Feb 11 2013Avoiding Uncapping of Property Taxes on Family Transfers

On December 31, 2012, Governor Snyder signed into law Public Act 497 of 2012 which provides that beginning December 31, 2013, a transfer of residential real property is exempt from uncapping property taxes if the transfer is to family members of “the first degree of kinship” and the use of the residential real property does not change following the transfer. This means that you can transfer your cottage or other residential real estate to your parents, siblings, or children without having to worry about the property taxes being reassessed at fair market value.

This is a huge break for families who have owned cottages and other residential real estate for a long time. Before this legislation, a transfer to family members would uncap the property taxes and the increase in the property taxes often made continued ownership by the family impractical. In recent years, Michigan court cases have held that under certain circumstances, joint ownership between parents and children avoided uncapping. However, owning property jointly with one or more children also has its disadvantages (liability exposure and loss of control, etc.).

The new legislation would allow you to transfer property to children at death without having the property taxes uncap. The legislation does not specify how the property must be transferred. For example, it is not clear that a conveyance of the property to a trust for the benefit of one’s children will avoid uncapping. It may be better to consider a “ladybird” deed that would allow you to keep control of the property during your lifetime and then allow the property to pass to your children if you still own the property at death. This would allow you to keep control of the property because your children would not have a vested interest until your death, and the property would pass free of probate proceedings. The State Tax Commission may provide more guidance on its interpretation of the legislation in the future.

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Jan 10 2013New Legislation: State and Gift Tax Certainty at Last

After much dissension and political maneuvering, Congress finally provided some certainty regarding estate and gift taxes at the end of 2012 by continuing permanently the $5,000,000 estate and gift tax exemption. The exemption, originally adopted for 2011, is adjusted for inflation and after adjustment the exemption was $5,120,000 in 2012 and is $5,250,000 for 2013. The adjustment will occur annually so that it will keep pace with inflation over time. The top marginal estate and gift tax rate increased from 35% to 40% under the new law. The new law avoided part of the “fiscal cliff” which would have reduced the exemption to only $1,000,000 and a 55% tax rate.

A “portability” feature that was added in the 2011 two-year “patch” legislation was continued under the new law. Portability gives the surviving spouse the ability to use later the unused portion of his or her deceased spouse’s estate tax exemption. In order to take advantage of this feature, the surviving spouse must file an estate tax return for the deceased spouse to make the election, even if the deceased spouse’s estate was below the $5,250,000 estate tax filing threshold. If the return and election is not filed by the surviving spouse, then the unused portion of the deceased spouse’s exemption is lost. The loss of the unused exemption would be important if the surviving spouse’s estate eventually exceeds his or her remaining exemption at his or her later death.

Before this portability feature was added, it was important for married couples with combined estates larger than the exemption to have separate revocable trusts with tax provisions and to divide their assets between their two trusts to make sure that the exemption of the first spouse to die was not wasted. For example, before portability, if a couple owned all their property jointly or left it to each other directly by beneficiary designations, upon the first spouse’s death, his or her exemption would be wasted. Then upon the surviving spouse’s death, there would only be one exemption available. The estate in excess of the one exemption would be subject to the estate tax. If that same couple had executed and funded separate trusts, they would be able to utilize two exemptions to shield twice the amount of assets from estate tax. Now, the portability election may avoid the necessity of couples having to create two trusts in order to minimize taxes. However, for couples whose combined estate is well in excess of the exemption (now $5,250,000), the two trust plan may still be advisable because the separate trust plan may also avoid estate tax on all of the appreciation on the assets in the first spouse’s trust from his or her date of death through the date of the second spouse’s death. In addition, the two trust plan can help a wealthy couple utilize the generation skipping exemption for both spouses. The portability feature applies only to the estate tax exemption – not to the generation-skipping tax exemption. The decision of whether or not a married couple should have two trusts is still best made with the advice of an experienced estate planning attorney.

Remember that when we refer to your combined estate, it includes all of the assets that you own and control including real estate, financial accounts, retirement plan accounts and life insurance at death benefit values (rather than cash value).

So, what does this all mean to you? If you are a single person, then your plan may not need to change at all as a result of the new law. If you are a married couple with combined assets under the current exemption ($5,250,000) and you already have separate trusts to minimize estate taxes that were drafted when the exemption was much lower, then you may be able to simplify your estate plan. Unless there are other reasons to have separate trusts (second marriages being one example), couples with estates under the exemption amount typically would prefer having one trust together or even joint ownership. The two trust plan might add additional accounting and an additional tax return that is now unnecessary. Those expenses were worth it when it was necessary to avoid an estate tax of around 50%. If the estate tax exposure is removed by the new law, going back to a simple plan may be beneficial.

