Obama and Death Taxes

President Obama spoke about the future of federal estates tax during his recent bus tour through the Midwest. A family farmer expressed her concern about the pending return of the 2001 federal estate tax exemption in 2013. If Congress and the President fail to act, the federal estate tax exemption per person will drop to $1,000,000, commencing January 1, 2013. The exemption is currently $5,000,000 per person.

President Obama responded by indicating that he was willing to compromise with a $7,000,000 exemption per family.  I think what the President was essentially referring to was a $3,500,000 exemption per person and the ability for a deceased spouse's unused exemption to be transferred to a surviving spouse.  This is consistent with what he has spoken about in previous campaign stops in 2008.

Curiously, the President also spoke about the tax code in general and said that the estate tax issue is part of the larger debate about the code.  This signals that the President may foray into the tax code in 2012.  There has been some speculation that the so-called "Super Committee" will take a close look at our tax code and make some recommendations in that regard. Finally, the President emphasized "basic fairness" in the tax code.

Bottom line. Don't expect the President to support an elimination of the federal estate tax or death tax.

Why Automobile Ownership is Important

Due to the hype about avoiding probate, many couples title their motor vehicles in both of their names.  For convenience, some couples title their vehicles in the name of the spouse who purchased them regardless of who regularly drives them.  Not paying close attention to how motor vehicles are owned can have devastating effects in Michigan.

Unlike many states, Michigan has “owner liability”.  What does this mean?  In simple terms, the owner of a motor vehicle is liable for an injury caused by the negligent operation of that motor vehicle.  See MCL Section 257.401.  So, the owner can be miles away from an accident, yet he or she can be legally responsible.

I have encountered many couples who title their vehicles in both names for probate avoidance reasons. It is true that if one spouse dies, the joint owner/surviving spouse is the sole owner of the vehicle without probate. The joint owner/surviving spouse can apply for a new title to the vehicle at the Secretary of State with a certified death certificate, the current registration and the original car title.

However, what many people don’t realize is that the process to transfer a vehicle title in Michigan after the sole owner’s death is relatively simple and can be done without probate in most cases.  If a person dies owning a vehicle (or several vehicles for that matter) in his/her sole name, his/her closest next of kin can go to the Secretary of State and apply for a new title as long as the total value of all vehicles is less than $60,000 and a probate estate has not and will not be opened.  The legal authority for this type of transfer is contained in MCL Section 257.236(2).

Bottom line.  Title a vehicle only in the name of the one person who usually drives it.  In Michigan, if the driver of the vehicle is also the sole owner, then only that person can be sued for negligence as the result of an accident involving the vehicle. So, be very careful about adding names to titles.  Don’t let your name be added to car titles for family members and avoid co-signing for car loans.  It is also a good idea to have an umbrella insurance policy that covers you for multiple loss contingencies.

In the end, how you title your motor vehicles should be controlled by liability concerns and not so much by estate planning or probate avoidance concerns.

Common Life Insurance Mistakes

If you haven’t done it recently, I strongly recommend that you check your existing life insurance policies for one or more of these mistakes.

1.     THE INSURED’S ESTATE HAS BEEN NAMED BENEFICIARY.  If the policy has a named beneficiary, the death benefit can be paid without the hassle of probate.

2.     THE POLICY HAS NO NAMED CONTINGENT BENEFICIARIES.  If the primary beneficiary predeceases the insured, the next default beneficiary is usually the estate - and that means probate is necessary.

 

3.     MINORS OR OTHER IMPAIRED PERSONS HAVE BEEN NAMED BENEFICIARIES.  If young children are in line for life insurance money, it usually means a court has to supervise the process and administration of the funds.  That can be avoided with proper planning.

4.     THE BENEFICIARY LANGUAGE IS WRONG OR UNCLEAR.  Estate planning attorneys run into circumstances all the time where the beneficiary designation doesn’t match the insured’s intentions.

5.      FAMILY NEEDS ARE NOT ADEQUATELY ADDRESSED.  It used to be that a million dollar insurance policy felt like it was enough to take care of family needs in the event of the breadwinner’s death.  For many, that’s not nearly enough any more.

6.     THE WRONG OWNERSHIP WAS CHOSEN FOR THE PROBLEM TO BE SOLVED.  Most people choose to own their life insurance policies personally.  That can be a mistake in certain business situations, or where there’s a family estate tax problem.

