Michigan Estate Planning Blog

Estate Planning for the Military Family

For too many of us, the necessities of estate planning are easy to forestall. However, for a military family, the exigencies of the present are too great to ignore. Proper planning is an immediate concern. How can military families properly plan? A recent Forbes article titled “Make a Legal and Financial To-Do List Before Military Deployment” sheds some practical light. Essentially, military plans always are based on battlefield “contingencies.” Whether over there or on the home front, changes on the “battlefield” are hard to predict. For example, for a deploying soldier (sailor, airman, marine or coast guardsman), have you secured enough life insurance to provide for your family? If yes, does your life insurance specifically carve out war, war-risk, service casualties, and the like as exclusions? Regardless, make sure you maximize any government-offered life insurance, as it does not exclude such risks. Ultimately, do not ignore making proper estate plans as well. Be sure to coordinate your estate planning with the beneficiary designations on your life insurance and other assets. While a Legal Assistance Officer in your local Judge Advocate General’s Office can assist, most state bar associations have attorneys who will assist you at little, if any, financial cost.

Reference: Forbes (June 28, 2012) “Make a Legal and Financial To-Do List Before Military Deployment”

Filing a “Protective Claim” for Same-Sex Estate Planning

The legality and constitutionality of same-sex marriage has not been far from the news or the estate planning of some who are affected. This particularly is true after the ruling of U.S. District Court Judge Barbara S. Jones in Windsor v. United States. When it comes to “same-sex” estate planning, there are significant tax burdens at play. However, according to a recent article in MarketWatch titled “Ruling poses tax issues for same-sex couples,” that doesn’t mean that you have to consider the protective claim. So, what is a protective claim? Any form of taxation is subject to a sort of protective claim. All that is required is that you pay your tax and then file an amended return. It should be filed on the basis of what your return should be if current litigation is decided in that favor. Still, the stakes are simply that much higher in this case with the many tax benefits that marriage as a federally-recognized institution brings. Some may consider it premature, but, in the case of either income taxes or estate taxes, taking the defensive position of a protective claim may be worth it. At the very least, there’s nothing to lose.

Reference: MarketWatch (July 10, 2012) “Ruling poses tax issues for same-sex couples

The Clock is Ticking on a Gift Tax Exemption Bonanza

A few poignant reminders never hurt anybody, especially when the issues are this pressing. Case in point: There are fewer than six months remaining to make use of the $5.12 million gift tax exemption. If you have not noticed, communication between Congress and the White House is rather contentious. After all, it is an election year and the stakes are high regarding the future of our country. Who will control the levers of power in 2013? That question will not be answered until November 6. In the meantime, the future of the gift tax (and the estate tax) hangs in the balance. Against the backdrop of this uncertainty, one known is that the $5.12 million gift tax exemption is available through December 31, 2012. That amount (or $10.24 million, if married) is yours to give – in liquid assets, unappreciated stock, real estate, or what have you – but only until the end of the year. The New York Times recently addressed this issue in a recent article titled “To Give or Not to Give, Up to $5.12 Million.” In the end, you may find yourself in this very real tax predicament. You could be stuck between the known and the unknown, 2012 and 2013 gifting exemptions, or, a rock and a hard place.

Reference: The New York Times (June 22, 2012) “To Give or Not to Give, Up to $5.12 Million”

Avoiding the (Medicare) “Doughnut Hole”

Even with the Affordable Care Act (ACA) – Obamacare by any other name – well in place and affirmed by the Supreme Court, the costs paid and lifestyles lived by many is being tied to the “doughnut hole.” This especially is true for seniors taking depression medications. As recently reported in Med Page Today, a new study by Yuting Zhang, PhD, of the University of Pittsburgh, Medicare may not fully cover depression medications for seniors, despite the ACA. The article is titled “Antidepressants 'Fall' Through Doughnut Hole.” If you are unfamiliar with the “doughnut hole” issue, you are not alone. It is the coverage gap created by Medicare Part D. For those whose income is at the lower end, there tends to be coverage. Likewise, for those who have an upper-end income, there is still coverage… with a gap in between. According to the new study, and sheer intuition, patients that fall within the doughnut hole are associated with a significant drop in medication use – 12% on average. That is always relevant, but perhaps especially so in the case of depression medication. While discontinuing any prescribed medication is never advisable, it is often easier to justify foregoing depression medication than other medications. I certainly recommend reading the original article for more details regarding this study, should this issue be relevant to you or someone you love.

