Making Decisions about Funeral Arrangements

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

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

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

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

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

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

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

Alan and Matt

Planning Ahead for an Unexpected Event

     A short time ago a client of mine passed away unexpectedly. A few days after the memorial service I got a panicked call from his widow who said, "I am sitting in the middle of a circle of papers and documents, I have no idea what to do, or how I am supposed to pay the bills!" 

     While this couple saved, invested well, and kept their estate planning documents up to date, he handled the financial issues and never communicated to his wife where anything was or how to handle the day-to-day financial obligations. I calmed her, assured her that because of their good savings and spending habits she would have no financial issues, and then set an appointment to meet with her and her financial planner to explain to her the extent of her assets and her ability to access them.

     This got me to thinking about preparing for the unexpected and how some clients do a good job of this and some do not. A little preparation can save family members much time and stress at a time when they are already grieving. It is a good idea for both spouses to be familiar with monthly bills and how they handled, and where investment accounts are and how they can be accessed.

     Over the years, to help our clients with this preparation, we have built a list of information we have found useful or important to know when a loved one passes away. This list, or at least its location, should be shared with spouses and children, and updated regularly. 

     We included our list at the end of this post, please feel free to use it and add to it were necessary. Also, feel free to let us know if there is other important information that you feel we should include on the list.   

     It is also a perfect opportunity to remind everybody to "live life to its fullest, but plan for the unexpected.” The planning is obviously more important for those left behind.

Inventory and Location of Legal Documents:

Will:______________________________________________________________

Trust:_____________________________________________________________

Power of Attorney:__________________________________________________

Living Will:_________________________________________________________

Patient Advocate Designation:_________________________________________

Important Contact Numbers:

Attorney:__________________________________________________________

Accountant:________________________________________________________

Broker:____________________________________________________________

Financial Planner:___________________________________________________

Life Insurance Agent:________________________________________________

Property Insurance Agent:____________________________________________

Doctors:___________________________________________________________

Spiritual Leader:____________________________________________________

Funeral/Burial Arrangements Desired

__________________________________________________________________

__________________________________________________________________

Close Family and Friends to Notify

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

Location of Assets

Deeds to property:___________________________________________________

Bank Accounts and PIN #s:___________________________________________

__________________________________________________________________

__________________________________________________________________

Brokerage Accounts #s and Passwords or PINs:___________________________

Certificates of Deposit:_______________________________________________

Mortgages:________________________________________________________

Safety Deposit Box Location:__________________________________________

Retirement Plans and IRAS:___________________________________________

Annuities:__________________________________________________________

Life Insurance Policies and Beneficiary Designations:

__________________________________________________________________

__________________________________________________________________

Vehicle Titles:______________________________________________________

Collectibles:________________________________________________________

Stock Certificates:___________________________________________________

Service Providers

Gas:______________________________________________________________

Electric:___________________________________________________________

Cable:____________________________________________________________

Internet:___________________________________________________________

Landscaping:_______________________________________________________

Telephone:_________________________________________________________

Newspapers/Magazines:______________________________________________

Plumber:__________________________________________________________

Heating and Cooling:_________________________________________________

Electrician:_________________________________________________________

Handyman:________________________________________________________

Important Passwords

Computer:_________________________________________________________

Email:____________________________________________________________

Router:____________________________________________________________

Creditors

Mortgages on Real Estate:____________________________________________

Other Borrowing:____________________________________________________

Credit Cards to Pay and Cancel:_______________________________________

__________________________________________________________________

__________________________________________________________________ 

Working Together to Assist Clients

Today’s blog begins a series focused how attorneys and financial planners can work together to assist clients following the death of a loved one. Over the coming month we will address a variety of areas where clients benefit when their advisors work together as a team to make a very difficult time in their lives a little easier. We invite and encourage our readers to send us their thoughts on these issues so that we can take them into account as we tackle this complex subject.

     The loss of a loved one is one of the most emotionally difficult experiences a person will ever face. Sadly, during our careers as planners and advisors, we face the loss of a client, with unfortunate regularity. When those clients leave behind a surviving spouse or children, it is important to be prepared to assist those survivors while being mindful of their grief over their own loss. This is a perfect opportunity for the attorney and the financial planner to work together for the maximum benefit of their client.

