Tuesday, December 21, 2010

Medicare Alert!

This is a critical time of the year for seniors, i.e. people 65 and older who are on Medicare. As most readers know, Medicare is the entitlement to medical services program for people 65 and older. Readers not in this category may have parents or friends who are Medicare recipients. Everyone with an interest in medical care services for seniors needs to be alert to the changes at hand.

There has been much nashing of teeth since the enactment of the Affordable Care Act (sometimes known as Obamacare). Whatever your views on this legislation, if you are directly affected, as all Medicare recipients are, these changes need your immediate attention.

1. Plan D - Drug Benefits. As many of you are aware, we are in the critical time of year for changes to Part D Drug Coverage. This is the time of year when many Plan D Insurers change benefits. One of these changes that can affect seniors is the change in "formulary", which is the list of drugs which is covered by the Plan. Drugs can either be added or deleted. These changes can cause confusion and perplexity. The advice right now: Talk to your Plan D Insurer or your Agent to find out what changes might be happening. Check the formulary for 2011 to see if it includes your drugs and what options you might have.

2. Doughnut Hole. The new law takes gradual steps to reduce the coverage gap known as the "doughnut hole." Those who reach the doughnut hole in 2010 may qualify for a one time $250 rebate check. A person reaching the "doughnut hole" in 2011 may get a 50% discount on brand name prescription drugs. Unless the law is changed, there will be a gradual closing of the "doughnut hole" through 2020.

3. Preventive Services. Those in original Medicare (not a Medicare Advantage Plan) will now qualify for a free yearly physical examination and other free preventive services. Your doctor will be aware of the services which will now be provided free under traditional Medicare. (Advantage Plans usually offered this service.)

4. Medicare Advantage Plans. As many seniors are aware, Medicare Advantage Plans were introduced in the last decade to provide medical services and drugs under separate plans administered by insurance companies. The administrators of these separate plans are principally Humana, United Health and the Blues. Among these companies there are literally dozens of plans that have been available with varying benefits, co-pays, exclusions and premiums. Many Medicare Advantage Plans included drug coverage at various levels.

You may be aware from the articles in the press that the 2010 Health Bill makes changes in Medicare Advantage Plans by reducing the subsidies to the insurance companies. As a result, there have been announcements by several insurers that they are either changing their Medicare Advantage Plans or discontinuing some of them. This is such a complicated area. We will not try to cover all the permutations and combinations. Seniors should refer to their 2011 handbook "Medicare & You," which is sent out by the government to all seniors. Medicare Advantage participants should consult their Agents and the reference book to see what changes might be in store for 2011. Decisions will need to be made before the first of the year, so "time's a wastin."

5. Part B Premium. The 2010 Affordable Care Act makes some changes in the Part B premiums to be effective in 2011. We are advised that the Part B premium will be affected by income, with higher income individuals having a larger amount deducted from their social security checks for Part B premiums. Check with social security at 1-800-772-1213, or the social security website to see if this change affects you.

6. Deadlines. As most seniors are aware, there are deadlines for making changes and elections. We are currently in the Part D enrollment period when changes in coverage can be made without penalty. Many seniors are also aware that there are penalties imposed for late elections and late changes.
7. Conclusion. This is a critical period for all Medicare Advantage participants, who include many of our clients. Blue Cross-Blue Shield has announced that they are terminating some of their Advantage Plans, while at the same time Humana and United Health are stepping up their recruiting. If you have an Advantage Plan, make sure what changes affect you. If you don't have an Advantage Plan, it may be that you will be able to enroll without penalty. Review the CMS 2011 booklet, Medicare & You.

Medicare services, benefits and costs are generally not within our professional competence. Our Elder Law work involves qualification for Medicaid (nursing home care), estate planning, guardianships and conservatorships. If you or your family have concerns in any of these matters, please contact Jim Modrall or Priscilla Hirt, or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., James R. Modrall III, 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.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Monday, October 11, 2010

FIVE REASONS TO REVIEW YOUR ESTATE PLAN

This month's newsletter is a heads-up for clients and professional advisors, for the benefit of their clients. At the risk of preaching to the choir, here goes:

#1 - Tax Laws Have Changed. All readers are aware of the current uncertainties about the federal estate tax. Kiplingers' latest tax letter indicates that there is not likely to be any action with respect to those who die in 2010. Without Congressional action, the exemption goes down to $1.0 million and a maximum rate of 55%, effective January 1, 2011. Predictions are that the $3.5 million exemption of 2009 will be restored, rates will be subject to Congressional negotiation and there is a possibility that the exemption will be indexed to inflation.

Unfortunately, many people seem to be frozen in the headlights with respect to estate taxes. Assuming that death in 2010 is not imminent (with a potential free pass), there is really no good reason for putting off a review of trusts or wills, especially since many of these documents contain ambiguities about allocation of assets between A and B Trusts.