Reference: Med Page Today (July 5, 2012) “Antidepressants 'Fall' Through Doughnut Hole”

Estate Planning – The Human Factor

Of the three essential elements to any estate plan, namely, the legal, the financial, and the human factor, the latter can be the most difficult. This challenge was the subject of a recent article in Financial Planning appropriately titled “The Human Factor.” Generally speaking, the human factor in any estate plan is the sum total of your personal, interpersonal, and family relationships and problems. Planning for these matters means taking everything you know and everyone you love into consideration. While the details will vary according to your own unique circumstances, the Financial Planning article provides some practical guidance. For example, have you considered the needs of yourself or your spouse (if married), should old age catch up with you physically or mentally? What about the potential of a likely heir having spendthrift tendencies or a substance addiction? Have you given thought to heirlooms and other items of tangible personal property that could trigger family feuds in the absence of clear inheritance direction?   Is that all? Hardly. It does, however, help to get you (and me) thinking about the “human factor” when it comes to our estate planning.

Reference: Financial Planning (July 1, 2012) “The Human Factor”

Estate Planning for a Special Needs Child

Financial and estate planning for your special needs child or grandchild may be the last thing on your mind while caring for their needs, but know that planning ahead can ensure proper protection for their future. The Wall Street Journal recently addressed this subject in an article titled Build a Financial Plan for Special-Needs Child. While you must approach your estate planning with a sense of urgency, the planning itself is an ongoing activity. Nevertheless, with special needs there are special concerns. Estate planning truly is a process and not an event. Don’t forget to consider the potential lack of public assistance resources in the future while coordinating your estate and financial planning. In addition, remember to factor in the lengthening life expectancies of adults with special needs. Life insurance, owned in the proper manner and in the proper amount, can provide additional financial security and peace of mind.

Reference: The Wall Street Journal (July 28, 2012) “Build a Financial Plan for Special-Needs Child”

Appraisals and Gift Taxes

If you are gifting to family this year and want to survive IRS challenges, then contact a professional appraiser promptly for the real worth of those assets! With the $5.12 million lifetime gift exclusion set to expire on December 31, 2012, many families will be looking to make significant wealth transfers this year, especially of family business interests. Accordingly, if your plans involve giving things rather than money, then the IRS will want to know the “value” of the gift itself. That’s why a professional appraisal is essential. A recent article by Reuters, titled Appraisers are your gatekeepers to gift tax deadline, shed more light on why this step is so important for gifting. Don’t let the increasing demand for appraisal services leave you short of getting your gifts assessed! If you want to take advantage of the generous gift tax laws, then there’s no time to waste.

Reference: Reuters (August 8, 2012) “Appraisers are your gatekeepers to gift tax deadline”

DIY Estate Plan Goes Wrong

The recent passing of Adam Yauch of the Beastie Boys sheds light on why DIY estate planning is a huge risk. A last-minute, handwritten addition to his will may not be lawfully legit and could cause years of legal headaches for his heirs if they pursue his request. Forbes recently analyzed the Last Will of Mr. Yauch in an article titled “Part Of Beastie Boy Adam Yauch's Will, Banning Use Of Music In Ads, May Not Be Valid.” It seems one of his last decisions and a last act of defiance was to make pen-and-ink revisions within a common legal provision. Unfortunately for Mr. Yauch, the language he chose and the addition itself did not work. So, what went wrong? The Last Will already specified that Mr. Yauch’s image and name aren’t to be used for any advertising purposes, but then he penciled in “or any music or any artistic property created by me.” Unfortunately the music of the Beastie Boys doesn’t belong to Yauch in the same way his image does, it also belongs to the other Beastie Boys. Bottom line: Mr. Yauch injected a provision related to copyrights into a statement about publicity rights. In the end, making DIY pen-and-ink changes should be left to the professionals if you want to ensure your wishes are carried through.

