Tuesday, December 26, 2017

Happy New Year

From our family to yours, happy holidays and a safe and successful New Year.

We'll be back in 2018 with more of our insights and explanations of the estate planning process.

Wednesday, December 20, 2017

First Thoughts on the "Tax Cuts and Jobs Act"

As we write this post (on December 20, 2017), the United States Senate has passed the Republican "Tax Cuts and Jobs Act" and the House of Representatives is set to re-vote on that legislation this afternoon (the House must re-vote because the version of the legislation it rushed to vote on December 19 contained provisions which violate Senate procedural rules). Following that vote the legislation will quickly receive the President’s signature and become law. That is when this process really gets interesting.
Republicans pushing this legislation have claimed, it is the “largest tax cut ever” (it is not) and a boon to the middle class (we will reserve judgement for now) and all manner of other grandiose claims. Whether some, all, or any of the promises made while promoting this legislation will ever come to pass remains to be seen, however there are certain things that will result from the legislation becoming law.
With respect to estate planning, those individuals with the largest estates will see a huge windfall, with the Estate Tax Exemption doubling from $5.5 million to $11 million per person. Under prior law only .02% of estates were subject to estate taxation. The new legislation further assures that large estates receive a significant benefit because the number of estates which will incur liability under these new provisions will amount to less than .01% of taxpayers. Despite this significant increase, in the exemption there has been no change in the laws with respect to basis, so heirs and beneficiaries will continue to receive a stepped-up basis for property transferred at death.
From an income tax perspective, the legislation maintains the number of tax brackets (there are seven) but changes the tax rate and income range for each of the brackets. These changes reduce the top tax rate and increase the threshold before a taxpayer will pay that rate and have varying effects on the other brackets to the benefit of some and detriment of others. The average middle-class taxpayer (making 19,050-$77,400) will now fall into a 12% bracket, down from 15%. However a number of individual deductions have been reduced, including the mortgage interest deduction and the deduction for state and local income/sales taxes, which may result in those same taxpayers owing more than in years past. On a positive note for many, the final legislation does not contain provisions in the original House bill which eliminated deductions related to tuition waivers for graduate students, student loan payments, and medical expenses.
Corporate tax rates will see a dramatic reduction with the tax rate dropping to 21% from 35% with few existing deductions seeing any substantial change. Although the legislation itself has not been dissected by experts because it was kept under wraps during the legislative process, it is believed that “Pass-Through” companies such as LLC's, partnerships, sole proprietorships and S-corporations may also see a significant benefit. Owners of Pass-Through companies will be able to deduct 20% of the income from those entities, subject to certain caps, effectively lowering the top tax rate they will pay. While some effort was made to limit individuals with "service industry" income (such as lawyers) from taking advantage of these provisions, a significant number of tax experts have recently detailed ways they believe these provisions can be manipulated to the taxpayers advantage.
Unanticipated loopholes in the provisions regarding Pass-Through entities are unlikely to be the only errors which Congress will need to correct in the legislation. Multiple lawmakers are already acknowledging that they will need to pass additional legislation to correct certain provisions of the tax bill to correct unintended consequences which are mostly a result of the speed with which the legislation was passed. Additionally much of the legislation leaves rule-making up to the Internal Revenue Service (IRS), which will now be busy attempting to prepare for significant changes which take effect in under two weeks (note the IRS has 18 months to write Rules which will be retroactive to January 1, 2018).
In addition to its implications for the tax code, the current legislation also contains language that will significantly impact other areas of public policy. It contains provisions which open sections of the Arctic National Wildlife Refuge to drilling and eliminates the individual mandate to purchase health insurance contained in the Affordable Care Act. Further, estimates of the fiscal impact of the legislation from groups across the political spectrum indicate that it is likely to balloon the deficit by many billions of dollars, with the Joint Committee on Taxation indicating that the bill will increase the deficit by $1.45 trillion over the next 10 years.
Overall this legislation is a benefit to corporations, pass-through entities, the wealthy heirs, and anyone with income in the six figures. It appears less beneficial to individuals with smaller incomes because the reduced tax rates are offset by limitations on deductions these taxpayers previously benefited from and decreases to the individual rates expire in 2025. Individuals in states and municipalities with higher local taxes will also see increased federal taxes because they will no longer be able to deduct their complete local tax bill. The repeal of the Affordable Care Act’s individual mandate to purchase health insurance is also likely to result in an increase in health insurance premiums for those people who continue to purchase health insurance.
It is important to regularly review the state of the tax code and to make changes to policy to reflect the changing times and while promoting this legislation Republicans suggested that was their goal. Tax experts will be busy trying to make sense of and take advantage of the new provisions, and the IRS will be busy writing regulations designed to close unintended loopholes. With the changes, tax law will be in flux for quite some time. As the 500+ pages of the new tax law become public we and others will be providing explanations of how the law impacts you. Be careful to consult your tax expert before changing any of your tax planning.

