Friday, March 23, 2018

Ensuring that Inherited IRAs Benefit their Beneficiaries.

As we have discussed in previous posts, there are many forms of trusts used in the estate planning process. While many planning strategies have greater benefit to individuals with more complex financial situations today’s post addresses one form of stand-alone trust which can be very beneficial to a wide variety of clients.

An “IRA Trust,” is a stand-alone trust, separate from a Living Trust that acts as the beneficiary of IRAs or retirement benefits. The provisions of an IRA Trust satisfy all of the regulations related to the distribution of IRAs and retirement benefits, allowing clients to create a situation where their beneficiaries can take advantage of their inherited benefits over their lifetime and enjoy extra protection from creditors and other potential problems.
The beneficiaries of the IRA Trust can be the same as those of the client's Living Trust. However, the distribution terms of an IRA Trust terms are often different from the Living Trust and frequently more restrictive in order to ensure that no matter what happens to the Living Trust assets, the IRA Trust assets will be available to help support children, grandchildren and other beneficiaries. Alternately, clients can use an IRA Trust to provide for a different group of beneficiaries than their Living Trust beneficiaries. For example, the Living Trust may benefit a second spouse while the IRA Trust has children and grandchildren as beneficiaries. Finally, an IRA Trust can help beneficiaries in more difficult or complex situations, such as beneficiaries who for any number of reasons are not prepared to handle large sums of money. In these situations, the IRA Trust Trustee can provide professional management of Trust assets, allowing the IRA assets to grow tax deferred, except for required distributions, and ensure that the beneficiaries do not waste those distributions.
Just like a Living Trust, the distribution provisions of an IRA Trust dictate how the beneficiaries receive distributions. One design option for an IRA Trust is the "conduit trust", under which the trustee has no power to accumulate plan distributions in the trust and must allocate any distribution received from the IRA or retirement plan to the beneficiaries. The conduit trust lessens the trustee’s ability to control the income but still allows control over principal distributions as necessary.
Alternatively, when it is desirable or necessary to impose greater control upon the dispersal of the Required Minimum Distributions (RMDs), an "accumulation trust" allows the trustee to hold the RMDs in trust for the beneficiary’s benefit. For example, if the beneficiary of the IRA Trust is special needs child, it is important to limit income distributions in order to avoid adversely affecting the beneficiary's right to receive state or federal benefits. It is important to remember however when using an accumulation trust that the federal government taxes income received from the IRA but not distributed to beneficiaries according to the potentially higher trust income tax rates.
Whether a client wants to provide for multiple generations, ensure a lifetime of income for a beneficiary in a difficult personal or financial situation, or simply ensure that different groups of beneficiaries receive the asset that provides them the greatest value, an IRA trust is an extremely useful tool for a wide variety of situations. Due to the complexities surrounding IRA and retirement plan distributions, it is important to work with experienced estate planning attorney familiar with those regulations in order for an IRA Trust to achieve a client's goals.


Friday, March 9, 2018

Property Tax Primer

Our practice focuses on estate planning, but because estate planning deals with finance, property, taxes, and a host of other complex concepts we also have knowledge and experience with those areas, which allows us to better assist our clients. As attorneys we are frequently called upon to explain things to our clients that fall outside the strict boundaries of the law. Recently a client called me with question that a bit of informal research indicates a lot of people need help answering. That question, "What does the Notice of Assessment, Taxable Valuation, and Property Classification, that IS NOT A TAX BILL, tell me?"

Understanding about their property tax liability is not simple. Many homeowners pay their property taxes via an escrow account connected to their mortgage and therefore the only time they think about property taxes is when a local election includes a millage resolution. In many cases, homeowners do not understand exactly how a millage will affect their property tax liability, except to know that it is likely to increase their property tax bill. 
Local municipalities, such as villages, cities, and townships, assess property taxes based upon the value of real estate. The “millage” is the rate of tax on real property and municipalities calculate that liability by dividing the value of the property by $1,000 and multiplying that number by the millage rate. This means that a piece of property valued at $200,000 subject to a millage rate of 30 will have a property tax liability of $6,000. On a tax bill, millage rates are broken out by what they fund, including schools, public safety, and other services provided by the municipality. Winter and Summer rates vary because municipalities collect millages for different services at different times of the year.
Since the municipality calculates property tax liability based on the value of property it is also important to understand how the municipality calculates that value. This is where the Notice of Assessment, Taxable Valuation, and Property Classification (the “Notice”) becomes relevant. The Notice is how the municipality informs the property owner of the taxable value of their property. The Notice also contains other information about the value of the property in addition to the taxable value and this information frequently surprises and confuses homeowners.
In addition to documenting whether a variety of property taxes exemptions exist for the property, the Notice includes a table showing the following information:

1. Taxable Value
2. Assessed Value
3. Tentative Equalization Factor: 1.0000

4. State Equalized Value
5. There WAS or WAS NOT a transfer of ownership on this property in 2017: WAS

Taxable Value is the value the municipality uses to calculate the property tax liability, depending on circumstances Taxable Value may change dramatically from one year to the next.
Assessed Value is the value of the property as determined by the Tax Assessor, the Assessed Value of the property is frequently different than the Taxable Value.
The Equalization Factor is part of a calculation that helps to ensure uniform property assessment across the state.
The State Equalized Value is the result of multiplying the Assessed Value times the Equalization Factor.
Knowing whether ownership of the property was or was not transferred in the prior year is relevant to understanding changes in values from one year to the next.

The municipality's Tax Assessor determines the Assessed Value of the property and the process used by the Assessor to make this determination is beyond the scope of this blog but in general, the Assessed Value for a property should be approximately half of the fair market value of the property. The Taxable Value for property differs from the Assessed Value due to legislation capping the amount the Taxable Value of property may increase from year to year as long as the same owner owns it. Thus if the property values in a particular area dramatically increase over time, the taxable value of a given property will not increase proportionately. However when ownership of a property is transferred (with certain exceptions) the limitation on allowable increase in Taxable Value goes away and the Taxable Value “uncaps” increasing to the Assessed Value of the property. In the example above, the transfer of ownership in 2017 allowed the 2018 Taxable Value to increase substantially.
The system is imperfect and it is possible to challenge the Tax Assessor’s valuation of the property, but doing so requires the homeowner to produce evidence substantiating their claim, it is not sufficient to simply request that the Assessor change their original Assessment. Under many circumstances, it is necessary to go beyond the local Assessor to a Tax Tribunal in order to receive significant changes in the valuation created by complex circumstances.
I hope that this information allows you to better understand a complex document or at least remind you that your attorney can be of assistance regarding a variety of subjects. As we remind our clients, taking the time to speak with an attorney can help address a problem the right way the first time, as opposed to calling an attorney after trying to handle a problem on your own and then needing assistance to correct mistakes. Much like calling a plumber under similar circumstances, it is likely to cost more for the attorney to correct a problem than it would have cost to get proper guidance in the first place.

Tuesday, February 27, 2018

When to Update an Estate Plan

We advise that estate planning is an ongoing process and that our clients should not simply put documents in the drawer and forget about them. Part of that ongoing process is a need to review and, if necessary, update documents on a regular basis. Our clients often ask us, "How often should I update my documents?"