#2. Family Situation Has Changed. If estate plan documents were made more than ten years ago, it is very likely that some aspects of the family have changed. At a minimum, everyone is older! Maturing grandchildren and aging children often present obvious reasons for changes. Does a child's bequest need to be protected from creditors or divorce? Does the inheritance of a child or grandchild need to be deferred to provide retirement income or protection?
Are the Successor Trustees or Personal Representatives properly designated? Maturing children can take over instead of siblings or friends. A disinterested Trustee or Personal Representative may be needed to resolve potential disputes.

Special needs sometimes arise for children or grandchildren because of accident or disability. There are almost as many reason for family changes as there are families.

#3. Health Needs Have Changed. Health issues can require special provisions. The possibility of long term care (nursing homes) needs to be considered. Is an individual or spouse in need of assisted living facilities? If so, is Veterans Assistance a possibility? Remember that customary estate planning does not work for Medicaid Eligibility. Signs of dementia, Alzheimers or Parkinsons are themselves a reason to review estate planning documents and take precautionary action.

#4. Powers of Attorney and HIPAA Compliance Need to Be Checked. Patient Advocates previously designated may be unwilling to serve or may have moved out of the area. Individuals who spend significant portions of the year in several states may need multiple Medical Powers of Attorney. In many cases, Medical Powers of Attorney were executed before the federal HIPAA laws went into effect in 2003, and HIPAA compliant authorization for access to medical records need to be addressed.

General Durable Powers of Attorney may need to be changed, expanded and updated. Documents executed in middle age are probably not adequate or appropriate for people over 70.

#5. Is Your Trust Up To Date? Trust provisions are often out of date as it relates to allocation of trust assets between a Marital Trust and a Family Trust, in the case of married clients. Often Trusts have not been funded, defeating one of the principal reasons for revocable trusts - avoidance of probate.
Joint Trusts are special candidates for review. A married client with a sick husband recently was aghast to find out that their Joint Trust became irrevocable at her husband's death. Therefore, she would have lost complete control over their assets had the Trust not been amended by both husband and wife. In this instance, neither of them had any recollection or idea of the consequences of their existing trust document.
Second marriages pose special problems in estate planning. Often a husband and wife have not faced up to the normal emotional relationships with step-children, especially after the death of one spouse.
The passing of one's spouse is a particular reason for reviewing changes in trusts. We often see trusts signed by husband and wife with the persuasive influence of one spouse on the other. The death of the dominating spouse often brings about a complete change of mind and attitude on the part of the survivor. Sometimes attitudes of this nature are suppressed by a reticent spouse during marriage, only to come to the surface after the death of the dominant spouse.
Conclusion. I will add a sixth point of consideration because of the amount of trust litigation that we see. That item is the matter of trust administration. Often family members are not experienced in trust administration, do not keep good records and sometimes do not follow the terms of the trust. We strongly recommend that clients consider administration issues and rely on professional counsel, legal and accounting, to avoid the delay, expense and hard feelings from intra-family disputes and litigation. We can assist in a review and update of your estate plan, as well as professional assistance in trust administration. Please call Jim Modrall, Priscilla Hirt, or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., 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.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Wednesday, September 29, 2010

Small Business Gets Help

This subject is a bit removed from our usual estate planning, probate and Medicaid matters. Many of our readers are retired, but we also have professional advisors and CPA's on our distribution list. The occasion for our rambling into the business arena is the passage by the US Senate of HR 5297 Small Business Jobs and Credit Act.

One of the particular highlights of the new law, aimed at propping up small business and providing access to capital, is the expanded definition of a Small Business.

Media Attention on Small Businesses. Anyone reading the paper or watching TV is aware that all politicians are focused on helping "Small Business." We also know from media publicity that Small Business creates 70% of all new jobs. Over the past several months we have heard complaints that Small Business cannot get access to loans, because of the crisis in the financial sector.

This should change in the next few months. Professional advisors should be alert to the new opportunities for their small business clients. By customary definitions, many businesses would not qualify for SBA assistance because of a revenue cap of $6.0 million.

Now, in lieu of a $6.0 million revenue cap, the standard, as we understand the bill, will be tangible net worth of $15.0 million and two year average net income of $5.0 million or less.

We have read that approximately 90% of all companies in America will now qualify for SBA loan assistance. This can be a big deal, as explained below.

What Kind of Assistance Does SBA Give? SBA - Small Business Administration has typically arranged for government guarantees on loans made by banks to "small businesses." Limits on guaranteed loans to small businesses have been increased substantially:


1) General purpose working capital loans for existing or start-up small business, the 7(a) loan program, have been increased from $2.0 million to $5.0 million.
2) Express loans - turn around time 36 hours, have been increased from $350,000 to $1.0 million.
3) The second mortgage loan limit has been increased from $1.5 million to $5.0 million.

These are huge increases, some of which will expire December 31, 2010, unless Congress extends them.

Fee Reduction. The new law eliminates origination fees on all SBA loans through December 31, 2010. This is a huge saving for small businesses, as the up front fees have been a major deterrent to the use of SBA financing.

