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

Wednesday, January 10, 2018

Planning for the Generations

In the previous blog we mentioned that our client, Edna, contemplated leaving gifts to her grandchildren that they would not receive outright until they reached retirement age. While Edna opted against this gifting option, other clients have seen value in restricting the distribution of gifts until beneficiaries attain physical, if not mental, maturity.

Harold is in his seventies and while he is now retired, he enjoys his time because he has significant investment income in addition to his Social Security. Harold’s investment income is sufficient to allow him the luxury of only taking the minimum distributions required by law from his IRA, allowing that account to continue to grow tax-deferred. Presuming that nothing changes, Harold will have the opportunity to provide for his loved ones after his death in a variety of ways.
Harold outlived two wives but was close with his own children, Isaac and Janice, as well as his stepchildren, Karen and Luke. While he wants to treat all four children equally, he recognizes that Luke has issues managing money, as evidenced by a recent bankruptcy. Additionally, Harold wants to provide for his grandchildren, but sees that each of them is at a different point in their lives and therefore it might not be appropriate to make gifts to them in the same manner. This sort of complex family situation is ideal for a Living Trust, because the Grantor (Harold) can divide assets as he sees fit and the successor Trustee has the responsibility of dispersing assets in the manner Harold chose.
In this case, Harold chose to divide the majority of his assets into four equal shares for the benefit of Isaac, Janice, Karen, and Luke. While the value of each of these shares is to be equal, the terms of distribution are not. Isaac, Janice, and Karen are to receive their shares over the course of five years, with the Trustee having the discretion to make distributions for their health, maintenance, or support if circumstances warrant. Luke’s share, in light of his ongoing bankruptcy, is to be held in trust with the Trustee having the authority to make distributions for Luke’s benefit, but not to distribute funds directly to Luke.
This difference in distribution terms will help to protect any inheritance Luke receives from garnishment by his bankruptcy proceeding, while still allowing Luke to benefit from the funds. Harold has provided that upon reaching age 65, Luke may receive whatever remains of his Trust outright. This additional restriction, lasting long beyond the current bankruptcy, helps ensure that as Luke gets older there will be  funds available for him in retirement. Due to the value of Harold’s trust, it is likely that there will be funds remaining at this time and Harold hopes that by 65 Luke will have the maturity to handle his own affairs.
To address Harold’s desire to provide for his grandchildren we established a separate “IRA Trust” that does not contain any assets during Harold’s lifetime, but the IRA Trust is named, in very specific fashion, as the beneficiary of Harold’s sizable IRA. The IRA specifically names sub-trusts created under the terms of the IRA Trust, each for the benefit of a particular grandchild, as a beneficiary. This designation, along with other terms that allow the IRA trust to comply with the law and regulations, allows the IRA Trust to serve as the beneficiary of the shares of Harold’s IRA while still using the separate ages of Harold’s grandchildren as the measuring ages for making the minimum distributions required under the law. As a result, each of Harold’s grandchildren, ranging in age from 30 to 12, will be treated slightly differently but all of them will benefit more from Harold’s IRA than if the IRA Trust did not exist.
First, the IRA Trust allows the Trustee to manage the assets and comply with laws, leaving the beneficiaries free to enjoy the boon from their grandfather. The IRA Trust also prevents a beneficiary from electing to take a large distribution from their inherited IRA without fully appreciating the consequences of that action. Finally, because the IRA Trust allows each beneficiary’s age to act as the measuring age for their required minimum distributions, the younger beneficiaries do not need to withdraw more funds in a year than necessary. This benefits the younger grandchildren by allowing more funds to grow tax deferred until age 65 when Harold has decided that his grandchildren will gain complete access to the funds.
Clearly, this level of complexity is not necessary for all clients but many clients like the idea of using particular assets to benefit certain beneficiaries and often there is a benefit to doing so in order to gain either tax savings or increased growth potential. The complexity of Harold’s plan is something that people should not attempt without consulting financial planners and attorneys experienced in complex estate planning as even simple errors in implementation may be very costly when it comes time to execute the plan.
Matt and Al

Monday, January 8, 2018

Estate Planning Opportunities Created by the New Tax Law

The Tax Cuts and Jobs Act (“The Act”) passed by Congress and signed by the President at the end of last year included significant changes in the Estate and Gift tax provisions of the Internal Revenue Code that open planning opportunities for limited time. For clients looking to insure their estates take advantage of every opportunity it is now time to review whether more advanced planning strategies are appropriate.