7.     BUY-SELL FUNDING POLICIES HAVE NOT BEEN PROPERLY REVIEWED.  Business owners sometimes use life insurance to help make sure the business will continue after an owner’s death.  Even where a plan has been put in place, failure to update it can have disastrous consequences for the owners and their families.

8.     POLICIES HAVE NOT BEEN REVIEWED AFTER DIVORCE (OR OTHER LIFE EVENT).  People sometimes forget to remove an ex-spouse as beneficiary under a life insurance policy.  They also sometimes forget that their divorce papers require them to use existing life insurance policies in certain ways.

Reflection on Memorial Day

Memorial Day is a special time to honor our brothers and sisters who made the ultimate sacrifice in service to our country.  It is also a time to honor and thank those individuals who serve today. Our nation is in the midst of three serious conflicts and our active duty service members need our support and prayers.  On this Memorial Day Weekend, please take a moment to reflect on the many sacrifices made by our nation’s veterans and the sacrifices they continue to make.  Your support is critical to their morale and the well-being of their families.

Ryan Wilson

U.S. Navy Veteran

Powers of Attorney and Power Grab!

A recent article in the Wall Street Journal, entitled “Power Grab!”, discusses the perils of powers of attorney.  The article was published on May 14, 2011. 

http://online.wsj.com/article/SB10001424052748704681904576315662838806984.html

A power of attorney is a legal document in which a person (the “principal”) names another person (the “agent”) to act on his or her behalf.  According to the article’s authors, Kelly Greene and Jessica Silver-Greenberg, powers of attorney are an emerging vehicle for fraud.  There are some points in the article that I agree with and there are others that I do not.

According to the article, the lesson for anyone entering into a power of attorney is vigilance.  I agree that vigilance is very important.  However, what is most important is the selection of the agent. Be very careful who you select to act on your behalf.  If you don’t have anyone who you can trust, then don’t execute a power of attorney. It is as simple as that. Overall, a power of attorney is common estate planning tool and is very useful.

Using a “springing” power of attorney is one way to limit fraud according to the article. However, I tend to disagree with this short-sighted analysis.  The key is access.  Don’t give the power of attorney to the agent until it needs to be used.  A careful attorney will keep an original power of attorney in his or her file for possible future use by the family. What I find most perplexing about the “springing” power of attorney argument is: what makes you think you can trust the person while you are incapacitated if you cannot trust them while you are competent? To me, you picked the wrong agent if you do not have sufficient trust.

I also find that a “springing” power of attorney is not as easily accepted by banks and other third parties.  Adding the springing power means you have to get a physician to sign off that you are incapacitated and some doctors may be reluctant to do so under the circumstances. Some doctors fear repercussions if something bad happens.

I do agree with the point made in the article about building in some controls. One of the things I find helpful is to require the agent to account to the family on an annual basis or upon reasonable request.   Also, if you give the power to make gifts, you want to be careful about the amount of the gifts and to whom a gift can be made.  In Michigan, a power of attorney must be specific about gifting powers.

If you spend a lot of time in different states, it is a good idea to have a power of attorney executed in each state.  It is more likely to be accepted if it is drawn up specifically for the state where it is intended to be used.

Overall, this is a good article to read. Final point, don’t forget about health care powers of attorney. They are as important as the regular or financial power of attorney.  By the way, a health care power of attorney in Michigan must be a “springing” power of attorney.

Tax Time: Things to Consider

Many do most of their thinking about taxes during this time of year - when they just finished filing their returns (or just filed an extension).

Professionals typically respond to more tax questions during the first quarter of the year than at any other time.  The areas of interest these topics, among others:

·       Traditional IRAs

·       Roth IRAs

·       Pension plans

·       Social security benefits

·       Life insurance and annuities

·       Education savings accounts

Here’s a small sampling of the frequently asked questions, along with short answers to them.

1.     Question:  Is it too late for someone to take a required minimum distribution (RMD) for 2010 from her traditional IRA?

Answer:  If a taxpayer turned 70 ½ in calendar year 2010, she had until April 1, 2011 to take her RMD from her traditional IRA - so it is too late.

If the client turned 70 ½ in a year prior to 2010, she was required to take the distribution for 2010 by the end of 2010.  If the client fails to take the RMD by the deadline, the IRS imposes a special penalty tax of 50% on the amount that should have been distributed.

2.     Question:  Can a self-employed person contribute to both a Simplified Employee Pension (SEP) IRA and a regular traditional IRA in the same year?

Answer:  Yes, subject to normal limits.