Increase in SBA Guarantee. While the percentage of SBA Guarantee may vary according to the size and amount of the loan, the former maximum 75% SBA Guarantee has now been increased to 90%. This reduction of risk for banks and other lenders should be a great incentive for them to make SBA loans.

Bottom Line. This advisory letter is not intended to be a thesis on SBA loan programs. This is an alert for all advisors that know business owners and entrepreneurs. If financing is a problem, the government is offering a new, much broader scope for relief. Supporting small business is a stated priority for both political parties!

Conclusion. Our firm is in contact with many active SBA lenders who are looking for business. Our business attorneys are skilled and experienced in expediting these matters. Any person you know who is interested in more facts, should call Doug Shepherd, Tom Pezzetti, or any of the attorneys listed below.

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

BRANDT, FISHER, ALWARD & PEZZETTI, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Friday, September 3, 2010

Is Your Estate Plan Bullet Proof?

What Do You Mean By Bulletproof? By "bulletproof" we mean the ability of others to change or challenge a trust or will. For example, a person makes a trust and transfers real estate and securities to the trust. Since the trust is revocable, the trustor (settlor or grantor) has not bothered to change the provisions regarding disposition of property at death. One of trustor's children moves in with him to provide care. The care giving child feels that there should be some special recompense for giving up part of her independent life to be a care giver.

Then comes the important question, whether the trust can be validly amended to change the provisions for equal distributions among all children?
Now What Happens? This scenario can be a perfect setting for a legal battle after Dad dies.

A couple of things often happen:

1) Care giver takes Dad to an attorney for a trust amendment, giving care giver the house or a larger share (sometimes everything).

2) Care giver has Dad sign over property during lifetime, with or without an attorney, or adds care givers name to bank accounts or securities.

We have covered in a prior newsletter the estate planning problems presented by joint accounts.
What Are The Legal Challenges In These Circumstances? The first challenges that are presented to a family and their legal counsel are Dad's legal competency and the question of undue influence. Questions in Michigan about the level of competency required to make or amend a trust have been resolved by Michigan's new trust law, which explicitly states that the legal standard for trusts is the same as the standard of capacity to make a will. This standard of competency is quite low. It does not require Dad to count backward by threes from 100. Dad merely has to understand what his property is, who the objects of his beneficence are, and the consequences of the action being taken. Nonetheless, the case law is replete with challenges to competency, conflicting evidence and testimony and, ultimately, decisions by a judge or jury.

Undue influence is also asserted in these circumstances. Care giving creates a presumption of undue influence that has to be initially overcome by credible evidence. Care giver has to support any favorable action by Dad with testimony from third parties, or sometimes writings. Care givers and counsel need to anticipate potential challenges and make sure that the case to support Dad's changes can be made after the fact.

Durable Power of Attorney. What authority does the agent named in a Durable Power of Attorney (DPOA) have to make changes? First, the DPOA cannot make a will. Second, a DPOA can often amend a trust. However, because a DPOA is a fiduciary, the validity of a trust amendment made by a DPOA will likely be subjected to the same challenges discussed above and will require supporting evidence that the changes were really Dad's wishes and directions.
The Case For the Care Giver. Our experience is that the services provided by a care giver are often unappreciated by other members of the family who are not providing the same time and effort. Sometimes the care giver is regarded is a free loader "living off Dad's money". Added to a care giver's frustration is a presumption by the Michigan Department of Human Services that family members are supposed to provide care giving service to a parent or spouse for free, absent a written care contract executed in advance.

Unfortunately, families usually do not address these issues ahead of time. Claims are made after Dad's death that he promised payment or promised a particular asset or extra share for services being rendered. Generally, these claims and legal battles are a continuation of early sibling rivalry, which surface after Dad is gone.

Equal Is Not Always Fair. This is an axiom that we often repeat to clients of both generations. A care giving child should have his or her time and effort recognized. It is usually best if other members of the family are both knowledgeable and approving of arrangements. Unfortunately, however, lack of communication, secrecy or procrastination are often present and contribute to legal battles and family disharmony.

Competent elder law attorneys can help lay the ground work and counsel Dad, care givers and other family members ahead of time to work out a fair and just solution to the dilemma of recognizing care giver's services without destroying family unity and good will.

If you or a friend are facing issues of care giving and their effect on estate plans, please contact Jim Modrall, Priscilla Hirt or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660
BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Thursday, July 22, 2010

Joint Ownership - Open Door to Litigation?

Avoiding Probate. We often counsel clients on the methods for avoiding probate, among which are revocable trusts and joint ownership.

Joint Ownership - JTWROS. As it is sometimes called in Michigan, JTWROS means that the surviving joint owner owns the property outright when other joint owners have died. At most financial institutions, this is an alternative to TOD (Transfer on Death) and POD (Payable on Death). In all three cases, JTWROS, TOD and POD, the surviving person or persons own the asset when the other named account owner dies. Many people are not aware of the alternative, or of the hazards that any particular account designation can present.

Two hazards should be considered when choosing a form of survivorship designation.

