: "an incurable and irreversible condition which is such that death is imminent and the application of death-delaying procedures serves only to prolong the dying process."

A "death-delaying procedure" is defined as: " any medical procedure or intervention which would serve only to postpone the moment of death. In appropriate circumstances, such procedures include, but are not limited to, assisted ventilation, artificial kidney treatment, intravenous feeding or medication, blood transfusions, tube feeding and other procedures of greater or lesser magnitude that serve only to delay death "

It is important to note that under the Illinois Living Will Act, food and water may not be withheld if doing so would result in death from dehydration or starvation and not the existing terminal condition.

HEALTH CARE POWER OF ATTORNEY: The Illinois Powers of Attorney for Health Care Law allows you to appoint an agent to make any health care decision you could make for yourself, including withholding food and water.

"Health care" is defined to include "any care, treatment, service or procedure to maintain, diagnose, treat or provide for the patient's physical or mental health or personal care." Unless you limit your agent's power in the power of attorney, the agent can "be informed about and consent to or refuse or withdraw any type of health care", including artificial life support such as a ventilator, or food and water. The agent's power may extend beyond death to allow an anatomical gift to be made by your agent or disposing of your body. Admission to institutions such as nursing homes may be done by the agent. If mental health may be an issue, please note that your agent may admit you to a mental health treatment facility. However, if you do not consent to such admission, the involuntary admission must be done under the laws guiding any involuntary admission.

It is important to note in all of these areas where your agent may act if you become disabled, that you may set forth your specific desires regarding treatment in the power of attorney document itself. Treatments that are not specifically addressed in the power of attorney for health care may be decided upon by your agent in his own judgment on your behalf. The agent must exercise due care.

CONCLUSION: The health care power of attorney is the broader-reaching option of the two discussed, allowing you to appoint an agent to make any health care decision, including withholding food or water, that you could make for yourself. The health care power of attorney also allows you to make your wishes known to the agent and to the world in the document itself. The living will is more limited in its application.

One final note is that if you happen to have both a power of attorney and a living will in place, the power of attorney will supersede the living will as long as there is an available agent.

Internal Revenue Service:
IRS MODIFIES ONE COLLECTION ALTERNATIVE

In the IRS's processing of delinquent accounts, the IRS has basically four options:

1. Levy assets until the account is paid in full;
2. Enter into an installment agreement to obtain full payment;
3. Place the account as uncollectible until circumstances change to allow it to be collected in full;
4. Compromise the liability to settle the tax arrearage.

Further, procedurally, the IRS has implemented a review step to determine the processability of Offers in a quicker time period. This was done due to the IRS' recognition that it was taking too long to process Offers in Compromise. However, the new process implemented appears to favor rejection of an Offer in Compromise, so as to clear the IRS' case load. The pre-review, initial stage is under a fourteen day time deadline to make a decision, which time restraint may force the IRS to reject Offers more readily to dispose of a case. Despite procedural changes to make their collection of delinquent accounts more efficient, the IRS is continuing to review modifications to the Offer in Compromise program including the implementation of a user fee in the amount of approximately $1,000 to cover the cost of the IRS in processing Offers. Despite recent changes to the Offer in Compromise program and the IRS' own critical review of the program, the Offer in Compromise is still an excellent program for delinquent taxpayers and the Service to resolve old uncollectible liabilities.

The Offer in Compromise program of the Internal Revenue Service offers a taxpayer an opportunity to free itself from tremendous tax liability at a substantial discount. At the same time, the government collects taxes at a substantial savings of expenses normally incurred and without destroying a taxpayer's life. Furthermore, the amount the government collects pursuant to an accepted offer equals what they would have collected through levy and garnishment for the next five years. The process becomes complicated, however, where a married individual at-tempts to compromise a tax liability for which their spouse is nonliable. These situations may arise for an individual where a tax liability was incurred before the person became married, where one is personally liable for a corporate obligation through the Trust Recovery Penalty provisions of the Internal Revenue Code or where each spouse filed tax returns separately.

When processing an Offer in Compromise, the IRS conducts a detailed analysis of the taxpayer's assets and monthly disposable income. When a married individual is offering to compromise his or her individual liability, tax practitioners must limit the consideration of the nonliable spouse's income and assets. The IRS has no legal basis in which to collect taxes from a nonliable spouse. The Internal Revenue Manual provides little guidance in this situation. However, the IRS requires the disclosure of nonliable spouse information before even considering an Offer in Compromise.

