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GANDELOT HARTMANN Law Blog

Tuesday, October 21, 2014

Year End Estate Planning Tip #1 – Check Your Estate Tax Planning

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season.  One area that married couples should revisit is their estate tax planning.

 

Do You Still Have “AB Trust” Planning in Your Estate Plan?

 If you’re married and you haven’t had your estate plan reviewed since before January 2, 2013, by an experienced estate planning lawyer, then pull your documents out of the drawer, dust them off, and take a closer look at their trust provisions.  Do they contain terms such as “Marital Trust,” “QTIP Trust,” “Spousal Trust,” “A Trust,” “Family Trust,” “Credit Shelter Trust,” or “B Trust”? 

 If so, then your revocable trust contains estate tax planning provisions that were required in most estate plans before January 2, 2013.  Now, you may not need this type of planning since the federal estate tax exemption has been fixed at $5 million per person adjusted for inflation (the exemption is $5.34 million in 2014 and expected to increase to $5.42 million in 2015). 

 Aside from this, the federal estate tax exemption is also “portable” between married couples (including legally married same-sex couples), meaning that when one of a married couple dies, the survivor may be able to get the right to use their deceased spouse’s unused estate tax exemption and so, without any complicated estate tax planning, pass $10 million+ to the deceased spouse’s heirs and the survivor’s heirs federal estate-tax free.

 

Do You Still Need “AB Trust” Planning in Your Estate Plan?

 With that said, do you still need to include “AB Trust” estate tax planning in your estate plan?  The answer to this question depends on several factors, including:

 

  • Are the combined estates of you and your spouse under $5 million?If the combined value of the estates of you and your spouse is under $5 million, then you will not need to worry about federal estate taxes (at least for now).Nonetheless, there may be other reasons to keep your “AB Trust” planning in place as discussed below.

     

  • Does your state still collect a state estate tax?– If your state still collects a state estate tax and your state’s exemption is less than the federal exemption, then “AB Trust” planning (or perhaps “ABC Trust” planning) may be required to defer payment of both state estate taxes and federal estate taxes until after the death of the surviving spouse.(Note that this will not be the case in Delaware and Hawaii since the exemptions in these states currently match the federal exemption.The exemptions in Maryland and New York will also match the federal exemption in the future, but not until 2019.)

     

  • Do you and your spouse have different final beneficiaries of your estates?If you and your spouse have different final beneficiaries of your estates (for example, you want your estate to ultimately pass to your children while your spouse wants their estate to ultimately pass to their siblings or their children), then “AB Trust” planning may be necessary to insure that the final estate planning goals of each spouse are met.

     

  • Do you and your spouse want to create a dynasty trust that will continue for many generations?Even if the combined value of the estates of you and your spouse is under $10 million, if you want to take advantage of both spouses’ generation-skipping transfer tax (“GSTT”) exemptions to create a lasting legacy for future generations, then “AB Trust” planning may be appropriate because the GSTT exemption is not portable between married spouses.In other words, if the combined values of the estates of you and your spouse is $10 million or less, then you may want to keep “AB Trust” planning in your estate plan so that you can fully use each spouse’s GSTT exemption for a dynasty trust for the benefit of your children, their children, and their children’s children.

 

In addition, there are many other factors and options to consider that an experienced estate planning attorney can explain.

 

What Should You Do?

 If you’re married and your current estate plan includes “AB Trust” planning but you’re not sure if you should keep it in your plan, then make an appointment with an experienced estate planning attorney to discuss all of your options.



Wednesday, September 4, 2013

Planning For Incapacity and Long-Term Care

With people living longer due to advances in medicine and changes in lifestyle, odds are that most of us will become disabled for some time before we die and may need long-term care. Unfortunately, too few plan for an event that is more likely to be a probability than a possibility—and the consequences of not planning can be disastrous for all involved.

