Wealth Conservation/Keys to Financial Security

Michigan Tax Increases - Seniors

2011-07-14T11:29:00.000-07:00

The Michigan legislature in May of this year passed several sweeping tax bills which will hit Seniors hard. This legislation was signed by Governor Snyder and goes into effect January 1, 2012.

For this summary, I thank the monthly newsletter "Aging Alert", published by the Area Agencies on Aging Association of Michigan.

The new law establishes three categories of Seniors as:
1. Born before 1946
2. Born between January 1, 1946 and December 31, 1952
3. Born after 1952

The new law creates classifications and distinctions for the tax impact on pension income, public and private.

For all three categories social security and military pensions will not be taxed.

The other effects of the new Michigan law may affect you or somebody in your family.

Born Before 1946.1. Public pensions not taxed.
2. Private pensions exempt up to $45,120/ single or $90,240/joint.
3. Investment income could be exempt up to $10,058/single or $20,115/joint.
4. Extra $2,300 exemption eliminated

Born between January 1, 1946 and December 31, 1952.
1. Up through age 66 retirement income up to $20,000/single or $40,000/joint not taxed.
2. Beginning at age 67 all income up to $20,000/single or $40,000/joint not taxed, except
3. If total income is over $75,000/single or $150,000/joint the $20,000/$40,000 exemption
cannot be taken.

Born after 1952.1. Public and private pensions taxed.
2. Beginning at age 67 there are two options
(1) keep the social security exemption and personal exemption
(2) count all income, including social security (except exemption of social security
$20,000/single or $40,000/joint), with no personal exemption
3. Option (2) not available if income is over $75,000/single or $150,000/joint

Conclusion. These changes may affect you or somebody in your family. Talk to your tax preparer to get more information. We thank Aging Alert for its succinct summary of the changes in Michigan law affecting Seniors.

If changes in your investments will affect your estate plan, you should contact Jim Modrall or Priscilla Hirt at (231) 941-9660, 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, David H. Rowe, Nicole R. Graf, Priscilla V. Hirt or E. Molly Kuras 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.

New Trust Rules

2011-06-30T12:37:00.000-07:00

Michigan adopted its own version of the Uniform Trust Code, effective April 1, 2010. Since the new law will impact trusts created both before and after April 1, 2010, it will behoove readers who currently have trusts to consider possible reasons for modifying those trusts. There may be tax reasons also which we will mention briefly.

Some of the comments in this newsletter will be particularly appropriate for second marriages and blended families. Please review these comments and see if any of them may apply to your situation.

1. Simplification. We have mentioned before that the 2010 changes to the federal estate tax law, raising the exemption to $5.0 million per person, makes the complicated A-B Trust formulas obsolete for most people. Most standard trusts for married individuals had a "hard to understand" formula for dividing trust property after the death of the first spouse into two separate trusts. The A Trust was generally a Marital Trust, qualifying for the marital deduction. The B Trust, sometimes called a Family Trust or Credit Shelter Trust, could have different beneficiaries, including children as well as the surviving spouse. For married couples with separate trusts, we generally recommend simplification to provide for a single Trust at the first death, with defined beneficiaries (usually just the surviving spouse) and a tax saving clause in the event the marital deduction is necessary.

The new portability feature, whereby a married couple gets the full $10.0 million exemption, may or may not be helpful. In any event, portability could affect the trust provisions depending upon order of death and the division of assets between the respective spouses.

2. Material Purpose. The new MTC (Michigan Trust Code) introduces a standard of "material purpose" for a court to apply when considering any post death modifications, reformation and termination of a trust. In our experience, families often try to correct ambiguities or otherwise change trust provisions after the death of the Settlor. Controversies often arise in second marriage situations with natural children and step children having different views about the interpretation of parent's trusts and the impact of a change in circumstances or change in tax laws on how trusts are administered. Typically, in drafting the purpose clauses for trusts, the emphasis was on saving estate taxes. There were often not explanations or amplifications of the intentions regarding the surviving spouse, discretionary distributions, and potential early distributions.

For example, it would be easy for a surviving spouse and surviving children or step-children to get together to agree to a premature termination of the trust, contrary to the Settlor's wishes. Protection of trust property from creditors and predators is often not explained as a Settlor's "material purpose" for delaying distributions or limiting trust withdrawals.

3. Place of Administration. Disputes about trusts after a Settlor's death are becoming more common as family disagreements come to the fore. Michigan law makes the "venue" for settling disputes frequently dependent on the "place of administration". In today's modern banking world, where banks change names, officers and personnel frequently, there can be arguments about which is the proper "place of administration" for deciding in what court disputes shall be resolved.

The family may not want the disputes resolved in a court in Los Angeles, Chicago or New York just because one of the bank's trust officers is located there. Similarly, if a successor trustee moves to Florida, does that mean that trust disputes, with Michigan law applicable, should be resolved in Orlando or Tampa? When two trustees reside in different places, which is the proper location for resolution of disputes?

We typically recommend that the trust provide that the disputes be resolved where property is located (Michigan real estate, for example) or a court in Michigan where the Settlor resided, on the theory that there may be local witnesses required and that a gathering at the family's prior location would be most convenient, or less inconvenient, than a court in another state.

The solution is to make sure that the trust specifies the proper venue for resolution of disputes. At least this will give some guidance to the successor trustee and surviving beneficiaries as to the Settlor's wishes for dispute resolution.

Conclusion. The intention of this newsletter is to cover several important points. For second marriages and blended families, these points are especially critical and our readers in those circumstances should make sure their trusts are up to date and in accordance with new Michigan Trust Rules and consistent with the new Federal Estate Tax rules (which are much more liberal to most clients than the prior law). If you have any questions regarding your trust, or want an up to date review, Jim Modrall or Priscilla Hirt, or any of the other attorneys listed below at (231) 941-9660. Our assistance can save you time, money and aggravation.

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, David H. Rowe, Nicole R. Graf, Priscilla V. Hirt or E. Molly Kuras 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.

What If I Lose It?

2011-05-24T08:01:00.000-07:00

What Happens To My Trust If I Lose It? This is a question we sometimes get from clients who are concerned about management of their trust and finances if they become incapacitated, mentally or physically. First, let's clarify the terminology. "Incompetence" used to be the common term in the days of asylums. It meant a person would be or could be confined involuntarily to an institution. The term commonly used today is "capacity" or "incapacitated", which means lack of capacity to perform a specific act or make a specific decision. That lack of capacity may be a permanent or temporary condition of the brain, or it may be a physical condition that inhibits normal activity.

Just as an example, a person may be heavily medicated and thereby unable to make medical decisions. In such a case, physicians may provide the necessary written determination of lack of ability or capacity to make medical decisions. Those decisions would trigger the patient's Medical Power of Attorney (MPOA).

How Does This Relate to Your Trust? The typical Living Trust is revocable by the trust maker, sometimes called a "Settlor" or "Grantor". The Settlor typically retains the power to amend the trust and is usually the Trustee. As Trustee, the Settlor continues to manage his or her property in the same manner that he or she would do without a trust. However, as people age, their ability to make financial decisions and judgments often wanes.

Trusts typically contain a provision stating that if the initial Trustee is unable to manage the trust, or becomes "incapacitated" (which in this case refers to management of trust property), a Successor Trustee takes over. Usually, a trust will contain a provision stating that the new Trustee (often designated as "Successor Trustee") can or shall take over management of the trust, when one or two physicians make a written determination that the initial Trustee is not able to manage trust affairs. (There does not need to be any further medical diagnosis or reasoning, so most physicians do not feel that they are revealing confidential information.)

Delicate Situation. Often the designated Successor Trustee is a spouse or child. In some cases, the Successor is reluctant to confront the initial Trustee, a parent or spouse, with the realities of the situation, perceived or actual. Sometimes the initial Trustee is reluctant to admit reality or give up control. Those situations often involve the intervention of a third party such as a physician, attorney or CPA, to help smooth the transition.

In many cases, the transition to Successor Trustee is made easier by accident, stroke or advanced dementia, where there is no resistance on the part of the initial Trustee.

However, the purposes of this discussion are to bring the matter of potential transition to our readers' attention, and to inform the potential Successor Trustees of their duties and responsibilities.

What Does the Successor Trustee Have To Do? The job of Successor Trustee should not be taken lightly. A trustee is a fiduciary, meaning that the Successor is accountable to the trust Settlor and the ultimately beneficiaries of the trust, often the spouse and/or children. A fiduciary has a relationship of trust, as "trustee" indicates, and is legally responsible to all interested persons. A trustee has duties of fairness, royalty and responsibility to all interested persons, without self-aggrandizement.

The thrust of this month's newsletter is dealing with a situation where the initial Trustee is still living, but is incapacitated for one reason or another, so that a Successor Trustee has taken over. The new Michigan Trust Code spells out the duties of a Successor Trustee while the Settlor is incapacitated. The principal rule is set forth in MCL 700.7603(2). That section states that the Successor Trustee shall account to the Settlor's designated agent (in a Power of Attorney), or if the sole agent is the Trustee, the Successor Trustee has to account to all "qualified trust beneficiaries" , informing them of the existence of the trust and keeping them reasonably informed about its administration.

Trust Language and the DPOA. Everyone who has a trust, which will include most readers of this newsletter, should be especially aware of the provisions of their trust and their DPOA (Durable Power of Attorney) relating to the power of an agent to amend the trust and withdraw funds from the trust. To save controversy and expense, the provisions in these two documents should be consistent. If an agent has a power to withdraw funds from the trust, the instruments should state whether that power is individual or only as a fiduciary. In other words, does the agent have the power to withdraw funds or make trust amendments in any way the agent sees fit and for any purpose, or is the power to be exercised only for the benefit of the trust Settlor?

Duty To Account and Report. The new Michigan Trust Code has extensive provisions about the duties of a Successor Trustee to report to the Settlor, the Settlor's Agent, and "qualified trust beneficiaries". At the risk of oversimplification, a "qualified trust beneficiary" is any current permitted beneficiary or a beneficiary who would take if the trust terminated on that date (which usually means the death of the trust Settlor).

Trust administration is not to be taken lightly. The Michigan Trust Code provides specific duties for Successor Trustees and clarifies their duties, obligations and responsibilities concerning reporting and accountability. We find more Successor Trustees taking over responsibilities for disabled spouses or parents, without proper counsel. It is a situation fraught with controversy in many families. Professional counsel and assistance will save a family from disharmony, litigation and expense.

Conclusion. The purpose of this newsletter is to highlight a situation which is becoming more common as we live longer, i.e. a trust Settlor who is unable to properly manage trust property. If you have a trust, or if you are designated as Successor Trustee, with a prospect of taking over trust management, please contact Jim Modrall or Priscilla Hirt, or any of the other attorneys listed below at (231) 941-9660. Our assistance can save you time, money and aggravation.

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.
http://www.bfarlaw.com
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

ESTATE PLANNING - WHERE DO WE GO NOW?

2011-05-02T11:57:00.000-07:00

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.

JOINT TENANTS WIN THE DAY

2011-04-19T08:11:00.000-07:00

Klooster Case. You may recall that our January, 2010 newsletter reported on the decision in the Klooster case favorable to taxpayers. You may recall that the Michigan Court of Appeals ruled in Klooster that property passing at the death of an original joint tenant did not get “uncapped” at death.