     There are a wide variety of issues that arise after a death, including the administration of the decedent’s estate and trust, updating estate planning documents for surviving spouses, and making financial decisions that take into account their changed circumstances. Some of these decisions must take priority over others and it falls to attorney and planners, who handle these matters with more regularity, to keep clients from becoming overwhelmed by the decisions that must be made, even as the client still grieves for their loved one. 

     Immediately following a death it is important to quickly determine if there are any documents showing the deceased client wished to make anatomical gifts, had a prepaid funeral, or left specific instructions for funeral or memorial services, as well as a specific burial request. This is important first because such instructions elevate the need for survivors to make certain decision, but also because discovering these instructions after the survivors take other contrary actions can be devastating. 

     After addressing matters related to the disposition of the decedent’s remains, the personal feelings of the client are paramount and their mourning should take precedence over meetings with planners and advisors, but when they are able, it is important to begin the process of administering the estate and trust. A first step in the process is to determine a list of assets and values held in the estate of, or a living trust of, the deceased spouse. The client's planner often as this information and is the best person to assist in developing a list of assets. Documents should be reviewed to determine ownership of assets and beneficiaries of any insurance policies or IRAs. A review of estate planning documents will indicate whom beneficiaries are, what are the terms of distribution, and who are the persons chosen to help administer the estate, the personal representative and the successor Trustee.

     In this stage of the process, the attorney can assist the client in determining whether any probate of assets is necessary and whether it is necessary to file a federal estate tax return. If a business was part of the deceased's estate, it is important that the surviving spouse and successor Trustee continue to handle the management of that business appropriately. It is also important to determine if any Buy-Sell Agreements exist to govern the transfer of the business to surviving partners. Finally, if there are any assets outside of the state of Michigan these will also have to be administered. 

     With their more complete knowledge of the assets, the planner is invaluable at this point in the process for determining what assets remain available for the spouse, revising  the surviving spouse’s investment plan and providing a strategy for cash flow for both the short-term and long-term to assist the client in maintaining his or her lifestyle.

     This only begins to scratch the surface of the choices that face clients at this difficult time in their lives. Over the coming weeks we will address a variety of issues in greater detail, paying special attention to how attorneys and financial planners can work together to assist clients in managing these issues. As we continue to explore this topic we must remind ourselves that as important as this planning is to our clients, we must always balance the need to make decisions with the client’s need to mourn their loved ones.

Private Information, Security, and your Estate Plan

Locating and gaining access to a loved one's assets during an emergency or after their death can be one of the biggest challenges. Today's blog addresses how clients can provide their loved ones with access to this information without risking identity theft. 

     We often mention, to our clients, and in this blog, the importance of maintaining a record of important information. This list can include the location of accounts, login information and passwords for online accounts, contact information for planners and advisors, and other sensitive personal information to avoid creating problems for loved ones attempting to administer the client’s affairs in the event of an emergency or their death. However, we rarely discuss how the client can safely maintain a collection of information, which, in the wrong hands, can lead to significant financial hardship. We recommend a combination of high-tech and low-tech solutions to maintain security while also making information accessible in the event of an emergency.

     First, we provide our clients with a worksheet designed to assist them in documenting much of the important information someone would need to administer their affairs in the event of their death or an emergency. On this worksheet, we recommend that our clients provide their loved ones and designees with important, but not private, information. This includes the names and contact information for planners and advisors, a list of utility providers, nonfinancial online accounts (including social media and shopping sites), and a list of known creditors. This is the information loved ones will need in order to handle the client’s day-to-day affairs. We encourage our clients to inform their loved ones of the location of this information so that it is easily accessible in the event of an emergency. 

     Second, with respect to information that in the wrong hands creates a risk of identity theft or loss of assets, including specific account information, passwords for online access to financial accounts, and private personal information, we encourage our clients to prepare a secure document containing this information, the location of which the client guards more closely. While the increased security makes accessing this information more difficult, it primarily impacts information that a loved one would only need if it became necessary to manage the client’s affairs in the long term.

     There are increasingly complex ways to protect private information, while still making it available in the event of an emergency. The simplest, but least secure, way is for the client to prepare a written list of the information and provide their designee with the location of that list. Using technology to increase security, the client can prepare a document containing the information, save that document to a flash drive and store the flash drive in a location known to their designee. For even more security, the client may use an online password management service, designed to provide a high degree of protection for all of their online accounts and private information. Using this method, the client will store the important information using the service and provide their designee with the secure password needed to access client’s information.