First Is Exposure to Creditors. This means, simply, that a mother who puts a son on her security account or certificate of deposit as JTWROS, may subject that account to attacks by the son’s creditors, even during the mother’s lifetime. This is a compelling reason not to use JTWROS. Personally, we have experienced clients with many sleepless nights when a son or daughter files bankruptcy. These claims can be avoided by using the TOD or POD account designations. Using either of these, the son’s creditors would have no recourse against mom’s financial assets.

Second Hazard - Litigation. The second hazard of any non-probate asset transfer has to do with litigation that can arise when other family members challenge the JTWROS, or other transfer designation, as being inconsistent with mom’s overall estate plan, which leaves property to all children equally, for example.

Michigan law, and the law of most states, creates a presumption that the surviving owner takes the property. However, that presumption can be overcome by evidence of undue influence or lack of capacity, or evidence that mom really intended that the account was a "convenience" account and that the son, as joint owner, would share the property would the siblings.

Generally, the son will usually counter that the special designation of him alone as a joint owner of the asset was in repayment for special care services rendered by the son, or an action separate from mom’s Will.
 
The recent Novosielski case in Pennsylvania is an example of a Treasury Direct account taken out in the name of Alice Novosielski and Tom Proach, her nephew, in the amount of $500,000. You can guess the result. Ms. Novosielski died and the nephew claimed that she intended that all of the Treasury Direct account belonged to him, even though that wish was inconsistent with her Will.

The Pennsylvania Courts have spent nine years trying to sort through litigation about what Ms. Novosielski’s intent was, whether there was undue influence and whether she had legal capacity to understand what she was doing. The nephew, Thomas Proach, was an agent under a Durable Power of Attorney, which creates a fiduciary relationship in itself.

What To Do In These Circumstances. In our experience, often the holder of a Durable Power of Attorney is in an excellent position both to influence the older person and to take self-benefitting actions that are generally questioned after the senior’s death. To avoid litigation, the senior’s intention should be fully documented. Is the account considered a "convenience" account for managing investments and paying bills? Or, is it intended to compensate the agent for end of life services? Did Ms. Novosielski intend that this joint account supersede the wishes expressed in her Will?

Dealing with seniors is a delicate matter, both to document and establish the competency of the senior, which is her understanding of the nature and consequences of her actions. Put another way, did she really know and understand what she was doing?

If a non-probate transfer is different from a Will, it is helpful to have a Codicil explaining intentions and reasons for differences. Absent any such explanations by the senior, self-serving joint account arrangements, or even TOD and POD designations are likely to be challenged in Court.
 
What Lessons Do We Learn From The Novosielski Case? We have outlined above some of the points that the attorneys, either for the nephew or Mrs. Novosielski, should have addressed when the joint account in question was established. If the nephew wanted to be sure that the joint account designation would hold up in Court, he should have made sure that Ms. Novosielski’s intentions were documented and that there were credible witnesses to her competency in doing so. Failure to take these precautionary steps is often a red flag that there has been fraud, lack of capacity or undue influence. In our experience, there is usually very little or no evidence, either supporting the account designation or evidence that the designation was for "convenience". Protracted litigation is the price of this lack of attention to proper details, or at a minimum, the price will be permanent disharmony and anger among the family.

Conclusion. Joint accounts, TOD’s and POD’s are important parts of estate planning. Often they are just as important as the provisions of Wills and Trusts. The same thing holds true with beneficiary designations for insurance and retirement plans. All of these methods of property transfer should be addressed in formulating an estate plan and keeping it up to date. If you, or anyone you know, is acting as a DPOA for an older family member, please let Jim Modrall, Priscilla Hirt or any of the attorneys listed below, assist in making sure that the estate plan in question avoids litigation and carries out the intention of the senior family member.
 
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660

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

Thursday, June 17, 2010

IRA TRAPS AT DEATH

IRA Owner Dies - What Happens? As IRA owners age, death of an IRA owner will become a frequent event. What challenges and decisions confront the beneficiaries, family members, and their professional advisors?

Our thanks go out to Attorney Robert Anderson of Marquette, who published a succinct summary of the decisions facing advisors and beneficiaries in a 2009 edition of the NAELA News. This newsletter will recap some of those decisions and problems that need to be confronted.

Owner Over Age 70-1/2. The issue here is the Required Minimum Distribution (RMD) for the year of death. The RMD for the year of death has to be taken by December 31 by the designated beneficiary if the owner had not taken his or her RMD prior to death.

Owner's RMD has to be taken by the beneficiary, and the beneficiary pays the tax regardless of stretch or rollover possibilities discussed below. Tax is paid by the beneficiary making the withdrawal. If there is more than one beneficiary, any beneficiary can make the required RMD withdrawal.

If RMD is not taken by December 31 of the year of death, a steep 50% penalty applies.

