For Your Own Good Understanding Michigan Estate Planning

Jan 30 2012The Future of Estate Taxes in 2013?

What will happen at the end of this year? Most estate planners felt that it would be very unlikely for Congress to let the estate tax exemption go back to only $1,000,000 (the exemption in effect in 2001). This consensus came largely from the fact that President Obama proposed an exemption of 3.5 million dollars with a cost of living adjustment and the Republicans succeeded in moving it up to $5 million for 2011 and 2012. However, in order to avoid reverting to a $1 million exemption, Congress must pass new legislation. That is why an automatic drop to $1 million no longer seems so unlikely. We will have to wait and hope that Congress can come up with a good compromise.

Jan 27 2012Common Estate Planning Mistakes

Avoid the issue completely. Many people find it uncomfortable to deal with their own estate plan because of the underlying issues of death and disability.  Others simply assume that they do not need an estate plan until they reach retirement age.  However, every adult should have some estate plan to cover not only the distribution of assets upon death, but also management of assets during incapacity.  As we all know, death or incapacity can strike at any age.  If you fail to plan for those possibilities, the expense, confusion, and additional stress upon your family or others that you leave behind can be tremendous.

Mar 04 2011New Estate and Gift Tax Legislation

In 2001, Congress passed tax legislation that increased the estate tax exemption from $1,000,000 over several years through 2010 when the estate tax was repealed for one year.  The estate tax exemption and rates changed as follows:

Year - Estate Tax Exemption, Maximum Estate Tax Rate

2001 - $1,000,000, 55%    
2002 -$1,000,000, 50%
2003 - $1,000,000, 49%
2004 - $1,500,000, 48%
2005 - $1,500,000, 47%
2006 - $2,000,000, 46%
2007 - $2,000,000, 45%
2008 - $2,000,000, 45%
2009 - $3,500,000, 45%
2010 - 0, 0%
2011 - $1,000,000, 55%

There were not enough votes in favor of the 2001 legislation to make the repeal of the estate tax permanent.  The law stayed in effect for 10 years and unless Congress took action, the estate tax would return in 2011 with the same exemption amount and rates as were in effect in 2001 ($1,000,000 exemption and a top rate of 55%).  In December, Congress finally passed the “Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010.”  Part of that Act provides for a $5,000,000 estate tax exemption per person and a top estate tax rate of 35%. 

The new law also makes the estate tax exemption “portable.”  This means that if a married person dies and does not use his or her entire exemption amount, the remaining portion can be used by the surviving spouse later in addition to the exemption of the surviving spouse.  In the future, this may avoid the necessity of spouses having to create separate trusts in order to minimize estate taxes.  In addition, under the previous 2001 Tax Act, the lifetime gift tax exemption, had remained at $1,000,000 per person.  Under the new Act, each person now has a $5,000,000 lifetime gift tax exemption. 

The 2010 Act, however, is only in effect for 2011 and 2012.  Further action by Congress will be required and is somewhat unpredictable.  For those individuals and married couples with substantial estates, the next two years may provide a good opportunity to make large gifts to children or grandchildren to take advantage of the increased gift tax exemption.  For those married couples with separate trusts to minimize estate tax, it may make sense to keep them in place for a couple of years at least until more permanent legislation provides more certainty. 
 
We recommend that you take the new Act into account for your estate plan.  If you would like your estate plan reviewed in light of the new Act, please contact our office.

Neil L. Kimball          
Neil P. Jansen         
James F. Scales         
Benjamin A. Zainea         
Amy L. VanDyke
Stephen J. Mulder
Daniel J. Kozera, Jr.

Oct 19 2010Some Movement on Estate Tax Legislation

As a result of the 2001 tax legislation, the estate tax exemption had grown from $1 million in 2001 to $3.5 million in 2009.  This year is the last year affected by the 2001 Tax Act, which resulted in a complete repeal of the estate tax for 2010.  As a result of Congress not having sufficient votes in the Senate to make the tax law permanent, the 2001 Tax Act expires at the end of this year and the estate tax returns at the beginning of next year with an exemption equal to what it was in 2001 ($1 million).  Most estate planners believed that Congress would have taken action before the end of 2009 to change the law so that the estate tax would not go away, resulting in the government losing all of the estate tax revenues from individuals dying in 2010. 