     Regardless of the method employed to secure all of this information, the underlying important concept we are attempting to convey is the importance of client preparation for emergencies. By taking the time to prepare lists like the ones we have discussed in this blog will allow clients to minimize the stress and inconvenience to their loved ones in the event of an emergency.

Additional DOMA Issues

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

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

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

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

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

Alan Ferrara

Planning for the Terminally Ill Client, Part II

     As we discussed last time, when a client becomes seriously ill or is diagnosed with a terminal illness it is obviously a trying time, but a complete review of their estate planning documents is important. We previously discussed the Durable Power of Attorney and the Patient Advocate Designation, but a client's Trust and funding documents also require review.
     The client may have neglected to update their Living Trust despite changes in the client's financial situation and family situation. Their estate planning documents require revisions because of these changes in order to avoid adverse consequences. Items to consider include:

1. The value of assets in the Trust may have increased dramatically since the last time the Trust was reviewed. Distribution terms for spouse and children may need to change because of the increase in assets. 
2. If the spouse or the other family members have been identified as being spendthrifts, the terms of distribution may need significant revisions. Rather than allowing for automatic distributions within the spouse's total discretion, an "ascertainable standard" as defined by the IRS, may be more appropriate so that the Trustee has the ability to pay or withhold principal and/or income for the spouse's benefit. 
3. The children who are beneficiaries may have creditor issues, unhappy marriages or destructive dependencies, which may require restrictions on distributions to protect them from themselves. 
4. If the client has remarried since the last time the Living Trust was reviewed and modified, provisions may be needed to protect the children of the prior marriage. While it is normal for the client to want to protect the current spouse as long as the spouse is alive, the trust should provide for the eventual distribution of principal to the client's children. Otherwise, the second spouse may be able to distribute assets to her family, disinheriting the client's children. 
5. Because of the increased size of the estate, or because of changing charitable inclinations, a client may want to make charitable contributions at death. 
6. The client may no longer be comfortable with those persons designated as Trustees and Successor Trustees to administer the trust assets for the benefit of spouse and children. 
7. A client may want to revise the trust to protect the current spouse demanding children or a second spouse. 

     In addition to carefully reviewing the trust distribution provisions, a client should review the ownership of assets to confirm that all of the assets have been transferred to the Living Trust or beneficiary designations revised where appropriate, in order to avoid probate upon the client the death. If not, these transfers should be made soon as possible.
     Once these changes are handled, the client can be comfortable that if the worst happens, loved ones will be protected.

Alan Ferrara

Buy Sell Planning As an Important Part of Estate Planning

When assessing a client's estate planning needs, it is important consider any business interests owned by the client. Business interests are frequently one of the client’s most valuable assets and absent other planning, pass according to the provisions of a client's Will or Living Trust. Unfortunately, often a direct transfer of the business interest to beneficiaries is not optimal for the operation or continuation of that business after the death of the client.

For example, if the surviving spouse or children have not been active in the business, their lack of operational experience can cause reduce the business’ value quickly or even cause the business to collapse completely, rendering it valueless. If the business is a large part of the client's assets and provides a good income stream, this scenario will pose a serious problem for the spouse and minor children if the business is lost. Another potential issue arises when only some, but not all, of the client’s children, are active in the business. If all the children receive equal shares of the business, the non-active children may try to manage the business without knowledge, again causing the value the business to decrease significantly. Alternately, the non-active children may demand the purchase of their interest by the children active in the business, creating substantial cash-flow problems.

However, by engaging in Buy Sell planning it is possible to significantly reduce the likelihood that such problems will arise. Buy Sell planning is also important when the client is not the sole owner of the business. In situations where a portion of the business is owned by a nonfamily member, but the deceased client's interest now goes to beneficiaries a Buy Sell Agreement can protect the nonfamily member and the business from new owners who,

• Have no interest in being a part of the business;
• Want to be part of the business but have no idea how to run it; or
• Are unrealistic about the value of the business.

All of these situations can decrease the value of the business, create cash flow problems if the beneficiaries demand a salary, or simply wish for cash in exchange for their interest.

All of these situations are common, however by executing a Buy Sell Agreement the business owners can proactively limit the chance that a sudden change of circumstance for one owner can bring down an entire business.