Without getting into the technicalities of the decision of the Michigan Supreme Court in Klooster, a quick review of the facts is in order.

1. August, 2004: James and Donna Klooster owned property as tenants by the entireties. Donna quit claimed her interest to James. On the same day, James quit claimed the property to himself and their son, Nathan Klooster, as joint tenants with rights of survivorship.

2. James died in January, 2005, leaving Nathan Klooster as owner.

3. In September, 2005, Nathan executed a quit claim deed creating a joint tenancy with rights of survivorship with his brother, Charles Klooster.

4. The City of Charlevoix asserted in 2006 that the property had become uncapped at the death of James in January, 2005.

Important Decision. Weaving its way carefully through the statute and the fact situation in Klooster, the Michigan Supreme Court determined that the transfer of property on the death of a joint tenant could be a “conveyance” for purposes of the property tax statute, defining “transfer of ownership”.

However, analyzing the exceptions, the Michigan Supreme Court decided that as long as James was an original owner of the property, the taxable value did not get uncapped in January, 2005 when James died. However, the Court also decided that the taxable value did get uncapped by the September, 2005 deed from Nathan to himself and his brother, Charles Klooster, as joint tenants. In other words, the Court decided that the City of Charlevoix was right for the wrong reason and that the taxable value was uncapped in 2006.

Taylor Case. The decision of the Michigan Supreme Court was a victory for taxpayers in a somewhat similar case in Traverse City, Michigan. In that case, Dr. Kenneth Taylor, a few weeks prior to his death, deeded his residence to himself and his daughter, as joint tenants with rights of survivorship. The City of Traverse City had asserted that the property was uncapped at Dr. Taylor’s death.

Dr. Taylor was an “original owner”, as defined by the Michigan Supreme Court. Therefore, his daughter did not have the property uncapped at her father’s death.

In sum, the Court Decision in Klooster was a victory for some taxpayers, including the Taylors, but not the Kloosters.

Nathan Klooster would have been fine, with no uncapping in 2005, if he had not deeded the property to himself and his brother, Charles, in September, 2005.

Key Importance of Klooster. The Klooster decision is a victory for taxpayers who want to hold on to the family cottage or residence without an uncapping. So long as an original owner is a joint tenant, the taxable value does not get uncapped at the original owner’s death. Generally, the joint tenancy is established between parents and children, so at least the children (or child) can inherit property without an uncapping at the parent’s death. If parents choose to skip a generation, passing the property to grandchildren, that would also permit a transfer of ownership without uncapping at the death of the original owner.

Estate Planning Clarification. The importance of the Klooster Decision is that all Michigan property owners with a residence or cottage that they want to keep in the family now have to re-examine their estate plans. If owners want to keep property in the family without uncapping, they should examine the Klooster alternative to see if it fits their circumstances and objectives.

Many clients have put their residence or cottage property in trust. Those provisions should now be re-examined by all property owners in light of Klooster.

Conclusion. The Klooster case is important for estate planning purposes and especially for cottages and residences. (The Decision may be of less importance for farms because agricultural property typically does not get uncapped so long as Ag usage continues.)

If you are concerned about uncapping of your property at death, we strongly urge that you contact Jim Modrall or Priscilla Hirt, at (231) 941-9660, or any of the other attorneys listed below, for a review of your estate plan in light of the Klooster decision.

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, Nicole R. GraF at (231) 941-9660

2011 - What To Do?

2011-02-25T07:32:00.000-08:00

The dust has settled on the 2010 eleventh hour Federal Tax Bill. The new features which are important to estate planners are:

(1) Increase of the individual Federal Estate Tax Exemption to $5.0 million per person.

(2) Re-combining the gift tax and estate tax exemption so that lifetime gifting becomes much more important.

(3) Introducing portability of the estate tax exemption for married couples.

These changes offer powerful estate planning opportunities and challenges.

Jumbo Exemption. The Federal Estate Tax Exemption for 2011 and 2012 is raised to $5.0 million per person or $10.0 for a married couple. The tax rate is reduced to 35% of the taxable estate in excess of the unused exemption.

Does this mean that married couples with less than $5.0 million of combined assets should forget about estate taxes? The answer is an emphatic "no." The principal reason is that in most cases tax planning is only one of the motivations for estate planning. Protection and management of family wealth for the future benefit of family members is still important.

What about married taxpayers with combined assets of more than $5.0 million? Certainly, estate planning and trusts take on a tax complexion.

Gifting Becomes Critical. For the first time ever, lifetime gifts take on huge importance in wealth preservation. Taxable gifts (those reported on Form 709 to the Internal Revenue Service), made to family members directly or in trust, take on a new importance for families. This is the first time that the lifetime gift tax exemption has exceeded $1.0 million per person. For wealthy taxpayers, this is a prime opportunity to make gifts in trust for family members, including charitable trusts. Charitable gifts and estate planning take on new importance because the value of property transferred to family members is so much larger. This subject will be dealt with in future newsletters.

A Note of Caution! Remember that property transferred by gift carries over the donor's cost basis for purposes of computing future capital gain. Thus, identification of property to be gifted is critical. High-cost-basis assets are definitely preferable, to minimize future potential capital gain taxes. Remember that capital gain rates are likely to increase in the future. Also, remember that property owned at death takes a step-up in cost basis to the date of death value.

Portability. The 2010 Tax Act introduces the concept of portability of estate tax exemptions between spouses. In a simple example of portability, assuming the husband dies in 2011 with a taxable estate of $3.5 million. No estate tax is due, without using a marital deduction. Morever, the surviving wife can elect to carry over the unused $1.5 million from the husband's estate to her taxable estate. However, in order to take advantage of this benefit, the surviving wife has to make sure that an estate tax return is filed for the husband, making the election to carry over or transfer the husband's unused estate tax exemption. The portability option is lost if a proper tax return is not filed for husband. (Even though no tax is due at husband's death.) It is still important to use a trust for wife, not an outright gift, in these circumstances.

Are A-B Trusts Obsolete? Many traditional trusts for married couples contain provisions for division of trust property at death into two separate trusts, Trust A and Trust B, or "Marital Trust" and "Family Trust." The alternative that we have been using the past few years is a trust for the surviving spouse alone, with the possibility of a "Q-TIP" election possible in the event that a marital deduction is needed.

In short, the traditional A-B Trusts formulas should be carefully reviewed to make sure that the interests of the surviving spouse are adequately protected. We have been warning in our seminars that there are a lot of out-of-date formulas and trust provisions out there. These formulas might have worked fine with an estate tax exemption of $675,000 or $1.0 million. These formulas may not be appropriate with the large $5.0 million exemption.

Are Sweetheart Estate Plans Now The Rule? For some married couples, a "Sweetheart" estate plan, with everything left to the surviving spouse may work just fine. However, usually there are family planning concerns that favor protection of family wealth with trusts. Trusts can help prevent improvident use and protect assets from both creditors and predators. There is no general rule. Every family's situation is unique and should be reviewed carefully when the question of estate planning updates arise. Moreover, if the estate tax exemption goes down in 2013, it is important to use the exemption of the first spouse to die with a trust.

Conclusion. The 2010 Tax Law presents many opportunities and some challenges. Remember that the new estate and gift tax provisions do not apply beyond December 31, 2012. Without action by Congress, the exemption drops back to $1.0 per person on January 1, 2013. Experience over the past year or so has taught us that we cannot depend on Congress to act in a timely fashion with respect to tax law changes. Most of us are aware that the country cannot keep spending with no regard for tax revenues. This means more changes on the horizon and the necessity for more frequent review of estate planning documents. If you have questions about your documents or need a review, please call Jim Modrall or Priscilla Hirt, 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.

ACT NOW - CHARITABLE IRA ROLLOVER ENDS JANUARY 31, 2011

2011-01-05T10:33:00.000-08:00

Short Deadline. We are trying to get January's newsletter published early so that charities and clients with charitable intent are aware of the brief extension of the $100,000 charitable gift from IRA accounts. The compromise tax bill enacted by the lame duck Congress and signed by the President reinstates this special tax benefit for 2010 and 2011. However, this IRA Charitable Rollover extension expires soon - January 31, 2011.

Double-Up Opportunity. A Charitable IRA Rollover made by January 31, 2011 can be allocated to 2010 or the 2011 tax year. Thus, a Donor with a large IRA and charitable commitment could have a total of $200,000 charitable IRA gifts, with $100,000 allocated to 2010 and $100,000 allocated to 2011. Even for smaller gifts, this may be a once-in-a-lifetime opportunity to satisfy charitable pledges and charitable gift intentions in a tax efficient manner using IRA accounts!

The Old Law. The Pension Protection Act of 2006 originally enacted the Charitable IRA Rollover. The Charitable IRA Rollover was summarized in our newsletter of August 2006, available on our website. This offered tremendous tax advantages to a person 70-1/2 or older. This benefit has now been given new life for tax years 2010 and 2011.

Important Points.
(1) The Charitable IRA Rollover must be made directly by the IRA Custodian to the qualified charity.
(2) The account owner does not recognize any taxable income.
(3) If the gift is allocated in 2011, it can satisfy the minimum required distribution for 2011.
(4) This is particularly advantageous for individuals who take the standard deduction on their Federal Income Tax Return (without itemizing charitable gifts or other deductions).
(5) The Charitable IRA Rollover is especially helpful to Michigan residents, where itemized deductions are not allowed for state income tax purposes. In other words, the charitable rollover amount is not reported as income and therefore not taxable by Michigan.
(6) Generous donors have the opportunity to bypass limitations on charitable gifts covered as itemized deductions.
(7) Charitable IRA Rollovers are limited to persons age 70-1/2 or older.

Bottom Line. The 2010 Tax Relief Act created a brief window of opportunity for both charities and individuals. Satisfaction of charitable gifts and pledges can be made in the most tax efficient manner from an IRA account by January 31, 2011. All donors and potential donors should discuss the income tax planning opportunities with their income tax advisors.

Caution. Donors should contact their IRA Sponsor to determine the procedures and minimum contribution amounts of the particular advisor. We understand that some advisors establish minimums of $1,000-$5,000 each. Also, remember that contributions must be made to a public charity. Donor advised funds or private foundations do not qualify. For example, if a Community Foundation were a Donee, the contribution would have to be to its general fund, field of interest fund, or an endowment fund for a public charity that had a fund at the Community Foundation.

Conclusion. If you want more information about charitable gifting as part of your estate plan, or if your documents need a review and update as a result of the new law, contract Jim Modrall or Priscilla Hirt, as (231) 941-9660, or any of the other attorneys listed below, or to schedule a no obligation appointment. Other beneficial provisions of the 2010 law will be discussed in future newsletters.

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.

Medicare Alert!

2010-12-21T08:13:00.000-08:00

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.

FIVE REASONS TO REVIEW YOUR ESTATE PLAN

2010-10-11T08:54:00.000-07:00

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.

http://www.bfarlaw.com/

Small Business Gets Help

2010-09-29T13:07:00.000-07:00

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.

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

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

Is Your Estate Plan Bullet Proof?

2010-09-03T06:51:00.000-07:00

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.

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

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

Joint Ownership - Open Door to Litigation?

2010-07-22T12:14:00.000-07:00

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.

IRA TRAPS AT DEATH

2010-06-17T07:12:00.000-07:00

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.

Heads Up - Roth Conversions Looking Better

2010-05-20T10:26:00.000-07:00

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.