When someone owns assets in his/her name and becomes unable to manage financial affairs due to mental or physical incapacity, only a court appointee can sign for the disabled person. This is true even if the person has a will, because a will can only go into effect after death. With some assets, especially real estate, all owners must sign to sell or refinance. So, for example, if a married couple owns their assets jointly, one of them becomes disabled and an asset needs to be sold or refinanced, the well spouse will have to go through the probate court in order for that to happen.

This is called a “living probate” because it is similar to the probate process at death but the person is still alive. It can be costly, time consuming and cumbersome with annual accountings, bonds, reports, ongoing determinations of incapacity/incompetency, and fees for attorneys, accountants, doctors and guardians. All costs are paid from the disabled person’s assets, and all assets and proceedings become part of the public probate record. A living probate usually lasts until the person recovers or dies which, depending on his/her age when the disability begins, can be years.

A fully funded revocable living trust avoids a living probate. When a living trust is established, the titles of assets are changed from the individual’s name to the name of the trustee. This is called “funding” the trust. If the trust has been fully funded (all titles changed) and the person becomes unable to conduct business, there is no reason for a living probate because the disabled person does not own any assets in his/her name. The successor trustee, hand-picked when the trust is created, can automatically step in without court interference and manage the disabled person’s financial affairs—selling or refinancing assets to help pay for his/her care and the care of loved ones, or keeping the owner’s business going—for as long as needed.

Other necessary documents include:

*    Durable Limited Power of Attorney, whichallows the successor trustee to transfer to the trust assets that may have been overlooked, and to manage assets (like IRAs) that cannot be put into a living trust;

*    Durable Power of Attorney for Heath Care, which gives another person legal authority to make health care decisions (including life and death decisions) if you are unable to make them for yourself.

*    HIPPA Affidavits, which give written consent for doctors to discuss your medical situation with others, including family members, loved ones and your successor trustee(s).

Planning for disability may also include disability income insurance (to help replace lost income), and long term care insurance (to help cover the costs of care that are not covered by medical insurance). Business owners may want to consider business or professional overhead insurance that will pay monthly operating expenses until they recover or the business can be sold or transferred, and buy-sell agreements in the event a co-owner becomes permanently disabled.

Disability before death is not always expected and it does not always happen, but it must be planned for.

 


Sunday, May 5, 2013

A Baker’s Dozen Ways to Make a Mess of Your Estate Plan

1.  Believing that a Will Avoids Probate.

Many people think that having a will is going to avoid probate.  In fact, the opposite is true.  In order for a will to be effective, the Will-maker has to die.  After the Will-maker’s death the will then has to be presented and “admitted” to the probate court.

If the Will-maker is not deceased, but is disabled, the will is of no use.  In such case the probate court will appoint a “guardian” to look after the disabled person and a “conservator” to manage the assets.  All of the probate court’s involvement requires attorneys, costs money and results in delays.

2.  Believing that Estate Planning is a Single Transaction.

We often review wills and trusts of new clients who come to us with documents that are 10-15 years old or older.  In the time between the signing of the documents and their visit with us, the client’s assets have changed in both value and composition, their family dynamics are different (marriages, births, deaths, divorces,etc).  Further, the estate tax and other laws effecting estate planning are in a constant state of change.  Finally, those individuals or institutions nominated as trustees, personal representatives, health care advocates and agents under powers of attorney may have moved away or fallen out of favor with the clients.

Our office takes the position that estate planning is a process, not an event.  In order for an estate plan to work efficiently is must be constantly updated to reflect current laws, family situations and asset values.  Just as you would not think of buying a new car and drive it for ten years without changing the oil or getting the engine tuned, you should not let your estate plan get “stale”.

We strongly recommend that our clients see us every year.  At the request of a number of our clients, we have developed the Estate Maintenance Program.  Clients who enroll in this program receive annual reviews with an attorney in our office.  At this session we review the entire estate plan, including trusts, wills, asset values and allocation, health care directive and patient advocates, and powers of attorney.  We review the current estate planning laws and discuss how those laws may impact the client’s individual estate plan.