Certainly most Democrats and Republicans believe that an estate tax should not come back with an exemption of only $1 million since that would require estate tax planning to be undertaken by even young couples with life insurance, retirement plans, and a residence.  President Obama, before and after his election, indicated that he thought a $3.5 million estate tax exemption with a cost living adjustment would be appropriate. 

For many months now, nothing has really been mentioned about changes to the estate tax laws.  However, recently a group of Republican Senators introduced a Bill that would retroactively raise the estate tax exemption to $5 million and reduce the top estate and gift tax rate to 35%.  For executors of estates of individuals who died in 2010, the law would allow them to elect whether to be taxed under this new estate tax law or under the present 2010 rules because there are different tax basis rules applicable in 2010 and 2011. 

We will have to wait to see if action is actually taken and a law is adopted before the end of this year.  Most estate planners believe that there should at least be a $3.5 million estate tax exemption in place.  With an exemption of $3.5 million, and through appropriate planning, a married couple could protect as much as $7 million from estate taxes.

Aug 23 2010Is Probate Really So Bad?

Probate has a terrible reputation.  The very word conjures up images of long delays, complexity, and huge legal fees.  Some people even think the State seizes your property or at least a portion of it after you die.  Actually, probate is intended to be a structured way of making certain that your assets pass to the right people according to your Will if you have one.  If you fail to leave a Will, then the State’s laws of intestate succession determine who receives your probate assets.  Intestate succession is simply the State’s best guess at who you would want to receive your property if you fail to make that decision yourself by having a Will.  Whether or not you have a Will does not really have a bearing on whether your assets pass through probate.  If you die with assets titled in your name alone and those assets do not pass by beneficiary designation, then those assets will have to pass through probate.  If you leave a Will, you decide who receives the property through the probate process.  If you do not have a Will, then State law determines who receives the estate.

Most probate estates proceed efficiently and without a huge cost.  I usually advise people to anticipate probate to run between $3,000 and $7,000.  The largest expense is the attorney’s fees going through the process.  Certainly, to the extent you can use Trusts and appropriate beneficiary designations to avoid this expense you should do so.  However, people often confuse regular probate proceedings with situations where beneficiaries are fighting or estates stay open for long periods of time because they are large and are waiting for the IRS to agree with an estate tax return before closing the estate.  Most probate estates do not run into those problems.  Even if you avoid traditional probate proceedings through a Trust, if beneficiaries of a Trust decide to argue, you can find yourself in Probate Court with large legal fees. 

So, the next time you hear someone talking about probate, simply realize that although it is a nice expense to avoid, it is not the horrible procedure that most people envision. 

Aug 16 2010Asset Protection

One important task of an estate planning attorney is to make certain that the client’s liability exposure is minimized to the extent possible.  For an unmarried individual, the options for asset protection are somewhat limited.  A revocable trust does nothing to protect the client’s trust assets from liability exposure.  Federal law protects certain retirement plans from creditors.  One method of protecting assets is for the client to place his or her assets in an irrevocable trust of some type.  Often this is not a practical or desirable solution. 

 For a married couple, there are a few more options available to protect assets.  For example, one option is to move ownership of some assets from the spouse that is involved in a more risky occupation or activity to the other spouse.  A married couple may also own assets as tenants by the entireties.  This is a special form of joint ownership between a married couple that protects those assets from the claims against only one of the spouses. 

 Having sufficient liability insurance coverage is the first line of defense.  A good estate plan, however, will take into account liability exposure beyond insurance coverage in determining the estate planning documents to use and how assets should be owned.

Jan 11 2010Transfer Tax Laws Changing

2009 ended without Congress having taken action to change our current transfer tax laws (estate, gift and generation-skipping law).  Under current law, estate and generation-skipping taxes are repealed for 2010.  While this may sound like a good thing to many, the repeal will only last for one year.  Unless Congress takes further action, the tax breaks that led to the one year repeal under the 2001 tax act will end on January 1, 2011 when the estate tax returns with an exemption of only one million dollars.  Last year, the estate tax exemption was 3.5 million dollars. 

 Most estate planners thought that Congress would take action in 2009 to set the exemption between 3.5 and 5.0 million dollars.  Most planners did not think that Congress would let the complete repeal occur in 2010 because of the loss of tax revenue at a time when the Country has a very large deficit.  Congress may still pass a law in 2010 to put a higher exemption in place before next January.  Nevertheless, because the estate tax is such a hot political topic, the future is uncertain.