Going Into Reverse - Coming Out Ahead

2010-04-22T06:56:00.000-07:00

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.

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

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

Tax Impact - New Health Care Bill

2010-03-30T12:09:00.000-07:00

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.

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

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

Taxpayer Wins Uncapping Case

2010-02-05T04:59:00.000-08:00

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.

WHAT A MESS!

2010-01-13T13:41:00.000-08:00

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.

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

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

Gifting - Who Gives and Who Gets?

2009-10-30T07:04:00.000-07:00

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

Trusts - New Michigan Rules

2009-10-07T08:45:00.000-07:00

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.

2010 - Your IRS Get Out Of Jail Free Card

2009-08-13T08:00:00.000-07:00

Converting Your IRA to a Roth. Many financial advisors over the years have recommended converting your traditional IRA into a Roth IRA so that future withdrawals from the Roth would be free of income tax, whether for you or your heirs.

We all know that withdrawals from a traditional IRA are subject to tax, whether mandatory or voluntary. We are also aware that withdrawals from a Roth IRA, voluntary during the owner’s life and mandatory after death, are not subject to income tax. Trading a taxable account for a non-taxable account seems like a no-brainer. However, there have been two obstacles:

(1) Payment of the income tax on the IRA withdrawal;

(2) Income limitations on taxpayers eligible to make the switch. Taxpayers with adjusted gross incomes of more than $100,000, were not able to make the conversion. However, the 2006 Tax Bill eliminated this limitation for 2010 and beyond. Obstacle #2 is therefore eliminated beginning 2010!

It Gets Better. For 2010 only, taxpayers can elect to defer recognition of taxable income on the conversion. They can report the taxable income in 2011 and 2012, spreading out the taxes that are due. As I understand the new 2010 rules, a taxpayer making an IRA conversion can recognize all the income in 2010 or spread it equally between 2011 and 2012. If the deferral is elected, the last payment of the tax bite can be deferred until 2013.

After 2010, the Roth Conversation can still be made, regardless of income level, but the deferral of income recognition and tax payment will not be available.

What is the Downside of the New Rule? The basic downside of the new rule is the same as before, i.e. paying income tax on the monies withdrawn and rolled into the Roth. Anyway you look at it, you’re paying income taxes sooner than would otherwise be required. This is the price one pays for a permanent avoidance of income tax on Roth withdrawals. Remember that your heirs will be paying income taxes on monies remaining the IRA account at your death, at whatever their personal income tax brackets might be.

To Defer or Not to Defer. If your financial and tax advisors recommend an IRA Conversion, or recommend analyzing the consequences, one of the hookers will be the possibility that income tax rates might change in 2011 and 2012. For that matter, there is always the possibility, even though remote, that Congress might retroactively change tax brackets for 2010. All of these factors need to be taken into account. Individual taxpayers need to assess whether their taxable income is likely to increase or decrease in the future and determine what, if any, offsetting deductions they might claim against a big lump sum of taxable income. High net worth clients should also take into account that paying income tax on IRA’s now gets that money out of the taxable estate, a further saving to the family down the road. While the balance in a Roth IRA account at death might be subject to estate tax if not payable to a surviving spouse, there won’t be the feared double hit: payment of income taxes on monies withdrawn from a traditional IRA to pay estate tax.

Further Complications. Advance income tax planning might be more complicated for some taxpayers who have both after tax and before tax IRA’s. In our experience that is relatively rare, but nonetheless when that situation exists, more involved consultations with your income tax advisors will be necessary to make sure that the IRS rules on withdrawals for rollover purposes are observed.

Estate Tax Considerations. We still don’t know where the estate tax revision and/or extension is going to land. According our sources, the debate appears to be what the future tax rate will be and whether the exemption is going to $3.5 million per person or $5.0 million per person. In any event, there are high net worth clients that will have to continue estate and financial planning on the basis that a portion of their estates are likely to be subject to estate tax at some point. IRA planning is important in minimizing the estate tax bite, as well as income taxes. It is human nature not to realize taxable income any sooner than is absolutely necessary. Moreover, the volatility of the stock market has made advance planning much more challenging. In some respects, taxable withdrawals from IRA’s for Roth Conversions, can be considered a bargain at depressed asset values. All of this, however, is tempered by the need to use outside resources to pay the income tax liability.

Another facet of IRA planning is the ability to use your IRA accounts for charitable contributions without recognizing taxable income. This is particularly advantageous in Michigan. Taxpayers with charitable pledges or serious charitable intentions should explore this opportunity to maximize the tax effectiveness of their gifts, by reducing IRA balances.

Conclusion. The purpose of this newsletter is to highlight a special benefit for 2010 IRA-Roth Conversions. This opportunity is too good to ignore. Moreover, higher income taxpayers that have not considered IRA Rollovers should consult their tax and investment advisors to analyze how this conversation can help preserve wealth for the family. For your estate planning needs and IRA consultations, as they relate to Trusts, Wills and beneficiary designations, please contact Jim Modrall 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.

Life Insurance Trusts - Alive or Dead?

2009-07-15T11:11:00.000-07:00

What About Life Insurance Trusts? Over the past several decades, insurance counselors, estate planning attorneys and CPA’s have counseled clients to create Irrevocable Life Insurances Trusts (ILITs) in order to exclude policy death benefits from the insured’s taxable estate. Typically, the insured would create an irrevocable trust with another person or bank as trustee. The trustee would purchase an insurance policy on the grantor’s life. The grantor/insured would continue paying premiums on the policy. Appropriate Crummey notices are sent to various beneficiaries granting them a limited withdrawal right in order to qualify the premium payments for the annual gift tax exclusion.

The trust would be the named beneficiary on the policy. At the death of the insured/grantor, the trustee of the trust would collect the death benefit (free of any estate taxes) and use the proceeds to benefit family and/or provide liquidity to the insured’s estate by purchasing assets which might otherwise be illiquid, such as real estate or interests in a family business.

Does Anybody Care About ILITs Now? With the federal estate tax exemption now $3.5 million per person, or $7.0 million for a married couple, does anyone still care about ILITs? The typical lawyers’ answer to that question is "it depends". For large estates where there will be a federal estate tax on values above $7.0 million, ILITs are still a valuable part of the estate planning arsenal. Of course, if the current "sunset" provisions of the estate tax law become effective starting in 2010, ILITs will become popular again, when the individual estate tax exemption reverts to $1.0 million in 2011 and thereafter. We consider this highly unlikely, as there are currently Bills pending in both the House and Senate to eliminate the "sunset" provision and extend the estate tax on large estates.

However, there are many existing ILITs currently in operation where administrative or financial problems arise.

Problem #1: The first problem we encounter is failure to send Crummey Notices and retain copies. Why is this important? The answer: if there is an estate tax audit, which would be normal for large estates, failure to observe formalities can result in either the inclusion of the death benefits in the insured’s taxable estate, or disqualifying annual premium payments for the annual exclusion, bringing back those amounts into the taxable estate, possibly with penalties for failure to file appropriate gift tax returns.

Problem #2: Problems often arise when an insured determines that he or she does not want to keep paying premiums or when the insured, and his or her advisors, determine that the policy held by the trust is no longer appropriate because death benefits are too high or too low or because cash values are either too high in relation to death benefits, or too low the carry the policy for the desired period of time in the event that premium payments cease. In addition, changes in actuarial tables sometimes mean that less expensive alternatives are available after the trust has been in effect for a few years.

A recent suit against Key Bank in Indiana highlights the hazards of such changes. Key Bank was the trustee of an ILIT holding an insurance policy on an insured in his early 50s with a death benefit of $8.0 million. Without going into detail, the insured decided either to stop paying premiums or pay a lower amount and reduce the death benefit to approximately $2.7 million. Fortunately, Key Bank, operating as the fiduciary, retained an independent consultant to evaluate the old policy and the new policy and the reasons for the change. The change was then implemented. You can imagine the consequences. The insured died unexpectedly. Naturally, the family, upset with the lower death benefits, sued Key Bank for breach of fiduciary duty.

Key Bank won the case, in large part because of their retention of an independent consultant to evaluate these changes. The beneficiaries were not consulted, probably because the trustee of an ILIT is normally tied to, or affiliated with, the insured rather than the beneficiaries. The bank was also assisted in its defense by the fact that death was unexpected and that the insured had passed other physical exams close to the time that these changes were implemented.

However, the case does emphasize a couple of important points about ILITs. First, circumstances change with respect to the insured, insurance premiums, and changes in personal and business financial situations. Second, is the competitive environment and the availability of new policies, sometimes on more favorable terms. Third, and this is important, is that part of the reason for obtaining life insurance in the first place is that death is uncertain. Normally, we don’t know when we are going to die. If we do know, it is usually too late make changes in insurance coverage. (This ignores the now popular "life settlement" market for large existing policies.)

Problem #3: Changes in the trustee. We have run into several instances where the trustee of an ILIT, for whatever reason, is not satisfactory to the insured or the insured’s family or, alternatively, resigns or dies. Changes in trustees sometimes require court approval. At one point several years ago it was difficult to find a bank which would act as trustee of an ILIT because of potential liability. Consequently, even for large insurance policies, individual trustees, lacking expertise in either trust administration or insurance, were appointed. Sometimes the trust does not contain provisions for filling the position of trustee, if a vacancy occurs, or a change is desired. In that case, a court petition is required.

Conclusion. Life is not certain and neither are ILITs. Great care should be taken in the administration of the trust, changes in policies, and the provisions of the trust relating to changing trustees. Banks and trust companies are now more willing to act as trustees, which provides some assurance that the formalities of administration and Crummey letters would be observed. Existing ILITs should be reviewed periodically by experienced attorneys, not just at the behest of an insurance advisor or agent. If you have an ILIT or are thinking of one, please contact Jim Modrall or any of the attorneys listed below for assistance in such review and evaluation.

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

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

SENIOR LIFE PRESERVER - REVERSE MORTGAGE?

2009-06-22T06:57:00.000-07:00

Introduction. The subject of this month’s newsletter is a brief discussion about Reverse Mortgages. First, what is a REVERSE MORTGAGE? It is a government insured mortgage available to seniors over the age of 62. There are no monthly payments! The loan is repaid from the sale of the house when the occupant dies or moves out. The mortgage proceeds can be used to pay off an existing mortgage, paid out in a lump sum, or paid in monthly installments. The borrower can choose combinations of the above uses of funds with the exception that any existing first mortgage has to be paid off first before funds can be disbursed to the borrower.

Background. A Reverse Mortgage is technically called a "Home Equity Conversion Mortgage (HECM). Searching Google.com, you are likely to wind up at the website for Fannie Mae or the Federal Housing Administration (FHA), a unit of the Department of Housing and Urban Development. As explained at some length in an article in the Wall Street Journal for Wednesday, June 10th, the maximum value of a principal residence that can be the subject of a Reverse Mortgage was raised to $625,500 in February. This may be an opening to unlock equity in more homes and provide more assistance to seniors needing help with the expenses of daily living. Similarly, because there is no monthly payment, a Reverse Mortgage may be a better financial decision than renting, for seniors who are down sizing. Because of this flexibility, Reverse Mortgages are rapidly increasing in popularity. The Wall Street Journal article of June 10th notes that the number of Reverse Mortgages jumped nearly 20% in the months of March and April, from the same period a year ago.