Reference:  Forbes (August 13, 2012) “Part Of Beastie Boy Adam Yauch's Will, Banning Use Of Music In Ads, May Not Be Valid

Spousal Lifetime Access Trusts (SLATs)

If you want to maximize your estate tax savings under the current $5.12 million, don’t delay! The estate and gift-tax exemption is set to expire at the end of 2012. So, how can spouses maximize their giveaways and still retain some takeaways when it comes to their wealth? Forbes recently considered this question in an article titled “Spousal Lifetime Access Trusts--Use Your Gift Tax Exemption Without Giving It All Away.” The answer: a Spousal Lifetime Access Trust – SLAT. Essentially, with the SLAT approach, each spouse can give their respective $5.12 million exemption amounts into separate irrevocable trusts. However, each spouse also names the other as the SLAT beneficiary and other loved ones (their children, commonly) as secondary beneficiaries. SLATs are a great way to maximize your estate tax savings while also maintaining access to your gifted property. With time running out for 2012, don’t miss this opportunity before the rules change next year!

Reference: Forbes (August 9, 2012) “Spousal Lifetime Access Trusts--Use Your Gift Tax Exemption Without Giving It All Away”

Gift Tax Exclusion

Giving gifts to loved ones is a great thing for many of us. Knowing the basics of the gift-tax exclusion is important when making these plans for the coming year. For some welcome straight answers on gifts and gift taxes, The Wall Street Journal recently examined the “Basics of the Gift-Tax Exclusion.” While the original article doesn’t offer exhaustive advice, it provides practical pointers you can use. For example, you can give away a total of $13,000 to your recipients. But remember, anything related to tax planning can have hidden complexities. After you’ve reviewed the fundamentals of the gift-tax exclusion, a gifting program can be one of the most simple wealth transfer strategies in your estate planning.

Reference: The Wall Street Journal (August 4, 2012) “Basics of the Gift-Tax Exclusion.”

Medicare Premiums Stay at $30 in 2013

Great news for seniors! The Medicare premiums for 2013 are projected to remain the same at an average of $30. That’s right, the Department of Health and Human Services issued its estimate not long ago, and Businessweek reported it in an article titled “Medicare Drug Plan Premiums to Stay at $30 in Coming Year.” Indeed, according to the estimate and bids from private insurers, the premiums for Medicare drug plans are expected to hold steady at the average where they stand today. For that matter, keep Medicare in mind as we approach the annual enrollment period that begins October 15.

Reference: Businessweek (August 6, 2012) “Medicare Drug Plan Premiums to Stay at $30 in Coming Year”

Protect Your “Virtual” Property

Technology and cyberspace have definitely changed the way we conduct business and communicate with others. Have you considered how this will impact your Estate Plan? What happens to all of your emails, passwords and other “virtual” property when you are gone? Dealing with digital assets can be a tricky business, often in ways that aren’t readily apparent. Nevertheless, digital assets are both vital and newsworthy topics for estate planning. For example, consider an article by SmartMoney titled “Protecting You Virtual Estate” and the similar article by The Wall Street Journal titled “With Estate Planning, Don’t Forget Virtual Assets.” Both are worthy of your attention. Digital assets can range from personal data held in social websites to intellectual property, or even domain names. Then again and more importantly, a growing majority of people do their banking, investing, and tax-paying online. Is this starting to hit closer to home now? Few states have laws in place to account for the postmortem transfer of digital assets, so careful planning is important. Don’t forget to protect your “virtual” property just as you would your tangible assets. You wouldn’t want valuable information to be lost to your heirs.

Reference:

SmartMoney (July 25, 2012), “Protecting You Virtual Estate”

The Wall Street Journal (July 28, 2012) “With Estate Planning, Don’t Forget Virtual Assets.”

