Window Closing on Discounts for Intra-family Gifts

We've been quiet for a couple of weeks, something we intend to avoid in the future, however today's blog addresses the Proposed Regulations announced yesterday by the Treasury Department and the IRS with respect to the ability to claim a discounted valuation for Intra-family gifts. If you or your clients are considering transferring partial ownership of a family business on to children it may be beneficial to do so sooner, rather than later.

In previous blogs we discussed the strategy of using a Family Limited Partnership or Family L.L.C. to transfer interests in either family owned businesses or other types of assets, such as real estate, to children while allowing parents to retaining control of the entity during their lifetime. A major benefit of such transfers is the ability of the parent to claim a significant discount in the valuation of the transferred assets for the purposes of Gift Tax liability. On Tuesday August 2, 2016, the Treasury Department and the Internal Revenue Service announced Proposed Regulations that address this strategy and, if put into effect as written, will significantly reduce the ability of family business owners to take advantage of this strategy.

Under current regulations, it is possible for a parent to transfer interests in a family business to the other family members while retaining operational control of those businesses. The transferred interest does not contain voting rights and specifically indicates that the family member does not have the right to sell or otherwise alienate the interest. The lack of control over the operation of the business and inability to sell the interest reduces the value of the interest and allows for a discount in the value for purposes of gifting. This discount allows the client to transfer a greater value of assets to their loved ones at a lesser cost for gift tax purposes. When it has challenged transfers of this nature in court, the IRS has consistently argued against the size of the discounts. 

The Proposed Regulations generally provide that if a parent transfers an interest in a corporation that the parent controls to any other member of the family any "applicable restriction" shall be disregarded in valuing the transferred interest. The Internal Revenue Code defines “applicable restriction” as “any restriction that effectively limits the ability of the entity to liquidate, but which, after the transfer, either in whole or in part, will lapse or may be removed by the transferor or any member of the transferor’s family, either alone or collectively.” In plain English, the Proposed Regulation provides that if a parent transfers an interest in a family owned business to their child with the restriction that the child cannot alienate their interest in the business without the parent’s permission, that restriction is ignored for purposes of valuing the transferred interest. The removal of such restrictions from consideration in valuing the interests transferred will have a significant impact on the strategy of transferring interests in family owned businesses.

While the Proposed Regulations will significantly limit the valuation discount available to clients when making transfers of family-owned businesses, it does not entirely eliminate the benefits of such transfers. Until these regulations go into effect and are tested in real-world situations, it is unclear what level of discount the IRS will argue is reasonable with respect to other restrictions placed on interests transferred to children that do not relate to the child's ability to alienate the interest. Additionally the strategy of transferring minority or non-controlling interests in family businesses to children is still very beneficial, especially when those business interests contain assets that are likely to appreciate significantly in coming years. Such transfers are also still relevant in the context of succession planning for family businesses, as an equity interest in the family business is often necessary to ensure that future generations are fully invested in the operation of that business before they are given control of the company.

There is still an opportunity to take advantage of the valuation discount, but the window for doing so may be closing. Before these Proposed Regulations can go into effect they must first go through a 90-day public comment period, after which there may be changes, but even if there are no changes, portions of the regulations will not take effect until 30 days after the government issues a final version of the regulations.

The strategy of using a Family L.L.C. to obtain a discount in the valuation of assets transferred to children is a complex legal strategy that business owners should not attempt without consulting an attorney and accountant who are familiar with the process. Avoiding significant issues with the IRS in implementing this strategy requires sound valuations of the business and working with advisors familiar with the process of justifying such valuations. If you have additional questions, concerns, or interest in discussing whether this strategy may be appropriate for your circumstances, or the circumstances of one of your clients, we encourage you to contact us quickly, as the time available to take advantage of this strategy is very limited.

Alan and Matt

Making Decisions about Funeral Arrangements

Well so much for scheduling posts to go up every Tuesday, I guess my technical expertise are not as sharp as I thought.

