Gifting - Who Gives and Who Gets?

Who Gives? Increasingly, clients are interested in gifting assets, usually to children and grandchildren. This is part of the normal transfer of wealth from one generation to the next generation. Parents and grandparents make continual and regular gifts to children and grandchildren, generally as holiday presents or to meet special needs such as medical bills or college expenses.

Sometimes large gifts are contemplated as part of estate planning. This month we will touch on some of the motivations and rationale for gifting - usually larger amounts than a normal Christmas gift.

Estate and Gift Taxes. Clients typically make annual gifts to take advantage of the annual gift tax exclusion, now $13,000 per donee per year. In addition, an individual is allowed to make a $1.0 million lifetime gift, free of gift tax. Gifts in excess of that amount are subject to gift taxes and, in our experience, are almost never done. Lifetime taxable gifts (part of the $1.0 million) are deducted from the $3.5 million per person federal estate tax exemption, in calculating whether a federal estate tax is due on death.

As part of overall estate and tax planing for clients with individual net worth in excess of $3.5 million, or married couples with combined net worth in excess of $7.0 million, we urge clients to take advantage of the $1.0 million gift tax exemption with gifts outright or in trust of assets that are likely to appreciate or to take advantage of current low values. Often we recommend and analyze more exotic techniques such as a Qualified Personal Residence Trust (QPRT), Charitable Trusts or Grantor Retained Annuity Trusts (GRATS), which are beyond the scope of this summary. Suffice it to say that where preservation of wealth is concerned and federal estate taxes are a likely possibility based on total net worth, we urge clients to consider employing some of these strategies to transfer wealth at little or no transfer tax (gift or estate).

Transfers to Spouses. Transfers to spouses are not subject to gift or estate tax, the theory being that those assets may be subject to estate tax at the spouse�s death. However, many times where there is substantial disparity in wealth between spouses, we can arrange special spousal trust gifts so that the donor can retain an element of control and that there is no tax when the trust is created or when the spouse dies. Lifetime planning is not a function of age. Married couples of any age should investigate these possibilities.

Medicaid Qualification. Gifting of assets has been a common technique in Medicaid planning where there is a possibility or likelihood that a person, parent or spouse may require nursing home care. Medicaid rules and regulations became much more strict with the Deficit Reduction Act of 2005. Therefore, for most people, we organize asset gifts at the time a donor is admitted to a nursing home, in order to protect as much wealth as possible and still qualify for Medicaid. Generally, advance gifts are not recommended. (As a side note, we can still protect assets of a married couple in Michigan.) Caution: All gifts are now taken into account in creating Medicaid penalties (delay in eligibility), unless the donor can prove that the gifts were not made for Medicaid planning. This proof is fact dependent and is an additional obstacle to overcome for annual gifts, payments for college expenses, etc.

Medicaid Exception. Where a considerable amount of wealth is involved and nursing home care is forecasted, we do intricate asset planning and often employ irrevocable trusts (which I call ProTec Trusts) in order to get past the Medicaid five year look back for gifts.

Veterans Assistance. Direct gifts or gifts in trust can be made for purposes of qualifying a Veteran for Aid and Assistance pension benefits. We are seeing more WWII Veterans and Korean Veterans over 65 requiring Assisted Living or Adult Foster Care assistance. There is no comparable look back provision for veterans benefits as there is in the case of Medicaid. Trusts are generally the most common and effective way to protect assets where pension benefits for a Veteran or spouse or widow of a Veteran is involved.

Asset Protection. There is increasing interest in asset protection against creditors claims. Asset protection sometimes takes the form of special trusts, which requires sophisticated planning.

An overriding concern in asset protection planning is the possibility that the transfer will be deemed a fraudulent conveyance. Under the laws of most states, including Michigan, a fraudulent conveyance, a gift or transfer designed to defraud creditors, can be avoided and the assets reclaimed from a transferee by a judgment creditor.

Many states have adopted favorable laws to protect trust assets from creditors so long as the creation of the trust is not deemed to be a fraudulent conveyance.

Asset Protection Trusts, in states with favorable laws, are becoming increasingly popular for individuals with substantial wealth. In most cases, these individuals no longer have to look to off shore trusts in exotic spots such as the Cook Islands.

Gifting may not be required for asset protection. Assets held jointly with a spouse as tenants by the entireties are protected in Michigan from the creditors of one spouse alone. Often times, therefore, no transfers or gifts are required to protect assets.