The primary benefit of a buy sell agreement is the protection provided to the health of the businesses. A Buy Sell Agreement typically provides that under certain circumstances, one of the parties has the right or obligation to purchase the interest of the other party for whom a triggering event occurred. The agreement typically provides for specific events, such as death, disability, desire to sell, or retirement that trigger the parties’ obligations to one another. Additionally the Buy Sell Agreement provides provisions for determining the value of the business interest and terms for the payment of the price over a fair time span to all the parties. Further, beneficiaries can receive fair value for their business interest over a reasonable period, without adversely affecting the health of the business. It is important to review and update the buy sell agreement periodically as the situation changes.

In circumstances where the potential for conflict exists between siblings or with non-family owners, the parties will "fund" the agreement with life insurance, to be paid in the event of the death of one of the parties. The life insurance proceeds pay the deceased's estate for the deceased’s share of the business and beneficiaries involved in the business operation or the non-family owner are free to run the business without interference. To the extent that the value of the business exceeds life insurance, the Agreement provides for the payment of the remaining value over a reasonable time, with reasonable terms.

I often meet resistance when I discuss a buy sell agreement with some of my business clients. That resistance usually melts away when faced with one of two questions:

1. "Do you want to be partners with your partner's spouse, if your partner passes away?
2. Will your children’s collective efforts result in the continued success of the business?

While client’s may like a partner’s family members, they are generally not interested in being partners with them and when they truly take the time to consider their children’s interests most clients acknowledge that ownership is better passed to particular children.

A business interest is often a large part of a client’s assets. A properly drafted Buy Sell Agreement is important to insure that beneficiaries benefit from that asset in the best possible manner. Having a Buy Sell Agreement allows a client's family to be treated fairly as part of the purchase agreement and allows the remaining parties to continue running the business with no management interference while purchasing the business interest for a fair price and at reasonable terms. This is why any complete discussion of estate planning issues is not complete without addressing the client’s business interests.

Insurance as Part of an Estate Plan

When clients are in their early career years, working hard to establish themselves and starting a family, not enough time and effort is placed on setting assets aside to protect the family for the future. The thought process usually is that with hard work, we will be able to save sufficient assets for putting our children through school and providing a nice nest egg for our retirement years. However, what happens if plans go awry and the client dies unexpectedly? The family loses someone who was previously contributing to the payment of day-to-day living expenses. This can have a significant adverse effect on the lifestyle or future plans of the surviving spouse and children. This is the perfect time to consider the need for life insurance to provide that protection.

Life insurance can provide protection for a spouse and children in the event a client dies prematurely. A life insurance policy can provide funds to pay family living expenses and college education costs. It can replace the income stream lost when one spouse passes away unexpectedly, and allows the family to maintain a standard of living is otherwise lost because of that death. At this stage in a client's life, term life insurance is probably the most economical way of funding this family protection. The relatively low cost of term insurance at young ages makes it affordable for families on a limited budget. The policy can be designed to protect for a finite number of years, (for example 10, 15, 20 or 30), depending on the length of the term insurance contract chosen. If the client dies at a young age, funds are available so a family's lifestyle can be maintained and dreams of college for children can be met. If the client lives to middle age and beyond, he builds a significant estate to protect the client and family in retirement years. In that case, the client lets the policy lapse or terminates it because it is no longer necessary.

Sometimes clients have targets for what they would like to leave to their children at their death. Clients often use life insurance to fund the difference between actual assets and the theoretical target set by the client. For example, if a client has five children and wants to pass on $500,000 each of death, a client needs $2,500,000. If the client only has $1,500,000 in assets, the difference can be funded with a life insurance policy at a much smaller cost on an annual basis than hoping to save the difference before the client dies.

Some of my clients have used life insurance fund a bequest to a child while giving a specific asset to another child that values that asset. For example, the largest asset of a client’s estate may be a business in which only one of the children are active. The client desires to leave the business to that child, yet does not want to be unfair to any other children. By purchasing a life insurance policy of equal value to the business, the client can assure that there will be sufficient assets to provide an equal split of value between us children.

On occasion, a client has used a life insurance policy to fund a special needs trust for a particular child, leaving the remainder of assets to other children in order to make certain that none of the estate is required to be used for the special needs child in lieu of government benefits.