Matt and Al

Monday, December 18, 2017

Patient Advocate Designations 2.0

The Patient Advocate Designation, when paired with the General Durable Power of Attorney, comprise the primary documents in the “here” portion of estate planning. Like the Power of Attorney, the Patient Advocate Designation grants another person (the Designee) the authority to make medical decisions on behalf of the Principal in the event that the Principal is unable to make their own medical decisions because of illness or accident. While on the surface the Power of Attorney and Patient Advocate Designations appear to be similar, there are some important distinctions between the two documents that are worth addressing.
Just as with the Power of Attorney, the Patient Advocate Designation can grant a variety of authority, but for the purposes of estate planning the document will include the authority to make any medical decision, including end of life care decisions, in the event that the Principal is unable to make their own healthcare decision. While it is occasionally useful to provide a Designee with less authority, for practical purposes most Patient Advocate Designations grant broad authority because they are only used in the event that the Principal is unable to articulate their own wishes.
The Patient Advocate Designation normally provides that two physicians must state in writing that the patient does not have the ability to understand and make their own medical decisions. Only after these physicians have confirmed that the Principal does not have the capacity to make his/her own decisions, can the Designee make medical decisions, including end-of-life care decisions for the patient. It is noteworthy that the ability to make decisions regarding healthcare is different from being physically incapacitated. Even if a person is unable to manage their own affairs due to physical incapacity, they may still have the ability to participate in their own healthcare decisions, if they are able to understand their doctors and articulate their wishes.
In order to make informed decisions for an incapacitated patient under any circumstance, it is generally considered good practice to include a release in the Patient Advocate Designation to allow the Designees to receive medical information from medical practitioners and medical facilities that is normally protected by privacy laws. Frequently this release will extend beyond those times when a Patient Advocate is called upon to make decisions so that the Designee can receive regular updates on the Principal’s health, even when they do not need to make decisions.
With a common focus being on a situation where a Designee needs to make end of life decisions, people sometimes lose sight of the fact that a Patient Advocate may also be called on to make decisions regarding long-term healthcare treatment. Such decisions include whether the Principal is able to reside in their own home due to medical risks, what scope of care is necessary to make the Principal comfortable, and where the Principal will live if they do need inpatient care. These decisions can prove to be especially difficult for Designees because they are not things that people generally like to discuss. It is important to make sure the Principal discusses these types of issues with the designee ahead of time if possible.
It is important to fully understand what authority is given in a Patient Advocate Designation before signing the document. An attorney experienced in estate planning should be willing to take the time to review the scope of that document before expecting you to sign anything. This is just one reason why we always remind our reader of the importance of working with an attorney to navigate the estate planning process.