After a taxpayer files an Offer in Compromise, the IRS conducts a two-part analysis. First of all, the IRS looks to the taxpayer's assets. Where only one spouse is liable, only those assets belonging to the liable spouse should be considered. It becomes important to protect an asset acquired by the nonliable spouse prior to the marriage. Those assets should not be included in an offer. However, the IRS will require proof that such assets were acquired prior to the marriage and therefore, should not be considered.

The second component of an Offer in Compromise is the taxpayer's monthly disposable income. There are two primary approaches where there is a nonliable spouse. First of all, you may totally ignore the nonliable spouse's income and expenses. This method is resisted by the IRS, especially where the nonliable spouse earns much more than the liable spouse. The second approach would be the consideration of the nonliable spouse's income only for the purpose of determining the liable spouse's expenses. The household expenses are apportioned between the two spouses based on their percentage of household income. This method is preferred by the IRS. This method, however, raises other questions. How are the national standards determined where the liable taxpayer has children from a prior marriage? What about expenses solely belonging to one spouse? (Such as court ordered payments for child support from a prior marriage). Finally, should the nonliable spouse be limited in their expenditures? In other words, should that nonliable spouse be forced to abide by the stringent standards put forth by the IRS?

Many issues are presented in processing an Offer in Compromise where there is a nonliable spouse involved. Tax practitioners must be sure to limit IRS consideration of nonliable spouse's assets and income. Otherwise, a taxpayer may be forced to pay more to the IRS than necessary.

Litigation:
OBTAINING A JUDGEMENT IS ONE THING... COLLECTING IS ANOTHER

Creditors cannot take control of or obtain a debtor's property unless a judgement is entered by a Court of proper jurisdiction. In order to obtain a judgement a lawsuit must be filed and a judge has to determine, either through the default of the defendant or through a hearing on the merits of the case, that the defendant owes the creditor money. The decision by a judge is reduced to a writing called a "Judgement Order" which allows the creditor the ability to collect the Judgement.

Subject to the rights of the defendant / debtor (ability to vacate judgments, appeal rights, etc.) the creditor can immediately act to collect the judgement through wage garnishments, levy on bank accounts and judicial sales of assets.

Depending on the type of judgement obtained by the creditor, a strategic determination is made whether to act immediately once the judgement is rendered or to wait 30 days before collection action takes place.

If the creditor simply does not know the whereabouts of the debtor's assets, search firms can be hired which employ the use of credit reporting systems to see if assets of the debtor can be found.

In the alternative, a much more direct route is to bring the defendant into the courtroom to interview them though a vehicle called "Citation to Discover Assets". A citation hearing is like a deposition where the creditor has the opportunity to ask the debtor all types of questions that are relevant to the collection of the debt. For example, the creditor, through its attorney, would ask about the whereabouts of bank accounts, safety deposit boxes, wages, recent transfers, etc. During this interview documents are produced by the debtor to substantiate his or her answers and the creditor can obtain a turnover order, garnishment or judicial sale of assets to collect his or her debt.

Creditors must be advised that there are cases when the debtor simply has no assets, or has a job under minimum wage which is exempt from collection (or no job at all). In these cases, the creditor simply cannot collect currently on the judgement. The creditor will have an opportunity to issue another Citation to Discover Assets at a later time to see if the debtor's financial situation has changed. However, be advised that generally judgements shall not be enforced after seven years from the time they were rendered (unless renewed or stayed by Illinois statute).

Taxation:
GIFTS TO CHILDREN

When parents or grandparents decide to make gifts to children under the age of 18 years, myriad legal issues arise regarding taxation and control of the property. In the State of Illinois, a person under 18 years of age cannot legally manage most property in his or her own name, so direct gifts to such children are prohibited.

For gift tax purposes, individuals may give up to $10,000 per person per year to any number of people without any gift tax consequences. A married couple can give up to $20,000 per recipient per year. As you can imagine, gifts to a minor can cause a problem, for example, as when due to the rights bestowed on a 16 year old (such as driving an automobile when the minor turns the age of 16) the minor exposes the assets to potential liability.

In light of this exposure and in consideration of the size of the gifts, the least favorable way to make gifts to minors is to the adult parents under the Uniform Transfers to Minors Act ("UTMA"). This is a transfer directly to the minor with usually the parent named as custodian to handle money until the minor reaches the age of majority which is between 18 and 21, depending on the type of gift, in the State of Illinois under the UTMA.

If gifts are made to the child under the UTMA it is considered the child's property for tax purposes. A parent's shifting of income producing property to their children under the age of 14 exposes the child to what is known as "kiddie tax" under the Internal Revenue Code.