Clients who are fortunate enough to have assets in excess of lifetime exclusion of $5,000,000 can use life insurance to replace the amount of the estate loss to estate taxes. These amounts can be replaced on a leveraged basis using life insurance because the cost of a life insurance policy, whether a term policy or a permanent policy will never exceed the face value of the policy. The replacement of the assets using life insurance policy is funded at a fraction of the cost. In a situation such as this, where a life insurance will always be useful, it may be more appropriate to use a permanent policy and continue to pay premiums, because a term policy has a finite existence and may lapse or terminate or become too expensive at a time when it would be most needed. While many clients worry about the costs reducing their livestock, the reality generally is that the life insurance premiums will be paid from excess assets, not assets being currently used to support the client's lifestyle that the payment of premiums will come from excess assets, not assets otherwise used to support a client's lifestyle.

For many years, the funding of a retirement benefit or savings using a permanent life insurance policy has been out of favor for a number of reasons. Some commentators are now suggesting that because of the income tax changes in the most recent tax law, which raise income tax rates on investment income, and dividends for some taxpayers, using a life insurance policy as an estate builder can be valuable because of the tax-deferred buildup of the value of the policy. While this remains to be seen, at least make sense to consider this as a possible planning option.

Whether a term policy or permanent policy makes sense will depend upon the intended use for the proceeds. Whatever type of policy is purchased, it will usually make sense to purchase it sooner than later because life insurance is less expensive for younger, healthier clients, resulting in smaller premiums. Using life insurance, goals can be met even if an unexpected death or other event occurs for a family. Clients should always discuss the purchase of life insurance with an experienced life insurance professional and their estate planning attorney.

Keeping a Vacation Home in the Family

A number of my clients have family vacation homes or cottages that they and their children have enjoyed for many years. After getting so much enjoyment from owning the cottage those clients often ask how they can set up their estate planning documents to ensure that when they die, that ownership experience passes onto their children and grandchildren. While, in theory, this may be a good idea, it often creates significant problems if a not fully thought out and planned.

One issue that often causes an issue is the gift tax consequence of transferring a valuable piece of property. However, because of the most recent tax legislation, most people have a sufficient exemption amount so that gift tax is not an issue.

Transferring cottages to other family members can create thornier issues because of personal relationships. While family members may have enjoyed their time at the cottage, for many reasons they may have no interest in owning the cottage with their siblings or other family members. Issues that can arise include:

1. What is the most efficient manner of ownership of the cottage?
2. How to insure that the cottage remains in the "family"?
3. How to establish rules for the management and use of the cottage?

Generally, traditional forms of joint ownership, such as tenancy in common and joint tenancy with rights of survivorship, are inefficient methods for family ownership of the cottage. The primary risk in these types of ownership is that over time the ownership interest is subdivided or fractionalized as it is passed down to subsequent generations. While it is the dream or wish of the parents that the children continue to enjoy the cottages they have in the past, as family members grow into adulthood they may have different ideas. A family member might not have had a great experience at the cottage, may live too far away to be able to enjoy it, cannot afford the share of the cottage expenses, or may simply prefer the value of the cottage in cash to use as they may choose. With tenancy in common or joint tenancy, a family member may try to use his or her partition rights under state law, forcing the sale of the cottage or vacation home.

Co-ownership of the cottage may lead to other conflicts, such as:

1. Who controls the operation of the cottage?
2. How are operating, maintenance or repair expenses shared?
3. Who determines when and what improvements to make and how to pay for those improvements?
4. How are the most desired dates for cottage use determined or allocated among family members?
5. Are pets allowed?
6. Can family members rent their time to third parties?
7. Are nonfamily members, such as spouses and siblings, allowed to own an interest in the vacation home?
8. What happens if a family member wants to sell his interest in the cottage?

While many of these issues do not exist while the parents are alive because the parents pay all expenses of the cottage and determine how it is used, after the death of parents, these issues and others can create family disagreements or even permanent rifts.

 If the parents are still interested in trying to establish a "family cottage," a limited liability company (LLC) is an ideal ownership vehicle. An LLC has a perpetual existence. Parents can transfer the property to an LLC and then gift interests in the LLC during lifetime or at death to other family members. The LLC as an entity can protect owners from lawsuits by users of the cottage if injured on the premises. It can also prevent owners from being able to use the right of partition in order to sell the property. If used with a properly structured operating agreement, it can promote shared use and fair governance of the property.