Is Disclaimer Advisable? Some estate planning attorneys use disclaimers as an active estate planning device. A disclaimer is legal action by the beneficiary to refuse to accept a property right (IRA account ownership) by a "disclaimer." A disclaimer has the effect of passing the property right to the contingent beneficiary, if one is named. If there is no contingent beneficiary, the disclaimed interest would pass to the owner's estate (which is usually not a good option).

Why Would A Beneficiary Disclaim? A disclaimer can transfer ownership of property to a younger or lower-tax beneficiary, which could save estate, gift or income taxes, depending on the family circumstances.

The disclaimer should be considered by beneficiaries and their advisors. However, note the requirements:

1) A qualified disclaimer must be made within nine months of death;
2) The disclaimant cannot receive any funds from the account before disclaiming, including the RMD.
3) A disclaimer can be made for the beneficiary's total share, a specific dollar amount, or a percentage;

Decisions in the Year After Year of Death. If not made before, there are certain decisions that need to be made before September 30 of the year after the year of death. First, and most common, is a spousal rollover. A surviving spouse can "rollover" a spouse' IRA into the survivor's own IRA. The survivor can designate new beneficiaries and obtain a new stretch payout option.

Why Would a Surviving Spouse Not Do a "Rollover"? One reason would be if the surviving spouse is under 59-1/2 and wants to start taking withdrawals. Another reason might be that the beneficiary is older than the owner and would have a less advantageous stretch option.

Keep in mind that the Five Year Rule is a default option in just about all situations. In smaller IRAs this might be a good choice.

September 30 Cleanup Deadline. The September 30 year after year of death deadline is important to get rid of unqualified beneficiaries, whose existence might taint the whole IRA and prevent utilizing the stretch. This can be done by paying off any non-individual beneficiary, such as a charity or estate. Remember all IRA distributions are subject to income tax at ordinary tax rates. It is advantageous from an income tax standpoint to delay distributions as long as possible and accumulate appreciation and income in the IRA account, income tax free. However, this can be done only if there are no "unqualified beneficiaries", which would be charities, estate or unqualified trusts. Only individual beneficiaries get the stretch. (Trusts can qualify if properly drafted.)

Conclusion. IRA accounts are an increasingly important part of family wealth. The death of an IRA owner requires consultation with professional advisors to make sure that the proper decisions are made on a timely basis. If your IRA account is important part of your estate plan, contact Jim Modrall, Priscilla Hirt, or Tom Pezzetti or any of the attorneys listed below.

BFAR is proud to announce the addition of Attorney Priscilla Hirt to its roster of qualified professionals. Priscilla has over 30 years experience in probate, trusts and estate planning in Southeast Michigan and brings the benefits of her knowledge and experience to the probate, estate planning and elder law practice of the firm.

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 and Nicole R. Graf at (231) 941-9660.

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

Thursday, May 20, 2010

Heads Up - Roth Conversions Looking Better

Attention High Income Taxpayers. Several months ago our newsletter was devoted to the favorable tax law provisions for Roth conversions in 2010. Since then there has been continued publicity in the financial press about this opportunity for high income taxpayers to make a Roth conversion. The year 2010 offers special benefits for Roth conversions, spreading the taxable income into 2011 and 2012, delaying the final payment of the tax until 2013.

While 2010 offers favorable tax results, there are new rules to the game since our August, 2009 newsletter.

New Tax Looms. High income taxpayers need to be especially vigilant about tax increases that:

1) Have already been included in the new health bill; and,
2) Pending increases in tax rates on ordinary income, capital gains and dividends.

Health Bill. The new health bill has two surtaxes which are interactive. First is a 0.9% levy on earned income. The second is a 3.8% Medicare surtax on unearned income. While taxable income recognized on a Roth conversation from an IRA payment may not be subject to surtax, it may have the effect of pushing up Adjusted Gross Income (AGI), subjecting other income to a Medicare surtax.

New Tax Proposals. As everyone knows, the 2001 tax cuts expire at the end of 2010. Tax rates on ordinary income, capital gain and dividends would go up in that event. There are several proposals around Washington, including those proposed by the Obama Administration that would significantly change the tax consequences of Roth conversion income for high income taxpayers. At this point, no one knows what will come out of Congress to address the staggering high deficits the country is incurring.

The bottom line is that high income tax payers need to be in continuous communication with their financial planners and CPA's to analyze what the financial impact would be from both the health care bill, new income tax legislation and the Roth conversion provisions, including the 2010 option to defer income.

From today's perspective, it appears that tax rates on all type of income are likely to increase for high income taxpayers. Therefore, deferral of income recognized on Roth conversions in 2010 may not be such a good idea.

Run The Numbers. No matter how these changes come about, each taxpayer has to run the numbers on his or her situation, types of income and future expectations to determine the best course of action from a tax standpoint. Overall, it would appear that high income taxpayers are going wind up paying more after 2010 so Roth conversions this year look appealing for these individuals.