Children 14 years old and younger who have unearned income in excess of an inflation adjusted amount (approximately $650) reduced by the child's standard or itemized deductions allocated to such income, is subject to taxes at the top of the marginal rate for his or her parents. Since the applicable standard deduction was $650 for 1996 (inflation adjusted for 1997) income in excess of $1,300 will be taxed at the parents' top rates. This provision applies to children who have not reached age 15 before the close of the year. For example, a six year old child has $1,500 of unearned income and no earned income. His standard deduction of $650 is allocated against his earned income, so that his net unearned income equals $850.00. The first $650 of that amount is taxed at the child's tax rate, while the remaining $200 of unearned income is taxed at the top rates of his parents.

The most favorable method of making gifts to minors is through an Irrevocable Trust. This trust may have very broad terms to benefit the child. The only required provision is that child have a right to withdraw gifts to the trust for a period of at least 30 days after the gift is made ("Crummey Powers"). A child must be notified of his right to withdraw each time a gift is made. While the child is a minor, such notice must go to his parents. In this type of trust, the child would be able to withdraw (if provided in the language of the trust) monies to fund a college education and ultimate distributions of the trust corpus to be made pursuant to the grantor's directions. For example, portions could be transferred to the child at age 25, at the age of 30 and a final distribution at the age of 35. These distribution percentages and amounts are determined by the grantor when the trust is created.

Corporate:
TRADEMARK INFRINGEMENT CONCERNS IN NAMING A CORPORATION

Did you know that use of a corporate name which is similar to a trademark or trade name (referred to herein as a "trademark") already being used for similar goods or services can result in liability for trademark infringement?

Likewise, use of a corporate name which is similar to someone else's trademark, even though you are not offering the same goods or services, can result in liability under anti-dilution laws and a permanent injunction preventing you from using the name. This is because your use "dilutes" the other's trademark by decreasing the ability of the other's trademark to identify its goods or services.

The Illinois Business Corporation Act requires only that a corporate name be "distinguishable" in the Secretary of State's records from a corporate name or an assumed corporate name of any other Illinois corporation or a foreign corporation authorized to transact business in Illinois, or any other reserved name. In fact, the Illinois Business Corporation Act states that "nothing [in the applicable sections] shall abrogate or limit the common law or statutory law of unfair trade practices, nor derogate from the common law or principles of equity or the statutes of this state or the United States with respect to the right to acquire and protect copyrights, trade names, trademarks, service names, service marks or any other right to the exclusive use of names or symbols."

Simply determining that a name is available to use for your Illinois corporation and then incorporating under that name does not protect you from an infringement or antidilution lawsuit. Particularly in situations where you use the corporate name to advertise and market goods and services, or if you know of an existing similar trademark for which your name may cause confusion to the public, you should take measures to protect yourself against being sued for trademark infringement or dilution.

Among the ways to protect yourself are:

1. Check with the Secretary of State for name availability. Although this offers only limited protection, this is free and should always be done when forming a new corporation.
2. If you will be using the corporate name for advertising and marketing of goods and services, or if there is another potentially similar mark, you may want to invest in a trademark search. We can help you find a suitable search firm which will check databases that have federal and state trademark registrations, as well as databases with business names and electronic yellow pages for common law searches. Doing this will give you some measure of assurance that you are not picking a corporate name that may be infringing upon someone else's existing trademark.
3. If you are using the corporate name for marketing and advertising of goods and services nationally, you may want to consider registering your own trademark to protect against infringement or dilution of your trademark by others.

Bankruptcy:
CHAPTER 7 - BANKRUPTCY DISCHARGES EFFECTIVE

A debtor who receives an order of discharge under Chapter 7 is discharged from all dischargeable debts. The court order does not identify which debts of the debtor are discharged and which debts survive the bankruptcy. The very broad language of the order of discharge in a Chapter 7 Bankruptcy has allowed the order of discharge to be effective against unlisted creditors in cases where there were no assets and the debtor inadvertently failed to list the creditor's claim.

If a debtor inadvertently omits a creditor from his schedules when filing Chapter 7 and there is a determination of no assets in the debtor's case, the omitted creditor's claim is discharged, although the creditor had no notice of the debtor's bankruptcy and thus was denied an opportunity to object to the proceedings and question the debtor regarding his financial affairs. Of course, should the creditor have a non-dischargeable debt, the creditor might be able to re-open the case to have their claim adjudicated as such.

Despite the continuous upholding of bankruptcy courts of dischargeability of an unsecured or a non-priority debt in a no asset Chapter 7 filing without notice, a debtor should always strive to comply with the code which requires full disclosure of all assets and liabilities so as to avoid possible perjury sanctions.

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.