Estate Planning Checkup

We periodically get medical checkups to make sure we are physically healthy. It also is a good idea periodically to have an estate planning checkup to make sure your estate plan is in good shape. We often use the following checklist to help our clients review their plans.

• When was the last time your estate plan documents were reviewed and updated?
• Have there been any changes in federal or state law that will affect your documents?
• Have there been any changes in your personal situation requiring any changes, such as:
• an increase in your net worth
• a divorce, death, or remarriage
• children growing older and requiring less or more supervision of assets at your death
• the birth of grandchildren you want to protect
• special needs beneficiaries, including beneficiaries with substance abuse issues needing protection
• concern about a child's marriage
• elderly parents or other relatives now needing assistance
• charitable gifts you desire to make
• Are you still comfortable with the people you have designated to be guardians for any minor children?
• Are you still comfortable with the people you have designated to make legal and medical decisions if you become incapacitated?
• Are all of your personal assets properly titled and funded to your Trust to avoid probate?
• Are all of your business assets properly titled and funded to your Trust to avoid probate
• Have you purchased any new personal or business assets recently, and are they properly funded to your Trust?
• Are the beneficiary designations for any life insurance on your life appropriately designated to your Trust?
• Are the beneficiary designations for any retirement plan accounts and IRAs appropriately designated to your spouse and/or your trust?
• If you have executed an Irrevocable Trust to hold life insurance have you:
• properly gifted funds to the Trust annually for premium payments?
• properly prepared and documented Crummey notices annually
• has the trustee periodically reviewed the appropriateness of the insurance policy and regularly reviewed and updated life insurance as appropriate?

     If the answers to any of these questions cause your client's concern or if they are unable to answer any of these questions, you know it is time to suggest they visit their estate planning professional to discuss and possibly change estate planning documents.

Alan Ferrara

How the Investment Income Tax Effects Trusts and Estates

The American Taxpayer Relief Act of 2012 imposes a 3.8% tax on the net investment income (NII) of individuals, estates, and trusts to the extent that the taxpayer's adjusted gross income exceeds the applicable thresholds. While the threshold amount for married and single filers are relatively high, the threshold for an estate or trust is only $11,950 for the tax year 2013. Therefore, if the undistributed NII of an estate or trust exceeds $11,950, the excess is subject to the 3.8% Medicare tax.

A trust or estate is only subject to the NII tax if the trust or estate contains undistributed net investment income. Therefore, the trust or estate can avoid this tax entirely by distributing its net investment income to its beneficiaries. With some trusts, especially those that contain mandatory distributions of all income or where the trustee regularly distributes all the trust income to pay the beneficiaries’ expenses, this is simple. However, for trusts that seek to minimize income distributions, such as Supplemental Needs Trusts for beneficiaries receiving government benefits, avoiding this tax becomes more problematic.

In situations where the distribution of trust income has the potential to create problems the Trustee must weigh the benefits of tax avoidance against the drawbacks of giving income to beneficiaries who may waste it or actually do harm to themselves. In these situations, rather than distributing income to avoid the NII tax it may be better to restructure the trust's investments to avoid receipt of NII. Investing in tax-exempt investments such as municipal bonds or tax-deferred investments or accounts such as life insurance or deferred annuity contracts can avoid the net investment income. It may also make sense to select investments producing growth but little or no income. Trustees can sell such assets later when cash is needed for distributions.

Another, less common concern, is that the value of income generated by a trust will exceed the liability threshold for a beneficiary as an individual. This issue may be addressed by including a number of permissible, but not mandatory beneficiaries in the trust, such as including grandchildren as permissible beneficiaries of a trust for their parent. This allows the trustee to make distributions to a number of trust beneficiaries who do not otherwise have sufficient income to subject themselves to this 3.8% Medicare tax, and  spreads the income among taxpayers potentially eliminating the tax liability altogether.

It is important for trustees and personal representatives of trusts and estates containing significant income generating investments to review those entities as soon as possible in order to determine the best results for each trust or estate. Clients should discuss the options with their professionals in order to maximize tax savings.

As a reminder, the IRS treats income distributed from a trust within the first 65 days following the year-end as distributed in the prior year. For example if a Trustee makes distributions from a trust of income earned in 2013 in the first 65 days of 2014, the beneficiaries report that income on their 2013 income tax return. This gives some flexibility in planning, but Planners should not delay acting to avoid problems. 