3.  Relying on Jointly Held Real Estate to Pass Title to Children

Imagine Mom and Dad own their home in joint names and Dad dies.  By virtue of the joint tenancy (or “tenancy by the entireties” as it is called in Michigan), Mom is now the sole owner of the home.  There was no probate and no estate taxes were due because Dad could leave his wife an unlimited amount.

Mom then goes to a lawyer she found in the Yellow Pages to inquire how she can title the house so her two children can own it after she is gone.  The local lawyer is a well-meaning counselor, but not well informed in tax and estate planning law.  He advises Mom to sign a “quit claim” deed, putting herself and each of her children on the title to the house as “joint tenants with rights of survivorship”.  This could be a very expensive mistake, for a number of reasons:

First, when Mom puts the house in joint names with her children, she has made a gift, under the provisions of the Internal Revenue Code.

Second, in the event either of the children is sued, files for bankruptcy or gets a divorce, Mom could lose her house, as creditors, divorcing spouses and bankruptcy trustees have the right to lien the house and foreclose on that lien.

Third, after Mom dies and providing neither of the children have lived in the house for two full years, the children will lose the $250,000 exemption on the gain on the sale of the home.  Each child may have to pay a large capital gain tax when the home is sold.

4.  Giving the Entire Estate to a Surviving Spouse without Considering Estate Tax Consequences.

Consider that Husband and Wife both have wills in which each gives the other their entire estate and upon the death of the survivor, to their children, in equal shares. These are what we call “I love you” wills.  Assume that Husband dies and his entire estate is transferred to Wife under the terms of the Will, so that Wife now owns an estate worth $1.5 million.  If wife dies after January 1, 2011 when the federal estate tax exemption is $1 million, Wife’s estate will owe taxes on the excess $500,000, and the tax rate is 55%.  The failure to plan will cost the children $275,000 in taxes.

A better way to plan would have been for Husband to have left some or all of his estate in a trust for his Wife, thereby using his exemption from estate tax ($1 million beginning in 2011).  Even though Husband’s estate was in trust, his Wife had the funds available for her lifetime, but those assets would not be taxed in her estate at her death.

5.  Thinking “That Won’t Happen in my Family

We have heard this phrase hundreds of times.  We tell our clients they should write down their wishes regarding health care decisions, distribution of their personal property and funeral/burial/cremation wishes.  The reason we make these recommendations is to avoid family disputes after a death or severe illness.  Most people assume their loved ones will not get into disagreements over the wishes of a parent who can no longer speak for him/herself.

People tend to remember what they want to remember or may try to imagine what Mom or Dad wanted in the way of a funeral or who was to receive the grandfather clock in the foyer.  Decisions must be made at or near the time of death when emotions are sometimes raw.  In second marriage situations, often the wishes of the children from the first marriage are a polar opposite with those of the second spouse.

This is why our Estate Planning Portfolios contain sections for Distributions of Tangible Personal Property, Memorial Instructions, Health Care Directions and other information designed to let loved ones know your wishes and to help smooth the waters at a stressful time. A famous philosopher once said: “The palest ink is better than the best memory”.  Write it down and save your loved ones from more grief.

6.  Failure to Protect Children’s Inheritances from their Creditors, Lawsuits and Divorces.

There is a relatively simple way to guard your children’s and grandchildren’s inheritances from possible creditors, lawsuits and divorces.  Rather than leave the inheritance to loved ones outright, you can provide that the each child’s inheritance be held in a trust for his/her benefit.  The funds in the trust can be available to the child for nearly any purpose you determine to be worthwhile.  However, in the event the child is faced with creditor problems, a lawsuit or divorce, the assets that are in the trust can be protected from the claims of those seeking to attach the inheritance.

7.  Failure to Leave Detailed Instructions for Health Care.

Experts tell us that we are seven times greater that we will become incapacitated within the next year, rather than die.  Yet most people do not have up-to-date instructions to a “patient advocate” detailing at what point they would want life support to be provided or discontinued.