Recharacterization. In this whole area of planning, an important aspect is the ability, after the fact, to reverse course, put the funds back into a regular IRA, and treat the whole Roth conversion as never having happened. In other words, a taxpayer gets a limited benefit of 20/20 hindsight and can reverse prior action without suffering a tax liability or penalty. This makes action in 2010 pretty appealing, if you can study tax rates, which may not be finalized for future years. For example, the 2010 election might bring about some changes in legislation that would increase taxes on conversions made this year. If those changes come about, recharacterization and reversing course might be a good alternative.

Bottom Line. Our never simple tax system is getting more complicated for high income taxpayers. So what else is new! It will behoove high income taxpayers, especially older individuals with large IRA�s to study the potential of Roth conversions in 2010, run the numbers and see if higher tax rates in the future make a 2010 Roth conversion a sound plan.

Beneficiary Designations. One further note, beneficiary designations on all retirement plans, including IRAs and Roths are generally an important part of estate planning for high net worth individuals. Financial planners often recommend individual beneficiaries without studying the impact that decision has on the overall estate plan. Sometimes, benefits should be divided among family members. Sometimes a trust is the best beneficiary to accomplish family objectives.

With the crazy estate tax situation in 2010 not yet remedied, estate planning for higher net worth individuals is important and constant vigilance needs to be maintained, especially this year.

Conclusion. If you want a current review of your estate planning documents with the estate tax limbo we now live in, please call James R. Modrall III or Thomas A. 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 and Nicole R. Graf at (231) 941-9660

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

Thursday, April 22, 2010

Going Into Reverse - Coming Out Ahead

Reverse Mortgages. Persons 62 and older are eligible to take out a Reverse Mortgage on their residence. Read on to learn more about this strange animal called a Reverse Mortgage.

A Reverse Mortgage is a first lien on a residence that has no monthly payments. In many cases, the borrower withdraws all or part of the loan in monthly installments, thus the term "Reverse Mortgage". The lender pays the borrower monthly rather than vise versa.

The idea is to permit seniors to tap the equity in their residence, or pay off an existing home equity loan or mortgage, avoiding a monthly payment, and augmenting retirement income. The borrower has a choice of benefits, lump sum, monthly payment or a combination.

Example. Take the hypothetical case of a 76 year old widow with an $300,000 condo subject to a $80,000 home equity loan on which the monthly interest at 6% is $400 per month. The widow's retirement income (social security and pension) is $1,600 per month. She can hardly afford the monthly payment on the home equity loan and might not qualify for a regular mortgage because of her low income. Solution: A Reverse Mortgage which pays off the home equity loan and provides a monthly income of $350 per month for the widow's lifetime. Her monthly available cash, therefore, has improved by $750 per month, the $400 interest payment she saves, plus the monthly cash disbursement by the lender. The widow makes no monthly payments on the loan but still has to pay for insurance and taxes, which are expenses she had anyway.

How Does The Loan Work? Reverse Mortgages are guaranteed by the federal government so there is generally a saving in the interest rate. The lender's interest accrues, adding to the outstanding loan balance each month. Included in the interest accrual is an insurance premium. Also, included in the loan balance are the initial expenses for the lump sum payment to the government, the lender's origination fee, appraisal and closing costs. In my experience, these fees and costs generally run $9,000-$20,000, depending on the amount of the loan. Fees have often been cited as a strong negative to Reverse Mortgages, as they may reduce the amount of the equity in the property that is available to the borrower's heirs. However, the benefits outweigh the negatives for many seniors.

Ultimate Payoff. The lender has to get paid its principal and interest somewhere along the line. There is no free lunch. The typical Reverse Mortgage terms provide that the loan becomes due at the death of the borrower or if the borrower moves out, for example to go to a nursing home. The borrower, or the borrower's representative, has six months in which to sell the property and pay off the loan. Generally, an additional six months is granted to reflect market conditions. If the property is not sold, the lender takes over the property and has to sell it. Since the loan is guaranteed by the federal government, the lender can't lose on the deal. The lender has no claim against the borrower's estate.

Whether there is any equity in the property left for the borrower's heirs, will depend on how much money the borrower has drawn and how long the borrower lives or stays in the house. For this reason, an older borrower, with a shorter life expectancy, is permitted to withdraw more money from the Reverse Mortgage loan than a younger borrower with a longer life expectancy. The insurance premiums paid to the federal government are supposed to cover variations in market values and life expectancies.

The program is relatively new, but is gaining in popularity because of bad market conditions, outstanding loans, and the squeeze felt by many retirees in their pension and social security income. In some ways, the program can be looked upon as a government incentive to seniors for staying in their own homes.

Down Sizing. Another use for a Reverse Mortgage is in financing a new, smaller home. For example, a married couple want to down size and realize $400,000 from the sale of their primary residence. They want to buy a smaller condo in Florida for $200,000. Based on their ages, they may be able to borrow $100,000 on a Reverse Mortgage on the new Condo This reduces their out of pocket purchase costs to $100,000, and leaves investable funds of $300,000. They have no mortgage payments on the new house and have substantial liquid funds for investment, living costs, or assisting family members.