Matt and Al

Friday, December 15, 2017

Powers of Attorney 2.0

A few posts ago we addressed how the “here” portion of estate planning allows people to appoint others to make decisions on their behalf if they become incapacitated due to illness or accident. The Power of Attorney is the legal document allowing a person to designate who will make legal and financial decisions for them in the event of incapacity.  While many are aware of a Power of Attorney in the event of incapacity, it is also worth noting that not all Powers of Attorney serve the same purpose and if not properly drafted a Power of Attorney may prove useless in the case of emergency.
In its most basic form, a Power of Attorney is a declaration that someone (the Designee) can act on behalf of another person (the Principal). This power can be very specific, such as, “Bob appoints Frank on a particular dated, to sign Closing documents on the purchase of a specific house”. In this example, Bob cannot attend the Closing so he authorizes Frank to sign the documents in his place. Bob is not incapacitated but Frank is still allowed to act in his stead. This is a Limited Power of Attorney.
As with many legal documents, it is possible to achieve a wide range of results with a Power of Attorney. Expanding on the first example, if Bob were out of the country and needed Frank to handle additional aspects of his home purchase, Bob could sign a more expansive Power of Attorney that gives Frank the authority to act on Bob’s behalf with respect to “any action related to the purchase and furnishing of a residence.” This broader authority, likely backed up with more specific language authorizing particular actions, would allow Frank to retain a Realtor, sign Purchase Agreements, purchase furniture, and even deal with movers, all on Bob’s behalf.  The flexibility of a Power of Attorney makes it a powerful tool in planning.
In the previous two examples the Principal is not incapacitated, Bob just needs Frank to act in a situation where he is unavailable. In the context of estate planning, we expand upon this concept to create the General Power of Attorney. This document provides the Designee with broad authority to act on behalf of the Principal. The document, containing many specific authorizations to affirm to those following the Designee’s instructions that the Designee is authorized to act, allows the Designee to act on the Principal’s behalf with respect to many of the common and uncommon decisions that a person must make every day. This “General” power is not without limits, the most important of which is the Designee’s “Fiduciary Duty” to act only in the Principal’s best interest. It is also important to recognize that the law places limitations on the actions a Designee may take on the Principal’s behalf, though some of those limitations can be superseded by specific language in the document.
Drafting is important when it comes to Powers of Attorney because under Michigan law a Power of Attorney must specifically indicate when it functions. This means that in order for a Power of Attorney to be useful in protecting a person during incapacity the document must indicate that it is a “Durable” Power of Attorney. The term Durable simply indicates that even if the Principal is incapacitated (but still alive), the Power of Attorney is intended to continue to function.
One final note on the varieties of Powers of Attorney, from the examples above you can see that Power of Attorney can function even when a Principal is not incapacitated. A Power of Attorney that allows action upon execution is commonly termed an Immediate Power of Attorney. An Immediate Power of Attorney is useful in estate planning as certain actions become more cumbersome to a Principal. It will allow a Designee, such as a trusted child to act on a parent’s behalf even when the parent could handle a task on their own. More commonly used is a “Springing” Power of Attorney that automatically takes effect upon a particular condition, such as incapacity, affecting the Principal.
We hope that this explanation helps you appreciate the benefits and complexity of the Power of Attorney. From a Limited Power of Attorney that functions only for a number of hours to a General Durable Power of Attorney that springs into effect upon incapacity, the Power of Attorney is a complex but important part of an estate plan. With proper drafting, it can allow trusted Designees to easily manage the Principal’s affairs during an unexpected emergency, making sure that such times need not be more difficult than necessary. Due to the complexity and expansive power that a Power of Attorney can give to another person we recommend that you always consult with a trusted attorney, experienced in estate planning, before signing anything that gives someone else authority to act on your behalf.

Matt and Al

Wednesday, December 13, 2017

Beginning to Understand Medicaid

Recently we began to address Medicaid eligibility and whether Medicaid is appropriate for a client’s circumstances. We choose to start our discussion of Medicaid from that perspective because the rules that govern Medicaid do not lend themselves to a simple explanation blog and frequently clients realize that coverage under Medicaid is inappropriate to their circumstance and therefore we do not explore the details of qualifying for benefits. For those for whom Medicaid coverage may be important this blog expands on Medicaid and discusses some of the rules that govern eligibility.