Further, studies have shown that when the detailed health care instructions are needed they are not available in approximately 75% of the situations.  The patient may not have told his/her loved ones where the document was located, or may even have forgotten that one existed.  Each of our clients has either a DocuBank™ or Legal Directives™ wallet card. This card is carried next to their health insurance card and is to be given to the hospital in the event of a life threatening illness or accident.  The hospital dials a toll-free telephone number and the health care directions and health care release are faxed to the hospital within a few minutes.  And the documents are available anywhere in the world – 24 hours a day, 7 days a week.

8.  Not Informing Your Loved Ones of the Existence of Your Estate Planning Documents.

In our experience, most of the disagreements that arise after a death could have been avoided if the deceased had left detailed instructions for funeral and memorial, disposition of personal property (jewelry, art work, etc.), desires for end-of-life health care, and explained the basics of the estate plan with loved ones.  We believe its best to share estate planning information with those who will be left behind.  They should know where the documents are located, who will be in charge when a disability or death occurs, and the general provisions of the estate plan.  They should also know who they should call in such an emergency.

9.  Not Having Gifting Powers in a Durable Power of Attorney.

A case before the IRS illustrates this issue.

George was on his death bed and his son was looking for ways to reduce his taxable estate.  George had given his son a durable power of attorney, giving the son broad powers to do a number of financial transactions, but it did not specifically give him the power to make gifts.

The son made a series of $13,000 gifts to reduce George’s taxable estate, using the annual gift tax exclusion.  After George died, the IRS successfully argued that the gifts were not proper because they were not specifically authorized in the power of attorney.  Therefore, the estate was not reduced, thereby increasing the taxes due on George’s estate.

Most powers of attorney do not contain specific authorization for the agent to make gifts.  Make certain you review your powers of attorney with your estate planning attorney to determine if gifting powers are included.

10.  Failure to Hire an Expert.

Almost all attorneys know how to draft a will.  That doesn’t mean they are experts at estate planning.  Even the so-called “simple” estate needs to be carefully planned.  We frequently see the work of well-meaning attorneys who do not understand the adverse tax consequences of putting a home in joint names with a child as a way to avoid probate.  Most lawyers use form documents that give the clients very few options, so the attorney doesn’t spend the time to really learn about the clients and their family, and explain the options available to them.

A well qualified estate planning attorney will concentrate first and foremost on the hopes, fears, dreams and aspirations of the clients and their families and only thereafter consider the tax and administrative costs that can be reduced or eliminated.  Such expert planning will give peace of mind to the clients and their loved ones.

11.  Failure to Make Proper Beneficiary Designations.

Designating a beneficiary of a life insurance policy or retirement plan seems like a simple task, requiring little thought.  Nothing could be further from the truth.  We generally recommend that the Living Trust be the beneficiary of life insurance, but that is not a hard and fast rule.  Each situation is unique and requires careful analysis and judgment.

Beneficiaries of retirement plans are even more difficult to determine.  Most clients want to avoid paying the income tax on retirement plan distributions for as long as possible.  They also want to avoid paying estate taxes on their retirement plans when they die.  There is no simple “one size fits all” solution to designating beneficiaries for such plans.  Further, it is important to review the beneficiary designations periodically in light of changing laws and family dynamics.

12.  Doing Nothing Until Congress “Finally” Decides on the Estate Tax Law.

For the past 10 years, Congress has failed to agree on the estate and gift tax.  While this has caused much confusion among estate planning attorneys, it is not a reason to avoid planning.  Tax savings is generally not the most important consideration in estate planning.  Taking care of family and loved ones is far more important than tax savings to most people.

Further, the one certain constant we have always had in the tax code is change.  The estate and gift tax laws have changed dozens of times in the past 40 years.  Waiting for a “final” tax law is just not going to happen.  A better approach is to prepare a plan that meets your needs today and then review the plan as circumstances and tax laws change.      