How Does It Work? Again, using the WSJ example, a senior owning a house worth $500,000, with a $50,000 balance might get a $250,000 reverse mortgage. With these funds, the first mortgage would be paid and the borrower would have $200,000 left to draw in a lump sum, a monthly payment, or a combination. Or, for example, a couple in their 70's who are down sizing, might sell an existing home for $450,000. Rather than paying cash for a smaller residence, they might decide to take $50,000 from the sale proceeds and buy a $200,000 condo using a Reverse Mortgage of $150,000. Thus, they would have no monthly mortgage payment, but would simply be paying taxes, maintenance and insurance on the new residence. A careful financial analysis might demonstrate that based on their health and circumstances, their financial outlay might be reduced by using a Reverse Mortgage, rather than renting at $1200-$1500 per month or more.

How Much Can I Borrow? The maximum amount available is based on a HUD formula. That formula takes into account the age of youngest borrower, assumed interest rate, and the appraised value of your house. If the appraised value is higher than the maximum insurable amount for our area, then the lower figure is used. The maximum insurable amount in Michigan is now $625,000.

The age of the youngest borrower (if there are co-borrowers) affects the amount one can borrow. For example, an 85 year old borrower (or youngest borrower) can borrow substantially more against the value of the house than a 65 year old borrower. The reason is obvious - the life expectancy of the older borrower is less and, therefore, the interest that accrues on the loan until the youngest borrower dies or moves, would be much less for an older person.

What Are the Fees Involved? There has been a lot of negative publicity about the fees that are incurred in Reverse Mortgages. The origination fee, payable to the lender, is limited to 2% on the first $200,000 and 1% on any amount over that, with a cap of $6,000. There is an insurance fee of 2% of the maximum claim amount, and an annual ongoing fee of 1/2 percent of the mortgage balance. In many cases, the origination fees for the lender and for the insurance are paid out of the loan. In some cases, we understand, the borrower has up-front fees. However, in our experience in counseling clients, we have generally seen the origination fees paid from the loan. That is, the fees are added to the loan balance due to the lender when the house is sold. These fees do add up and should be a consideration in the decision to use your home to augment retirement income. You will note that the federal rules require counseling and a full explanation of costs. Our local agency suggests shopping around, as fees may vary.

What If The Amount Owed Exceeds The Value Of The Home, Or The Sale Proceeds? There is no deficiency payable from the borrower’s estate, if the proceeds from the sale of the home are less than the amount owed. The lender cannot force the sale of the home so long as it is occupied as a principal residence. If the borrower moves out or dies, the borrower or the borrower’s estate generally has six months in which to sell the home before it has to be turned over to the lender. We understand that obtaining an additional six months extension for the sale is relatively easy to get. Again, this probably depends upon the amount owed in relation to the value of the property. In the event that the sale proceeds exceed the amount owed, the balance goes to the borrower’s estate or trust.

Will HUD Be Able To Honor The Insurance? With the decline in housing prices, there is some concern that certain Reverse Mortgages may wind up under water. However, HUD is collecting insurance premiums from all borrowers which will help defray all losses incurred by the lenders. As with any insurance program, losses are possible. However, HUD is building reserves to cover future losses. Current appraisals will take into account the decline in property values, so seniors exploring the Reverse Mortgage option now may find that they are not able to borrow as much as might have been possible two or three years ago.

What Is the Bottom Line? Reverse Mortgages are not for everyone. If a senior has already moved to assisted living, a nursing home, or moved in with relatives, this option is no longer available. We have found that the program is most appealing to older seniors, often in the 80's, whose fixed income from social security or pension benefits is being squeezed by increased expenses. Because of their age, they generally can borrow larger amounts against the equity in their homes. Reverse Mortgages, despite their up-front costs, can often permit seniors to stay in their homes and augment their income without having to sell the residence and move to a rental. Moreover, as we pointed out above, in some cases where seniors plan significant down sizing, a Reverse Mortgage may be an attractive option to eliminate a monthly mortgage payment on the new, smaller residence.

Reverse Mortgages can be part of overall estate planning for seniors, and need to be considered in relation to the borrower’s age, health and the possibility that Medicaid might be needed to pay for nursing home costs. A Reverse Mortgage is not a "one size fits all" solution, but can be a handy tool in estate and financial planning. If you have questions regarding these matters, or government assistance programs such as Medicaid or VA Benefits, please call Jim Modrall 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 and David H. Rowe 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.

SPECIAL DEAL ON LONG TERM CARE INSURANCE

2009-06-22T06:54:00.000-07:00

Long Term Care Insurance - Peace of Mind and Protection. As we have mentioned in prior newsletters, we estate planners typically recommend Long Term Care ("LTC") insurance for clients who want to protect their assets from the drain of long term care, whether provided in a nursing home or in the patient’s own home. The principle objections or obstacles to the purchase of long term care insurance is: (1) the cost; or,(2) bad health.

We have pointed out in previous newsletters that both cost and health conditions may be mitigated by single premium life insurance policy with an LTC rider. That is, excess liquid funds such as CD’s can be converted into an insurance policy with LTC benefits and a death benefit for family, in the event the LTC benefit is not needed.

Special Incentive. A recent article in the insurance section of the MainStreet.com newsletter of March 3, 2009 has called our attention to a special provision of the Pension Protection Act of 2006 ("PPA") that permits the conversion of existing life insurance policies or annuities to LTC insurance effective January 1, 2010 without income tax penalties.

Built-in Tax Penalties. Many clients have life insurance policies, often paid up, which have a potential income tax cost on the income build up in the policy, in the event the policy is cashed in during lifetime. Similarly, annuities - variable, fixed or combination - often have a built-in tax liability on accumulated income. Being able to acquire LTC insurance with a lump sum premium (the cash value of the life insurance policy or annuity) could be a good alternative for clients with existing contracts who want to protect their estates against the cost of long term care, whether home bound or nursing home.

New Products. MainStreet.com points out that insurers are currently designing policies to meet the demand for the tax free exchanges permitted by PPA. Heretofore, a single premium life insurance with LTC benefit has been a popular option for clients who have liquid assets and are young enough or healthy enough to qualify for a single premium policy.

Keep in touch with your insurance advisor to stay informed of new products which may be offered later this year with LTC benefits that are attractive. These products may mirror some of the special features of existing single pay policies such as return of premium and/or death benefit in addition to LTC coverage. MainStreet.com estimates that new policies will probably provide for single premiums of $50,000-$200,000, depending on the benefits chosen, age, etc.

Why LTC Insurance? Long term care needs are a fact of life for many of us as we live longer. Statistics show that of people reaching the age of 85, 50% will have some form of mental deficiency such as Dementia, Parkinson’s, Alzheimer’s, or related brain dysfunctions. While the term "nursing home" has bad connotations, my personal experiences have been that nursing home care may not only be a necessity but a blessing for both the patient and family members. Care giving chores for dementia patients can become onerous for individual care givers and beyond the abilities of many. Many patients do better in a nursing home with continual company and attention as opposed to many hours of solitude in their own surroundings.

Moreover, we have seen the benefits of long term care insurance in helping patients to remain at home as long as possible by providing a care giver with much-needed assistance.

Many clients recognize the benefits of long term care insurance but are either too old or unhealthy to qualify or, alternatively, state that they cannot afford the premiums. We advise clients to investigate LTC coverage before age 70. The new tax free exchange provisions of PPA may provide just the incentive many people need to acquire LTC coverage on a tax advantaged basis and thereby protect assets from the devastation of nursing home costs, should an extended period of nursing home care be required.

If you have any questions concerning long term care insurance, Medicaid planning or your estate planning, please contact Jim Modrall or any of the attorneys listed below.

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

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

DIVORCE TRAP

2009-06-22T06:50:00.000-07:00

Have You Been Divorced or Do You Have Friends Who Have Been Divorced? Hardly anyone I know could avoid a yes answer to either of these alternative questions. Divorce has become a common part of our daily lives.

The recent decision of the United State Supreme Court involving a divorced decedent and his retirement plan highlights at the highest level a problem that we as trust and estate attorneys see frequently.

The Kennedy Facts. William Kennedy worked for DuPont. He named his wife as beneficiary of his retirement plan, with no contingent beneficiary. William and his wife divorced with a provision in the divorce decree divesting his wife, Liv, of her interest in William’s retirement plan. This is a common provision in divorce decrees and settlement agreements.

You can guess what happened. William did not file a change of beneficiary before he died. DuPont or the plan administrator paid the balance of the retirement funds to Liv. William’s Personal Representative, his daughter, filed suit against DuPont for improper payment of the plan benefit based on several legal arguments. The estate won in the District Court. The Circuit Court reversed, holding that Liv was the beneficiary under the plan and that the plan administrator was therefore bound to pay the benefits to her. Going all the way to the United States Supreme Court, the Circuit Court was affirmed. Payment to Liv, the ex-wife, was proper despite the divorce decree. The Supreme Court did not mention any rights that the estate might have against Liv to recover the funds already paid.

Divorce Settlements Can Be Confusing. As mentioned above, it is a common provision in divorce decrees and property settlements that the respective parties either relinquish any interest as a spouse in the other’s retirement plan, or sometimes when the retirement plan assets are large and disproportionate, the divorce decree and settlement provides for an assignment to the less advantaged spouse of a portion of the other spouse’s retirement plan under what is called a QDRO, a Court Order dividing a qualified retirement plan and permitted by federal law.

In addition to retirement plan benefits, typically divorce decrees and property settlements have specific provisions relating to life insurance policies and the obligation of the spouse/owner to continue a beneficiary designation or permitting a change of beneficiary. Michigan law (and also the laws of other states) provides that a divorce nullifies a spousal beneficiary designation. Problems arise where no action has been taken to formally change the designation of a divorced spouse as primary beneficiary prior to the death of the insured.

The difference between life insurance and retirement plans, however, is that federal law trumps state law where certain qualified retirement plans are concerned, as was stressed by the US Supreme Court in the Kennedy v. DuPont case.

Result for the Decedent’s Estate. Both situations involving retirement plans and life insurance (or annuities, as the case may be), with an intervening divorce, are a ripe area for litigation, and possible loss by the decedent’s estate, children, or subsequent spouse. The situation arises because of the failure of the spouse who is the owner of the retirement plan or insurance policy to carry through with the terms of a divorce and change the beneficiary designation. Whether this is the fault of the individual or the individual’s attorney, can be debated in each case based on facts and circumstances. This lack of attention to housekeeping details can be disastrous and is a common source of litigation. The insurance company or retirement plan administrator does not mind paying out the death benefit, it just does not want to pay out twice.

The moral of the Kennedy case and similar situations is that divorced individuals should pay attention to the details of their property settlements and divorce decrees and make sure that each item requiring attention has been attended to, including deeds, title transfers and beneficiary designations.

Often, unfortunately, after a long, difficult divorce proceeding, the parties are so relieved to have it finished that they neglect the details of implementing the agreement. If you have been divorced, check again to make sure that all of the property divisions agreed to have been accomplished including beneficiary designations. If you have friends who have been divorced, you might remind them of the Kennedy case and suggest that they attend to their own details to make sure that their families are not subjected to the expense and delay of litigation to say nothing of the possible lost resources.

Conclusion. Divorce plays an important role in estate planning and needs to be carefully considered when the estate plan of each spouse is reviewed and updated. If you have a need for a review or update of your estate planning documents, with or without references to a divorce decree, please contact Jim Modrall or any of the attorneys listed below.