Estate planning focuses on the legal and financial aspects of the distribution of the person's assets following their death. While our clients appreciate the peace of mind they get from this planning there are other issues related to death and dying which are equally important to consider, many of which are more personal and may have a greater impact on your loved ones. Today's blog addresses one of these very personal matters, issues surrounding making funeral arrangements.

Following the death of a loved one, an issue that often causes the most complications is the funeral arrangements. Many questions surround this matter, including what would the deceased want, who is responsible for paying for services, and who has the authority to make decisions? Each of these areas can be fraught with intra-family stress and strife, but as with many other issues addressed in this blog, planning can limit or eliminate many of those problems.

For many individuals, funeral planning begins long before they have any reason to believe death is imminent. This planning takes multiple forms, from a simple note stating their wishes to a detailed letter of instruction including their desire for burial or cremation, the selection of a church for services and hymns to be played, and even charitable organizations to which contributions can be made to honor the decedent in lieu of sending flowers. It is also becoming more common for individuals who want to preplan their funerals to work with a Funeral Director to plan and completely pay for their services in advance. The benefits of preplanning the funeral, as articulated by our clients, include ensuring that their wishes are honored, avoiding excessive spending on funeral services, and knowing that with the planning completed their family members will have more time to focus on the grieving process. While many benefits to preplanning your funeral exist, not everyone is comfortable doing so. Nonetheless, it is important to know who will be responsible for these decisions when the time comes to make them.

Recently the Michigan Legislature updated the law that governs who has authority to make funeral decisions to allow individuals to name a designated Funeral Representative. This individual, who may be named as part of a Will, Power of Attorney, or a separate writing signed in the presence either two witnesses or a notary, has legal priority to make decisions regarding final arrangements. Prior to this change, and in the absence of a designated Funeral Representative, surviving spouses have priority, followed by children, grandchildren, parents, grandparents, and finally siblings. This extended statutory plan of priority creates many conflicts, as various family members argue about funeral arrangements, each believing they know best for their loved ones. With the change in the law, an individual can appoint the person responsible for making decisions and inform that person of their wishes in advance. Regardless of who makes decisions, a frequent concern regarding funeral arrangements is the cost of those services and the responsibility for paying that cost.

The average cost of a traditional funeral in the United States is between $7,000 and $10,000, which is a substantial expense for anyone to bear unexpectedly. Some individuals choose to limit the effect of this cost on their loved ones through preplanning and prepaying for their funeral as we discussed above, others carry small life insurance policies to cover the expense, but many people do nothing at all. In these circumstances, loved ones must figure out how to pay for these costs in a short time. Under Michigan probate law, the costs of funeral and burial take priority over all other claims, except the costs and expenses of administering a decedent's estate. This means that whoever pays for these expenses is entitled to reimbursement for their costs before almost all other creditors. This priority however does little to clarify who will be responsible for these expenses. One potential solution to this uncertainty is executing a living trust. As we have discussed before, following the death of the trust Grantor, the successor Trustee can immediately take over the administration of the trust and in that capacity make distributions from the trust to pay for funeral expenses. In the absence of this planning however a relative or other individual must incur the substantial costs and await repayment during the probate process.

While problems and choices follow us even in death, it is possible to limit the problems that arise following your death by engaging in planning while you are alive. While this planning may initially be difficult to consider, the benefits to your loved ones in a very difficult time make that difficulty seem minute.

Alan and Matt

Estate Planning and Dementia

We hope that everyone enjoyed the long holiday weekend and is ready to return to work refreshed and prepared for a successful week. Today's blog addresses the difficult subject of preparing for a time when we are unable to make our own decisions due to the onset of disease. We know how difficult these times are for families and encourage our clients to consider these possibilities in their planning in order to limit the problems that will arise if they are unable to make decisions for themselves.

I read an article recently about Dementia Awareness Week in the United Kingdom which got me thinking about how people can prepare for the impact of dementia long before any signs of the condition are apparent. A diagnosis of dementia can be devastating to a person and their loved ones. The symptoms of dementia are progressive and its time frame is unknown, but can include memory loss, communication problems, and mood changes.