Alan Ferrara

Extra Privacy Gained from Trusts

     Increased privacy is one of the major benefits of using a living trust in estate planning. The Trust allows you to avoid public disclosure of the assets of the estate and the distribution provisions of the Will in the Probate Court. It also allows the Grantor to provide Beneficiaries with information that applies to their own distribution but not the distributions for other Beneficiaries. 

     The Michigan Trust Code (MTC), which governs the duties and powers of the trustee along with the rights and interests of trust beneficiaries, requires that a trustee of an Irrevocable Trust or a Living Trust which became Irrevocable upon the death of the Grantor inform a trust beneficiary of the following information:

• That a trust exists that names the person as a beneficiary 
• The identity of the Grantor of the trust. 
• The Trustee’s identity, including address and telephone number 
• The court, if any, in which the trust is registered The terms of the trust that describe or affect the beneficiary’s interest and relevant information about the trust property.

     The MTC also mandates that the trustee must provide an annual accounting of the Trust property to everyone who receives, or may receive, a distribution from the Trust. The Grantor of a Trust may override that statutory requirement and dictate whom, if anyone, the Trustee must provide with an accounting. It is important to note that even when the terms of the trust waive the annual accounting, a Probate Judge has the authority to order the Trustee to provide the court, or other parties, with an accounting.

     The benefits of these statutes to a Grantor include the ability to provide bequests of different values for children without revealing the differences in gifting. Alternately, it allows the Grantor to make equal gifts to multiple children, but under different terms, without creating strife because one child receives their bequest outright while other gifts continue in trust with restrictions on distribution. 

     The Michigan Trust Code strikes a balance between the Grantors’ right to privacy and the Beneficiary’s ability to confirm the Trustee meets their fiduciary duty. The information that Trustees must provide to a beneficiary gives that person sufficient information about their rights to the trust assets to determine whether the Trustee is doing their job. If the beneficiary suspects something is amiss, the information gives them a basis for the Probate Court to order a complete accounting. 

     It is important for successor trustees to understand the law and review the terms of the trust in order to determine the scope of their duty under the trust and applicable law. Often the attorney who drafted the trust document is the most useful resource for successor trustees in determining what information the trustee must provide to beneficiaries. A responsible attorney will provide clients with contact information and assurances that they will be available to help the successor trustees administer the trust when the time comes.

Matt Ferrara

Recent Changes in Michigan's Power of Attorney Law

As our clients get older and making decisions becomes more of a challenge for any number of reasons, it becomes even more important to have a properly drafted Power of Attorney authorizing others to make financial decisions on their behalf. Last year, the Michigan Legislature adopted a new Durable Power of Attorney (POA) statute, MCL 700.5501, effective after October 1, 2012, which while not invalidating documents executed prior to that date, applies to documents created after that date.

The requirements of the new statute include:

1. The POA must be signed in the presence of two witnesses, neither of whom is the attorney-in-fact, both of who must sign the POA, or the POA must be acknowledged before a notary public.
2. The attorney-in-fact must now sign an acknowledgment or acceptance, with statutorily prescribed language, before the attorney can act. This acknowledgment includes an understanding that there are specific limitations to the attorney-in-fact's powers, that the attorney-in-fact must maintain proper records with respect to receipts, disbursements and investments, and that the attorney-in-fact may be liable for any damage or loss to the principal.
3. The attorney-in-fact cannot make a gift of any of the principal's assets, unless specifically provided for in the POA.
4. Unless the POA specifically provides that, the attorney-in-fact cannot create an account or transfer an asset in joint tenancy between the principal and the attorney-in-fact.
5. The POA may exonerate the attorney-in-fact of any liability to the principal for breach of fiduciary duty, however the statute specifically exempts actions committed by the attorney-in-fact in bad faith or with reckless indifference.
6. The new statute specifies that it does not apply to a POA executed before October 1, 2012 or executed in a business setting.

     The Michigan Trust Code (MCL 700.7602 (5)) also contains language that with respect to a Trust the "settlor's powers with respect to revocation, amendment, or distribution of trust property may be exercised by an agent under a durable power of attorney only to the extent expressly authorized by the terms of the trust or the power of attorney".

     With the changes in the law, more thought and effort will be needed to determine what a client wants or needs with respect to the provisions drafted in the client's POA. These changes will become especially important if the POA is intended to be eventually used for Medicaid or other sophisticated planning. As always, a thorough review by experienced advisors is highly recommended..