When discussing the complexity of qualifying for Medicaid benefits it is helpful to start with a clear definition. Medicaid is a government program implemented to ensure that essential healthcare services are available to those whose income and resources are insufficient to address the costs of the services. Medicaid is funded with a combination of Federal and State funds and subject to Federal Law and Regulation, but administered by the States according to Rules that vary from State to State. The collected rules governing Medicaid have generously been referred to as “convoluted and often incomprehensible” by institutions including a Federal Appellate Court. This complexity includes thousands of pages across multiple documents including legislation, regulations, rules, and policies. Much, but not all of, this complexity can be boiled down into three primary requirements:
  1. A Medical/Functional Eligibility Test,
  2. An Asset Test, and
  3. An Income Test.
The first criterion for qualifying for benefits under Medicaid requires the applicant to demonstrate a medical/functional eligibility. Medicaid determines medical/functional eligibility through a seven factor test and an applicant requiring assistance with any of the seven factors meets the eligibility criteria. Most Medicaid applicants satisfy this test because they require substantial assistance with daily functions including eating, toileting, bathing, dressing, and/or ambulating. While these are the most common factors, an applicant may also qualify for Medicaid because they require assistance due to memory issues, have conditions requiring substantial physician interaction, have complex daily medical treatments, or have mental health conditions.
After an applicant meets the medical/functional eligibility for Medicaid they are then subject to an Asset Test. The Asset Test is the aspect of Medicaid most individuals believe they understand and also the aspect subject to the most misconceptions. A simple summary of the Asset Test is that an unmarried applicant may have no more than $2,000 in countable assets in order to qualify for Medicaid. Since Medicaid is not simple it is important to understand the term "countable assets" exists because Medicaid exempts certain property when determining an applicant’s assets. These exemptions include the applicant's home, one vehicle, assorted household goods and personal items, certain life insurance policies, some funeral plans and expenses, and a small number of other assorted assets. An important note, while the value of these assets is not counted when determining whether an applicant meets the Asset Test, any of these assets which pass through the Probate process following the applicant's death may be claimed at by the state as part of the "estate recovery" process, which is designed to help the states for cover part of the costs of Medicaid care provided.
The application process is further complicated for a married couple, when only one spouse requires Medicaid coverage. The rules regarding asset ownership vary from state to state and therefore it is important to understand the rules in your state. In Michigan, during an initial application, the assets of both spouses are deemed to be assets of the applicant. This means that the non-applicant spouse, or Community Spouse, will likely need to “spend down” a portion of their assets in order for the applicant to qualify for Medicaid. The rules for this spend down are as complex as any other portion of Medicaid, but in short the Community Spouse is allowed to protect one half of the countable assets, but not more than $120,900 (in 2017), unless a different amount is determined pursuant to a court order.
After successfully passing these first two tests, the Income Test is likely much less daunting as it only requires that an applicant's monthly income be no greater than their monthly medical expenses. Unlike with the Asset Test, the Income Test only includes the applicant’s income when considering eligibility. Income of a Community Spouse is not counted, nor is the Community Spouse required to contribute his or her own separate income towards the cost of the applicants nursing home care. Additionally in certain circumstances the Community Spouse is granted a portion of the applicant’s income in order to assist the community spouse in maintaining assets such as the home. While this test may appear inconsequential it is important for potential Medicaid applicants to be aware of, so they do not take steps to meet the Asset Test only to learn they are ineligible because they have too much income.
Navigating all of the rules and regulations that govern Medicaid eligibility can be extremely time-consuming and there are many potential pitfalls which can result in a denial of benefits. The most common issue that causes problems with an application is when an applicant engages in a transaction that Medicaid deems to be a Divestment. A Divestment is defined as any transaction that takes place for less than fair market value in order to assist in qualifying for benefits. This includes the obvious example of giving away assets in order to meet the Asset Test, but also less obvious pitfalls including paying loved ones for assistance prior to applying for Medicaid. When an applicant engages in a prohibited transaction, Medicaid assesses a penalty, making the applicant ineligible to receive coverage despite otherwise qualifying for Medicaid. While it may appear obvious what transactions will be deemed divestments it is again critical to know that each state treats the issue of divestment differently and understanding the rules of your state is essential to avoiding the creation of a substantial problem.
As you can see, even when summarized, the rules for Medicaid eligibility are complex. Before taking any action related to Medicaid we strongly encourage our readers to consult with specialists with substantial experience in the field in order to minimize the chances of making an error that causes significant issues.