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

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

Anatomical Gifts - Recent Developments

2009-04-06T13:16:00.000-07:00

Michigan Expands Laws. Effective May 1, 2008, Michigan adopted the Revised Uniform Anatomical Gift Law, which amended, expanded and replaced many of the provisions of the original 1978 statute.

Drivers licenses and the Secretary of State’s Registry have been the primary method for expressing willingness to make an anatomical gift at death. Paramedics and ambulance crews are experienced in reviewing the back of your drivers license to see if there is any indication of a willingness a make an anatomical gift. However, let’s face it, most of us don’t like to think about this subject. I would venture a guess that very few people have made a donor intent known by inscribing the back of their drivers license and, more probably, have not registered with the Secretary of State for electronic recording of a willingness to make an anatomical gift.

Expression By Will. Our Estate Planning Questionnaire contains a space for indicating a desire to make an anatomical gift at death. Frankly, a relatively small percentage of clients make such wishes known in their Will.
　
The new statute broadly defines a document of gift to include donor card or "other record used to make an anatomical gift", which would include a Will.

In the event of an accident, or in the event of many medical interventions, a donor’s Will simply is not available. Its contents may not be known to family and friends, much less hospital and doctors.

How To Address the Problem. The new statute, MCL 333.10112 makes it mandatory for any person rendering medical assistance to make a reasonable search of an individual for indication of donor intent or refusal. This obligation is imposed on medical professionals, hospitals, law enforcement officers, fire fighters, doctors or other emergency rescuers. This new provision does not impose civil or criminal liability so has no practical teeth.

From an estate planning standpoint, however, the important point is make donorative intent, if any, known to medical professionals and the family. Generally, clients who want to make anatomical gifts have strong feelings on the subject. Those intentions may or may not be made known to spouses, children or other friends and relatives.
　
Medical Power of Attorney. It appears, therefore, that clients who have a serious intent for anatomical donations at death should:

1) Make a notation on their drivers license.

2) Register with the Secretary of State.

3) Alternatively, or including any of the above, make a specific provision in his or her Will.

4) Finally, if the only action taken is a provision in a Will or Codicil, we recommend a provision in the Medical Power of Attorney (Patient Advocate Designation) making known that there is an anatomical gift provision in the patient’s Will. Typically, if there is a hospital stay, the Patient Advocate Designation is available and referred to.

Recommendation. Refer to your Medical Power of Attorney, whether the printed form such as Five Wishes or the document drafted by us. If you have a serious intent to make an anatomical gift, in the event of death, make sure your MPOA has a reference to your intention and your Will, if you have made provisions there of your intentions to make an anatomical gift.

Decisions by Relatives. The new Michigan statute has an expanded list of individuals who are authorized to make anatomical gifts at death, provided there is no clear intention that a decedent has refused to make such gifts or has issued instructions barring any anatomical gifts, whether for transplants or research. Similarly, the new law contains provisions for oral instruction, positive or negative, and the revocation of previous instruction.

　
Moreover, the new law contains provisions for reconciling any differences that might occur between the administration of care and potential medical treatments.

Gruesome Subject. We realize that this is not a typical subject for dinner table conversation. However, it is receiving increasing attention as a result of medical advances. If your feelings are strong one way or the other about organ donations, we suggest we make your wishes known in your Will or Codicil and in your Medical Power of Attorney. For many people, this is not a subject of concern and debate. However, if this is a matter of concern to you and you wish to add an anatomical provisions to your Will and/or to your Medical Power of Attorney, we will be happy to assist you and prepare the necessary documentation for nominal fee of $50 for simple provisions.

If you have any other matters of concern concerning your existing estate planning documents, please contact Jim Modrall or any of the attorneys listed below.

©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
*These articles are meant strictly for informational purposes. Nothing contained therein should be construed as legal advice.

All In The Family

2009-02-09T13:48:00.000-08:00

Introduction. The purpose of our newsletter is to inform readers of what we think are interesting developments in the estate planning and elder law areas. Occasionally, related income tax developments come to our attention which we think some readers might find interesting.

What is a "Family"? A recent decision of the Tax Court in the Leonard case involves an interesting court decision on what constitutes a family for income tax purposes. We are all aware of the dependency deduction. The dependent deduction shows up boldly on the income tax return. However, there are other income tax issues that are directly affected by the financial arrangements involving a group of individuals, related or not, residing in a common residence.
While this may not affect our readers directly, you may be aware of friends or other members of your family who may have similar circumstances.

Danita Leonard Facts. Danita Leonard was an unmarried individual with full time employment. She provided 80% of the household expenses for her roommate, her roommate’s two grandchildren, and herself.

On her federal income tax return for 2005 she claimed:

1) head of household status;
2) adjusted gross income under $30,000;
3) a dependency deduction for her roommate and her roommate’s grandchildren;
4) child care credit;
5) child tax credit;
6) unearned income credit.

(She also claimed an education credit for college courses she took in connection with her employment, an issue not germane to our discussion here.)

The IRS challenged all of the items for which Danita claimed eligibility. It is of great interest that Danita represented herself all the way to the Tax Court, which ruled that Danita was:

1)entitled to head of household status;
2)entitled to claim a dependency exemption for her roommate;
3)entitled to claim dependency exemptions for the grandchildren of the roommate, because each was qualified as a qualifying relative;
4) not entitled to a child tax credit;
5) not eligible for the earned income credit;
6) eligible the education tax credit.

Comments We credit Attorney Marc Soss, a contributor to our estate planning newsletter from Leimburg Services with bringing this case to our attention. The case was entered under Section 7463(b), which means that it cannot be claimed as a precedent in other cases. However, practitioners in family law and estate planning may well use the principles enunciated in this case in advising people about the income tax benefits of various living and expense sharing arrangements.

Brief Review. To qualify for "Head of Household" treatment, a taxpayer must not be married or a surviving spouse at the close the taxable year. Moreover, the taxpayer has to have a dependent living in the home as the dependent’s "principal place of abode". Without getting into specifics and technicalities, the Tax Court found that one or more of the persons living in Danita Leonard’s house, for which she was providing the principal support, qualified as dependents under IRC Section 152. In fact, the Court determined that Leonard’s roommate and the roommates two minor grandchildren were dependents.

Conclusion. The purpose of highlighting the Leonard decision is to point out that there are many living arrangements involving individuals related or unrelated who care for minor children. While many such living arrangements involve taxpayers at or near the poverty level, often individuals with more substantial incomes provide such support. All "these un-conventional families" need to study the possible tax benefits of "head of household" status.

We would also express respect and admiration for the taxpayer, Danita Leonard, who pursued and argued her own case in front of the Court. For the more specific references for readers, friends or advisors, we refer them to Leonard v. Commissioner, TC Summary Opinion, 2008-141.

We hope you find this comment of interest and further hope that it may find applicability among the members of your family, friends or acquaintances.

If you have questions concerning estate planning matters, including elder law or medicaid eligibility, please contact Jim Modrall 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 and David H. Rowe 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.

Gifts - To Report Or Not To Report

2009-01-29T07:34:00.000-08:00

Introduction. Gifting is a fundamental part of our culture. Gifts to charitable organizations are typically reported on income tax returns where itemized deductions are claimed. Reporting on charitable gifts, especially of property other than cash, is a separate subject not covered by this newsletter.

Other the other hand, gifts for the benefit of family members are part of our culture and a key component of estate planning recommendations.

Quick Review. The annual gift tax exclusion is now $13,000 per year per donee. In other words, a single person can gift $13,000 to each of two children, for a total $26,000 in 2009. If each child is married and the spouse appears on the check, annual exclusion gifts would double to $52,000.

Present Interest. In order to qualify for the annual exclusion, the gift has to be a present interest such as cash or property. Gifts in trust typically do not qualify for the annual exclusion because full enjoyment is delayed by the terms of the trust. An exception to this rule would be trusts for minors under section 2503(c) of the IRC, or gifts under UTMA - the Uniform Transfers to Minors Act. In each of these cases,enjoyment of the property has to be transferred to the donee by age 21. The minor’s social security number is typically used on the account and any taxable income on the principal of the gift has to be reported on the minor’s income tax return.

When Should Annual Exclusion Gifts Be Reported on a Form 709 - Federal Gift Tax Return? If a spouse consents to treat half of the gift as being made by the non-donating spouse, the split gift with the consent of the non-donating spouse has to be reported on a Form 709, even if the gifts are annual exclusion gifts. Often this requirement is ignored because these are tax-free gifts, and the taxpayers expect that there is no penalty for failure to report. Moreover, taxpayers generally do not like to pay for filing tax returns that they consider unnecessary.

Potentially Taxable Estates. Who’s to know whether there will be a federal estate tax at death or at the death of a surviving spouse? The estate tax exemption is $3.5 million per person for 2009. Under current law, the estate tax goes away in 2010 and returns with the vengeance 2011. As we have indicated in other newsletters, our expectation is that exemption will continue at $3.5 million per person after 2009 (or possibly higher) when Congress addresses these tax issues in their overall review of tax legislation that is expected this year under the new administration.

Therefore, we advise higher net worth clients, with total marital assets in excess of $7.0 million, or $3.5 million for single individuals, to conduct their affairs and file information returns with the IRS to avoid future controversies and unnecessary taxes in the future. This especially means filing Form 709 for purposes of making disclosure to the IRS and starting the three year statute of limitations running so that gifting will not be challenged by the IRS many years in the future in connection with estate tax audits.

Lifetime Exemption. The lifetime exemption for tax-free gifts is currently $1.0 million per person (in addition to qualified annual exclusion gifts). Many higher net worth clients are taking advantage of this exemption by making gifts of appreciating property usually in trust. These gifts should always be reported on Form 709, along with proper appraisals if the property is other than cash or listed securities.

Section 529 Plans. Establishing qualified tuition plans (QTP or Section 529 Plans) offers the possibility of pre-funding annual exclusion gifts for five years. Thus, $65,000 can be contributed to a Section 529 Plan for each beneficiary. The contribution is allocated rateably over the five years and should be reported on a Form 709 Gift Tax Return. If a donor dies within the five year period, any unabsorbed portion of the exclusion is brought back to the taxable estate of the donor, if any. Despite this boomerang provision, we recommend pre-funding Section 529 Education Plans for grandchildren or great grandchildren as an essential and valuable part of estate planning techniques.

Crummey Withdrawals. A familiar technique for gifts in trust, especially life insurance trusts, is to give a potential beneficiary a limited right to withdraw a portion of the annual contribution so that such withdrawal amount can be counted against the annual exclusion gift for that donor and donee. Crummey Withdrawal provisions are another important weapon in the estate planner’s arsenal and can accomplish substantial estate tax reductions, assuming that a donor’s net worth puts him, her or them in the position of potential estate tax in the future. As with other types of specially qualified gifts, we recommend that Crummey Gifts be disclosed on Form 709, even though no tax is due, to prevent future attacks by the IRS.

Conclusion. If you have questions concerning gifting as part of tax saving strategies, or strategies for transferring wealth to future generations, please call Jim Modrall 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 and David H. Rowe 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.

King Henry VIII and Queen Elizabeth Repealed

2008-11-26T07:09:00.000-08:00

History Changed. Would you believe that 500 years after the death of Queen Elizabeth Michigan has taken its first steps to eliminate a medieval carryover into our laws of trusts and estates? This old relic is called the Rule Against Perpetuities (RAP).