With the adoption of the Act, Congress changed the Estate, Gift, and Generation-Skipping Transfer (GST) tax exemptions under the Internal Revenue Code. The prior law exempted the first $5 million (as adjusted for inflation in years after 2011) of transferred property for each taxpayer from Estate and Gift Tax. This allowed a married couple a total exemption of  $10.9 million of assets in 2017.
Under the new law, for estates of decedents dying and for gifts made during lifetime after December 31, 2017 and before January 1, 2026, the exclusion amount is doubled from $5 million to $10 million (again as adjusted for inflation occurring after 2011) and is expected to be approximately $11.2 million per person or $22.4 million per married couple in 2018. The Act does not make changes to the tax rates for Estate, Gift, and GST, which remain subject to a maximum tax rate of 40 percent. Additionally, the current basis step-up under Code §1014 for property inherited from a decedent remains in place.
Despite the early discussions regarding the Act, it is important to note that there is no provision in the final legislation for ultimate repeal of the Estate, Gift, or GST taxes, and the increased exemptions remain in place only until December 31, 2025, at which time they revert to the current $5 million level (indexed for inflation).  These circumstances open a significant, once in-a-lifetime opportunity for clients with estates above the above the exemption limits to protect more assets from taxation. Some clients may be tempted to take a wait and see attitude given that the new limits do not expire until December 31, 2025, but delaying this discussion comes at their peril as the tax legislation may be modified significantly if the 2018 midterm elections or 2020 Presidential election bring changes in the control of Congress and the White House. In addition, although death is inevitability, none of us knows when, so planning is important.
The tax changes, when combined with valuation discounting, open the door for strategies that can shield significant assets from Estate and Gift taxation through the use of direct gifts, gifts in trust, and gifts of business interests (such as family partnerships, LLCs and corporations). Such gifts will also shift future appreciation of the assets to children and grandchildren, who may also be in lower tax brackets for income tax purposes. It is also possible to make use of legislation adopted in 2017 by the Michigan legislature to create self-settled trusts which are likely to provide creditor protection and allow clients to take advantage of the higher exemptions. 
While clients may initially be reluctant to make larger gifts immediately, a review of the options and strategies to protect assets from Gift or Estate tax while still providing some control of the assets should be considered immediately. As always, the tax rules are complex and retaining attorneys experienced in complex estate planning is important because errors in implementation of sophisticated strategies can be very costly if done incorrectly.
Al and Matt

Friday, January 5, 2018

The Right Plan for Senior Clients

While there are some aspects of estate planning that feature more prominently when dealing with an older client, it is important to remember that each client is unique and that their needs must be addressed on a case by case basis. There is no one size fits all package of estate planning documents that is right for every client and while there are many proactive strategies that an older client may employ, much of that planning is designed to address specific circumstances which never come to pass.

Edna and Frank were married for many years but never considered estate planning. Frank passed away in his mid-eighties and Edna discovered that many of her preconceived notions about how she and Frank owned property were mistaken. We assisted Edna through the probate process and ensured the transfer of her home and a large savings account from Frank’s name alone to her control and ownership. After consolidating that savings account with her primary bank accounts, we began assisting Edna with her own planning to ensure that her children, Brian and Gail, did not have to deal with the stress and difficulties of probate when Edna passed.
Edna’s financial situation was relatively common for a woman of her age. She owned her home free of any mortgage, she had checking and savings accounts, and she owned a number of CDs. She was receiving Social Security, a pension from her work as a teacher, and a smaller survivor’s pension from Frank’s employer. This income allowed Edna to break even with her yearly expenses, but she and Frank were good savers so when Edna needed additional funds she could dip into the savings account.
At first it made sense, due to her uncomplicated circumstances, to keep Edna’s planning simple. We prepared a basic Will to make certain that in the event any assets needed to pass through Probate the court had clear instructions. We then assisted Edna with naming Brian and Gail as the Transfer on Death Beneficiaries of her bank accounts and prepared a Quit Claim Deed with a Reserved Life Estate (commonly called a Ladybird Deed) that allowed Edna to own her home during her lifetime but automatically pass ownership of the property to Brian and Gail at her death. The goal of the plan was to avoid Probate to the extent possible, but to prepare for unexpected circumstance.
Those unexpected circumstances did arise, though not in the way we anticipated. In the years following our work with Edna, her health took a turn for the worse and she was no longer able to maintain her home or safely live alone. Rather than move into an assisted living community, Edna moved in with Brian and his family. This allowed her the ability to sell her home, which had appreciated nicely, and suddenly Edna found herself to have significantly more assets than she realized.
Not wanting to be a burden on Brian and his family, Edna insisted on paying some amount of room and board. In order to avoid any later question of propriety we prepared a simple Rent Agreement detailing what Edna would pay Brian each month. We also prepared a Care Agreement, supported by a doctor’s recommendation, detailing the care that Gail provided to her mother, in exchange for compensation. This planning is useful in avoiding later arguments and addressing issues related to Medicaid that could arise under similar circumstances.
In addition to these agreements, Edna wanted to use some of the proceeds to the sale of her home to help her grandchildren. While initially Edna considered a more complex plan involving holding assets in trust for each of her five grandchildren until they reached retirement age, through lengthy discussions of the merits of the options Edna eventually invested the funds in §529 plans to assist the grandchildren with college costs.
Edna’s situation is an example of how an estate plan does not need a Living Trust to be successful and gives some insight into how a trust could become part of a simpler plan. Had Edna decided to delay distribution of the gifts for her grandchildren until they retired, it would require the creation of trusts to administer those funds for more than forty years. While this is certainly an option that was available, if Edna wanted to make use of it, the simplicity and more immediate benefit of a §529 plan made more sense under the circumstances.
An estate plan should reflect the client’s circumstances and not take a one-size fits all approach. It should take into account what types of assets the client has, not just net worth, to make a plan that works best for the client and their family. Had Edna owned assets that were more diverse or had other major concerns, different planning would be appropriate, but under the circumstances a Will and proper beneficiary designations served to address her needs. This is the benefit of working with experienced attorneys can provide. They have the knowledge to make recommendations that meet your needs without establishing unnecessary complicated plans.