An employer’s SEP contribution into the participant’s IRA is treated like a pension plan contribution from the employer - even where the participant is the owner of the company.

Regular IRA contributions can be made by the participant to his or her traditional IRA, up to the maximum annual limit.  For 2011, the maximum IRA contribution is $5,000 if under age 50 and $6,000 if 50 or over. However, the amount of the regular IRA contribution that can be deducted on the employee’s income tax return may be reduced or eliminated due to the fact that the employee is an active participant in a pension plan.

3.     Question:  I understand that company-owned life insurance must now have proper notice and consent forms signed prior to issue, and that the employer may be responsible for filing a tax form with the IRS.  Can you explain the rules?

Answer:  Normally a life insurance death benefit is income tax free.  In order to maintain the tax free nature of the death benefit from a business owned policy, the Section 101(j) rules must be followed.  Among other requirements, compliance with Section 101(j) requires a notice and consent form to be signed prior to the policy’s start.

The IRS also requires an employer to report the number of its policies subject to Section 101(j) on IRS Tax Form 8925 every year.

Living Trusts for Couples

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 significantly changed estate planning for 2011 and 2012.  One of the key changes was to increase the federal estate tax exemption amount from $1 million to $5 million per person.  So, for a married couple, they can theoretically pass a combined $10 million to their descendants without a federal estate tax.  One of the other key changes was to provide for the “portability” or transfer of the exemption from the deceased spouse’s estate to the surviving spouse.  This latter change may reduce some of the incentive to use living trusts.

One of the main reasons for using living trusts is to eliminate or reduce the federal estate tax.  In the past, if each spouse had a living trust and sufficient assets were transferred into each trust up to the exemption amount, the exemption amount of the first spouse to die was fully utilized, i.e., it was not lost.  As a result, the couple was able to maximize the transfer of wealth to their descendants.  This ability to use both exemption amounts has been a critical motivator for traditional A/B trust planning.  The recent addition of the “portability” or transfer of the unused exemption amount to the surviving spouse will likely translate into fewer living trusts for married couples. However, does this mean living trusts are dead for married couples? The short answer is “No.” There are many other good reasons to use living trusts for married couples.

The traditional A/B trust planning will still be needed if the spouses want to designate certain assets for children and other descendants, instead of the surviving spouse.  There is also the issue of control. For example, using the A/B trust planning will help ensure that the assets left in the B trust (or family trust) at the first death will eventually pass to the children and descendants of the couple, and not to any new children or new spouse of the surviving spouse.  This may be more of an issue if there is a significant age gap between the spouses, or if there has been a prior marriage.  Another good reason to consider A/B trust planning is creditor protection. The asset in the B trust (or family trust) can generally be protected from the creditors of the surviving spouse and children.  Another practical reason to consider A/B trust planning is that the current law is set to expire on January 1, 2013, and there is great uncertainty as to what will happen in 2013. Will “portability” survive?  There is not way to know.

One of the most important reasons to use the A/B trust planning model is the generation-skipping tax (GST).  (The GST is that nasty tax which is generally imposed when assets are transferred to grandchildren instead of children.) It should be noted that each person has a $5 million GST exemption.  While the federal estate tax exemption can be transferred to the surviving spouse, the GST exemption is not “portable” and will be lost if it is not used during lifetime or at the death of the first spouse to die.

It should also be noted that in the traditional A/B trust planning model, the assets left in the B trust (or family trust) are not subject to estate tax at the survivor’s death.  So, the assets can appreciate (hopefully) and the appreciation is not subject to further estate tax. On the other hand, if all of the assets are left to the surviving spouse, the appreciation is included in the estate of the surviving spouse and subject to estate tax at that time. This may be an important consideration depending on the total size of the combined estates.

There may be some situations where A/B trust planning is not as important or needed.  If it is overwhelmingly important for the surviving spouse to maintain full control of all marital assets, then A/B trust planning may not be needed. Also, A/B trust planning may not be needed where the couple is in a long-term committed relationship and the only children belong to both of them. Some other factors favoring a simple plan without trusts include: the couple has no real concerns about the possible remarriage by a surviving spouse; the couple intends for their children to be the primary beneficiaries of the estate when both spouses are gone; and asset protection concerns are not important.

In summary, living trusts are not dead as an estate planning tool for married couples, at least not yet.  They may be used less, but they are still very viable and valuable instruments. In light of the changes made by the 2010 Tax Relief Act, I am recommending that those with sophisticated estate plan have those plans reviewed.