Anatomical Gifts - Recent Developments

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.

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.
*These articles are meant strictly for informational purposes. Nothing contained therein should be construed as legal advice.

All In The Family

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

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

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.

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

Important Homestead News

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

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

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.