In closing, please give us a call if you would like to review your estate plan in light of these changes. Our approach is to recommend those changes that are best for you under your particular circumstances, if any changes are needed at all. The good news is that we now have some certainty and can be more confident in our direction with this new law. It is certainly a positive development for almost all of our clients.

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Dec 03 2012New Mail Scam

You may receive a letter from “National Records Service, Inc.” of Northbrook, Illinois providing you with information about a deed to your property recorded at the local Register of Deeds office.  The letter states that “the U.S. Government website” recommends that property owners have a certified copy of their deed.  The company offers to obtain one for you at a cost of $59.50.  The letter does say near the bottom that “many government records are available free or a nominal cost from government agencies.”  However, the intention of the letter is to scare you into thinking that you need a certified copy of your deed.  In reality, as long as your deed has been properly recorded with the Register of Deeds office, you never need to provide the original deed to anyone else.  If you decide to sell your property, a new deed will be prepared by an attorney or a title office to convey the property to the purchaser.  It is not necessary to pay this fee to obtain a copy of your deed.  You can simply write to the Register of Deeds and provide a check, or go to the Register of Deeds in person and pay a nominal fee to obtain a copy of your deed should you feel it necessary.  There seems to be no end to the number of individuals or entities that will use fear to extract money from others.

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Sep 05 2012Tenth Common Estate Planning Mistake

Fail to review and update estate plans. Attorneys attempt to draft estate planning documents so that they anticipate circumstances that may arise such as the death of a beneficiary or a person appointed to serve as personal representative. As your circumstances change, you may not need to revise your estate planning documents. However, it is important to review your estate plan every few years in order to make certain that it still meets your objectives at that time. As we all know, our assets and liabilities, our estate planning objectives, and our family situations change throughout the years. It is important to make certain that your estate plan is appropriate in light of all of these changes. Many clients start out with a more simple estate plan and as their estate grows and their family circumstances change, they fail to revise their plans. This can result in people being appointed to handle an estate as a personal representative or handle a trust as a trustee who are not appropriate under the circumstances. Failing to revise an estate plan can also result in greater loss of assets to estate taxes and expenses than is necessary had the appropriate plan been in place.

1. Fail to review and update estate plans. Attorneys attempt to draft estate planning documents so that they anticipate circumstances that may arise such as the death of a beneficiary or a person appointed to serve as personal representative. As your circumstances change, you may not need to revise your estate planning documents. However, it is important to review your estate plan every few years in order to make certain that it still meets your objectives at that time. As we all know, our assets and liabilities, our estate planning objectives, and our family situations change throughout the years. It is important to make certain that your estate plan is appropriate in light of all of these changes. Many clients start out with a more simple estate plan and as their estate grows and their family circumstances change, they fail to revise their plans. This can result in people being appointed to handle an estate as a personal representative or handle a trust as a trustee who are not appropriate under the circumstances. Failing to revise an estate plan can also result in greater loss of assets to estate taxes and expenses than is necessary had the appropriate plan been in place.

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Aug 20 2012Ninth Common Estate Planning Mistake

Own all assets jointly with your spouse when your total combined worth exceeds the Federal Estate Tax exemption. For a married couple with a total net worth of $5,000,000 or more, special planning may be required to minimize the estate tax liability which will be imposed upon the last spouse’s death.  In those situations, joint ownership may be inappropriate and may result in more estate taxes being payable than necessary.  Appropriate estate planning for a married couple with larger estates typically involves each spouse having a separate trust and making sure sufficient assets are titled in or will pass to each spouse’s trust regardless of which spouse dies first.  Through this planning, you can double the amount of assets that can be protected from estate tax.

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Jun 28 2012When is it Appropriate to Have a Trust?

People often ask when is it appropriate to have a trust.  A trust agreement is a mainstay of many estate plans because a trust can be flexible to take into account many different situations.  Certainly a married couple with a large estate (beyond the estate tax exemption) should consider having separate revocable trusts to take advantage of each spouse’s estate tax exemption to minimize estate taxes.  Also, a person who remarries but has children from a prior relationship may want to create a trust to hold certain assets that will be available to those children after his or her death.  The remaining assets may be owned jointly with the new spouse.  People who have children with special needs or children who are otherwise unable to manage their assets for themselves might consider a trust to manage assets for those children.  The trust can make sure the assets are not wasted and avoid disqualifying a disabled child for governmental benefits.