Matt and Al

Monday, December 11, 2017

The Question of Medicaid Planning

To expand upon our previous post on Gifting, today we are addressing Medicaid. Often questions regarding gifts are tangential to questions about qualifying for Medicaid. Taking time to educate clients on the benefits, and limits, of Medicaid is the first step to deciding if Medicaid is appropriate for a client's circumstances.

With the rising cost of healthcare, especially as it applies to long-term care for elderly individuals, our clients often inquire about Medicaid and its rules and limitations. While Medicaid is the “best insurance money can’t buy,” qualifying for coverage under Medicaid comes with significant asset and income limits. In addition, the facilities which accept Medicaid as a payment over private pay options are many fewer, and may be of lesser quality. Still, a common concern for clients is that significant medical costs incurred in their later years may wipe out assets they worked for their entire lives, leaving them unable to pass on any inheritance to loved ones. Questions initiated by the client, and sometimes by children worried about an inheritance, often center around protecting assets or about giving money away during lifetime.
It is important to clarify that qualifying for Medicaid is not about keeping the government from taking a person’s money, but reaching specific limits of assets before Medicaid coverage is available. In addition it is important for clients to understand that all health care is not the same and there are significant differences between providers. This is the point in most conversations about Medicaid where we discuss the differences between private-pay facilities and facilities funded primarily by Medicaid. We remind our clients that while a private-pay facility generally has a higher cost, the quality of life in those facilities tends to be markedly better. Whether because the facilities have more staff per patient, better amenities, or even simply nicer rooms, a private-pay facility is going to provide generally better care.
This conversation provides us with a gateway to remind people that the funds they will potentially spend on their care are the funds they worked hard to earn during their life. This leads to more in depth discussions about what is motivating inquiries about Medicaid and what is more important to the client, the quality of their care or passing more wealth on to their loved ones. It also provides us with the opportunity to discuss whether the client has reason to believe that they will need the types of long-term healthcare that Medicaid covers. This is because many people believe that Medicaid is an advanced version of Medicare and covers more costs than it actually covers. Often people begin asking questions about Medicaid long before they actually have need for such care and when they may never have healthcare need that Medicaid would cover.
Medicaid planning is a complex area of law with many potential benefits, but it is not something that everyone should be doing. There are a number of things that can be done to prepare a client for a potential Medicaid need, but it is first and foremost important to make sure that clients have the information they need to determine if Medicaid is appropriate to their circumstance. Even if Medicaid is appropriate, the rules that govern eligibility create many potential pitfalls for the unwary, it is important to avoid taking steps that could actually inhibit qualification for coverage in an effort to speed up coverage. As with so many things we discuss, the advice of an experienced attorney is invaluable.

Matt and Al

Friday, December 8, 2017

'Tis the Season for Gifting

Since restarting the blog we have focused primarily on basic estate planning concepts, explaining the various documents and how they work together to create a plan to address the uncertain and unexpected changes that come along during life. Over the next few blogs we are going to move into some more complex planning issues and address how they can be part of an estate plan. In the spirit of the season, we will start with the topic of gifting.