When it comes to keeping an estate plan up to date, there is no one-size-fits-all answer, because a client’s need to update documents is related to when things change in the client's life. For some clients there is a need for annual review and updating the documents to reflect changes in asset ownership, gifting to loved ones, charitable inclinations, or desires to change their beneficiaries. For other clients, for example those with young children, fewer changes may be necessary though it is important to ensure that the designees named to serve as Guardians and Trustees remain current with the people that a client wants to raise and provide for their children.
There are a number of life events that may give rise to the need for amendments or other changes to estate planning documents, including births, deaths, changes in employer/retirement, and in geographic relocation. Depending on how documents are structured and whether various life events were taken into account in the drafting of documents, any of these events can create the need for significant updates.
While most estate plans automatically take into account the birth of additional children, unless the client has designated successors, the death of a successor trustee, attorney in fact, or patient advocate means that it is time for an update. The same is true if the client simply no longer wants their original designee involved. Failure to update designees may delay or derail the administration of an estate or Trust.
As we touched on previously, in general estate planning documents do not “expire”. A Will drafted in 2018 is as good as one drafted in 1968, but documents can get “stale.” A stale document is one that has not been updated in many years and especially in the case of Powers of Attorney and Patient Advocate Designations, a stale document can make administration more difficult. Financial institutions, doctors, and others may be reluctant to follow the instructions of a designee relying on a ten year old document, worrying that the Principal may have executed a contradictory document in the interim or, because of time, may not want that person designated to exercise power. Refreshing documents regularly keeps them current with laws and helps avoid conflicts with anyone accepting the documents as proof of authority
We recommend reviewing documents at least once a year to confirm whether or not changes are necessary. When in doubt if a change is needed, an experienced estate planning attorney can provide you with the guidance you need to avoid putting yourself or your loved ones into a difficult position.

Matt and Al

Friday, February 23, 2018

You May be Owed Millions of Dollars

All right, we acknowledge that our title is more than a little click-baity, but today's blog does provide you with the tools to discover whether the State of Michigan is holding money, though probably not millions of dollars, in trust for your benefit. 

The State of Michigan, and every other State, operates a Department for tracking and maintaining Unclaimed Property. Unclaimed Property is any property that legally belongs to a known person, but the person (or company) currently in control of the property cannot locate the proper owner. This situation arises in the context of estate planning when it is impossible to locate the beneficiary of a Trust or Will, but more commonly arises when a person is entitled to a refund or proceeds from insurance policy and they cannot be located.
The process for locating and claiming Unclaimed Property is easy and rarely necessitates an attorney's involvement. The Michigan Department of Treasury maintains an Unclaimed Property website, there you can search for Unclaimed Property by last name or business name. If potential unclaimed property is located, a one-page form is all that a person needs to complete in order to initiate the process of claiming the property. Personal Representatives and Trustees may use the same website to locate property belonging to recently deceased relatives, which those representatives can then claim for the decedent’s family.
While the value of unclaimed property is generally not exorbitant, we have assisted multiple clients in making claims for abandoned insurance policies, bank accounts, and company stock that resulted in surprising windfalls for the beneficiaries. The simplicity of making a claim for Unclaimed Property means that doing so has almost no downside. The alternative to locating property that the state of Michigan is holding in for your benefit is the property will escheat to the state of Michigan, usually in three years.
We recommend that our clients take the time to search for unclaimed property approximately every year, because there are some assets, including unclaimed wages, which the State only holds for a single year. This search can be part of an annual checkup of estate planning where clients review their existing estate planning and consider whether any changes are needed to that plan based upon events that occurred in the previous year. Take a few minutes before the weekend to see if you have an unexpected windfall waiting for you.

Matt and Al

Wednesday, February 21, 2018

A Tale of Two Documents

As we discussed in previous posts, estate planning addresses more than just post-death planning. Powers of Attorney and Patient Advocate Designations allow a person to choose who has the authority to act on their behalf in the event of incapacity. It is important that all of your estate planning documents are up to date and specifically grant authority to the designee because companies seeking to protect themselves from litigation are reluctant to allow designees to act absent confirmation they are doing so in the Principal’s interest.

Nick and Paul have almost nothing in common except that both were in situations where their loved ones needed to make use of Durable Powers of Attorney in order to manage their affairs. While both families were able to act on behalf of their loved one, their experiences while making use of a Durable Power of Attorney were very different.
While Nick and Paul both had Durable Powers of Attorney, naming people to act on their behalf in the event that they became incapacitated, there were significant differences between these documents. Both men had originally done estate plans in the early 2000's, but only Paul had taken the time to regularly update his documents so that when both were incapacitated in 2015 Paul's Durable Power of Attorney was two years old while the Nick’s had not been updated in nearly 15 years.
Paul's son, who was designated as his father's Attorney-in-Fact had little trouble managing Paul's finances, including ensuring that Paul's home and bank accounts were properly funded to Paul's Living Trust. Paul's updated Durable Power of Attorney contained specific enumerated powers as well as the provisions that exculpated third parties who acted in reliance upon good faith that Paul's son had the authority to act on his father's behalf. Between these specific provisions regarding the powers the Attorney-in-Fact could exercise and the provisions for protection from liability, it was relatively easy to manage Paul's affairs during his incapacity.
Unlike Paul, Nick had not taken steps to ensure that his estate plan was up to date. Since the time Paul executed is Durable Power of Attorney, the person Paul named as his primary Attorney-in-Fact had died and Nick’s son needed to acquire additional documentation in order to prove his authority under his father’s Power of Attorney. In addition, Nick's Power of Attorney lacked significant detail with respect to the powers the Attorney-in-Fact could exercise. Instead of enumerating specific powers, Nick’s Power of Attorney only stated that his Attorney-in-Fact had broad authority to act in Nick's best interests, including a much smaller number of activities than Paul's more up-to-date documents contained.
Contrary to the relative ease with which Paul's son was able to manage his father's affairs, Nick’s son repeatedly needed assistance in establishing that the primary named attorney-in-fact could no longer act, that he had authority to act in his father's behalf with respect to particular activities, and that despite the amount of time which had elapsed since the execution of Nick’s power of attorney, no contradicting document existed. Fortunately we were able to provide sufficient assistance to keep these inconveniences from rising to the level of significantly interfering with Nick's care.
Keeping all estate plan documents up to date so that they reflect the client’s current wishes is important and not just because those wishes may change over time. Ensuring that documents provide sufficient guidance to designees and institutions allows the documents to be used efficiently and effectively when needed. While it is possible to guide designees through these matters, and we are happy to do so, it is much preferable, as with most estate planning, to know that the documents will work as intended and not encounter additional problems while attempting to cope and deal with obviously difficult circumstances.

Matt and Al

Monday, February 19, 2018

Mixer Feelings

While a great deal of an attorney’s responsibility attaches to understanding the law, in the area of estate planning an experienced attorney will also serve as a guide, counselor and mediator, assisting client's designees as they navigate complex family dynamics. It is important to communicate to beneficiaries left behind after a client has died the wishes of the client as laid out in the estate planning documents. While a beneficiary may disagree or be unhappy with the terms of the documents and what has been left for them, it is important that all beneficiaries understand the intent of the client and that arguing against it can cost all parties significant time delays and expense. Despite this process, a may still act against their own best interest and the best interest of the other beneficiaries.