Tough Estate Planning Questions to Consider

Do you have an Estate Plan? If so, have you updated it lately? Some Estate Planning questions may make you uneasy now, but rest assured they can help you be prepared for the future. A recent article in Forbes, titled 12 Estate Planning Questions That Might Make You Squirm, offered 12 questions to ask yourself. Here they are: 1. Who will raise your children if both parents die? 2. What if you all die in a common disaster? 3. Are there any other descendants you haven’t yet mentioned? 4. Have you told me about all the important relationships in your life? 5. Do you have any genetic material on ice? 6. Are you transgender? 7. Have you ever made large gifts to others? 8. Who is going to take care of your pets? 9. When do you want the plug pulled? 10. What are your passwords, usernames and security questions? 11. Did you enter into a prenuptial or postnuptial agreement or did you sign a community property agreement? 12. Have you had any serious or chronic health issues? Not all of these questions may apply to you. However, the point is to make a sober self-assessment of your current estate planning goals. Ask yourself the tough questions now, even if they make you a bit uneasy. An experienced estate planning attorney can help you through this process, and perhaps even reveal some “blind spots” of which you were unaware.

Reference: Forbes (July 24, 2012) “12 Estate Planning Questions That Might Make You Squirm”

Non-Spousal IRA Inheritance with an IRA

Unlike in prior years, non-spousal beneficiaries can now defer income taxes from the inheritances they receive. The trick is to get it done right! You can’t teach an old dog new tricks, but you can teach an inherited non-spousal IRA to “rollover” correctly. In fact, if you do not handle this basic financial transaction with care, then it will cost you. As with most tax moves, there is a wrong way and a right way. First, the wrong way. In former times you had no choice as a “non-spousal” inheritor of an IRA. You had to take the entire account balance as a “lump-sum” and take the tax hit. Similarly today, the result is the same if the money reaches you before it reaches an IRA trustee. Now, for the right way, as described in a recent article in SmartMoney titled Rolling Over Uncle Henry's 401(k). Essentially, you can let your inherited IRA spill over into a newly created IRA you establish to receive regular distributions from the inherited IRA. Note: the retirement funds you inherit cannot be accumulated tax-deferred in the newly created IRA, as under certain rules that apply to spousal IRA rollovers. In fact, you are required to make minimum withdrawals or face a 50% excise tax on the difference between what you should have withdrawn and what you actually did withdraw. Another article in Forbes, titled IRA Rollovers - Let's Be Careful Out There, offers more assistance on the rollover process and reviews some recent court cases to illustrate the finer points of an entirely trustee-to-trustee rollover. Never let an IRA trustee of an inherited IRA write a check directly to you! Instead, instruct the trustee to talk to the new trustee of your newly created non-spousal beneficiary.

Reference: SmartMoney (August 9, 2012) “Rolling Over Uncle Henry's 401(k)”

                  Forbes (August 2, 2012) “IRA Rollovers - Let's Be Careful Out There

Estate Planning for a Special Needs Child

Financial and estate planning for your special needs child or grandchild may be the last thing on your mind while caring for their needs, but know that planning ahead can ensure proper protection for their future. The Wall Street Journal recently addressed this subject in an article titled Build a Financial Plan for Special-Needs Child. While you must approach your estate planning with a sense of urgency, the planning itself is an ongoing activity. Nevertheless, with special needs there are special concerns. Estate planning truly is a process and not an event. Don’t forget to consider the potential lack of public assistance resources in the future while coordinating your estate and financial planning. In addition, remember to factor in the lengthening life expectancies of adults with special needs. Life insurance, owned in the proper manner and in the proper amount, can provide additional financial security and peace of mind.