13.  Failing to Think About Charitable Giving.

Those who keep such statistics tell us that 95% of people give to charity while living and yet only about 5% leave a gift to charity at death. Why is this so?  Most people think of their family as their “favorite charity” and believe that they should pass as much as possible to the family.  Also, they may think that a relatively small amount to a charity won’t make a difference.  Both of these assumptions are incorrect.  It’s actually easier to leave a gift at death, since the charitable gift will generally be a small percentage of your total estate. 

It is amazing what a number of small gifts can do for a charity.  Most after-death gifts to churches are between $5,000 and $10,000 – an easy amount to leave at death.  Small gifts to a college or university, when added to other similar gifts, can provide scholarships to needy students, or will help a researcher in breakthroughs in medical science.

Leaving a legacy gift to a charity does not need to take a great deal away from your family.  It will give you a sense of pride that you have perpetuated your giving even after you are gone. 


Thursday, February 21, 2013

Eight Estate Planning Things to Do Before You Travel

Before any trip, most of us create a “to-do list” of things we have put off and want to take care of before we leave. Here is a checklist of estate planning things to do before you take your next trip. Taking care of these will help you travel with peace of mind, knowing that if you don’t return due to serious illness or death, you have made things much easier for those you love.

1. Have your estate planning done. If you have been procrastinating about your estate planning, use your next trip as your deadline to finally get this done. Be sure to allow adequate time to get your estate plan completed in advance of your trip.

2. Review and update your existing estate plan. Revisions should be made any time there are changes in family (birth, death, marriage, divorce, remarriage), finances, tax laws, or if a trustee or executor can no longer serve. Again, be sure to allow enough time to have the changes made.

3. Review titles and beneficiary designations. If you have a living trust and did not finish changing titles and/or beneficiary designations, now is the time to do so. If a beneficiary has died or if you are divorced, change these immediately. If a beneficiary is incapacitated or a minor, set up a trust for this person and name the trust as beneficiary to prevent the court from taking control of the proceeds.

4. Review your plan for minor children. If you haven’t named a guardian who is able and willing to serve and something happens to you, the court will decide who will raise your kids without your input. If you have named a guardian, consider if this person is still the best choice. Name a back-up in case your first choice cannot serve. Select someone responsible to manage the inheritance.

5. Secure or review incapacity documents. Everyone over the age of 18 needs to have these: 1) Durable Power of Attorney for Heath Care, which gives another person legal authority to make health care decisions (including life and death decisions) for you if you are unable to make them for yourself; and 2) HIPPA Authorizations, which give written consent for doctors to discuss your medical situation with others, including family members.

6. Review your insurance. Check the amount of your life insurance coverage and see if it still meets your family’s needs. Consider getting long-term care insurance to help pay for the costs of long-term care (and preserve your assets for your family) in the event you and/or your spouse should need it due to illness or injury.

7. Organize your accounts and documents. It used to be that we could just point to a file cabinet and say everything was “in there.” But now so much is done online that there may not even be a paper trail. Make a list of ALL of your accounts, where they are located, and the user names and passwords, then review and update it before each trip. Print a hard copy in case your computer is stolen or crashes and let someone you trust know where to find it. Clean up your computer desktop and put your financial and other important files where they can be easily found. Make a back-up copy in case your computer is stolen or crashes, and let someone know where to find it. Be sure to include on your master list any passwords that might be needed to access your computer and files.

8. Talk to your children about your plan. You don’t have to show them financial statements, but you can discuss in general terms what you are planning and why, especially when any changes are made. The more they understand your plan, the more likely they are to accept it—and that will help to avoid discord after you are gone.


