ESTATE PLANNING - WHERE DO WE GO NOW?

Estate Tax - Not Dracula for Most. For most clients, the estate tax Dracula has gone away. The compromise tax bill raised the individual exemption to $5 million. This means that most clients will not be concerned about minimizing estate tax. For a married couple, total marital assets have to exceed $5 million before concern arises. The new "portability" provisions of the tax law mean that for a married couple, marital assets will have to exceed $10 million before tax reduction strategies need to be considered.

This is a huge change from the 90's when the individual exemption was $600,000, and the maximum tax rate was 55%. Estate taxes could and did take a huge bite out of family wealth. We estate planning attorneys devised all sorts of strategies, many of which included charitable trusts, to minimize or legally avoid estate taxes. Now estate taxes will not be a factor, except for high net worth clients. Note: we will still put savings language in our trusts just in case the estate tax comes back. However, this seems highly unlikely at this point.

Michigan, of course, has no state death taxes. The Michigan inheritance tax went out in 1993, and the Michigan legislature has failed to enact an estate tax. Many states have done so, however. Before a Michigander moves to another state, he or she should consider the estate tax as well as other potential tax costs.

Out of a Job? Did the change in the federal tax law mean that we estate planning attorneys are out of a job? On the contrary, the human factors of daily life, including family dynamics mean that structuring trusts and estates is just as important as ever.

Second Marriages. Non-tax factors are especially important in designing trusts which are fair to the children of both spouses. Fairness, of course, is in the eyes of the beholder. Spouses can differ about what is fair, but the important thing is frank discussion and good communication to avoid disruption and expensive legal battles when one or both spouses are gone.

Who Will Administer. Administering a decedent's property, whether in an estate, trust or both, is a key decision. In second marriages, with children of each spouse, the writer has found that co-trustees - the surviving spouse and a child of the deceased spouse - rarely works. Relations with a step-parent are almost never the same when the birth parent dies. A disinterested trustee is a much better way of protecting the interests of the children of the deceased spouse.

When is Property Distributed? The senior generation still needs to decide whether property just goes to children, or also to grandchildren. Whether one or both is selected, the Trust Settlor needs to decide if there is any delay in distribution of property based on age of the child or grandchild, in order to protect the property from improvidence, creditors, predators or spouses. We see distributions from trust at later ages for all of these reasons, especially protection from a divorce or assurance of retirement funds.

Trusts for a child or grandchild's lifetime have become more rare for moderately wealthy Midwestern clients. Mostly, the senior generation wants to protect inheritances, but not prevent access for the whole lifetime of a child or grandchild.

Surviving Spouse. Decisions for a married couple involve access to funds by the surviving spouse. The provisions in a husband's trust, for example, if he is the wealthier spouse, involve discussions of:

How much property does the wife have in her name or have access to?
What are her support needs likely to be?
How much wealth should pass to the kids?
Should there be any control on wife's withdrawal of funds from the husband�s trust?
If there is control, who exercises it?

Sweetheart Estate Plans. The relatively high estate tax and low exemption pretty much made "sweetheart" estate plans a non-starter. A sweetheart estate plan means that the surviving spouse basically gets everything, without any restrictions. With an individual exemption of $5 million, this means that many nuclear families (single marriages), with joint children will mean that simple sweetheart estate plans will probably come back in vogue. There may not be a tax reason to have a trust for the surviving spouse. Some couples endorse the idea of a sweetheart estate plan for each spouse. Others want some protection of the marital assets after the first death, either to protect the surviving spouse from improvidence and creditors, or to assure some inheritance to the kids. Sometimes, of course, there are dual motivations. However, we generally do not recommend sweetheart estate plans for several reasons. First among these is the fact that a surviving spouse can live many years after the first death. That means that support may be needed for a long time and some professional management or assistance in protecting assets will be needed. Secondly, there are a lot of late life marriages which expose the assets to a late arriving spouse. Thirdly, elderly people are often vulnerable to abuse or undue influence, especially as mental faculties fail. Continuing trusts can help prevent financial catastrophes for any or all of these reasons.

Communication is Important. Considering all of the factors discussed in this newsletter, it is also important that a couple's estate plan be discussed with children and if it is a second marriage, with the children of both spouses, so that everyone knows the couple's decisions about fairness, estate administration and ultimate benefit of financial assets are known. Often times, the older generation is accustomed to secrecy about financial matters, is uncomfortable discussing these matters with family, or perhaps does not trust children or in-laws. Trust is important, of course, but communication is also important. We find that failure to communicate is frequently the cause of litigation, uncertainty, mistrust and sometimes misappropriation.

Conclusion. I hope that this newsletter has provided some food for thought. Saving estate taxes is not the only reason for a carefully, well thought out estate plan, both for married individuals and single persons. Disputes can arise after the death of single individuals. Some of the biggest and most expensive court battles have erupted where there are no children. The new estate tax liberalization may be a good reason to review your estate plan documents and bring them up to date to reflect current ideas, current finances and current family circumstances. Please call Jim Modrall or Priscilla Hirt, to schedule a no-obligation appointment, at (231) 941-9660, or any of the other 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.