Ramona was a lovely woman who had strong, but different, relationships with her two daughters, Samantha and Tammy. Ramona's relationships with her daughters reflected different hobbies that each enjoyed, and because of differences in Samantha and Tammy’s personalities, Ramona's relationships with her daughters rarely overlapped. Unfortunately, while Samantha and Tammy's different personalities allowed Ramona to enjoy time with each of her daughters, those personality differences also created deep-seated tension between the sisters.
Following Ramona's death, Tammy and Samantha were named as co-trustees to administer their mother's Trust, but unfortunately almost immediately problems began to arise. Shortly after Ramona's death Tammy went to Ramona's home and removed a number of items of personal property. In response, Samantha took steps to secure Ramona's estate planning documents, which led to rapidly escalating retaliatory actions between the women until both realized that they would be unable to continue the administration of their mother's Trust without some sort of mediator. We had represented Ramona in preparing her estate plan and, thankfully, her daughters trusted us to act as impartial arbitrators and guide them through the administration process.
Tammy and Samantha divided the administrative efforts so that their contact would be minimal and for the most part occur using us as intermediaries, which worked well until it came time to address the division of the remaining personal property. This portion of the administration grew increasingly acrimonious as Samantha and Tammy continued to argue. The argument came to a head in our offices where we met with the two women in separate conference rooms and attempted to sort out the cause of their fighting. After much discussion, it became clear that Samantha was particularly incensed by Tammy's initial removal of items from Ramona's house, including a KitchenAid stand mixer. That mixer was a particular sticking point because Samantha knew that Tammy already owned a stand mixer and therefore likely had no need for Ramona's mixer.
When we broached the subject of the mixer with Tammy, she shared with us a number of wonderful memories of her time speaking with her mother and recollected how impressed Ramona always was that the mixer she received as a wedding present held up so well over many decades of use. Tammy indicated that she hoped her mother's mixer would continue to serve her just as well and help her to remember her mother every time she baked. As Tammy shared the story, it became clear that her initial action had not been malicious, but that she never considered how Samantha might feel about the situation. The idea of a compromise began to form and we returned to speak with Samantha.
After confirming that Samantha did not share Tammy's sentimental feelings about the mixer we brought the two women together and asked Tammy to share the memories of baking with Ramona with her sister. After Tammy recounted all the years that she baked with her mother, we were able to work out an arrangement where Samantha received Tammy's mixer, Tammy kept Ramona's mixer, and the two sisters began the process of healing their relationship. While I cannot say that we created lasting peace in our time, we did at least enable the family to effectively administer their loved one's affairs.
While not all conflicts are as simple to resolve as swapping small appliances is important to recognize that often what seemed like insurmountable conflicts have their roots in relatively small transgressions and with proper assistance, it is possible to begin the healing process. An experienced estate planning attorney will do more for the family than prepare documents or go to the Probate Court. They can also help strengthen family bonds in the face of emotional difficulties.

Matt and Al

Friday, February 16, 2018

What are Will Substitutes?

A good estate plan makes the transition of assets desired by the decedent an easy process. Even in the absence of good planning, the Probate Court will attempt to follow the wishes of the deceased if it is possible to establish by clear evidence what the decease wanted to happen. Establishing that by clear evidence, when potential beneficiaries disagree about intent can be very time consuming. 

Jan had two sons, Ken and Luke. Ken has three children, while Luke never married and has no children. While Jan lived comfortably and was generally well organized but never saw the need to work with an attorney to prepare an estate plan. Instead, she made lists of items in her home that she wanted distributed to her sons, daughters-in-law, and grandchildren, and prior to her death wrote a letter to Ken and two of her grandchildren telling them what she wanted to happen to her home and money after she passed away.
While Jan had good relationships with all of her family members, she was particularly close to two of her grandchildren who lived close to her in her later years. These two grandchildren provided helped Jan a great deal so in her letter Jan indicated that, with the exception of the items she listed for each of the other family members to receive from her home, she wanted these two grandchildren to inherit her remaining assets. Following Jan's death, Ken and his family engaged our firm to assist them with the probate of Jan's estate and the enforcement of her wishes.
Since Jan never created a will it was necessary to petition the Probate Court to appoint a Personal Representative (the “PR”) for her estate and to grant that person the authority to follow Jan's wishes. Normally when a decedent lacks a formal Will the intestacy statutes control the appointment of the PR and the distribution of an estate. Michigan law also allows the submission of other writings to the probate court, including letters, as evidence of the decedent’s testamentary intent (their wishes regarding the distribution of assets after their death) for the Court to rule that those writings are to be treated as a "Will Substitute." In our Petition to the Probate Court we included copies of the letters written to Ken and both grandchildren, requesting that the Probate Court appoint Ken as the PR and authorize him to distribute Jan's assets pursuant to the wishes articulated in her letter.
While under the best of circumstances it is possible to establish a document as a Will Substitute with only a single Hearing, in this case the process was complicated by Luke's desire to have his mother's assets distributed pursuant to intestacy statutes. Under the intestacy statutes Ken and Luke, as Jan's surviving children, were entitled to divide Jan's property equally between them. Since the proposed Will Substitute would result in Luke inheriting only a small number of family photos and other personal items he had substantial incentive to question and challenge the use of that document.
As a result, in order achieve the Probate Court’s permission to make distributions pursuant to Jan's letters, we undertook a lengthy process of litigation. This process required a number of hearings and delays in the administration caused by Luke's need to represent himself after the attorney he initially hired to pursue the matter requested the court's permission to stop representing Luke. While self-representation is not uncommon in probate matters, it has the potential to increase significantly the amount of time needed to resolve the matter because the self represented party may not fully understand the actions they need to take but also because in any family conflict the emotions involved may result in parties pursuing a matter well after it is clear that they lack a chance of prevailing.
Fortunately for Jan's grandchildren, Michigan law encourages judges to consider any form of a person's expressed wishes to serve as a Will Substitute. Despite our success in achieving Jan's stated goals, it is important to note that much of the complication here could have been avoided with a small amount of proper planning. While there are few barriers to a disgruntled heir, like Luke, attempting to challenge the validity of a Will or Will Substitute, it is much easier to achieve the desired results with the proper documentation. In those circumstances, being able to present Luke with a Will articulating his mother's wishes likely would have ended his efforts to overturn Jan's wishes with significantly less effort.

Matt and Al

Monday, February 12, 2018

Planning and Writing an Ethical Will

In the last blog, we discussed ways clients can protect their beneficiaries against their own flaws and weaknesses. For those clients who are concerned that their beneficiaries have not developed what they consider an appropriate value and belief system, it is often a good idea to take a holistic approach to estate planning and discuss how to pass on "values" as well as "valuables". An "Ethical Will" is an ideal vehicle for attempting, one last time, to impart important values to beneficiaries.