While dementia can be a horrible diagnosis, with proactive estate planning you can ensure that someone with dementia is protected and properly cared for making that challenging time a little easier. As a person becomes less able to handle their affairs, it becomes more important to put documents in place that will allow designated people to make legal and medical decisions on behalf of that person as they become medically incapable of handling their own affairs.

A Durable Power of Attorney is a good place to start. This document allows a person to name another person or persons to make legal decisions for them immediately or upon a determination of. This ensures that whether because a person no longer wants the burden of making decisions or because they are unable to make decisions for themselves, that those decisions will be made by a person of their choosing.

A Patient Advocate Designation is similar to a Durable Power of Attorney, in that it is used to name another person to make decisions when a person is unable to make them for themselves, but names people to make medical instead of legal decisions. This is especially important in cases of dementia because ensuring that your desires surrounding healthcare are followed even when you cannot articulate them for yourself is important.

Without these two documents, loved ones will not be able to readily make decisions for a person who becomes incapacitated, requiring the family members to turn to the Probate Court to have a Conservator and Guardian appointed to make medical and legal decisions. The process is costly, can take valuable time, and is a public process. By executing a Durable Power of Attorney and a Patient Advocate Designation, a person can avoid the probate process and provide for immediate decision-making and protection of the person with dementia.

Establishing a Living Trust (a revocable trust) can also protect a person with advancing dementia. If ownership of assets have been transferred to the Trust, the person named as successor trustee can use those assets to care for a person with dementia without any cost, delay or public scrutiny by the probate court. 

Additionally. while they are able, a person diagnosed with dementia may also want to consider an Ethical Will, which is a way to share one's values, life lessons, and hopes with family and friends. The Ethical Will does not transfer material wealth, but can be a statement of what truly matters in life and a hope that those who receive eventual inheritances will take to heart the values and hopes laid out in the document.

While all of these documents are especially pertinent for a person diagnosed with dementia, we should all consider implementing them in order to protect ourselves against an untimely incapacity.

Alan and Matt

Planning to Protect Children with Special Needs

We've previously addressed how estate planning can be used to protect minor children in the event of unexpected events. For those parents whose children have special needs this planning is even more important, as it can impact eligibility for programs that assist their children with their day to day lives. Thankfully it is possible to protect children with special needs and maintain their eligibility for such programs through the use of a Supplemental Needs Trust.

The birth of a special needs child changes the lives of a family dramatically. In addition to the lifelong challenges, parents must also plan for the child’s care and well-being in the event of their deaths or inability to care for their child. It is important for parents address these issues in their estate planning, failure to do so can have serious implications for their child’s future care.

A supplemental needs trust, also known as a special needs trust, can be an important planning tool for parents of children who are likely to need special care and support for their entire lives. A supplemental needs trust protects assets for the benefit of a special needs child without jeopardizing eligibility for means tested benefits such as Medicaid, Medicare, and Supplemental Security Income. If properly drafted, assets in supplemental needs trusts do not count toward eligibility calculations for these and other potential benefits.

As indicated by the name, supplemental needs trust assets can be used to supplement governmental benefits by paying for care and items that are not covered under those programs. Funds can also be used for enrichment purposes, such as costs of visiting family members, specialized education programs, and allowing the child to live in the similar manner as when the parents are alive.

While a supplemental needs trust can be established at any time, parents risk not providing protection to their special needs child in the event of an untimely death prior to completing appropriate estate planning. The supplemental needs trust can be funded immediately with discretionary assets or funded with assets from a parent’s Living or Revocable Trust at death. A supplemental needs trust is not only for wealthy families with significant assets, but also for others who may not currently have significant assets but still have a desire to protect their child. Often a supplemental needs trust is funded with a life insurance policy so that funds are available for use for the child on the death of parents. By working with a qualified financial planner and/or insurance professional, a parent can determine the type of policy and amount that best protects their child.

Once parents establish a supplemental needs trust it is important to inform grandparents and other family members of the existence of the trust so that funds otherwise available or to be given to the child can be directed into the trust for the benefit of the child rather than to the child directly, avoid a potential error that would interfere with government benefit eligibility.