What is the RAP? The Rule Against Perpetuities - RAP - was established in medieval England to prevent property from being tied up in trusts forever. Since land was the principal form of wealth in medieval days, the ruling monarchs and parliament decided that it was against public policy to prevent alienation of real estate indefinitely. By alienation we mean sale or other transfer of ownership. In other words, there was concern that estates, land primarily, would be held in a trust forever which could be uneconomical or unproductive and thereby contrary to the welfare of society and the country. These medieval rules were carried over into American common and statutory laws. From your history books you might recall that the laws of most states originated with the common law and statutes that existed in England when most of the early settlors came to North America. When the laws regarding property were codified in statute, most states adopted some version of the English RAP. The RAP regulates the length of time that a trust can be in existence. In Michigan, it was generally limited to a maximum of 90 years, or the longest life of a beneficiary living at the time of the Trust, plus 21 years.

Many States Have Repealed RAP For Competitive Reasons. Starting with such states as Alaska, South Dakota and Delaware, states have begun repealing RAP as the rationale for limiting the life of a trust has become less tied to land and more involved with securities and business interests of various types. Moreover, since trusts typically buy and sell property, real estate as well as securities, state legislatures have decided that there is no strong public policy to restrict the period of time, or number of generations, that a trust can be existence.

Some states have inserted a ridiculously long period of time such as 1,000 years. Others have eliminated RAP completely. In Michigan, the legislature in 2008 has split the baby in Public Acts 148 and 149.

Michigan’s Solution. Effective May 28, 2008, the RAP was abolished with respect to personal property held in trust. This would include all financial instruments, corporate shares, bonds, etc. It is now possible in Michigan to have a trust holding personal property exist in perpetuity.

What About Real Estate? For some reason, the legislature did not make a sweeping abolition of RAP. The elimination expressly applies only to personal property. This is a strange distinction in our modern era because real estate can be held by a corporation or an LLC, the shares or membership interests of which are classified as personal property. Therefore, it is easy to hold real estate in perpetuity by transferring title to a separate entity such as a corporation or LLC.

What Difference Does This Make to Most Clients? Some clients, wealthy or not so wealthy, want to establish trusts for future generations which will not be subject to estate or inheritance taxes. These are sometimes called "dynasty" trusts. Generally, these trusts are identified with the super wealthy families such as Ford, Kennedy, Rockefeller, etc.

Now with many states removing the barrier to perpetual trusts, Michigan trustees and residents found themselves at a disadvantage when contrasted with other states where perpetual trusts can be established. Now that disadvantage has disappeared for trusts that were revocable on May 28, 2008, or are created after that date. However, perpetual trusts are a favorite topic of writers in the financial press. Michigan trusts are no longer disadvantaged for those residents who want to explore this option.

We find relatively little interest in perpetual trusts among our clients. This may be because of the typical Midwestern conservative values and the desire not to control family wealth from the grave forever. Conclusion. Whether you have any interest in a dynasty trust or want to explore the possibility, or desire any help with your estate planning needs, please call Jim Modrall or any of the attorneys listed below.

Brandt, Fisher, Alward & Pezzetti, P.C.

This newsletter is for informational purposes only and is not intended as legal advice.

Important Homestead News

2008-10-03T06:08:00.000-07:00

Good News From Lansing. These days it is hard to find good news in Lansing or Washington when it comes to taxes. However, in 2008 Public Acts 96 and 198, the Michigan legislature addressed the dilemma of homeowners who have put their houses up for sale and moved out.

Homestead Status. Michigan taxpayers are familiar with a Homestead exemption for their principal residence, which usually is worth a savings of 18 mils on their property tax bills - approximately half of the total potential tax burden for most taxpayers. We deal regularly with questions from clients about Homestead status, who can claim it and how. Most homeowners are familiar with the Homestead Affidavit, filed with the local assessor, to establish the Homestead exemption - sometimes called the Principal Residence Exemption (PRE).

Homestead Rescission. Michigan law requires that a property owner is required to rescind the PRE within 90 days after the property is no longer used as a principal residence, i.e when the owner moves out. Homestead status is determined on a calendar year basis. Normally, the PRE will be in effect for the taxable year in which the property is transferred or is no longer the principal residence. So, if a person moves out and/or rescinds the PRE during 2008, for example, the PRE status is generally maintained for the 2008 tax year. Prior to the 2008 amendments, an owner moving out of a home listed for sale in 2008 would lose the homestead exemption for the tax year 2009. If the owner failed to file the Notice of Rescission, continuing the exemption for 2009, the owner could be liable for penalties. For example, clients moving to a smaller residence or moving out of state in 2008 could be on the hook for a much large tax bill in 2009 and subsequent years until the property sells. (If a person moved out of their home in 2007, the PRE would be lost for 2008.)

Conditional Rescission. The 2008 statutory amendments to MCL 211.7cc.(5) are now permitted to file a Conditional Rescission Notice affirming that PRE property is not occupied, is for sale, is not leased and is not used for a business or commercial purpose. A new Department of Treasury form 4640 has been issued for this purpose. The statute requires it to be filed annually prior to December 31 in order to maintain the PRE for the next tax year. The statutory amendments states that an owner may retain an exemption "for not more than 3 tax years on property previously exempt ...".

While it is not completely clear how the 3 tax years are determined, it would appear that a homeowner moving out in 2008 and filing a conditional rescission prior to December 31, 2008, would be able to keep the PRE in effect for tax years, 2009, 2010 and 2011, if the property is unoccupied, listed for sale, and not leased during that period of time. (Let’s hope that the property owner in question has priced the property at a reasonable enough level to sell within that period of time.) Similarly, an owner who moved out in 2007 can get retroactive relief for 2008 under the new law, but the owner needs to act promptly.

Conclusion. The conditional rescission and continuation of the homestead exemption is a great tax break for the many Michigan residents who have been forced to move as a result of a lay-off or transfer. It also benefits retired property owners who have moved and have their residences listed for sale. It can be especially beneficial if the client has moved within the State of Michigan and can now claim two properties for the PRE, pending the sale of a previous homestead property. The new law has a critical time element for owners seeking relief for 2008. Relief should be sought before the December Board of Review meeting.

If you have questions pertaining to the PRE, estate planning or your property tax classifications or valuations, please call Jim Modrall or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660

©BRANDT, FISHER, ALWARD & ROY, P.C.

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

Urgent News Re: Charitable Trusts

2008-07-18T10:35:00.000-07:00

Charitable Lead Annuity Trust. A Charitable Lead Annuity Trust ("CLAT") is a charitable trust designed to pass significant wealth to the next generation without transfer tax. The CLAT was publicized after the death of Jacqueline Kennedy Onassis who had reportedly established a CLAT in her will or revocable trust for the benefit of her children.
Basically, the idea of a CLAT is to provide for sufficient annual payments from the trust to a charity over a period of years so that the remainder gift to children, at the end of the term, has a tax value of zero or close to it.
How Does This Work? I was alerted to the impact that the rapidly changing interest rates will have on a zero gift CLAT. Each month the IRS publishes the applicable interest rate for the next month based on Federal mid-term interest rates. For example, the applicable rate for May was 3.2%. For June and July, 2008 the rate is 3.8%, and for August, 2008 the rate is 4.2%. In calculating the value of the remainder gift to family, the IRS assumes that the earnings of the trust will be equal to the applicable interest rate ("AFR").
Example. Suppose $1 million is transferred to a twenty year CLAT with annual payments to a family foundation (or a public charity) at the May AFR of 3.2%. The annual payment to the charity from the $1 million trust would be $68,464.54 for a 20 year trust. Using the May AFR of 3.2%, the taxable gift would be zero. If the trust earns more than 3.2% there will be a tax free remainder at the end of the twenty year term. For example, if the trust earns 6.85%, the earnings will exceed the payments to charity and there will be $1 million remaining after 20 years. If the trust earns more than 6.85%, the remainder value will be greater than $1 million .
Similarly, if the trust earns less than 3.2% there will be no remaining assets for family. (How many financial advisors tell their clients that they can expect to earn less than 3.2% on their portfolio over a twenty year period?)
Why The Urgency? The IRS regulations permit the grantor of the trust to use the AFR for the month of the transfer or either of the two previous months. Thus, a CLAT done before the end of July, 2008 will qualify for the 3.2% rate.
Why is this important? If the grantor delays until August when the lowest AFR is 3.8%, the annual payment to charity would have to be $72,284.63 for the 20 year term in order to have a zero gift. That is a difference of $3,820.09 per year to accomplish the same result, a taxable gift valued at zero.
Using a compound growth rate of 5% for 20 years, that saving would amount to $126,312 (assuming an annuity in arrears). As they say, "this ain’t chicken feed!"
What Is The Benefit? Why would a client want to do a CLAT in the first place? First, this interests clients who are pretty sure to have an estate tax at death. That is, clients that have total assets more than $3.5 million (the exemption in effect for 2009 and likely to be in effect in the future).
Second, clients may have a charity or private foundation that they want to benefit. We have done CLATs benefitting both family foundations and public charities where there is a strong charitable interest.
Third, we have had clients who want to delay distributions of wealth to family members for various reasons. Among them are maturity of grandchildren, retirement funds for children, or delays for reasons of divorce credit or claims, etc. (Delays can also be useful in the case of incarcerated relatives but we assume that no readers of this newsletter would fall into that category.)
More On CLATS.
We have talked about why people would use a CLAT. CLATs come in two flavors. In the most commonly used CLAT in our experience, the donor does not claim an income tax deduction, but the trust gets an income tax deduction for all the payments to the charity. The alternate form provides a charitable deduction for the discounted value of the charitable payments, but the trust is taxed on the income. In either case the objective is the same: payments to a charity and a tax free gift to children at the end of the term.
In some cases clients may elect to use several CLATs of different terms if part of the objective is to use up the taxable gift exemption of $1 million, for example, by reducing the annual payments to charity, the length of the trust term, or some combination of both.
Conclusion. There is not a lot of time left to set up a CLAT before the end of July, 2008. However, with another jump in interest rates imminent, there is still a substantial advantage to a trust established in August, 2008, using the June rate of 3.8%. A CLAT can be an important estate planning tool for wealthy clients with a charitable intent. (There is an especially strong reason to use a CLAT if a client has a Private Foundation where the client’s family will retain an element of control over the activities of the Foundation.) You don’t have to be a Ford or a Rockefeller to establish a Private Foundation!
If you or your clients are interested in exploring the CLAT, or the organization of a Private Foundation, please call Jim Modrall or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Saving The Cottage

