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Tax Law

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. 


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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