An Ethical Will is a document that details a client's core values and principles and communicates that philosophy to their beneficiaries. It is not a legally binding document, but rather an expression of the beliefs, opinions and cherished memories a person does not want forgotten. It may be something as simple as things you learned from your grandparents or other relatives that you want your children to remember. It may be a reminder of important events in your life or something you learned from an experience that you want to pass on. It might also be an expression of the values to which you hope your beneficiaries will aspire. Where appropriate, we should give these life lessons a higher priority in our estate planning discussions.
Jim Stovall, author of "The Ultimate Gift", a book in which the main character passes on 12 life lessons to his grandson, has said "Giving second- or third-generation family members resources without a mental, emotional and informational foundation is like giving them a loaded weapon without instruction or caution." More of my clients are starting to feel the same way. Similarly, a bank trust officer once said to me that he thought third-generation money was the most useless. The first generation worked hard to earn the money and the second generation saw how hard their parents worked for the money and had an appreciation of it. However, the third-generation had no idea how hard it was to earn, had no appreciation for the money, and therefore rarely put it to good use.
A simple Google search of the words "Ethical Will" will provide more than enough information and examples if one wants to consider writing an ethical will. It need not be something large or formal, and may begin with simple thoughts jotted down from time to time. The website,, suggests some tips for writing an Ethical Will, such as:
  1. Over time, write down ideas - a few words or a sentence or two about:
    1. Your beliefs and values
    2. Things you have done to act on your values
    3. Things you have learned from others
    4. Things you needed to learn from experience
    5. Things for which you are grateful
    6. Your hopes for the future
  2. Write about important events in your life
  3. Save items, such as quotes and cartoons, that articulate your feelings
  4. Review what you collected after allowing it to sit for a time and then arrange the information into an order that makes sense to you.
While an Ethical Will may be beyond what many clients are willing to prepare, it is becoming more critical that people pass along their values before they pass along their valuables. While leaving one's tangible estate is important, it can be even more impactful to leave an "intangible” legacy.

Al and Matt

Friday, February 9, 2018

Protecting Beneficiaries Against Themselves

The next two blogs take a break from our example series to address a side of Estate Planning that can occasionally get lost in the efforts to get the best legal advantages for our clients. It is important to remember that regardless of the legal and financial benefit a client may receive from having a plan, the emotional benefits cannot be forgotten. 

As estate planning attorneys, we spend a considerable amount of time with clients discussing the “legal” topics of estate planning, such as taxation, probate avoidance, and beneficiary selection. We worry about the value and type of assets in the estate as well as ensuring that clients transfer assets properly so that documents work as intended. We work with the clients to determine who they want to receive assets, in what proportions, and the manner in which they are to receive these assets. In short, we worry about how clients’ "tangible assets" will be distributed following their death.
Sometimes, clients are open about the shortcomings or flaws of their beneficiaries and their ability to handle assets they might receive. More often, clients will initially keep their concerns to themselves, reticent about telling family secrets. In order to properly draft an estate plan that meets their needs it is important that we as professionals are able to get clients to open up about such concerns. 
Are the beneficiaries mature enough to handle large sums of money? 
Do they have problems with a rocky marriage, creditor issues, or even a drug or alcohol dependency? 
Is there a reason to exclude a particular beneficiary?
It is our job to help the client consider all of these factors in determining the distribution of their assets. 
Legally, we can assist the client with options for protecting beneficiaries against themselves and their own tendencies. Clients can establish Trusts that allow the trustee to determine how much money a beneficiary needs, or should have, at any one time. Limitations on immediate distributions can protect the beneficiary’s inheritance against creditors or being included in a divorce settlement. It is possible to include provisions to protect the beneficiary against drug or alcohol dependencies by requiring that the beneficiary demonstrate, through regular testing, that they are not engaging in their vices before the trustee makes distributions. The only limitation on what a client can do is their imagination. I once had a client who indicated that one of his son could not receive any inheritance unless the son was “not married to that woman”.  The client had his reasons for doing this, and the provision created the potential to cause significant family issues upon the client’s death, but for a time it was part of the terms of the client’s trust.
Properly drafted Wills and Trusts can ease a client’s mind that they have legally protected their beneficiaries. However, what about a client’s concern that their beneficiaries have not developed values and beliefs similar to the client that makes the client comfortable with passing on tangible valuables. If this is a concern, a client may want to discuss and consider preparing an “Ethical Will” to help point there beneficiaries in an appropriate direction. The next blog will expand upon the purposes of Ethical Wills in greater detail.

Al and Matt

Wednesday, February 7, 2018

Long Delayed Probate

One of the common complaints about the Probate process is that it takes a long time. This can be true and, even more frustrating for clients, sometimes those delays are not caused by action but rather inaction. Today’s example shows how the process can drag on despite a Personal Representative’s best efforts.

When Donna’s mother, Edith, passed away, Donna hoped that everything related to Edith’s estate would be simple. Edith owned a home and had both a checking and savings account. Edith had also taken the time to write out a simple form Will, leaving everything she owned to Donna, and have this Will witnessed and notarized as required by Michigan law. By any estimation this was to be a simple Probate and we were happy to assist Donna in completing it. Unfortunately, Donna and Edith had one problem-- they had not anticipated, Edith’s son Frank. 
Frank had not been active in his mother’s life and therefore Edith had chosen to make Donna the sole beneficiary and Personal Representative under her Will, leaving nothing to Frank. However because of the rules of Probate administration, Donna was required to give Frank notice of the proceeding, which is where problems began. Under Michigan law, while an informal Probate is favored, any interested party (which includes heirs of the decedent who were excluded under Will) may Petition the Probate court to seek a formal probate. In this matter, Frank filed such a Petition challenging the validity of Edith’s Will. 
When a Probate proceeding becomes formal it means that there must be Hearings before the Probate Judge, and when the Probate court schedules Hearings it does so based on the assigned Judge’s calendar. Unless there are extenuating circumstances, such as a time-sensitive emergency, these hearings are scheduled for a date weeks in the future so that the Parties involved have time to file written information with the Court and give the other Parties involved the required Notice. When Frank caused the informal Probate of Edith’s estate to become a formal proceeding the simple process of administering a relatively small estate transformed into a saga that Donna would not soon forget. 
The first Hearing on the matter was scheduled for six weeks from the date that Frank had filled his Petition challenging the validity of the Will. During the intervening time, we prepared a Response to Frank’s Petition evidencing the proper execution of Edith's Will and provided Frank and the Court with that Response. Three days before the scheduled Hearing we received Notice that Frank had hired an attorney to represent him and this attorney had promptly filed a Motion to Adjourn the scheduled Hearing in order to have time to properly prepare. While inconvenient, this type of request is common in Probate litigation and the Court willingly allowed the delay, moving the Hearing forward four weeks. 
In the next four weeks we attempted to communicate with Frank’s new attorney, but after an initial conversation received no replies. Nothing further was filed with the Court and the day of the scheduled Hearing the attorney did not appear in Court. As a result of the missing attorney, but the presence of Frank in the Court, the Judge further adjourned the Hearing for two weeks and we provided Notice to the Attorney who finally responded to communication indicating that he had never been paid a Retainer Fee by Frank, therefore had stopped working on the matter, and had never filed an Appearance with the court. Frank unfortunately neglected to tell the Court that his attorney had “fired him”. Nearly two weeks later we received another Motion requesting an Adjournment, this time due to Frank’s illness. The matter had not yet grown to the point where the Judge felt that delay was unwarranted and the matter was delayed five more weeks. This five week delay become nine weeks when Donna needed to travel for work and then the Judge was on vacation. 
Thankfully in the interim we were able to convince the Judge to grant Donna limited authority over Edith’s Estate in order to at least maintain the status quo of the property. We had been able to provide Notice to Creditors and prepare an Inventory of the Estate’s assets. All of this was beneficial when 26 weeks later we again appeared at the Probate Court for a Hearing to discover that Frank had a new attorney, retained the prior day, requesting a further delay. Thankfully, by this the Judge was able to see the chain of events, review our Response to Frank’s initial threadbare Petition as well as the additional work done by Donna in her limited capacity, and see through all of Frank’s excuses.. 
Since Parties are entitled to due process in the Court, the Judge could not simply reject Frank’s attorney’s request out of hand, but another Hearing was scheduled for two weeks later with the caveat that no further delays would be granted in the matter. As the Hearing day drew near, we received a phone call from the newest attorney indicating that he intended to withdraw from the representation because Frank had failed to communicate further information to him that would support Frank’s claim that Edith’s Will was invalid. When the day of the Hearing arrived, Frank failed to appear in Court. 
The Judge, after a seven month delay, quickly allowed Frank’s attorney to withdraw from the matter and named Donna as Personal Representative of the Estate. Normally this would be the point where Donna was able to proceed with the remainder of the Administration without further ado, but Frank was unwilling to let the matter drop. Over the course of the following year Frank filed a number of spurious motions with the Court forcing Donna to spend substantial additional time and effort in the administration of her mother’s estate. 
The moral of this story is that in the end the right party triumphed, but that there are more efficient ways of reaching the same result. Had Edith taken the time to speak with an experienced attorney she could have learned about deeds that would transfer her home to Donna automatically at her death and been instructed to name Donna as the beneficiary of her bank accounts. These two actions, which collectively cost almost nothing, would have saved thousands of dollars in fees and hours of time because the assets would then have passed to Donna without having to go through the probate process. This is just one example of how a small amount of planning now can result in huge future savings. 