Matt and Al

Wednesday, January 3, 2018

Estate Planning that Grows with the Family

Since restarting the blog, we focused on the basics of estate planning with an emphasis on how the documents work. Our next few blogs will focus on the how having an estate plan can be a benefit under a variety of circumstance. All of these examples come from our work, though we have changed the details to protect attorney-client privilege.

As part of an estate plan, a Living Trust provides substantial flexibility to evolve over the lifetime of a client. Take for example Amy and Brian who began working with us shortly after they had their first child Cassie. At that time, both Amy and Brian were young adults with no particular health concerns, so their initial estate plan addressed what would happen to Cassie if Amy and Brian both died. We designed a plan to take into account the next 3-5 years, as in that time it was likely that Amy and Brian’s lives would continue to change.
We drafted Wills for Amy and Brian, primarily to Appoint Guardians that ensured Amy and Brian chose who would raise their child in the event of their deaths. We also established a Living Trust that contained broad general authority for a successor Trustee to provide for Cassie’s financial well-being in the event of Amy and Brian’s death. The Living Trust also contained provisions for distributing any remaining Trust funds  to Cassie when she reached age 25. Finally, we worked with Amy and Brian to “fund” their Living Trust making sure that their home, bank accounts, and mutual fund accounts were all owned by the Living Trust.  We also made sure that their life insurance and retirement accounts named the Living Trust as a beneficiary. This funding ensures that in the event of Amy and Brian’s deaths the Trustee would control all of their assets without any probate.
This “simple” plan ensured that the Probate Court would have no part in administering Amy and Brian’s assets, that Cassie (and her Guardians) would have funds to provide for her care, and that upon reaching age 25 Cassie would receive the remainder of her inheritance outright and free of trust. While this plan did not consider  every possible contingency, it did create a groundwork for protecting Cassie in the event of Amy and Brian’s unexpected deaths and built in Trustee flexibility. The plan also created the groundwork for more expansive planning as Amy and Brian’s lives changed.
Over the next fifteen years, Amy and Brian’s lives changed substantially. Three years after our initial meeting Cassie got a little brother, David, five years after our initial meeting Amy and Brian bought a new home, and ten years later Brian’s mother Edna moved in with Amy and Brian after the death of her husband. As these changes occurred in Amy and Brian’s lives we assisted them in making small changes (to ensure that assets were split between Cassie and David), kept funding up to date (by making the Living Trust the owner of their new home), and made significant changes to their trust to address their role as caregivers for Edna.
Throughout the years, we amended or restated Amy and Brian’s initial Living Trust, making the desired changes without needing to re-fund all of their assets. We additionally were able assist them in adding assets to their Living Trust as they acquired those assets over the years. Had it been necessary, we could also have changed the people named as successor Trustees or Guardians.
It has now been twenty-five years since we began working with Amy and Brian, their children are adults, and as we review their planning they continue to have options. We always hope that our client’s families thrive without problems, but if Cassie or David appeared to have risk factors that a sudden influx of wealth could exacerbate, Amy and Brian could adjust the distribution terms of the Living Trust to allow their successor Trustees more authority over funds. As it is, Cassie and David have done well for themselves and in their most recent documents Amy and Brian decided to name their children as their successor Trustees and distribute all of their inheritance to them immediately.
This example of a “simple” plan that evolves through a client’s lifetime demonstrates the flexibility of estate planning to adapt to changing circumstances. Over the next few blogs, we will lay out how a Living Trust can protect clients and their loved ones over more complex circumstances. We implore you to remember our warning that a Living Trust is a complex legal document and it is important that you work with an experienced attorney and not attempt to DIY a document designed to protect your family’s future.

Matt and Al