Any time of the year, but especially during the holiday season, clients often consider how they can help their loved ones by gifting cash or other property to them. Obviously the inclination to gift is important, but in the context of estate planning, gifting is generally associated with the tax implications of transferring assets, be it money, real estate, business interests, or any other property. The tax implications of gifting are a pressing issue because the Internal Revenue Code (the “Code”) imposes a Gift Tax on any gifts above a certain level.
The Code treats gifts during lifetime and at death in a similar manner considering them both transfers of wealth that may be taxable if the gifts exceed a certain value. The general rule is the Code imposes a tax on the transfer of wealth, but there are a number of exceptions to the general rule. First, gifts to a spouse are not taxed, unless the donee spouse is not a U.S. citizen. Second, gifts to anyone (relatives or otherwise) to pay for education or medical services are also exempt from gift tax as long as those gifts are paid directly to the school or provider. Third, there is an “Annual Exclusion” amount that allows a person to make as many gifts as they want, to as many people as they want, as long as the total gifts to a single person in a year are under a certain amount known as the Annual Exclusion (currently $14,000.00 and rising to $15,000.00 in 2018).
If a gift to any one person exceeds the value of that Annual Exclusion it counts against the giver’s Unified Credit which can be used during lifetime or at death. The Unified Credit translates into an “Exclusion Amount” which is currently $5,450,000.00 and set to rise to $5,600,000.00 in 2018. The Exclusion Amount can be used to protect transfers at death from Estate Tax or gifts during lifetime from Gift Tax. Each dollar of the Exclusion Amount used by a person during their life reduces their Exclusion Amount at death. If a married person does not use their full Exclusion Amount during lifetime or against Estate Tax at death their surviving spouse can add any unused portion of that Exclusion Amount to their own Exclusion Amount. The result of all of these exclusions is that a married couple can give away in excess of $11,000,000.00 in their lifetime without ever paying any tax on those gifts, which currently make the Gift Tax a very low impact tax, except in the case of high net worth individuals. Congress is currently debating changes in estate and gift taxation. If changes become law, we will discuss this then.
Because for the majority of the population has little worry about making taxable gifts, why is gifting a concern in estate planning? In our experience, issues with gifts revolve more around the personal impact of gifts to the donee rather than the legal impact. People commonly express concerns about gifting different amounts to different children, the impact of making gifts to children who may not make good use of the assets, their own financial security if they choose to make gifts, and the impact of gifting on other aspects of planning, including Medicaid. The stress and anxiety of these questions frequently outweighs a person’s concern about writing a check or turning over control of another asset.
When assisting clients navigating these issues we focus first on the client and ensure that the gifting is both the client’s desire and that the gift will not have a negative impact on the client, either currently or long-term. We remind our clients that they worked hard to accumulate the assets they have and that they should not give away anything that would result in a negative impact to their own lifestyle. Once the client is comfortable their own needs are taken care of, we can then discuss with them their particular situation on how to make gifts to assist loved ones, yet attach strings to protect against the known failings of those loved ones.
It is possible to use Trusts to make gifts to children or grandchildren, but place limits on the use of those gifts and also protect those gifts from creditor problems. One can also structure an intra-family loan that uses gifting to return loan payments to children at the end of the year (or simply provide children with the funds to make the loan payments). It is possible to structure the terms of a Living Trust to take into account gifts made to beneficiaries during lifetime and offset distributions from the Living Trust by the value of the lifetime gifts so that children ultimately receive the same distributions whether during their parent’s life or at death.
Gift planning, as with any other type of tax planning, should never let the “tax tail wag the dog”. By this we mean while it is important to consider the tax ramifications of the gift, it is more important to make sure the gift makes sense after a sound analysis, and then consider strategies enabling the avoidance of taxation. As we always stress, working with an attorney experienced in the legal obstacles and solutions is critical to avoiding mistakes and unanticipated consequences.
Matt and Al