Alan Ferrara

The Importance of Talking about your Estate Plan

     One of the more difficult aspects of working with clients to develop their estate plan is helping clients become comfortable discussing their goals and concerns for what happens to their estate after they pass away. This comfort is important because it is impossible to draft documents that truly achieve the client's goals when the client is unable to articulate those goals. Once clients have an estate plan it is also important that they become comfortable discussing that plan with those people whom they have trusted with its administration.

     After going through the initial process of creating an estate plan, many clients put those documents in the drawer and never mention them to their children to the people they have named in the documents to make decisions, except perhaps to tell them where the documents are located. This failure to discuss the client’s posthumous wishes can cause unexpected difficulties in administering an estate and hurt feelings of beneficiaries who do not understand why their parents made certain choices. For example, a client may choose to provide that assets are held in trust for their grandchildren as opposed to making gifts to their children. This may leave the children wondering if they've done something that made their parents reluctant to trust them, when the clients goal was to remove the burden of saving for college costs from their children in order to make their lives easier.

     In another scenario, a client may choose one child over the others to act as Successor Trustee. While the parent’s goal was to appoint the child who could most efficiently administer the estate, perhaps due to geographic location or flexibility of their schedule, the children are left wondering what they did “wrong.”

     The reasons clients have for distributing their wealth the way they do are as disparate as the number of estate plans. By taking the time to discuss an estate plan with the successor designees and beneficiaries who will be administering benefits from that plan, clients provide guidance and clarity that helps their loved ones achieve the clients' underlying goals.

     Estate planning is a ongoing process and communication is a major part of the process. While clients may not wish for their beneficiaries to know the full scope of the bequests made in their documents, by taking the time to discuss the scope and reasoning behind an estate plan clients can influence the lives of their beneficiaries with more than the monetary impact of their gifts.

Matt Ferrara

Veteran's Aid & Attendance Pensions

     Over the past few months, I have heard from a number of financial professionals whose clients are asking questions regarding eligibility for the Veterans Administration's Aid & Attendance Pension. The Aid & Attendance Pension is a benefit available to veterans with 90 days of active duty service during wartime. Due to the World War II, the Korean War, and the Vietnam War, the vast majority of military veterans potentially eligible for the Aid & Attendance pension served during a qualifying wartime. In addition to the wartime service requirement, veterans seeking the Aid & Attendance Pension must qualify medically and financially.

     The Aid & Attendance Pension provides additional funds to veterans or their surviving spouses to pay for assistance in performing daily tasks. A significant goal of the Aid & Attendance Pension is to provide veterans with the care they need to live a full life without the veteran needing to rely on Medicaid for long-term medical care.

Clients who desire to meet the financial qualifications for the Aid & Attendance pension generally consider one of two actions. Either the client wishes to purchase annuities in order to convert assets into an income stream, or the client wants to give away assets to children or other loved ones. Both of these actions, while potentially allowing the client to meet those financial limits, have potential negative consequences.

     Two issues arise for clients wanting to convert their assets into income. First, it is important to note that the Aid & Attendance Pension has both an income and asset limit, so it is possible that converting assets to an income stream will not achieve the goal the client intends. The second issue, involves the financial advisors desire to maximize their clients return on investment. In many cases, especially with elderly clients, an annuity is not the vehicle that will provide the best return on investment. Alternately, clients seeking to give away assets do not consider the choices that continued access to and control of those assets can provide the client.

     Unlike Medicaid, the Aid & Attendance Pension has no divestment penalty, allowing individuals to give away assets in order to meet the financial qualifications. However, it is important for clients to consider what they are giving up by giving away those assets. When considering long-term care, more assets equals more choices. Also, while clients believe that children will retain assets given to them in case the parent ever needs those assets, even in situations where children have the best of intentions, unexpected expenses, lawsuits, and investment mistakes occur, creating a situation where assets are no longer available to pay for care in the future.

     A significant drawback with the Aid & Attendance Pension is the existing backlog of claims for veteran’s benefits. In many cases, it may take over a year to process a claim for the Aid & Attendance Pension, and while the claim may eventually be approved and pay out retroactively, there is a time during which the client must subsist on their artificially lowered assets.

     The Aid & Attendance Pension has the potential to improve significantly the client’s quality of life. However, qualifying for this benefit is not always in the best interest of the client, especially when the client has significant assets with which to pay for their care. Before taking any action designed to assist in qualifying for a government benefit, clients should speak with an attorney experienced in veteran’s benefits to ensure that such actions will achieve the client's goals.