2008-07-11T10:38:00.000-07:00

How Should the Cottage Be Preserved for the Family? In advising clients about "keeping the cottage in the family", I learned one thing - there is no one-size-fits-all. "Cottage" is a term we use in general to refer to a family’s "up north" property which has been enjoyed by at least two generations and usually more. There is often a great deal of emotion involved in the senior generation about trying to preserve family ownership of the property for use by grandchildren and later generations.
The practical aspects of how and whether a cottage is going to be "kept in the family" is a complicated challenge with many considerations.
How Should Family Ownership be Continued? When the senior generation is gone, the decision about continued family ownership and enjoyment usually comes down to consideration of many factors, among them:
Type of ownership
Property tax considerations
Income tax planning
Usage
Decision making - possible future sale
Ownership. Continued family ownership of the property involves a discussion of the pros and cons of ownership in one of three forms:
1) Trust
2) LLC (limited liability company)
3) Joint ownership
Of these joint ownership is generally the least satisfactory. Ownership as JTWROS - joint tenancy with right of survivorship - is often unsatisfactory became unanimity is required. Fractional ownership - tenancy in common - is generally ruled out because one owner can force a sale of the property.
Between ownership by a Trust and an LLC, there are arguments in favor of each. The LLC can provide for transferrable interests, but a property held by an LLC can never be a "homestead" for Michigan property tax purposes. A beneficiary of a Trust, on the other hand, can claim the homestead exemption if, in fact, the individual occupies the property. (This occupancy does not have to be exclusive.)
Property Tax Considerations. Property taxes are a major concern because of the uncapping of taxable value when the owner, or survivor of a married couple, dies. Although clients tell me that the SEV on lake front property has declined in the last year or so, the SEV is still much higher than the taxable value in the most instances. In considering property taxes, the homestead exemption is especially important and in many instances there is some member of the family who can claim the property as homestead. Continued ownership of the property is the often crafted around this objective, in order to keep long range property taxes at a minimum.
Income Taxes. The income tax aspect of a continued ownership needs to be reviewed. Property taxes and interest are generally deductible on individual tax returns. Usage fees are not deductible and consideration needs to be given whether contributions toward expenses are treated as usage fees or loans. If loans, are the loans to be secured or unsecured?
Expenses of Operation. Consideration needs to be given to how the property expenses are to be funded. Will there be an endowment that the parents provide and, if so, how long will the endowment last? In this respect, parents sometimes decide to endow the continued ownership for a limited period of operation - often three to five years so that the family has time and flexibility to decide how continued family ownership and operation will be handled.
If an endowment is not provided, then some mechanism of providing for usage fees or loans needs to be considered.
Decision Making - Property Usage. In considering continued family ownership, the senior generation needs to give thought to how decisions on property usage and operation are to be made. Is there a committee or board and, if so, how is that group chosen? Decisions have to be made on priority of usage. Is this going to be on a rotation basis, determined by lot, or some combination thereof?
Decision Making - Sale. Generally, the decision on sale is sometimes deferred until an exploratory period has passed. Some provisions generally are made for sale of the property some time in the future by a majority or super majority vote. This can be either on a per capita basis or on a family basis. In the latter case, for example, if there are four children, does each family have a 25% vote? If so, does a family have to vote its entire interest as a whole to prevent a splintering of a family interest? While these questions appear to be a little academic, they often provoke active discussions among family members as to how important decisions like sale of the family cottage are to be made. Needless to say, the articulation of the voting mechanics can get quite complicated, either in the case of ownership by Trust or an LLC.
Conclusion. Continued enjoyment of the cottage by a family, after the senior generation is gone is often an important estate planning challenge with many considerations and alternatives. If your cottage trust needs review, or if one of your clients inquires about making provisions of continued family ownership of the cottage, please call Jim Modrall or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660 ©BRANDT, FISHER, ALWARD & ROY, P.C.This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Retirement Accounts - Smart Planning Can Save Big Money

2008-06-27T10:29:00.001-07:00

Meeting with a client recently reminded me of a topic that we have explored before. That is, smart tax planning for retirement accounts.
In particular, in this case, both husband and wife had both IRA accounts and 401K Plan accounts. This particular family had other assets including a family business and two residences. They intended to make charitable gifts at the second death using their trusts as the vehicle for disposition of property at that time. The second point that was raised involved retirement income or rather cash for current living expenses. Charitable Gifting. It always makes the most sense to use retirement plans to implement charitable gifts at death. This is the most tax efficient way to benefit a favorite charitable, religious or educational organization. The nonprofit entity can liquidate its share of the plan without paying any income tax. If the charitable gift had simply been made from the trust, an individual beneficiary would have been stuck with income taxes of 30% or more on withdrawing the same sum from the retirement plan.
How does one implement a charitable gift of a retirement account? Assuming that the charitable gift is to be made at death, the charity is named as a beneficiary. Normally, the charity would be listed for a fixed percentage. The plan sponsor might permit a percentage with a cap or a fixed amount.
Another alternative is to set up a separate retirement plan, by making a transfer from an existing IRA, for example, with the charity as the sole beneficiary. This is probably the cleanest and simplest way to plan for charitable gifting. The amount in the charitable IRA account can be regulated by withdrawals, or maintained by taking distributions from other plan accounts. Sometimes a client will provide in his or her trust that the charitable gift be augmented if the IRA account is less than a specified amount.
If the charity is named as only one of the beneficiaries of a plan, the family should be aware that there are time limits on making the distribution to charity after the death of the account owner. Otherwise, the stretch feature for the individual beneficiaries may be lost. This is another good reason for using a separate account for charitable gifting.
Important Reminder. This discussion brings up another point that married couples sometimes forget. For example, if a couple intends that their church or university is to get a gift of $50,000 at death, they should make sure that the spouse with the largest retirement plan take steps to be sure that the gift is made at the death of the account owner. Otherwise, the surviving spouse is likely to roll the account into her own IRA with beneficiaries that she can change at any time. (Assuming, the wife is the survivor, which is generally the assumption made in commentaries like this.) We have seen charitable intentions defeated often by inaction, intentional or unintentional, by the surviving spouse. Income Tax Planning During Lifetime. Another useful way to reduce income tax is to carefully plan distributions from retirement accounts so as to take no more than the Minimum Required Distribution (MRD). This should be done by using income and/or principal from other investments to meet current living costs. As any income tax advisor can attest, income tax planning for seniors can be a delicate matter.
Tax on social security benefits can be a huge variable for many people who do not have significant pension income and live off investments, social security and retirement plans.
Financial planners and other income tax advisors should study their client’s investment portfolio and income sources to devise strategies for minimizing retirement plan withdrawals and income taxes in general. Many times cash for current needs can be provided from principal (not taxable income). This can reduce or eliminate income tax on social security.
For example, couples with a substantial investment portfolio can use annuities and other vehicles to defer the recognition of capital gains and ordinary income. This can reduce taxable income and avoid income tax on social security payments. Remember the old adage, "don’t pay income taxes unless you have to!".
If you have charitable intentions and want expert advice on integrating those goals with your overall estate, or if you want to discuss more effective use of your assets, please call Jim Modrall or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

The Case For Asset Protection

2008-06-05T08:40:00.000-07:00

What Is Asset Protection? The subject of asset protection is receiving a lot of attention these days. Clients often read articles in newspapers and magazines about the need for asset protection and there are promoters selling various schemes for protecting assets from creditors. Usually, the "creditors" are plaintiffs who sue for astronomical damages as a result of negligence or wrongful death. We have implemented various strategies for clients with business exposures. Asset protection and these various strategies have been the subject of prior newsletters. A recent Massachusetts case carries the issue of personal liability to an extreme. Bad Facts. The case was a lawsuit against Dr. Roland Florio who had been treating a patient named Sacca for several years. Dr. Florio and other physicians prescribed cancer medications for Sacca. Dr. Florio advised Mr. Sacca that he could not drive while taking medications. When treatment was competed, Dr. Florio had informed Mr. Sacca that it was safe for him to drive again. Apparently, Mr. Sacca continued certain medications.
A couple of years after the cancer treatment had begun, Mr. Sacca passed out at the wheel and killed a ten year old boy on the sidewalk. The boy’s administratrix sued not only the estate of Mr. Sacca, who died a few months later, but Dr. Florio personally on grounds of negligence.
Dr. Florio’s response was that he only owed a duty to his patient, Sacca, and did not have any duty to any one else, including the ten year old pedestrian. Dr. Florio’s Motion for Summary Judgment was granted by the lower court.
The Massachusetts Supreme Court held that there was a duty to the young boy under the theory of common law negligence. That is, a doctor has a duty to warn a patient of the side effects of a drug, such as dizziness or fainting.
In other words, the Court stated that Dr. Florio’s duty was to warn his patient, Sacca, of potential side effects and the risks of driving while taking the medication. The case was sent back to the lower court for further proceedings. Those proceedings would establish what actions that were taken or not taken by Dr. Florio. In other words, the assumption in a Motion for Summary Judgment or Motion to Dismiss is that even if the Plaintiff’s allegations are correct, there is no potential liability.
Where Do We Go From Here? The broad expansion of the doctrine endorsed by the Massachusetts Supreme Court could lead to far reaching results, probably not intended by statute or case law. For example, would there be liability under Massachusetts law if the patient had consulted a doctor in Ohio? What about the usual side effect warnings that come with all prescriptions?
So far, Michigan Courts have been willing to limit liability to third parties, but no one can give assurances that liability won’t be expanded. Liability to third parties is well established, for example, in the case of automobiles where a third party is injured. That is, GM’s duty of care to the auto buyer/operator would probably extend in many states to the person injured by an exploding gas tank or faulty brakes.
These expansions of liability make Asset Protection a primary priority for many people who are in the manufacturing or service business. Unfortunately, clients don’t plan in advance for protection, but rather arrive at an attorney’s office after an accident or claim has arisen. That is usually too late!
If you, a client or friend wish to explore the parameters of this field and the various protective mechanisms, please call Jim Modrall or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660 ©BRANDT, FISHER, ALWARD & ROY, P.C.This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Whither Goeth The Estate Tax?

2008-03-27T13:45:00.000-07:00

Estate Tax -Yes or No?. One of the biggest frustrations of estate planners the past few years has been planning for potential estate taxes. The exemption, of course, has been rising, now $2 million and increasing to $3.5 million in 2009. However, the sunset provisions of the large exemptions and the regression to $1 million in 2011 have been a cause of concern.

We advised clients that despite the impasse in Congress, there was movement to increase the exemption and establish a permanent rate in the August 2006 legislation. This was dropped at the last minute because of lack of agreement on the tax rate.

Now we have an election year, a recession, rising deficits, and a costly war. We have been advising clients that the likely compromise will be a personal exemption $3.5 to $5 million per person with some compromise rate of 35 percent (45 percent is the current rate).

Latest Senate Budget Resolution. Conrad Teitell, a leading tax authority on philanthropy and charitable planning, has just released his summary of the latest Senate Budget Resolution. Amendment 4160 was the only estate tax amendment to pass. It would make the 2009 law permanent - a $3.5 million exemption ($7 million per couple) with a 45 percent flat rate. This amendment passed 99 to 1!

Amendment 4160 and the Budget Resolution do not constitute law, but are only the Senate’s intentions regarding the budget.

Mr. Teitell points out that five other amendments were offered but not passed:

Amendment 4170 (exemption per couple $15 million, 35 percent rate) rejected 47 to 52.

Amendment 4191 (exemption $10 million per couple, rate starts at 15 percent, top rate 35 percent) rejected 50 to 50.

Amendment 4372 (special protection for small businesses, ranches, and farms with a $5 million exemption, a lower rate for smaller estates, and a maximum rate of 35 percent) rejected 48 to 50.

Amendment 4196 (exemption $10 million per couple, $5 million per person, rate 35 percent) rejected 38 to 72.

Amendment 4378 (exemption $10 million per couple, $5 million per person, 35 percent flat rate with a small surcharge for large estates, special breaks for small businesses, farms, and ranches) rejected 23 to 77.