 What this may mean to you and your estate plan depends upon your circumstances, how you will be leaving your estate upon your death, and the value of your estate.  If the estate tax exemption is allowed to return to one million dollars next January, it will require many married couples to revise their estate plans.  If your plan includes a trust with a formula that allocates trust assets among your spouse and children (or other beneficiaries), the estate tax repeal or the possible return to only a one million dollar exemption may drastically alter or eliminate the amount to be left to your spouse, for example.  While we hope that Congress takes action to at least restore the estate tax exemption to its 2009 level of 3.5 million dollars, if it does not, then the failure to plan accordingly may have very harsh consequences to many families.

Nov 23 2009Common Estate Planning Mistakes – Part 1

The following is a series of the most common mistakes people make with respect to estate planning:

• Avoid the issue completely. Many individuals find it uncomfortable to deal with their own estate plan because of the underlying issues of death and disability.  Others simply assume that they do not need an estate plan until they reach retirement age.  However, every adult should have some estate plan to cover not only the distribution of assets upon death, but also management of assets during incapacity.  As we all know, death or incapacity can strike at any age.  If you fail to plan for those possibilities, the expense, confusion, and additional stress upon your family or others that you leave behind can be tremendous.

Nov 12 2009How Should You Own Your Vehicles

As a general rule, you should own your vehicle in your name alone. The primary reason for this is to limit your liability exposure. If your car is involved in an accident, most likely you will be the one driving at the time. If someone is injured as a result and they bring a claim for negligence that exceeds your liability insurance coverage, then only your individually-owned assets will be exposed to that claim. If you are married, your spouse’s assets and many of the assets you own jointly with your spouse will be protected because your spouse is not responsible for your negligent acts. However, if you own your vehicle jointly with your spouse, almost all of your assets, your spouse’s assets, and your joint assets will be exposed to the liability (there are exceptions for certain retirement assets). As a joint owner of a vehicle, your spouse is responsible for the acts of those operating the vehicle. Therefore, the way to best limit your liability exposure is to have the vehicle titled solely in the name of the person who operates the vehicle most often.

While assets titled in your name alone at death usually result in probate proceedings through probate court, that is not true if the only assets titled in your name alone are one or more cars with a total value of under $60,000 and one or more boats with a total value under $100,000. So unless you have very expensive vehicles or leave other assets in your own name alone requiring probate, your “next of kin” (spouse or children) can simply transfer title to the vehicles at the Michigan Secretary of State’s office following your death without probate or other legal expenses.

Sep 04 2009Adult Children Need Estate Plans Too

It often does not occur to parents that when their children turn age 18, they are no longer minors under Michigan law. Once a child reaches 18, he or she has legal independence of parents and the ability to enter into contracts and execute other documents including estate planning documents. Although most 18 year olds have not yet accumulated substantial assets, they should execute certain estate planning documents.

Your children should have a general Durable Power of Attorney to authorize one or more individuals to handle financial transactions for them. Although this document can be written so that it is effective when it is signed, it is most needed if a child becomes incapacitated as a result of an accident or illness. Under those circumstances and without a Durable Power of Attorney, financial transactions may have to wait until a conservator has been appointed through a probate court proceeding. These proceedings certainly come at a time when it is difficult on the family and a General Durable Power of Attorney will almost always avoid the necessity of a probate court conservatorship proceeding.

Similarly, your adult children should have a Designation of Patient Advocate in which they name an individual to make medical decisions if their physicians determine that they can no longer make informed decisions about their own medical care. The Patient Advocate then can make those medical decisions for the child under those circumstances. Without this document, a probate court guardianship proceeding may be necessary. The Designation of Patient Advocate can also include a “living will” statement that indicates what treatment your son or daughter may or may not want under particular circumstances. In light of the recent case involving Terri Schiavo, all adults should consider executing one of these documents to make their wishes clear and help avoid disputes over their medical care.

Finally, your children should consider having a Will or even a Trust, depending upon their financial circumstances, to specify how they would want their assets distributed in the event of death.

Parents who are sending their children off to college or to military service often forget that although their children may be financially dependent upon them, they are legally independent and need to address these issues to avoid a great deal of confusion, expense and emotional turmoil. Estate planning is one of the many tasks that your children should address as they reach adulthood.