Matt Ferrara

Additional DOMA Issues

     As we discussed in our last post, the United States Supreme Court issued its decision in the case of US v. Windsor, more commonly known as the Defense of Marriage Act (DOMA) case. The Court struck down a provision in the law that required the Federal Government to treat same-sex spouses as unmarried for purposes of federal law. It is still unclear when the decision goes into effect and whether it only covers same-sex couples married in a state allowing same-sex marriages and residing in that state. While not related to estate planning, which is normally our primary focus here, there are important planning issues affected by this change about which you and your clients should be aware.

     One area with potentially far-reaching consequences is retirement planning. When reviewing the retirement planning for married same-sex clients remember:

1. In general, the required minimum distribution (RMD) rules are more liberal for married plan participants whether the participant is in pay status or not.
2. The spouse of a deceased employee can roll over a distribution attributable to the employee subject to the same rollover rules as if the spouse were the employee
3. In certain situations, a participant must have spousal consent before the participant can leave retirement benefits to someone other than the spouse, before a lump sum can be taken in lieu of a joint and survivor annuity, and before the plan account can be used as security for a loan.
4. In a divorce, a spouse's pension benefits are often part of the property settlement. When there are pension benefits involved, courts often use a qualified domestic relations order (QDRO) to handle those benefits. Without a QDRO, taxes for the benefits fall on the spouse who earned the benefits even though the other spouse receives the benefits.

     This case will also have an effect on employer-provided health plan benefits. The employee can exclude from income any amounts received from his employer as reimbursement for medical care expenses as long as the medical expenses represent care provided to the employee, the employee's spouse, or dependents. This ruling will expand the employee's right to exclude from income expenses paid for care provided to the same-sex spouse. The same is true for spousal entitlement to health plan coverage under the COBRA continuation rules. 

     While many details of the ruling remain unclear, it is important that we as planners understand the consequences of this decision in order to best serve both our business and individual clients. 

Alan Ferrara

Happy Fourth of July

Happy Fourth of July!

Have a Safe and Happy Holiday. We will be back next week.

Al Ferrara

Matt Ferrara

SCotUS Decides an Important Estate Planning Case (and Overrules DOMA)

     Last week, the United States Supreme Court issued its decision in the case of US v. Windsor. This case, more commonly known as the Defense of Marriage Act (DOMA) case, has received much press coverage. This past week by 5-4 decision the Supreme Court found Section 3 of DOMA violated the Equal Protection Clause of the Fifth Amendment. Somewhat less well known, but equally important, is the estate planning relevance of Windsor.

     At its heart, Windsor was a suit brought by a taxpayer to collect a refund on Federal Estate Taxes. Edie Windsor and Thea Spyer were legally married in Canada in 2007, following an over forty year committed relationship while living in New York City. When Spyer died in 2009 she left her entire estate to Windsor. Since DOMA prevented same-sex married couples from receiving a wide range of Federal government benefits, the estate did not qualify for the unlimited marital deduction available to married couples. As a result, Windsor, as personal representative of the estate paid over $363,000 in Federal Estate Taxes. Windsor then sued for a refund and a declaration that Section 3 of DOMA violates the Constitution.

     While the Windsor decision has far-reaching consequences regarding many different types of federal benefits available to married spouses, with respect to estate planning legally married same-sex couples are now entitled to the following tax benefits:

• the right to file a joint Federal Income Tax return;
• the opportunity to obtain tax-free employer health coverage for the same-sex spouse;
• the opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of Federal Gift Tax;
• the opportunity for the estate of the first spouse to die to receive a marital deduction for amounts transferred to the surviving spouse;
• the opportunity for the estate of the first spouse to die to transfer the deceased spouse's unused exclusion amount to the surviving spouse;
• the opportunity to consent to make “split” gifts; and
• the opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA using the more favorable spousal rules.

     All of these benefits are subject to Federal law and therefore are applicable to legally married couples in all 50 states, whether or not that state recognizes same-sex marriage. This means that clients legally married in any of the 13 states that currently recognize same-sex marriage may take advantage of these benefits no matter their state of residence. For financial planners and other estate planning professionals this change in the law will have a substantial effect on planning for any client that falls into this category.

     Any action regarding estate planning should only be undertaken following consultation with an experienced professional. If you have questions or concerns involving a specific situation, please contact us directly and will be happy to assist you.

Matt Ferrara