New Competition. As pointed out by a recent Wall Street Journal Article, competition is heating up the Reverse Mortgage market. Active lenders are Genworth Financial, Bank of America, Wells Fargo and Financial Freedom. Also, the Article points out that Met Life is also dropping its Reverse Mortgage origination fees and servicing charges. Because the Reverse Mortgage scene is constantly changing, clients are advised to do comparative shopping, which has potential to save thousands of dollars in origination fees and servicing charges.

Conclusion. Reverse Mortgages can be a useful tool for financial planners, seniors and estate planning advisors. We have had several clients tap their home equity with a Reverse Mortgage, enabling them to stay in their homes, augment their income and improve their standard of living. We suggest that an interested borrower get quotes from several lenders. A Reverse Mortgage generally involves modifications of a client's Will or Trust, as well. If you, friends or relatives want to consider a Reverse Mortgage and discuss its impact on overall estate planning, please call James R. Modrall III or Thomas A. 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 and Nicole R. Graf at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Tuesday, March 30, 2010

Tax Impact - New Health Care Bill

Keebler Analysis. Credit for this summary alert goes to Bob Keebler, a Wisconsin CPA who advises affluent clients throughout the country. Bob has analyzed the important income tax provisions of the 2010 Health Care Bill and has posted his narrative on our Leimberg estate planning listserve. This is a synopsis of his presentation. I have to confess that I have not read the new health care bill. As passed, it will have an impact on affluent clients, meaning singles with income over $200,000 and married couples with income over $250,000, the "Threshold" amounts.

Medicare Surtax. The 2010 Bill establishes a 3.8% Medicare Tax on passive net investment income in excess of the threshold amounts. This newsletter will attempt to summarize Bob Keebler's analysis of the new Surtax.

The 2010 Health Care Bill establishes a third tier of income tax calculations. We are familiar with the first two tiers, the regular tax calculation and the AMT (Alternative Minimum Tax). We now have a third tier, Surtax calculation, for higher income tax payers. Also, it is important to remember that the Bush tax cuts expire in 2010. Therefore, the highest marginal effective tax rates are likely to increase from 35% to 43.4%, effective January, 2013.

Investment income would normally be royalties, dividends, interest, and capital gains. The new tax will be levied on "passive" investment income as opposed to "active" investment income, a distinction which has been present in the Code for many years. An example of this distinction would be a landlord who actively manages rental properties vs. rental income from partnerships, or income from oil and gas investments, where the taxpayer is not "active" in management.
Modified Adjusted Gross Income. The measuring rod for the Surtax will be Modified Adjusted Gross Income ("MAGI"). MAGI will include capital gains and all other income, including pensions, deferred compensation, etc.

It is important to note that distributions from qualified retirement plans are not subject to the Surtax. However, taxable distributions will push up MAGI so that other passive investment income, becomes subject to the tax.

Two Important Points. With increasing rates ahead for high income taxpayers, Keebler makes two important points for them and their counselors:
1. Death in 2010. For taxpayers dying in 2010, prior to November 30, representatives should choose a fiscal year ended November 30 to achieve maximum avoidance of increased tax rates, particularly the Surtax. Under special provisions of the Internal Revenue Code, estates and revocable trusts can elect fiscal years other than the year ended December 31. This is a commonly used tax deferral technique, which will now help avoid some of the rate increases and Surtax.
2. Roth Conversions. We have written previously about the advantages of Roth conversions in 2010. We see increased publicity for this technique in the financial press. The new Surtax makes Roth conversions in 2010 look even more attractive. The distribution from a regular retirement plan will be taxable in 2010. However, the 2010 tax rate appears to be much lower than affluent taxpayers will face in future years, especially those higher income taxpayers who will be facing the large increase in the top bracket.

Conclusion. Many professionals have not yet had an opportunity to analyze the impact of the new Health Care Bill on client taxes. Suffice it to say that if you advise higher income clients or if any reader fits this category, be alert to these changes. Make sure that you, or your client, sit down with a financial planner or CPA, to analyze the potential impact that the bill will have after 2010 and consider what steps you can take this year to minimize your potential tax exposure in the future.

We get involved with estate and trust administration which will have potential impacts under the new legislation. Roth conversions also impact estate planning by beneficiary designations, etc. If you have questions regarding any of the above, please contact James R. Modrall III or Thomas A. 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 and Nicole R. Graf at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Friday, February 5, 2010

