Taxpayer Wins Uncapping Case

Joint Tenants Are Happy. Property owners are universally unhappy that the taxable value of their property gets "uncapped" at death. In the case of a married couple, the property gets uncapped at the second death, with taxable value rising to fair market value for the year after the second death.
A popular tactic in the circumstances has been for a husband and wife to execute a deed transferring the property to husband, wife and child, as joint tenants with full rights of survivorship. Alternatively, if husband dies first, wife can do the same thing, transferring the property to herself and son, as joint tenants.
The Michigan Department of Treasury has taken the position that in the circumstances described above, the property is uncapped when wife dies (the second death), unless the son was a joint owner in 1994, when the new property tax laws were enacted.

New Case. These were essentially the facts in a recent decision by the Michigan Court of Appeals in Klooster v. City of Charlevoix, decided December 15, 2009.
In Klooster, husband and wife, James and Donna Klooster, owned property as tenants by the entireties. In August, 2004, Donna quit claimed her interest to James. On the same day, James, the sole owner, quit claimed his property to himself and their son, Nathan Klooster, as joint tenants, with rights of survivorship.
James died in January, 2005. Then in September, 2005, Nathan executed a quit claim deed, creating a joint tenancy with rights of survivorship with his brother, Charles Klooster. The City of Charlevoix asserted in 2006 that the property had become uncapped at the death of James in 2005 and that the taxable value was to be uncapped, approximately doubling.
The Michigan Tax Tribunal affirmed the decision by the Assessor and the Board of Review that uncapping had occurred.
The question before the Court of Appeals was whether James' death was a "transfer of ownership", as defined by the Michigan statutes. Unfortunately, the specific sections of the statute are ambiguous.
Many practitioners throughout Michigan have observed this ambiguity and have assisted in the creation of joint tenancies, usually between parents and children, in the hope of avoiding an uncapping when the last parent dies.
Without getting into the technicalities of the Court's analysis of the statutory language, we would note that the analysis by the Court of Appeals will probably be challenged on appeal to the Michigan Supreme Court.

Trustworthy Decision? At this point, it is too early to say what the Michigan Supreme Court will decide and whether the Michigan legislature will address this potential loophole and clarify the language of the statute.
If the Klooster decision is upheld by the Supreme Court, taxpayers are faced with the further questions whether any legislative fix could be retroactive to joint tenancies created prior to a statutory change.
We have employed this strategy for clients on occasion, with the caveat that the Michigan Department of Treasury has consistently taken the position, in the facts outlined above, that the property gets uncapped at the parent's death.
Should clients rush out and attempt to do the same thing to forestall uncapping? That raises another question, "what is the downside of trying?" Depending on the facts involved, there may not be much downside from clients trying to get in under the wire, where the facts are clear and where the creation of a joint tenancy fits in with the overall estate plan.

Stay Tuned. To paraphrase Yogi Berra, "it ain't over till it's over."
If you have questions concerning uncapping, joint tenancy and integration with your overall estate plan, please call Jim Modrall or Tom Pezzetti or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660

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

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

WHAT A MESS!

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

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

But apparently, the unthinkable has happened. Congress has not taken any action to delay, prevent or terminate the Sunset Provisions in current law. In other words, 2010 will bring a complete lapse of estate taxes and a return to the $1.0 million individual exemption in 2011.

Consequences. Remember that the gift tax is still effect. If nothing is done to restore the estate tax, persons dying in 2010 will have a completely different legal matrix applicable to their estate. The good news is that there will be no estate tax.

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

There are exemptions for carry over basis, in particular as to assets allocated to a spouse. The purpose of this newsletter is not to go into detail about the technicalities of this law. Congress tried carry over basis years ago and found it to be unworkable.

What About My Estate Plan? Most traditional Wills and Revocable Trusts have some division of the Trust at death, usually called an A/B Trust formula. The interpretation of these formulas, if someone dies in 2010 without an applicable estate tax, will be up in the air.

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

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

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

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

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

The dilemma can certainly be solved. The timing is an issue. Please call Jim Modrall, Tom Pezzetti if you wish to schedule an appointment to discuss this matter and the status of your current documents. Alternatively, contact any of the attorneys listed below.

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

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

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

Gifting - Who Gives and Who Gets?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trusts - New Michigan Rules

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2010 - Your IRS Get Out Of Jail Free Card

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?

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.

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.

SENIOR LIFE PRESERVER - REVERSE MORTGAGE?

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.