Senate Finance Committee. We understand that a third hearing on estate tax revision is scheduled by the Senate Finance Committee in April. At its March 12, 2008 hearing the Committee heard testimony about possible substitutes for the current estate tax system. We have no advance indication of the agenda of an April meeting. However, considering the current gridlock in Congress and the election controversies, it seems to this writer that a compromise on the estate tax is the easy way out, if Congress is going to resolve the mess at all before the election.

Stay Tuned. The winds of Washington blow in strange directions. It is hazardous to predict an outcome in our current environment. However, it is somewhat comforting from a planner’s perspective to have near unanimous Senate approval of an amendment which would basically freeze the 2009 tax provisions.

My guess is that wholesale estate tax reform will probably go the way of wholesale reform of the income tax (a lot of talk and no action). However, who’s to tell. Political prognostication is not my forte. Let’s just hope we get some Congressional action before November.

If you wish to consider estate tax planning or any other matters concerning wills, trusts, or probate, please call Jim Modrall or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660

©BRANDT, FISHER, ALWARD & ROY, P.C.

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

Too Good To Be True

2008-02-28T12:47:00.000-08:00

Introduction. This newsletter is slightly off topic. I give credit to one of the authors of my email estate planning newsletter for bringing the subject to my attention.

Zero Tax. It is hard to believe, but there were provisions in the 2003 and 2005 tax laws to provide for zero tax on net capital gains and qualified dividend income in the years 2008, 2009 and 2010. Who gets this tax plum?

Taxpayers who fall into either the 10% or 15% federal income tax bracket (without the addition of capital gains or qualified dividends) are likely candidates for zero federal tax gains.

Keep on Reading. At first blush you may not think you would fit into this category, but read on. There may be ways to take advantage of zero tax.

1) The first thought of transferring appreciated securities to kids who would be in a low tax bracket has been blocked by broadening the "kiddie tax" extending the age of a child/recipient to age 19 or age 24, for a student still dependent on parents.

2) However, you may have an adult child (out of college) who falls into the 10 or 15% bracket. You can gift appreciated securities to that child, who can then sell them with zero tax.

3) If you help support a parent or other family member, using appreciated securities, you may be able to take advantage of the zero tax rules for 2008.

4) US service members deployed to combat zones would be good candidates either to sell securities or receive gifts of appreciated securities which can be sold.

5) Explore other ways to reduce your taxable income, if you want to take advantage of this benefit.

Techniques to Reduce Taxable Income. If you are interested in exploring the possibilities of reducing your tax bracket to take advantage of the zero tax, you should go over the various alternatives with your income tax advisor or financial planner to see if there is a way to qualify for this zero tax benefit. Some methods used by clients to reduce taxable income (and especially to reduce income taxes on social security) could include some of the following techniques:

1) Use investment vehicles such as variable annuities by which income tax can be deferred.

2) Use segregated principal for living expenses.

3) Reduce withdrawals from retirement plans.

4) Maximize tax deductible contributions to retirement plans (not an itemized deduction, but a subtraction from gross income), utilize tax loss carry backs or carry forwards to reduce your tax bracket.

Negatives. There are down sides to be considered in income tax planning, of course. These include:

1) Capital gains income might trigger taxation of a non-taxed social security benefit.

2) A parent might be faced with disposing of the gifted funds in qualifying for Medicaid.

3) A student might find extra money jeopardizing eligibility for financial aid.

Conclusion. The subject of this month’s newsletter does not pertain directly to estate planning and thus is a little bit out of my area. However, I thought you might find this to be an interesting subject and possible cause to sit down with your financial planner or income tax advisor to see if any of the possible applications of zero tax can benefit you or members of your family. One bright spot in this whole process is that transaction costs for stock sales can be very cheap. Moreover, the wash sale rule does not apply so that the same security that is sold to recognize gain can be immediately repurchased at a higher cost basis.

Maybe this newsletter will trigger a flash of inspiration, with some ideas that might be applicable to the situation of you, a member of your family, or a friend.

In the meantime, if you have estate planning needs or have friends or family members who require consultation for estate planning or Medicaid eligibility, please don’t hesitate to contact Jim Modrall or any of the attorneys listed below.

©BRANDT, FISHER, ALWARD & ROY, P.C.

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

The Death Monster

2008-01-09T12:56:00.000-08:00

Identity Theft. This is a common worry for all of us, based on the tremendous publicity about protecting social security numbers and bank accounts. Perhaps you have had personal experiences of unauthorized exploitations of your own identity and assets.

A recent email caught my attention because it dealt with identity theft of a deceased person.

What is Involved? If there is a scam involving use of a credit card or social security number of a deceased person, the decedent is obviously not in a position to care. However, the decedent=s estate, trust or spouse could be involved in an unpleasant mess. As you are no doubt aware, the time and sometimes expense of sorting out an unauthorized credit card purchase or bank account withdrawal can be aggravating. If professional help from an accountant or attorney is used, that will mean an out of pocket expense.

A joint credit card account is an especially dangerous target because a surviving spouse may have to fight off the collection efforts for unauthorized expenditures. In our practice we see the effect that such collection efforts have on a surviving spouse who is the typical target on a creditor collection, whether the spouse is a joint signer or not.

Other Scams. It is always possible that a thief may seek to use an identity and social security number for immigration purposes, as a cover for other illegal activities or simply as an alias.

Some Suggested Steps. Typically in our area, a funeral home will notify Social Security immediately in the event of a death. It is important to verify that this has been done. Similarly, we would recommend notifying the credit reporting agencies of the death, so that the credit files are immediately brought up to date. For the record, the agencies and phone numbers are:

Equifax - 888-766-0008

Transunion - 800-680-7289

Experian - 888-397-3742

Many people caution about being too detailed in the decedent=s obituary such as giving exact dates and places of birth. Certainly, given a decedent=s age and birth location, anyone choosing to probe deeply, particularly via the internet, would be able to locate a birth certificate. Again, I would think that notification of the Social Security Administration and the credit reporting agencies would be the principal deterrent to exploitation of a decedent=s identify.

Other Experiences. I recently received two absolutely authentic-looking emails from a bank where I maintain an account. These communications, with the appropriate bank logo, stated there were irregularities in the account and that the account could be Asuspended@ unless I contacted them. Fortunately, the response link was blocked and I never made communication with the sender. When I contacted the bank=s customer service office, I found out that the emails were forged and were an attempt by someone to get by account information. This information could then be used to make charges against the account by telephone. Needless to say, I was upset at both receiving the emails and at learning that they were fraudulent.

Several years ago, I had two unauthorized telephone withdrawals from accounts at a different bank. After the second one, I closed the account on recommendation of the bank. (Which stood the loss in each case.) My experiences involved very minor amounts of money. Friends have told me of unauthorized charges on their credit cards of $5,000-$20,000 in two different instances. Sometimes the banks pick up these charges, but sometimes they slip through bank security and it is up to the cardholder to find them in their monthly statements.

Moral of the Story. Be sure to be wary of emails asking for personal or financial information. Make sure that you and your family are vigilant about clearing the credit history of any deceased member of your family to avoid aggravation, time and expense. Check your credit card bills carefully to discover any unauthorized activity.

If we can be of any assistance in estate planning or probate for you, family members, friends or relatives, please contact Jim Modrall or any of the attorneys listed below.

©BRANDT, FISHER, ALWARD & ROY, P.C.

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

Estate Taxes and Life Insurance

2007-12-07T11:03:00.000-08:00

This newsletter is a summary of the September edition of my estate planning email newsletter which contained statistics relating to both life insurance and estate tax returns.

Estate Tax Returns. As you would probably suspect from the fact that the individual estate tax exemption has risen to $2.0 million per person, the number of estate tax returns filed fell from about 108,000 in 2001 to 45,000 in 2005. That number is undoubtedly lower for 2006 because the exemption is now increased to $2.0 million per person.

Estate tax revenue, however, dropped by a much smaller percentage, from $23.5 billion in 2001 to $21.6 billion in 2005. Again, as you would suspect, an increasingly high percentage of the estate taxes paid came from larger estates.

The report notes that revenue for federal estate and gift taxes has ranged from 1% to 2% of federal budget receipts since World War II. Since Congress has adopted the pay-go policy (assigned revenue sources to replace tax reductions), what do you think of the chances that the estate tax will be repealed?

Life Insurance. The subject of life insurance is a confusing and touchy one. The Life Insurance Marketing Association (LIMRA) has some interesting statistics on the subject.

We deal with life insurance in an estate and Medicaid planning context. We sometimes review life insurance coverage from the standpoint of estate liquidity (for taxes and debts) and not so much from the standpoint of income replacement.

Income replacement is a common reason for younger persons to buy life insurance (in addition to the group insurance from their employment). LIMRA reported that 75% of married couples with children under 18 buy life insurance to replace lost income.

LIMRA also says that 43% of parents want life insurance to pay off the mortgage on their home.

In our experience, there are three principal deterrents to the purchase of life insurance:

1) Cost. Even though term insurance rates have been falling, many parents are concerned with the cost of life insurance protection.

2) Lack of Knowledge. LIMRA states that 50% of persons surveyed don’t know how much insurance to buy.

3) Confusion. Parents find the subject of life insurance very confusing, probably because of the different products available.

Advice for Young Parents. Many readers of this newsletter would not be classified as young parents. However, many readers have children or grandchildren in this category. You can provide a valuable service to these loved ones by discussing the matter of life insurance protection and sharing your knowledge about it.

Young persons typically have term insurance. The cost is low in relation to the amount of the death benefit. This is especially important for parents before their children finish college. The expenses of education, mortgage payments and income replacement can be staggering at that phase of life. Typically, for most people with average health, the cost of term insurance is not prohibitive. The consequences of inadequate insurance for parents in this stage of life can be devastating.

Tax Advantages. The tax advantages of life insurance are designed for more sophisticated, higher net worth individuals. Life insurance is tax advantaged because the build up in the contract is not subject to income taxes. That build up, sometimes called cash surrender value (CSV) can be a valuable source of liquidity in later years. Individuals or couples in high tax brackets, but still under the age of 60, can use the tax saver provisions of life insurance for asset build up, especially if the contract and death benefits are protected with an Irrevocable Life Insurance Trust (ILIT).

Conclusion. As all of you know, we do not sell life insurance. However, we see examples of good estate planning using life insurance everyday. Properly designed ILITs provide tax efficient vehicles for transfers of wealth from one generation to the next. Life insurance contracts, in their various iterations, permit accumulation of income, dividends and capital appreciation without income tax or estate tax.

We suspect that one of the reasons that more people do not use this device is the problem of confusion about life insurance products and all of the variations thereof. Another problem is the discipline of paying annual premiums by contributions to the Trust and the attention to the detail of the Crummey notices each year. However, most investment advisors recommend the "slow and steady" approach to wealth accumulation and this also applies to wealth transfer.

We suggest that you consult younger family members about the benefits of life insurance for income protection and that you and your colleagues who have concerns about wealth transfer and/or estate taxes seriously consider ILIT’s to accomplish significant wealth transfers in one of the most tax efficient ways possible.

If we can be of any assistance in consultations regarding ILITs, please contact Jim Modrall III or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H. Douglas Shepherd, Karin Church and Laura E. Garneau at (231) 941-9660

©BRANDT, FISHER, ALWARD & ROY, P.C.

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