The Magic Book Myth
“I got a trust so it’s all taken care of” – the Magic Book Syndrome
By CURT FERGUSON
We call it the “Magic Book Syndrome.” From something he read or heard, the farmer decided that he should get a living trust so his estate will “automatically” be taken care of when he dies. Maybe you are that farmer. Let’s imagine it.
You have a three-ring binder containing your living trust documents. When you die that three-ring binder sprouts legs and arms: it is the Magic Book. Your checking account was frozen upon your death, because your social security number was the taxpayer identification number for that account. But the Magic Book secures a new taxpayer identification number from the IRS, proves to the bank that it–the trust–can open a new bank account, and does so. It then pays your funeral bill and final medical bills and all of the correct tax-deductible expenses arising at your death. The Magic Book files your last will and testament with the Circuit Clerk, makes and delivers copies of the living trust to each beneficiary, has your mail forwarded, cancels all magazine subscriptions, changes the locks on the house, secures and inventories the contents of your safe deposit box, and makes sure the family will never argue over the division of your personal effects.
But that is only the beginning. Your Magic Book appraises all of your land and machinery, establishes the value of the livestock, and decides when to sell your grain. It even knows the tax consequences so it won’t miss a step up in basis on the growing crops and any potentially marketable timber. It winds down your sole proprietorship, collects any outstanding rent and pays any accrued lease obligations. It makes appropriate tax elections on your limited liability company or partnership so that the business assets get a stepped up basis, and it dissolves your subchapter S corporation in a way that lets your heirs finally escape taxation on the trapped capital gain. Your Magic Book prepares and files your final 1040 income tax return, then the 1041 income tax return for all income accruing after your death.
Your Magic Book doesn’t stop there. It collects your life insurance, claims your IRA and annuities, and disclaims any such asset if it is better to pass on to a contingent beneficiary; but it only disclaims if the trust beneficiaries won’t object. It arranges with the title company to insure that there are no outstanding liens or clouds on the real estate. On the six-month anniversary of your death, the Magic Book decides whether to have any assets re-appraised if that will reduce the estate taxes due, then it files your estate tax form 706 with the IRS and the IL-700 tax return with the Illinois Attorney General. If you leave a surviving spouse, it makes several tax elections, such as electing to preserve your un-used estate tax exemption, to make the qualified terminal interest property (QTIP) election, and to make a reverse QTIP election if appropriate. Of course, the Magic Book pays any estate taxes that are due.
Your mighty Magic Book is still not done. At this point it has only inventoried your estate! It prepares a detailed accounting for all beneficiaries so they know the specifics of what they are to receive. Fortunately, with its magical power, it has assured that every necessary expense and tax has been paid, but not a penny too much, and that the assets remaining are precisely and accurately valued. Now it is prepared to distributed your assets to your beneficiaries.
If you left a surviving spouse, the Magic Book selects the correct assets and transfers them to the Credit Shelter Trust, other appropriate assets to the Illinois QTIP Trust, and remaining assets to the Marital Trust. If your assets are going to other beneficiaries, the Magic Book places each one’s share of the money into his or her bank account, moves the right investments into each beneficiary’s investment account, and delivers each deed, duly recorded, to the appropriate beneficiary’s mailbox. If your estate plan was designed to provide each beneficiary with an Empowering Trust™ (under the beneficiary’s practical control but protected from divorce, lawsuit, catastrophic illness, and future estate taxes) then the Magic Book retitles all of the assets into such trusts and passes control to the new trustees.
Have you been to your lawyer to get your Magic Book?
Of course, there is no Magic Book. Regardless of what documents you use to plan your estate, many technical issues must be addressed by your family and professionals at the time of your death. For a smooth estate settlement, make sure your plan and your people are prepared.