It is possible to use an LLC operating agreement to meet the goals of the family, and should include:

1. A determination of who is the manager of the LLC--all members or a named managing member.
2. A procedure for determining what maintenance or improvement is to occur on the property and a method of allocating associated expenses.
3. A method of equitably allocating among family members the dates for using the cottage, especially during holidays, school vacations and most ideal seasons.
4. Rules for members using the cottage, including restrictions on allowance of pets, ability to invite guests, and the ability to rent out the member's time to outside parties.
5. A method for penalizing a member for violation of usage rules and/or failure to pay the required contribution for expenses.
6. A method for determining the transfer of member interests, including price and terms, for any member desiring to sell their interest. This could include a restriction on any sale to a non-family member.

While gift and estate taxes are unlikely to cause an issue, the consequences in regards to property taxes should not be forgotten when considering the transfer of a vacation home. Under Michigan law, if you convey less than 50% of ownership in real estate to others, there is no change in the property tax assessment rules for determining taxable value. Parents can gift up to 49% of the property to family members without any real estate tax consequence. If they prefer, the parents can first transfer the property to an LLC and then transfer 50% of the LLC to family members.

Because property values are still somewhat depressed, this is an opportune time to transfer the vacation property to family members and move value and future appreciation to family members and out of the parents' estate, while continuing to allow parents to maintain control of the asset.

While parents have the best interests of their family at heart, trying to maintain a vacation home in the family for a number of generations can create a nightmare scenario. It makes good sense to discuss this strategy with qualified counsel and the family itself to make sure there is sufficient interest to maintain the family cottage for future generations and to properly structure the transaction.

A Happy New Year from Plainly Legal

When I sat down to write this post around noon on December 31, I intended to use today to write about the current state of the law affecting estate planning. As you likely know, one part of the Fiscal Cliff is the expiration of the present law regarding the taxes paid on transfers of wealth at death, the Estate Tax. Tied to the Estate Tax is the Gift Tax, which taxes certain transfers of wealth during a person’s life. If Congress does nothing, when the present law expires the new threshold for estate taxation in 2013 will be $1,000,000. This means that estates with a value over $1,000,000 and lifetime gifting (with some exceptions) over $1,000,000 will be subject to taxation. The rate of taxation is also set to increase from a maximum rate of 35% of every dollar over the threshold to a maximum rate of 55% of every dollar over the threshold. This is just one of the results of the nation “going over” the Fiscal Cliff and I could spend a month of posts explaining those results.

However since as I was writing this post, Congress had not managed to find the collective moral courage to set aside partisan bickering, care more for the good of the nation than their own job security, and fulfill their oath to the American people, I find it difficult to articulate the state of the law. Ultimately, no matter what the law is as the sun rises over Washington, D.C. this New Year’s Day 2013, it can (and likely will) change. Tax rates and thresholds can be set retroactively, the difference between a tax increase and tax cut depends on the day of the week the law passes, and the nation’s economy will not split like the hull of the Titanic in the course of a single day or even a single month. Instead of a dry recitation of statutory interpretation I have for you three thoughts:

1. It is a new year. Take a moment to assess your goals from the past year, see how you did in achieving what you set out to do. Once you know where you came from, it is easier to plan for the future, so start achieving your 2013 goals today. Whatever else you do with the day is up to you, but I suggest spending it with friends and loved ones. There are 364 more days to spend making money, helping others, and fixing the dripping sink,  so why not start the year off with a little enjoyment.
2. Thank you for your trust and support. We have been writing this blog now for a little over three months and we intend to continue writing it for many more. Thank you for continuing to use us as counselors, advisors, and attorneys. It is our greatest pleasure to serve you, your families, and your clients. We truly appreciate it when we receive new clients through your referrals. If there are areas of estate planning, business planning, or other law that you would like to see us discuss here, please do not hesitate to let us know in the comments or by email.
3. Go team! As we go through the season of college football bowl games and NFL playoffs, may your team  score enough points to beat their opponent (or if you are so interested, just beat the spread).

A Happy and Successful New Year to you, your family, and everyone else in your life from everyone at Finkel Whitefield Selik and the Plainly Legal blog.

Al Ferrara

Matt Ferrara