Matt and Al

Monday, February 5, 2018

Understanding Informal Probate

Our recent blogs have focused on the benefits of estate planning. As we have indicated in the past, even if an individual does not do any of their own planning, there is a default plan under Michigan law that addresses the distribution of assets in the absence of other instruction. While this is only one aspect of the Probate process, it is a good place to start a series of the examples focused how an estate plan, or lack of one, affects post-death administration. 

Alice was the wife of Bill, the mother of Carole and Don, and the grandmother of six loving grandchildren. She stayed active in her later years volunteering with a number of organizations and was well respected in the community. After her husband, Bill, passed away, she became the sole owner of all of their joint assets and never felt the need to do any additional estate planning to address the distribution of her home, bank accounts, and the IRA she rolled-over to her own IRA after Bill’s death. She never saw the need to worry about what would happen after she died. Despite Alice's lack of concern, her estate was valued at more than $500,000.00 and required a fair amount of work.
Since Alice owned all of her assets individually and did not have a Will, it was necessary to open a probate estate in order for Carole and Don to gain the authority to gain access to and manage Alice's assets. Michigan law allows for three forms of probate administration, the small estate affidavit (for states with a total value of under $20,000), the informal probate proceeding (a simplified form of probate requiring more limited involvement of the probate court), and the formal/supervised probate proceeding (used to handle any litigation involving an estate). To administer his mother’s estate, Don retained our firm to assist him with the informal probate process. 
When opening an informal probate proceeding without a Will it is necessary to provide the court with a variety of information, including the identity of all of the decedent’s heirs, the identity of the proposed Personal Representative (as well as any other individuals with equal priority to serve in that role under the law), and a statement that the person applying for the informal probate is unaware of the existence of any Will belonging to the decedent. Don’s application for informal probate requested that the court appoint him as the Personal Representative though he had equal priority under Michigan law with his sister Carole. Upon receiving the Probate Court's appointment and his Letters of Authority Don then had 28 days to inform Carole of his actions. It is at this point in the estate administration process that it is first possible for an “informal” probate to become a “formal” probate. Had Carole chosen to challenge Don's appointment as Personal Representative the Probate Court would hold a Hearing on the matter and the administrative process would, at least temporarily, transition to a formal probate.
Fortunately, Carole and Don have a strong relationship and Carole lived outside of the state, so it made sense to everyone for Don to serve as the Personal Representative negating the need for a more formal probate proceeding. As Personal Representative, Don was then obligated to fulfill certain duties, including informing any known creditors of Alice of her death, publishing a notice to unknown creditors, assembling an inventory of the estate assets and keeping the Court and Carole informed of the status of each of these actions. As he proceeded with his duties, Don also became responsible for paying Alice’s outstanding bills, closing her accounts, and eventually selling her home. After he completed these duties, Don divided the remaining assets equally between himself and Carole as required by the Michigan Intestacy Statutes. Because of the various notice requirements, the minimum time for completion is 6 months and maybe longer depending upon the types of assets in the estate
It is worth noting that not all of Alice’s assets passed through the Probate process. While inventorying Alice’s assets Don learned that Alice had designated beneficiaries of her IRA many years earlier, naming her grandchildren to receive equal shares of that account. This beneficiary designation superseded the intestacy statute because the IRA custodian was contractually obligated to pass the IRA to the grandchildren, and the court had no jurisdiction in that asset. Thankfully, all of Alice’s grandchildren were over the age of 18 so this distribution was able to happen without any additional complication. If any of the grandchildren have been under the age of 18, the Probate Court would have required that a guardianship and conservatorship proceedings be instituted to protect the interests of the minors. This proceeding would have continued until all of the grandchildren reach the age of 18, necessitating annual accountings and hearings with the Probate Court. Consider how the children would have felt if Alice had spent most of her other assets maintaining her lifestyle and the only significant asset was the IRA. Was it really Alice’s intent to essentially “disinherit” her children in favor of her grandchildren?
The probate of Alice’s estate was a relatively simple process without any conflict between heirs, without the discovery of unknown creditors, and without difficulty in distributing assets to heirs. Even with that simplicity it took nearly a year to complete the process. With a little bit of planning on Alice’s part much of the work done by Don could have been significantly simplified and it certainly would have decreased the cost in both attorney’s fees and Don’s time. We recommend that everyone put some form of planning in place, because the value of that planning is worth many times its cost. Keep in mind that estate planning is not a one size fits all process, you should take the time to work with an attorney who will assist you in preparing the plan that is appropriate for your circumstances.

Matt and Al

Wednesday, January 24, 2018

Other Planned Gifting

While gifting strategies can involve millions of dollars and extensive family businesses, they can also take a much smaller form, allowing parents to make gifts to children to assist in the purchase of a home or other investment opportunities. Coupled with intra-family lending strategies it is even possible to greatly exceed the annual gifting limits.