Tuesday, January 22, 2013

The American Taxpayer Relief Act of 2012- What It Means For You

As you probably know, Congress avoided the so-called fiscal cliff by passing – at the 11th hour –the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), signed into law by the President on January 2, 2013. The 2012 Tax Act makes several important revisions to the tax code that will affect estate planning for the foreseeable future. What follows is a brief description of some of these revisions – and their impact:

  • The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news for all Americans; for more than ten years, we have been planning with uncertainty under legislation that contained built-in expiration dates. And while “permanent” in Washington only means that this is the law until Congress decides to change it, at least we now have more certainty with which to plan.
  • The federal gift and estate tax exemptions will remain at $5 million per person, adjusted annually for inflation. In 2012, the exemption (with the adjustment) was $5,120,000. The amount for 2013 is expected to be $5,250,000. This means that the opportunity to transfer large amounts during lifetime or at death remains. So if you did not take advantage of this in 2011 or 2012, you can still do so – and there are advantages to doing so sooner rather than later. Also, with the amount tied to inflation, expect to be able to transfer even more each year in the future.
  • The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at death) to grandchildren and others who are more than 37.5 years younger than the transferor; in other words, transfers that “skip” a generation. Having this exemption be “permanent” allows to take advantage of planning that will greatly benefit future generations.
  • Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death.
  • The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
  • The “portability” provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up a trust specifically for this purpose. However, there are still many benefits to using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.
  • Separate from the new tax law, the amount for annual tax-free gifts has increased from $13,000 to $14,000, meaning anyone can give up to $14,000 per beneficiary, per year free of federal gift, estate and GST tax – in addition to the $5 million gift and estate tax exemption. By making annual tax-free transfers while alive, you can transfer significant wealth to your children, grandchildren and other beneficiaries, thereby reducing their taxable estate and removing future appreciation on transferred assets. And, they can significantly enhance this lifetime giving strategy by transferring interests in a limited liability company or similar entity because these assets have a reduced value for transfer tax purposes, allowing you to transfer more free of tax.

For most Americans, the 2012 Tax Act has removed the emphasis on estate tax planning and put it back on what, are the true motivators to do estate planning: taking care of you and your families the way you want. This includes

  • Protecting you, your families, and your assets in the event of incapacity;
  • Ensuring your assets are distributed the way you want;
  • Protecting your legacy from irresponsible spending, a child’s creditors, and from being part of a child’s divorce proceedings;
  • Providing for loved ones with special needs without losing valuable government benefits; and
  • Helping protect assets from creditors and frivolous lawsuits.

For those with larger estates, ample opportunities remain to transfer large amounts tax free to future generations, but it is critical that professional planning begins as soon as possible. With Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated. Thus, it is best to put these strategies into place now so that they are more likely to be grandfathered from future law changes.

Further, as is well publicized, the 2012 Tax Act included several income tax rate increases on those earning more than $400,000 ($450,000 for married couples filing jointly). Combined with the two additional income tax rate increases resulting from the recent healthcare bill, income tax planning is now more important than ever.

If you have been sitting on the sidelines, waiting to see what Congress would do, the wait is over. Now that we have increased certainty with “permanent” laws, there is no excuse for you to postpone planning any longer. Please schedule an appointment today.




GANDELOT HARTMANN, Counselors at Law, assist clients within Grosse Pointe Farms, Michigan as well as Harper Woods, Detroit, Saint Clair Shores, Grosse Pointe, Eastpointe, Warren, Roseville, Centerline, Hamtramck, Fraser, Clinton Township, Utica, Shelby Township, Macomb Township, Chesterfield, New Baltimore, New Haven, Washington, Romeo, Armada, Sterling Heights, Troy, Royal Oak, Southfield, Oak Park, Auburn Hills, Pontiac, Oxford, Metamora, Berkley, Lathrup Village, Huntington Woods, Pleasant Ridge, Ferndale, South Lyon, Ortonville, Dryden, Milford, New Hudson, Northville, Clarkston, Lake Orion, Madison Heights, Rochester, Birmingham, Bloomfield, Bingham Farms. We service all counties throughout Michigan, including Wayne County, Macomb County and Oakland County. We also coordinate the individual planning needs of our clients across the United States and internationally.



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