One other advantage of a living trust is that to the extent assets are owned by the trust or payable to it by beneficiary designation, those assets will not be subject to probate proceedings upon death.  The trust is usually a better and more certain method for making sure that your assets pass the way you want them to regardless of unexpected events (such as a child predeceasing you and leaving children of his or her own).  Also, trusts can be structured in a way that provides certain tax benefits to you if you leave assets to charity.  These are only some examples of situations where trusts can be helpful.  An experienced estate planning attorney should be consulted to make certain that the right tools are used to achieve your specific goals.

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Jun 13 2012Bill Passes Michigan House to Eliminate Uncapping for Real Estate Transfers to Family

The Michigan House of Representatives overwhelmingly passed a bill that would eliminate the uncapping of real property transferred to family members of the first degree provided that the use of the property does not change.  The bill will now go to the State Senate.  The original bill (House Bill 4753) provided for elimination of uncapping for transfers to family of the third degree (more distant family members like nephews and nieces).  Family members of the first degree include parents, children, and siblings.  If the bill passes the Senate and becomes law, this will allow families to pass down to their children a family residence or cottage without having the property taxes skyrocket, often making retention of the family home unaffordable.  It would, however, have an undetermined financial impact on the revenues of municipalities.

 Under recent case law in Michigan, the only way to avoid uncapping when transferring property to one’s children is to make them joint owners with the parents.  This approach is more uncertain than a statutory exemption and has other pitfalls (liability exposure, loss of control, etc.).  If the bill passes into law, it will allow parents to pass the property to children through an estate or trust without the disadvantages of joint ownership and more certainty that the property taxes will not uncap.

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Jun 13 2012Eighth Common Estate Planning Mistake

Own all assets jointly with a new spouse when you have children by a prior marriage.  In a second marriage, often the couple places all of their assets in joint name for simplicity and to avoid probate upon the first spouse's death.  While this may be appropriate for some couples in a first marriage; the problem in a second marriage is that often the spouses assume that upon their death, their surviving spouse will leave some assets to their children by their first marriage.  However, the surviving spouse may remarry and retitle everything jointly with his or her new spouse.  As a result, simple joint ownership in a second marriage where there are children by a prior marriage can result in the unintentional disinheritance of your children by your first marriage.  In those situations, it is usually better for each spouse to have a separate trust that provides for the surviving spouse and also provides for the children by the first marriage.  Sometimes life insurance in this situation can assist in making certain that your children by your first marriage are amply provided for at your death.

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May 30 2012Seventh Common Estate Planning Mistake

Create a trust but fail to transfer your assets to the trust. If you are a single person and choose to create a trust in order to avoid probate proceedings upon your death, you need to actually retitle your assets into the trust prior to your death in order to avoid probate. Simply creating the trust and leaving the assets in your own name will not avoid probate. It is often this second step of retitling assets that is left undone. In that event, you will have incurred the cost of creating a trust yet still fail to avoid the cost of probate proceedings at your death. You may also have to change the beneficiary designations on life insurance and retirement plans to make certain that those death benefits do not pass through probate. For married couples with one trust, it may be better from a liability exposure perspective to own many assets jointly as husband and wife (rather than in the trust). In short, you should obtain advice from an experienced estate planning attorney regarding how to own each asset under your particular circumstances.

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May 17 2012Sixth Most Common Estate Planning Mistake

Assume that a will protects you in the event that you become incapacitated.  A will, by its very nature, comes into effect only at the time of your death.  The fact that you may have appointed a personal representative to handle the distribution of your assets upon your death in your will does not authorize that person to act for you during your lifetime or during any period of incapacity.  In order to appoint someone to act for you if you become incapacitated, you should execute a Durable Power of Attorney to authorize them to act for you in your financial matters, and a Designation of Patient Advocate to authorize them to make medical decisions for you in the situation where you are not able to make them for yourself (usually these Designations include language that is typically referred to as a “living will”).  Without a Durable Power of Attorney or a Designation of Patient Advocate, if you become incapacitated, a guardianship or conservatorship proceeding may be necessary to have people formally appointed by the court to make financial and medical decisions for you.

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