Eric and Fran have two children, Georgia and Haley, with whom they are very close. Circumstances had led to the daughters, along with their husbands, living a significant distance from Eric and Fran. A significant factor in this situation was the high cost of property near Eric and Fran’s home, keeping the daughters in their young marriages from affording to live closer to their parents. Eric and Fran had done fairly well for themselves and have the flexibility to assist their children, but want to do so in a way that does not completely provide the daughters and their husbands with a handout. 
Through a series of discussions with us, each other, and a realtor, Eric and Fran located a large parcel of land for sale in an area that was centrally located for all three families. They then proposed that if the daughters and their husbands were willing to build a home on the property, Eric and Fran would purchase the land and divide it into three parcels so that the family could all be close together. This land division would take the form of a gift where Eric and Fran would each give each of their daughters and each husband a gift of interest in the land on December 31st and January 1st of the following year. This complex gift allowed Eric and Fran to each give $14,000 of value to each of their daughters ($28,000 from both parents together) plus the same amount to each son-in-law. They then repeated the gift the next day so that within the span of twenty-four hours Eric and Fran had effectively gifted $112,000 in land to each of their children. 
While this initial gift allowed Eric and Fran to bring their family back together, it was only half of the plan they eventually put into place. Once Georgia, Haley, and their husbands owned the land, there was still the matter of building houses. After working with builders and architects to create designs for all three homes, construction was set to commence.  Instead of funding the construction with a standard building loan, Eric and Fran had the means to loan each of their daughters the cost of construction. They did this much like a normal loan, documenting the whole process and including with the loan a mortgage on the property and residence, which insured that Eric and Fran would be repaid, and gave them a priority lien on the property in the event their daughters ever found themselves in financial dire straits. 
A significant benefit of this intra-family loan was the ability for Eric and Fran to use the IRS’s Applicable Federal Rate (AFR) as the interest rate for the loans, instead of using a standard bank rate. While bank rates at the time were relatively low, the AFR for a short-term (under three years) intra-family loan was under 1% annually. This allowed Eric and Fran to establish loans to their daughters that would save the daughters thousands of dollars in interest payments over the lifetime of the loan. The monthly loan payments were amortized over a normal 30-year period with a balloon payment at the end of three years, the intention being that the loans be “refinanced” at the three-year mark to pay the balloon payment and every three years thereafter to continue to take advantage of the very low short-term AFR. 
While all of these steps provided a great benefit to Georgia and Haley, Eric and Fran wanted to build in one more benefit to their daughters (and their sons-in-law). Each year after the creation of the loans, if each couple made all of their required payments on time and in full, Eric and Fran would make additional “gifts” to reduce the principal of the loan. These gifts are always less than the annual exclusion and therefore will never impact the couple’s lifetime exemption. Eric and Fran also like the idea that the future gifts are discretionary (and not guaranteed or required) and that they are not simply handing their daughters money that they will not fully appreciate. If Georgia, Haley, and their husbands follow through with their obligations in full (and Eric and Fran continue to make annual gifts), they will enjoy fully paid off homes in a burgeoning Michigan community in less than ten years, a significant advantage and one that will not incur any gift tax liability for anyone involved. 
We cannot state enough that this and every other strategy we discuss in this blog involve complex planning and should not be attempting without consulting experienced attorneys and other advisors to ensure that expensive errors to not occur. 

Matt and Al

Monday, January 22, 2018

Planning to Address Highly Appreciating Assets

While not applicable to all clients, it is important to recognize that clients in unique financial situations create unique planning opportunities. One more common situation is a client who wishes to limit their possible Gift/Estate Tax liability while retaining control and income from assets that are likely to continue appreciating over the years. Commonly this includes real estate and family owned companies. 

Carl and Debbie opened a dry cleaner in a strip mall many years ago. Since then, they bought the strip mall containing their store, then the gas station on the corner, and then many other pieces of commercial property. They continue to own that original dry cleaners, and many of their children and now grandchildren have worked there to ensure they understood the value of hard work. In addition to growing the assets of the family owned businesses, Carl and Debbie ensured that their family members got good educations and where possible went into careers that bolster the growth of the family business. While still active in some aspects of the family business, Carl and Debbie now are ready to begin stepping back and giving more responsibility to others, but they are not quite ready to relinquish control of the company. Nor are they prepared to reduce the income to which they have become accustomed.
Carl and Debbie have been cautious clients for many years, making sure to limit their liability through judicious use of LLCs for each of their businesses, creating a tree of holding companies that protect them in the event that a tenant or customer should decide to create legal problems at a particular property. A company known as C&D Holdings, LLC (C&D), ultimately owns all of these different entities and Carl and Debbie each own 50% of the Membership Interests (like stock for an LLC) in C&D. Further breaking down the Membership Interest of C&D, the LLC has Voting and Non-Voting Membership Interests, meaning that the owner of the Voting Interests has control of the decision making for the company and the owners of Non-Voting Membership Interests do not get a say in the operations but do have value. C&D has 4% Voting and 96% Non-Voting Membership Interests, with Carl and Debbie owning an equal share of each.
Carl and Debbie are aware that the value of C&D is likely to continue to increase over the coming years, even as they become less active in its operation. Additionally, they want all of their family (five children, twelve grandchildren, and three great-grandchildren) to benefit from their success, even those family members are not directly involved in the operation of C&D. Carl and Debbie also know that they are not ready to retire from the operation of the business, nor have they fully prepared the family members who are active in the operation of C&D for that situation. The generally increasing value of the company, coupled with the desire to continue to receive income from the business creates a situation where it is beneficial to Carl and Debbie to begin gifting part of their Non-Voting Membership Interests in C&D while retaining the Voting Membership Interests.  This allows the value of the company to appreciate in the hands of Carl and Debbie’s heirs and limits the future Estate Tax liability created at their deaths. While these gifts will have an impact on Carl and Debbie’s Gift Tax liability, it is possible to limit that impact through further planning. 
The rules regarding Gift Tax liability are somewhat complex and we addressed them in an earlier blog, so we will let you refresh yourself on those as you choose. For Carl and Debbie’s purposes it is important to know that their goal is to pass as much value to their children using as little of the lifetime exemption as possible. Discounts in the value of C&D’s Membership Interest stem from limitations what the recipients of a gift may do with that property. A major limitation on the gifts is the recipients’ inability to sell their newly received Membership Interest in C&D. The terms of C&D’s Operating Agreement limit the sale of Membership interest to only Carl, Debbie, or their descendants and require the approval of the owners of the Voting Membership Interests to approve any sale. Additionally, the value of the Non-Voting Membership interests is further limited because those Membership Interests do not give the new owners any say in the management of C&D.
These limitations, combined with a valuation of C&D by a qualified appraiser, create a situation where the value of the Membership Interests that Carl and Debbie gift to their family members can be discounted for gift tax purposes reducing the value of the gifts required to be reported. This discount allows them to transfer more of C&D to their family (where it will continue to grow in value) without using up all of the Gift Tax Exclusion. In addition to this discount, Carl and Debbie are also able to take advantage of their ability to each make gifts up to the annual exclusion ($15,000.00 for 2018) without using any of their lifetime exclusion. This has allowed them to each make annual gifts of their Non-voting Membership Interests to their children, grandchildren, and now great-grandchildren over the course of many years. It is important to note that as family members receive the Non-voting Membership Interests, they will share in any income distributions from C&D.
The result of this extensive, complicated, and intricate planning is a process by which Carl and Debbie are transferring ownership but not control of their family business to the next generations. As Carl and Debbie step back from operations, they will be able to transfer the Voting Membership Interests to their children (or grandchildren) who will succeed them at the helm of the business, leaving those individuals with the fiduciary duty to act in the family’s best interest while running the business. 
As always, the strategies discussed in this blog are complex and require a significant invest to implement properly. Improper use of these strategies can be very expensive both due to the tax implications but also with the ability to properly operate a business. Do not attempt these strategies without working with experience professionals. 