Taxpayer Wins Uncapping Case

Joint Tenants Are Happy. Property owners are universally unhappy that the taxable value of their property gets "uncapped" at death. In the case of a married couple, the property gets uncapped at the second death, with taxable value rising to fair market value for the year after the second death.
A popular tactic in the circumstances has been for a husband and wife to execute a deed transferring the property to husband, wife and child, as joint tenants with full rights of survivorship. Alternatively, if husband dies first, wife can do the same thing, transferring the property to herself and son, as joint tenants.
The Michigan Department of Treasury has taken the position that in the circumstances described above, the property is uncapped when wife dies (the second death), unless the son was a joint owner in 1994, when the new property tax laws were enacted.
New Case. These were essentially the facts in a recent decision by the Michigan Court of Appeals in Klooster v. City of Charlevoix, decided December 15, 2009.
In Klooster, husband and wife, James and Donna Klooster, owned property as tenants by the entireties. In August, 2004, Donna quit claimed her interest to James. On the same day, James, the sole owner, quit claimed his property to himself and their son, Nathan Klooster, as joint tenants, with rights of survivorship.
James died in January, 2005. Then in September, 2005, Nathan executed a quit claim deed, creating a joint tenancy with rights of survivorship with his brother, Charles Klooster. The City of Charlevoix asserted in 2006 that the property had become uncapped at the death of James in 2005 and that the taxable value was to be uncapped, approximately doubling.
The Michigan Tax Tribunal affirmed the decision by the Assessor and the Board of Review that uncapping had occurred.
The question before the Court of Appeals was whether James' death was a "transfer of ownership", as defined by the Michigan statutes. Unfortunately, the specific sections of the statute are ambiguous.
Many practitioners throughout Michigan have observed this ambiguity and have assisted in the creation of joint tenancies, usually between parents and children, in the hope of avoiding an uncapping when the last parent dies.
Without getting into the technicalities of the Court's analysis of the statutory language, we would note that the analysis by the Court of Appeals will probably be challenged on appeal to the Michigan Supreme Court.
Trustworthy Decision? At this point, it is too early to say what the Michigan Supreme Court will decide and whether the Michigan legislature will address this potential loophole and clarify the language of the statute.
If the Klooster decision is upheld by the Supreme Court, taxpayers are faced with the further questions whether any legislative fix could be retroactive to joint tenancies created prior to a statutory change.
We have employed this strategy for clients on occasion, with the caveat that the Michigan Department of Treasury has consistently taken the position, in the facts outlined above, that the property gets uncapped at the parent's death.
Should clients rush out and attempt to do the same thing to forestall uncapping? That raises another question, "what is the downside of trying?" Depending on the facts involved, there may not be much downside from clients trying to get in under the wire, where the facts are clear and where the creation of a joint tenancy fits in with the overall estate plan.
Stay Tuned. To paraphrase Yogi Berra, "it ain't over till it's over."
If you have questions concerning uncapping, joint tenancy and integration with your overall estate plan, please call Jim Modrall or 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 and Nicole R. Graf at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Wednesday, January 13, 2010

WHAT A MESS!

The Unthinkable. At the date of this writing, it appears that Congress will adjourn before December 31, 2009 without any action to fix the estate tax. Almost no one in the estate planning profession would have dreamed that this would be possible.

To refresh your memory, the 2001 Bush Tax Bill reduced rates and increased the exemption so that in 2009 the exemption became $3.5 million per person with a fixed rate of 45% on the amount of the taxable estate in excess of that amount. For a married couple, thus a total of $7.0 million could be protected from the federal estate tax.

But apparently, the unthinkable has happened. Congress has not taken any action to delay, prevent or terminate the Sunset Provisions in current law. In other words, 2010 will bring a complete lapse of estate taxes and a return to the $1.0 million individual exemption in 2011.
Consequences. Remember that the gift tax is still effect. If nothing is done to restore the estate tax, persons dying in 2010 will have a completely different legal matrix applicable to their estate. The good news is that there will be no estate tax.

The bad news is that there will be what is called carry-over basis, which is intended to impose a capital gain tax on assets when they are sold, based on historical costs.

There are exemptions for carry over basis, in particular as to assets allocated to a spouse. The purpose of this newsletter is not to go into detail about the technicalities of this law. Congress tried carry over basis years ago and found it to be unworkable.
What About My Estate Plan? Most traditional Wills and Revocable Trusts have some division of the Trust at death, usually called an A/B Trust formula. The interpretation of these formulas, if someone dies in 2010 without an applicable estate tax, will be up in the air.

Without changes, it is probably that there will be a great many petitions to probate courts for interpretation of trusts which became irrevocable at death in 2010.

(We avoided this interpretation question in recent years where nuclear marriages were involved by providing for a single trust for the benefit of the surviving spouse, at the first death.)

Horns of a Dilemma. Clients are thus faced with a dilemma, modify older A/B Trusts formulas in existing Revocable Trusts, or wait to see if Congress reinstates the estate tax in early 2010.

Our recommendation would be to wait until the end of February to see if Congress takes action, retroactive or not. Clients with imminent health issues may wish to modify their A/B Trust provisions promptly in January, but otherwise we think it is prudent for clients to wait and see if Congress acts.

If Congress does not act in reasonable haste, then we would recommend clients with A/B Trust formulas in their trust documents set up appointments right away to make changes, which will eliminate ambiguities in the event of death in a period when there is no tax and carry over basis applies.

The dilemma can certainly be solved. The timing is an issue. Please call Jim Modrall, Tom Pezzetti if you wish to schedule an appointment to discuss this matter and the status of your current documents. Alternatively, contact 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 and Nicole R. Graf at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.