Conclusion. Transfer of wealth to the next generation or generations is part of normal human desire, and a foundation of estate planning and planning for wealth preservation. If you or a friend a facing any of the above situations where gifting or transfer of assets is considered, please contact Jim Modrall, Tom Pezzetti, Jr., or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe or Nicole Graf at (231) 941-9660

© 2009 BRANDT, FISHER, ALWARD & PEZZETTI, P.C.This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Trusts - New Michigan Rules

This will no doubt not be the last newsletter about the new Michigan trust rules which go into effect April 1, 2010. The new trust statutes were enacted this summer after many years of debate. A special panel of Michigan attorneys and bankers has been working on a local adaptation of the Uniform Trust Code (UTC).

The UTC has been adopted with some local modifications by over 20 states, and the number is growing . The attempt in Michigan has been to codify many rules involving trust execution and administration that were part of normal practice and case law. The drafters attempted to clarify various uncertainties and to spell out in greater detail certain issues that have arisen.

Effective Date. As noted above, the effective date of the statute is April 1, 2010. The statute will be effective for trusts created on or after that date. As to trusts created prior to that date, the terms of the trust will control except that "any rule of construction or presumption" in the new statute will apply to trusts executed before the effective date, "unless there is a clear indication of a contrary intent in the terms of the trust."

A Few Important Observations. Obviously, there will be questions of interpretation of the new statute where disputes involving trusts arise, especially trusts that are not modified after April 1, 2010. Three points of concern may be of interest:

1) Jurisdiction - what court hears trust disputes.
2) Registration of a trust.
3) Should a trust have a trust protector?

Jurisdiction. All trusts should be reviewed to ascertain whether there are provisions concerning a designation of a court to hear disputes is either necessary or proper. One example in my practice recently brings this issue to the fore. A Settlor in Grand Traverse County dies. No beneficiary resides in Grand Traverse County. Under the probate statute, the decedent's Will would be filed in Grand Traverse County, regardless of the identification of location of the Personal Representative and beneficiaries.

The decedent's trust, on the other hand, appointed a relative as Successor Trustee who resided on the East Coast. Typically, jurisdiction over a trust is determined by "place of administration". Does this mean that any issues concerning the trust, administration or interpretation, have to be brought in a different state because the trust is supposed to be administered there, even though Michigan law applies?

Proper jurisdiction to hear disputes about trust administration and interpretation, which can arise long after death, will become a very important issue under the UTC. You can imagine the added expense if the decedent's trust had to be interpreted and applied in a Massachusetts or New York court, while a probate matter would clearly stay in Michigan.

Registration. The registration of a living trust has been something that has typically been avoided by attorneys and clients alike. The process is simple. It involves filing a short form with the Register of Probate of the Settlor's county of residence. The terms of the trust do not have to be included, but the form identifies the Settlor, the Trustee and the Successor Trustee. Trust registration was typically regarded as a nuisance and an unnecessary detail.

However, trust registration may take on a new importance under the UTC as a means to establish jurisdiction for possible disputes.

Trust Protector. The UTC has extensive provisions regarding the duties, responsibilities and powers of a Trust Protector. A Trust Protector is an individual or entity identified in a trust whose duties are stipulated, generally in detail. Sometimes the Trust Protector's duties are to stay in touch with the family situation and advise the trustee about the needs of beneficiaries. Sometimes a trust protector is given authority to change the trustee, direct withholding of distributions, if appropriate, and to change the situs of the trust and the applicable law.
A Trust Protector is generally desirable to introduce an element of flexibility in a trust which may last for many years.

A Trust Protector can also introduce a personal element in trust administration where the trustee is either a corporate trustee, without particular personal contact with the Settlor and the Settlor's family, or to provide a mechanism for changing trustees. The ability to change trustees can be especially important where trusts are designed to last for many years.

Another concern would be the desirability of "forum shopping" for administration of the trust. For example, the law of one state may be more favorable in permitting premature termination of a trust than another.

For example, in a "dynasty trust" intended to last for lifetime of each child beneficiary, should the children, by unanimous agreement, be able to terminate the trust early and get their hands on the trust assets directly? The laws of various states and application by their judges could differ radically in this respect and thus frustrate the intent of the Settlor who may have really intended the trust to benefit grandchildren and/or future generations.

Conclusion. These are some of the issues that concern trust drafters. We will devote future newsletters to other issues which may impact clients thinking about their trust instruments. We always recommend review of estate planning documents every five years for people over 65 and every ten years for younger clients.

However, the UTC (and possibly a new estate tax law) will no doubt be an encouragement to all clients and attorneys to review trust documents to determine whether amendments should be made before April 1, 2010, to take advantage of present law, or whether any changes should take place after that date, and subject the trust to the UTC in its entirety.

For a review of your trust and other estate planning matters, please contact Jim Modrall, Tom Pezzetti, or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe, or Nicole R. Graf at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.