Matt and Al

Friday, January 19, 2018

Planning for Charitable Gifts

Many clients wish to provide for their favorite charities in addition to their loved ones. While sometimes charitable giving is as simple as writing checks, with proper planning it is possible to make gifts to loved ones and charities in a manner that insures that each gains the greatest advantage from what they receive. 

As we discussed in our last blog, Arthur and Beth married after re-meeting each other after decades apart while volunteering with a favored charity. Their involvement with this organization continues to be a major part of their lives together and both of them wish to provide for the organization financially after their death. Thankfully, their lives apart resulted in a situation where both Arthur and Beth have the means to continue to save money during their retirement, despite rising costs in their lives, and therefore they should be able to fulfill their charitable inclinations without creating hardship for their surviving spouse. 
Both Arthur and Beth receive pensions from their former employers and this allowed them to delay receiving Social Security benefits and thus increasing the amount they receive from that benefit. Further, each benefited from wise investing after the death of their first spouse, giving them a sizable if not overly large nest egg. On top of these advantages, both Arthur and Beth have IRA accounts that they funded during their working years, and they now draw upon these accounts in the case of emergencies but otherwise only take the Required Minimum Distributions. While not everyone enjoys these advantages, Arthur and Beth were fortunate to have circumstances that allowed them to do so and now can take advantage of other strategies to help achieve their planning goals. 
Despite their financial stability, Arthur and Beth are unlikely to ever have an Estate Tax liability. This is especially true in light of the recent legislation that raises the exemption threshold for each of them to nearly $11 million. There are, however, other taxes that may impact their loved ones as they receive inherited assets; the most prominent of these is Income Tax. While most inherited assets will not have any related income taxation (or at least receive a stepped-up basis to limit potential taxation), when Arthur or Beth’s children receive distributions from an IRA inherited from their parent, those children will incur Income Tax liability at their individual rate on the funds distributed each year. This is a primary reason it is normally advisable to “stretch” inherited IRA distributions over the lifetime of a beneficiary. Arthur and Beth want to take another tactic with their planning, eliminating the potential tax liability and fulfilling a different goal.
Arthur and Beth have decided to name each other as the primary beneficiary of each of their IRAs, so that the survivor of them can roll over the account into their own IRA and continue to have access to those funds if needed after their spouse’s death. Each has then indicated that after the death of their spouse they will name their favored charity as the beneficiary of the remaining IRA assets, allowing those funds to pass to the charity. The benefit here is a substantial gift to a worthy charitable institution and the ability of the charity to take distributions from the IRA without incurring the Income Tax liability that an individual beneficiary would incur. It is worth noting that there are risks to this strategy as Arthur and Beth have structured their plan. 
By naming each other as the primary beneficiary of their IRAs, both Arthur and Beth risk their surviving spouse changing the contingent beneficiary designation from the charity of their choosing to another charity or even to other individuals. Arthur and Beth could avoid this risk by naming the charity as the primary beneficiary but they trust each other and feel it is important that the survivor of them have access to the IRA funds if necessary to address emergencies. It is important to note that this planning works with traditional IRA accounts, but is not generally advisable when dealing with Roth IRAs due to the differing tax consequences. 
As we continue to remind our readers, all of these planning opportunities arise due to working with experienced professionals, attorney, financial planners, and accountants who can guide you to success. None of the examples used in this blog are appropriate for every person and you should not attempt anything you read about here without consulting experts to avoid unanticipated (and costly) results.

Matt and Al

Wednesday, January 17, 2018

Estate Planning for a Second Marriage

Estate planning is an excellent tool for balancing interests and taking steps to avoid future pitfalls. Nowhere is that more evident than when we assist couple contemplating second marriages with blended families plan for the future.

Arthur and Beth have an interesting story; they met when they were kids and got married as they reached retirement age. Both of them had previous marriages and children, but after years apart, they reunited through the charity work they did in their 60’s after retiring from their original careers. While it took them a while to engage in the estate planning process, they both saw the benefit of an estate plan when it came to achieving their goals.
When Arthur and Beth combined their lives, they did so carefully, not wanting to worry their respective families about sudden changes. This meant that they clearly delineated who paid for what in their marriage, but also helped them to assess their financial situation and evaluate what the other would need in order to continue to live comfortably after one of them passed away. Neither wanted to find themselves unprepared because they had given up some aspect of their independence. This strict organization allowed us to create a plan that allowed each of them to know that the other would be cared and provided for if they were to pass away first and also know that their own children would be the ultimate recipients of their assets.
Mindful of the concerns their children might have of losing their potential inheritance, and aware that Michigan law provides a surviving spouse with specific benefits related to the deceased spouse’s estate, Arthur and Beth negotiated and executed a Prenuptial Agreement that provided that each gave up any rights to the others assets that might be available under Michigan law either in a divorce or at death. They did specifically agree that their respective Living Trusts would contain provisions that benefited a surviving spouse.
Both Arthur and Beth have their own Living Trusts, which are now the owners of the assets they previously owned individually. This means that when either of them passes away, their respective successor Trustee will only control those assets, and the surviving spouse (and his or her family) has no fear that he or she will lose control of their own assets. The two trusts are similar in that they each provide the surviving spouse with the right to receive distributions of the trust’s income and principal sufficient to cover the costs that the deceased spouse had paid during their lifetime. This ensures both Arthur and Beth that the death of their partner will not be more difficult due to a sudden financial change. However, bank accounts and bills are not the only part of Arthur and Beth’s assets that their estate plan addresses.
When they married, Arthur sold his home and moved into to Beth’s condominium. To ensure that if Arthur survives Beth he does not need to immediately look for a new home, we included a provision in Beth’s Living Trust that allows Arthur to continue living in the residence as long as he is alive and pays for a designated portion of the expenses. This benefits Arthur and protects Beth’s children by giving each guaranteed rights regarding the property. Under some circumstances we include a provision that gives the surviving spouse the right to require the Trustee to sell a residence and use a portion of the sale proceeds to purchase a new residence (in the name of the Trust) if the surviving spouse wishes to move. Arthur and Beth did not opt for this level of complexity in their planning, knowing that if Arthur choose to move he had sufficient assets from the sale of his home when they married.
When dealing with blended families it is also worth noting that the selection of Trustees and other designees may become more difficult, with children feeling slighted if parents omit them in favor of second spouses or the other spouse’s children. This situation often gives rise to distrust and insecurity, which can threaten the implementation of even the best planning. To address these concerns with Arthur and Beth we took an approach that provided everyone with a bit of responsibility and accountability.
During their lifetimes Arthur and Beth named each other as Co-Trustees of their respective trusts, making it clear to their children that they had the utmost trust in their new partners. After the death of either of them, the surviving spouse will serve as a Co-Trustee with one of the deceased spouse’s children, but in the event that there is a disagreement between the surviving spouse and their Co-Trustee, the spouse retains the authority to act without the Co-Trustee’s consent. This allows the deceased spouse’s children to have a hand in the management of their parent’s trust and have insight into the use of the funds that will eventually pass to them, but does not overly burden the surviving spouse by requiring them to “beg” their late spouse’s children for funds.
Arthur and Beth provide good insight into a blended family that works well together and in the end is likely to implement their planning with little trouble. They also are an example of how with proper planning it is possible to provide for loved ones and charities in a more advantageous manner. Our next blog will address this aspect of their planning in detail but as you can see, the insight of experienced professionals can be the difference between peace and quiet and war and peace when it comes time to administer an estate plan.