It is important to remember that protecting special needs children is more than simply setting up a trust for their benefit. Another important aspect of this planning is the need to choose the correct trustee to administer the trust. Parents should try to pick a trustee who knows the child and knows and supports their wishes for the child's benefit. Often the trustee is a family member who knows the child well and is able not only to communicate with them but also use the trust assets to provide an appropriate lifestyle. Parents will often spell out their wishes for the child's in a separate letter, giving the trustee a better idea of their wishes for their child.

The rules for government benefits are complex and therefore parents should consult with an attorney knowledgeable with not only those rules and also supplemental needs trusts in order to ensure that any planning provides the maximum protection for their children.

Alan and Matt

Estate Planning Really is For Everyone

It has been a long time since we last posted anything new here, but after seeing a number of different articles in the news media and other publications we felt that it was time for us to come back and revisit some important issues in estate planning and to discuss some of the changes to the area that have transpired over the past two years. We look forward to hearing from our readers if there are particular questions you or your clients have had about estate planning, because as always one of our major goals is to make the process of estate planning approachable and understandable.

We'll start off with a subject that both of us constantly attempt to help people understand, the question of "Who needs an estate plan?".

Estate planning is not just for older, wealthier individuals. Estate planning covers a number of areas that can be of great benefit to a person of any age. While often estate planning is associated with planning for one's eventual death and the transfer of property to loved ones, estate planning is much more than that.

A person of any age, whether or not owning significant assets, can benefit by writing a Will. Estimates vary, but surveys regularly indicate that less than 50% of adults have a Will and even fewer have documents protecting them in the event of a disability. 

A Will is a basic estate planning document that can provide specific instructions about how your property is to be distributed. But if you have minor children, a Will is important because it will designate your choice for Guardians to take care of the physical well-being of your children in the event of a premature death. The Will also name a Personal Representative (sometimes called an Executor) to administer your estate for the benefit of the beneficiaries you have named. While it will not eliminate the probate process under state law, a Will at least allows you to designate your beneficiaries rather than allowing a complicated state statute to determine how your assets are distributed. For example, the Michigan intestacy statute provides for six different potential distributions to a surviving spouse and an additional four potential distributions to other beneficiaries, all dependent on who survives the decedent. Based on the complexity of these rules, it is easy to see that failure to specifically designate those beneficiaries who are to receive your assets can result in unintended and undesirable results. For some people, especially younger adults, it may be even more important to consider documents protecting you in the event of disability rather than death.

A Patient Advocate Designation (PAD) is a document that allows you to specify the person or persons you want to make medical decisions on your behalf in the event you become disabled and unable to make your own medical decisions because of illness or accident. If a PAD has not been executed and a person becomes incapacitated through illness or accident, someone must file a petition with the local Probate Court to have a person appointed to make medical decisions. This process is time-consuming costly and public.

A Durable Power Of Attorney (PoA) is a document that allows you to specify the person or persons you want to make legal decisions on your behalf in the event you become disabled and unable to make your own legal decisions because of illness or accident. If a PoA has not been executed and a person becomes incapacitated through illness or accident, someone must also file a petition with the local Probate Court to have a person appointed to make legal decisions. Again, the process is time-consuming costly and public.

You may also want to consider a Living Will which, although nonbinding, is an expression of your intent that you do not want to be kept alive by extreme measures if doctors indicate that such measures will only prolong the dying process rather than lead to a recovery. This document and allow those designated to more quickly make medical decisions you would want if you could make them.

While these documents are applicable for all adults, parents with children who have reached age 18 and perhaps going off to college or another state for job opportunities may want to have these children execute a PAD or PoA, because otherwise medical personnel will likely not allow parents to make decisions on behalf of their adult children.

While there are other estate planning documents that are beneficial as an estate gets more complex, the documents discussed here are the basics which are important for all people. To ensure that you have planning that is appropriate for your needs please consult with an experienced estate planning attorney.

Alan and Matt