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I was opening my mail at home last week and I almost tossed in the garbage a packet of information from the Cook County Assessor. That move would have cost me $400.00 (on a missed homeowner’s exemption).

The homeowners exemption form was mailed in postcard form for years, but the format was changed this year to an 8 1/2 by 11 packet of information that includes a homeowner’s exemption application, a senior citizen exemption application and a senior assessment freeze application. All three are mailed together now.

The senior citizen exemption can save up to $250 in real estate taxes and is only for those 65 years of age and older. If you get the senior exemption you automatically get the homeowners exemption too and do not have to apply separately.
The homeowners exemption cuts real estate taxes by as much as $450 but an annual application must be signed and mailed back to the assessor.
The senior freeze puts a limit on the real estate assessment (not on the amount of the tax bill) and to get this you must be 65 year old and have an income of no more than $40,000.00

If you didn’t receive your application packet or threw it away (like I almost did) you can get the forms online at http://www.cookcountyassessor.com/forms/forms.html or by calling 312-443-7150 to request one. The forms are due by March 29, 2002.

What to do with your 401K if you are retiring or leaving a job

In meeting with clients and reviewing their retirement assets, I find that many clients have several 401k accounts from former jobs. It’s not uncommon to find two or three 401k accounts per spouse, or up to 6 total accounts between a married couple.

Rather than leaving 401k’s with former employers, it’s better to rollover or transfer 401k accounts from ex-employers to an IRA account. There are many benefits, and no disadvantages to rolling your old 401ks into an IRA. Some of the advantages are as follows:

Investment choices inside the 401k are limited. 401ks usually have only three or four mutual funds to pick from and are heavily weighted toward the stock of the company many times. There are more investment choice with a large mutual fund family like Vanguard or Fidelity.

In the event of your death, your heirs can’t do a “stretch-out” inherited IRA. I recently handled a case in which a father in his 40s died with a substantial sum in a 401k. The rules of the 401k plan dictated that all of the money had to be distributed to his young children (and taxes paid) within 1 year. If the money were in an IRA, the children could have done a “stretch out” IRA and could have kept the money in the IRA, with no income tax, and very small withdrawals, for almost 60 years!

Good chance to diversify from company stock. Selling stock within an IRA or 401K will create no income tax so diversification is easy. When you roll over funds to an IRA you can make new investment choices and can get rid of some of the company stock in your account. Transferring the funds to an IRA is like a forced rebalancing of the investments.

If you are retiring, consider using a little known rule that applies only to the stock of your employer within the 401k. Many company’s encourage you to buy the stock of your employer. This can be disastrous if you buy too much of the stock and then there is a downturn in the employer’s stock. Just look at stocks like Enron and Lucent, both once high-flying stocks that are grounded. You can always sell stocks within a 401k or IRA and you will owe no income tax. But you can’t get the money out of the 401k without paying income tax on it. Here is a way to get money out of a 401k and reduce the income tax you owe on it. (Reasons to take the money out of the 401k might be that you already have a large balance in the 401k and want to avoid excessive estate and income tax on the account at death or you need some funds available to invest or spend outside the 401k. For example, let’s say you work for Motorola and have ½ of your 401k invested in Motorola stock. If you took the Motorola stock out of the 401k because you needed money, normally you would owe income tax on the whole amount. The “net unrealized appreciation” rule (NUA rule) allows you to take the Motorola stock out of the 401k and pay income tax only on your “basis” or what you paid for the stock. At retirement, it can be a good practice to get some funds out of a 401k because estate taxes and income taxes can consume up to 85% of an IRA/401k account. A very elegant next step is to take a distribution of company stock under the NUA rule from your 401k, pay income tax on “basis” and then contribute the money to a charitable remainder trust (CRT). You will get an income tax deduction for most of the amount contributed to the CRT (that will offset the taxes you owed on the company stock coming out of the 401k); you can diversify the company stock by selling it within the CRT with no tax; estate and income taxes will be reduced and you will do some good by leaving funds to charity at death.

Avoid having your small 401k ($5,000 or less) sold out. Through the end of this year, employers can sell the stock in small 401k accounts of $5,000.00 or less and distribute it out to you. This will increase your taxes and decrease your retirement savings. They are allowed to do this so that they do not have to administer many small accounts. If an ex-employer does this, resist the temptation to spend the check you receive. If you spend it you will no longer have the money and will owe 28% tax plus a 10% penalty (if you are under age 59 1/2). Instead, deposit the check in an IRA account and you will owe no tax. This is just another reason to roll over your funds to an IRA.

For more information on the options available to 401k owners see the following website:

http://www.quicken.com/retirement/401k/topic/?top=changeJob

Everyday asset protection:

Easy ways to protect your estate

I was reading recently about the biggest lawsuits of 2001. That made me think of simple ways to protect your assets. More on that in a minute. The four biggest lawsuits of 2001 were as follows:

$3 billion. Tobacco case. Won by Richard Boeken, a California man, against Philip Morris tobacco. He contracted lung cancer from smoking Marlboros since age 13. The trial judge reduced the verdict to $100 million.

$1 billion. Land contamination. Won by a retired judge in Louisiana against Exxon Mobil for contamination of land the ex-judge owned.

$480 million. Plane Crash. Won by Florida residents (against Cessna) who were burned in a plane crash.

$312 million. Nursing Home Neglect. Won by the estate of Wyvonne Fuqua, of Texas, who suffered from dementia, against the nursing home where she lived.

These cases are extreme examples and it’s unlikely (thankfully) that you ever will be involved in cases like these. All of the defendants were businesses, not individuals. The most common lawsuits that I see are divorce cases, car accident cases, misrepresentation claims from a home sale, business disputes and collection cases. There are some simple and legal ways to protect yourself from lawsuits:

Use Tenancy by Entirety for house. If you are married, you can hold title as tenants by entirety. In Illinois, a creditor cannot take your house if title is held as tenants by entirety. If title is in joint tenancy, the creditor can take your house.

Life insurance, annuities and IRAs are exempt (can’t be taken). Life insurance proceeds (and the cash value inside the life policy), IRAs, 401ks, and annuities cannot be taken by creditors. Ken Lay the ex-CEO of Enron made good use of an annuity to protect his assets. According to Mother Jones magazine, “Late last month, the wife of former Enron chairman Kenneth Lay tearfully told a national television audience that she and her husband were struggling to avoid personal bankruptcy following the collapse of the Houston energy-trading company. What Linda Lay failed to tell viewers of NBC's Today show, however, was that she and her husband had shifted millions in personal assets to investments that are beyond the reach of creditors or legal judgments. In February 2000, Mother Jones has learned, the Lays paid about $4 million -- an amount greater than Lay's entire salary from Enron that year -- to buy variable annuities that will, starting in 2007, guarantee the couple an annual income of about $900,000.”

Have an umbrella policy in place. An umbrella policy is an add-on to homeowner’s insurance and protects you from slip-and-fall cases and catastrophic car accidents. It’s a good idea to add umbrella coverage and it is relative cheap.

Use an LLC for stocks, real estate and cash. Cash, stocks and other assets that are available to creditors can be transferred to a limited liability company (LLC). This will provide protection from creditors for these assets.

Use continuing trusts to protect inheritances of your children. It is always wise to set up continuing, flexible trusts in your living trust for your children that will allow them to protect their assets from divorce and creditors (once you are gone).