Matt and Al

Monday, January 15, 2018

Planning for the Here

While much of the focus of an estate plan is on the hereafter, it is important to remember that a Living Trust, Durable Power of Attorney, and Patient Advocate Designation make up parts of the “here” planning as well. When a client begins to reach a point where they cannot manage all of their own affairs, those documents become the workhorses, helping loved ones assist in their care.

Ursula was a strong independent woman who had lived nearly thirty years after the death of her husband without ever considering remarriage. She had two grown children, Vivian and Walter, and three grandchildren, lived alone in the house she and her late husband had built nearly fifty years earlier, and was generally healthy. However, as happens to everyone, time eventually began to catch up with Ursula and it became more difficult to handle her own affairs.
First, she stopped driving at night, then limited her driving distance, but eventually Ursula admitted that it was no longer safe for her to drive at all. With this admission began the discussion of whether living alone was still a good choice but Ursula was not interested in selling her home, so Vivian and Walter did not press the issue. Vivian lived relatively nearby and did not work fulltime, so she was able to assist her mother when needed. The grandchildren also served as drivers when necessary.
As these changes began happening on a daily activity level, we became involved to update Ursula’s planning. We discussed the various parts of the estate plan and reminded Ursula of why she had the documents in the first place and, following those discussions, we helped her make some changes to her plan.
First, Ursula decided that it made sense to make Vivian an immediate Co-Trustee with herself to ensure that, if necessary, Vivian could manage any of the Living Trust’s assets in the event that Ursula was unable to act or simply did not want to deal with investment decisions and banking transactions. We also updated Ursula’s Power of Attorney to make it immediately active and named Vivian to act under that document for the same reasons. While Vivian (and Walter as the successor designee under both documents) had no desire to run their mother’s life, all the parties involve recognized that a time could come when it was easier on Ursula for someone else to act in her stead, and at her direction. Everyone involved recognized that Ursula was still in control and that any action taken by Vivian must be in Ursula’s best interest. This is not to say that Vivian could not take an action that benefited herself if Ursula so directed, but we did stress the importance of Vivian’s fiduciary duty to Ursula.
As time went on, circumstances did eventually arise where Vivian needed to act on her mother’s behalf, initially simply because Ursula did not want to be bothered, but later in order to manage affairs as Ursula developed additional health issues that limited her mobility. The documents prepared allowed Vivian to organize and simplify all of Ursula’s finances, consolidating her multiple bank accounts into a single account. As Ursula consented to moving to a senior living community, Vivian was able to sign documents for Ursula’s new apartment and handling the closing on the sale of Ursula’s home (she was delighted that one of her grandchildren purchased it). All of these transactions took place at arm’s length to ensure that there was no question that Vivian was acting in her mother’s best interest, and had the family dynamic been different additional documentation could have been provided to assure Walter that his sister was acting in their mother’s best interest.
In the end, due to the years of serving as Co-Trustee with her mother, when the time came for Vivian to administer the Living Trust after her mother’s death the process was simple, requiring little more than the writing of a few checks and the closing of a bank account. Nevertheless, this simplicity was borne from good planning; planning that gave Ursula piece of mind and made her later years less stressful. This is the result of good, ongoing communication with experienced professionals. Had nothing been done with Ursula’s planning as her life began to change, her later years would have been more difficult for Vivian and Walter. Always be aware that your estate plan is more than just a set of documents to be used after your death. Your estate plan is part of a process that needs regular updating to ensure that it still meets your current needs.

Matt and Al

Friday, January 12, 2018

Planning for Business Owners

In our previous blog we touched on how planning for clients with a variety of assets can be more challenging, or at least provide the opportunity to make use of more interesting planning strategies. One situation where this is especially common is when the client owns a family business. When that is the case, the relationship between the business and the beneficiaries is a lynchpin in the planning.

Michael and Nancy own a series of businesses, originally inherited from Nancy’s parents and then expanded, that over the years have allowed them to provide very well for their three children Oliver, Pam, and Quinn. All three children are now adults with children of their own, and Michael and Nancy have assisted them with funding their grandchildren’s college costs. Pam is very active in the family businesses, ready to step in and take over control whenever her father is ready to retire. While Oliver and Quinn are not involved in the businesses, Oliver has become a successful CPA and is doing well on his own. Quinn on the other hand has struggled to find her way in the world. A recent divorce has left her in a precarious financial and personal situation.
Adding to the complexity of planning for Michael and Nancy is that a section of their business is very reliant on the work on a particular key employee without whom that portion of the business is likely to suffer. The employee also has expressed interest in owning part of the business. While the complexity of this situation cannot be explained in the confines of our normal word limits we will summarize how proper estate planning can be used to ensure that Michael and Nancy can provide for Oliver, Pam, and Quinn equally, address concerns about differing financial states, and avoid creating a competitor.
First, it is important to note that much of the planning for Michael and Nancy’s situation revolves around the use of a document called a Buy-Sell Agreement (Buy Sell). This document creates an obligation for the owners of a business to sell and a particular party to buy the business under certain predetermined circumstances. The Buy Sell will establish the triggering events (often Death, Incapacity, and/or Retirement of the seller), the sale price (or at least how that price will be determined), and the terms for paying the sale price. Depending on the relationship between the buyers and sellers, there may be a life insurance component to the Buy Sell that guarantees there will be funds for some, if not all, of the purchase price.
For Michael and Nancy we used two different Buy Sells to achieve their goals, one with their daughter Pam and one with their key employee. For the key employee the Buy Sell granted an initial sense of ownership in the part of the business in which he was involved, and guaranteed him the right to buy out that portion of the business when Michael and Nancy retired or passed away. The Buy Sell even included incentives to encourage the key employee to improve the business while Michael and Nancy remained the owners, increasing profits in the near term without significantly increasing the final purchase price. This Buy Sell was part of the planning to create sufficient liquid assets to allow Michael and Nancy to make Pam the sole owner of the remainder of the family business while still having assets to leave to Quinn and Oliver.
In addition to the funds from their key employee’s Buy Sell, Michael and Nancy created a Buy Sell with Pam which controlled the transfer of the majority of the remaining family business assets. Michael and Nancy funded this Buy Sell with the proceeds of a Second to Die Life Insurance policy on Michael and Nancy’s lives that provides the business with the funds to buy Michael and Nancy’s interest in the company from their Living Trust, leaving the Trust with liquid assets to distribute to Oliver and Quinn. In lieu of those liquid assets, Pam will receive her parent’s voting interest in the company, giving her complete control of that asset.
Since the liquid assets for Oliver and Quinn will pass through Michael and Nancy’s Living Trust, they were able to provide their Trustee with the discretion to hold distributions to Quinn in trust in the event the Trustee deemed that she needed additional assistance with the large influx of money. While this creates a situation fraught with potential problems because Michael and Nancy named Oliver as the first successor Trustee, the family dynamic between Oliver and his “baby sister” is strong and Michael and Nancy are comfortable with the situation.
This example touches on the simplest use of a Buy Sell and does not address many of the other strategies available to business owners for transferring wealth to their beneficiaries but clearly, the complexity of even this simple plan requires the involvement of other experienced professionals. As always, do not attempt to implement the strategies you read about here without consulting an attorney experienced in the estate planning field.

Matt and Al