Wednesday, December 6, 2017

Having a Trust is Half the Battle

As we discussed when we wrote about Living Trusts, one of the benefits of a Living Trust as part of an estate plan is the ability to change the distribution terms of the trust without needing to make changes to all of the assets. Once assets are funded to a trust they remain part of the trust property until they are specifically removed. This raises the question, what does it mean to fund assets to a trust? The funding of a trust requires making the trust the owner (or beneficiary) of an asset. This may sound simple but it is an aspect of estate planning that is often lacking, even with people have taken the time to prepare all of the documentation. Any assets not funded will be required to go through the probate process before the assets can be transferred to the trust and be administered and distributed pursuant to the terms of the trust, Depending on the assets requiring probate, the process can be relatively simple, but may be complex and require a lot of time and fees before the assets reach the trust.
Some assets are very easy to fund to a trust. For example, tangible personal property (including pots, pans, furniture, jewelry, etc.) is assigned to a trust with a one page document that declares those assets are property of the trust. This Assignment even works prospectively so that as a person acquires more “stuff" it all becomes property of their trust. The Michigan Probate Court has accepted these assignments of personal property as transferring assets of trust and therefore not requiring they be probated. Assignments are also commonly used to transfer ownership of business assets, such as L.L.C. Member Interests and partnership to the trust, though in that case it is necessary to review the terms of the company’s Operating Agreement or Partnership Agreement to ensure that those transfers are allowed under the entity’s controlling documents. Transferring stock of a corporation requires the canceling of an old stock certificate and the issuance of a new stock certificate in the name of the trust.
For bank accounts, investment accounts, stock, bonds, and other intangible financial assets a person must generally contact the company that holds the assets or accounts and inform that company of the person’s desire to transfer ownership of the asset to a trust. Many companies have specific types of accounts to hold assets owned by a trust so that the company follows the proper procedures when there needs to be a change of trustee. In most cases this change is simple, requiring a bit of paperwork and providing the company with proof of the trust’s existence (in the form of a Certification of Trust). Occasionally there will be additional requests for information about the trust because a company has particular record keeping requirements. While these requests are common, no company should need a full copy of a trust in order to allow a transfer of an asset to that trust. If a company does ask for such information it is best to have them communicate with the attorney who drafted the trust to ensure that you privacy is maintained and the company follows the law.
While funding a normal investment account to a trust is simple enough, it is important to remember that retirement accounts (IRA, 401k, 403b, etc.), operates differently and must be funded differently. Since you cannot generally change the ownership of a retirement account without negative tax consequences, you must change the Beneficiary Designation on the account in order to fund it to the trust. For married couples it is usually best to name a spouse as the Primary Beneficiary, because a spouse can “roll over” a retirement account into their own name at the death of the first spouse, and delay taking distributions until they reach age 70½. Naming a trust as a Contingent Beneficiary is often an excellent tactic to minimize the number of people involved in administering assets after death and to potentially create better creditor protection for beneficiaries (we will talk more about this in the future). Ultimately, the decision about whether to fund retirement assets to a trust is one that should be discussed with the attorney who drafted the trust and a trusted financial advisor. These people are best equipped to understand the circumstances and help you make good decisions.
A third major asset that needs to be funded into a trust is real estate. This includes primary residences, vacation property, vacant land, and any other buildings you might own. These transfers are made through the use of deeds that are recorded with the County Register of Deeds. The exact form of deed used may vary by circumstance, but again this is an area of trust funding where an experienced attorney’s assistance can be invaluable. That attorney should not only be able to recommend the proper form of deed, but also prepare the deed so it is ready to sign in conjunction with the estate plan and handle the recording of the document with the county.
There are many different types of property that need to be funded to a trust, so it is impossible to discuss them all here today, but as we have recommended repeatedly in this blog the help of an experienced attorney can be invaluable. If a person only receives a set of documents and brief instructions on the need to fund assets to the trust they are being done a disservice. In those circumstances, people frequently fail to fund to the trust and then probate remains necessary after the person’s death. Trust funding is as important to the estate planning process as the documents. Keep in mind that trust funding is part of the estate planning process. It is ongoing and must be updated as a person acquires new assets to ensure a smooth administration of the trust.
Matt and Al

Monday, December 4, 2017

Irrevocable vs Revocable Trusts, What's the Difference

As we previously discussed, there are different kinds of Trusts that serve different client needs. It is common to have a Living Trust as part of an estate plan because such trusts give the Grantors versatility to adapt their planning as life circumstances change to protect family members and avoid probate. There are other forms of Trusts that provide less flexibility to the Grantor, but they are useful in the right circumstances. Every Living Trust executed as part of an estate plan is revocable (changeable) during lifetime, but at the death of the Grantor becomes an Irrevocable Trust (unchangeable) administered by the Successor Trustee pursuant to the terms set by the Grantor during lifetime. 
This transition from Living to Irrevocable Trust at the death of a Grantor is the most common instance of irrevocable trusts in an estate plan. Generally the terms of the Living Trust provide that at the death of the Grantor no changes may be made to the terms of the trust, and that the successor Trustees have a duty to administer the Trust as a separate legal entity. This duty requires the successor Trustees to apply for a Tax ID number from the IRS, inform the institutions that hold the trust’s assets of the change in status, and provide the Beneficiaries of the trust with sufficient information to allow them to enforce their rights under the trust. The Trustees are charged with following the Grantor’s instructions with respect to administering and distributing assets to trust beneficiaries until the assets of the trust are exhausted or distributed outright to a beneficiary. 
While the “Irrevocable Living Trust” is the most common instance of an irrevocable trust in an estate plan, other forms of irrevocable trusts are available depending upon the need of the client. While clients like the Living Trust because it is changeable, they can control it during lifetime, and they can receive the benefits of the assets in the Living Trust, those benefits can be detrimental in certain tax and printer liability circumstances. Irrevocable trusts are beneficial as part of an estate plan because an irrevocable trust, if properly drafted, is a separate legal entity from the person who created it and therefore is treated differently in a number of respects. If properly drafted, irrevocable trust assets and income are not considered as owned by the Grantor, therefore taxable income is not included in the Grantor’s income nor can creditors up of the Grantor generally reach irrevocable trust assets. The drawbacks of an irrevocable trust generally require that the Grantor cannot be a beneficiary or trustee of an irrevocable trust, prevents the Grantor from changing the terms of the trust and prevents the Grantor from enjoying the benefits of the assets. In addition, income earn by a trust is taxed at a higher rate than that earned by an individual if income is not distributed to beneficiaries.
Even with these downsides, creating an irrevocable trust can address a variety of complex planning circumstances. The Irrevocable Trust can be used to own insurance policies provide cash to pay estate tax on the death of the Grantor, or be used to provide proceeds used to fund a business buyout, while not being includable in the Grantor’s estate. An Irrevocable Trust can also be used to hold funds to care for the needs of children with disabilities and not be subject to the requirement of state agencies that such funds be used in lieu of state funds instead of in addition to any straight funds. A recent change in Michigan law also allows the creation of an irrevocable trust that allows the Grantor to have substantial use of trust assets while shielding those assets from creditors in the event of a lawsuit. These techniques tend to involve individuals with more complex planning situations and significant assets, but can assist in addressing concerns about careers with higher than average liability or to address concerns regarding assets and second marriages. Other sophisticated estate planning strategies also use different types of Irrevocable Trust, but a discussion of these is beyond the scope of this blog.
Care should be taken when considering irrevocable trust strategies because, as with all good planning ideas, some may be taken to a ridiculous and untenable level. While properly executed and administered irrevocable trusts comply with legal provisions, the IRS is always looking for situations where trust are not properly drafted or administered, opening up the client to taxes and penalties Always consult with an attorney experienced in estate planning before signing any documents.
Matt and Al