Reference: The Wall Street Journal (July 28, 2012) “Build a Financial Plan for Special-Needs Child”

Appraisals and Gift Taxes

If you are gifting to family this year and want to survive IRS challenges, then contact a professional appraiser promptly for the real worth of those assets! With the $5.12 million lifetime gift exclusion set to expire on December 31, 2012, many families will be looking to make significant wealth transfers this year, especially of family business interests. Accordingly, if your plans involve giving things rather than money, then the IRS will want to know the “value” of the gift itself. That’s why a professional appraisal is essential. A recent article by Reuters, titled Appraisers are your gatekeepers to gift tax deadline, shed more light on why this step is so important for gifting. Don’t let the increasing demand for appraisal services leave you short of getting your gifts assessed! If you want to take advantage of the generous gift tax laws, then there’s no time to waste.

Reference: Reuters (August 8, 2012) “Appraisers are your gatekeepers to gift tax deadline”

Tough Estate Planning Questions to Consider

Do you have an Estate Plan? If so, have you updated it lately? Some Estate Planning questions may make you uneasy now, but rest assured they can help you be prepared for the future. A recent article in Forbes, titled 12 Estate Planning Questions That Might Make You Squirm, offered 12 questions to ask yourself. Here they are: 1. Who will raise your children if both parents die? 2. What if you all die in a common disaster? 3. Are there any other descendants you haven’t yet mentioned? 4. Have you told me about all the important relationships in your life? 5. Do you have any genetic material on ice? 6. Are you transgender? 7. Have you ever made large gifts to others? 8. Who is going to take care of your pets? 9. When do you want the plug pulled? 10. What are your passwords, usernames and security questions? 11. Did you enter into a prenuptial or postnuptial agreement or did you sign a community property agreement? 12. Have you had any serious or chronic health issues? Not all of these questions may apply to you. However, the point is to make a sober self-assessment of your current estate planning goals. Ask yourself the tough questions now, even if they make you a bit uneasy. An experienced estate planning attorney can help you through this process, and perhaps even reveal some “blind spots” of which you were unaware.

Reference: Forbes (July 24, 2012) “12 Estate Planning Questions That Might Make You Squirm”

State Estate Tax Activity

Federal changes for the estate tax are handed down from Congress and the White House, but don’t forget to pay attention to the rules in your own neck of the woods. State-level estate tax changes are taking place all across the country. Recently, Wealth Strategies Journal took a snapshot of 16 states considering amendments, higher exemptions, and even outright repeals. As you might expect, the results were mixed. The article is titled Multi-State Estate Tax Update: Much Activity - What Are The Results? So even if your state does not currently have such taxes, things can change in the future. With many state budgets in the red, all sources of potential revenue are on the table, to include inheritance and estate taxes at the state level.

Reference: Wealth Strategies Journal (July 10, 2012) “Multi-State Estate Tax Update: Much Activity - What Are The Results?

Non-Spousal IRA Inheritance with an IRA Rollover

Unlike in prior years, non-spousal beneficiaries can now defer income taxes from the inheritances they receive. The trick is to get it done right! You can’t teach an old dog new tricks, but you can teach an inherited non-spousal IRA to “rollover” correctly. In fact, if you do not handle this basic financial transaction with care, then it will cost you. As with most tax moves, there is a wrong way and a right way. First, the wrong way. In former times you had no choice as a “non-spousal” inheritor of an IRA. You had to take the entire account balance as a “lump-sum” and take the tax hit. Similarly today, the result is the same if the money reaches you before it reaches an IRA trustee. Now, for the right way, as described in a recent article in SmartMoney titled Rolling Over Uncle Henry's 401(k). Essentially, you can let your inherited IRA spill over into a newly created IRA you establish to receive regular distributions from the inherited IRA. Note: the retirement funds you inherit cannot be accumulated tax-deferred in the newly created IRA, as under certain rules that apply to spousal IRA rollovers. In fact, you are required to make minimum withdrawals or face a 50% excise tax on the difference between what you should have withdrawn and what you actually did withdraw. Another article in Forbes, titled IRA Rollovers - Let's Be Careful Out There, offers more assistance on the rollover process and reviews some recent court cases to illustrate the finer points of an entirely trustee-to-trustee rollover. Never let an IRA trustee of an inherited IRA write a check directly to you! Instead, instruct the trustee to talk to the new trustee of your newly created non-spousal beneficiary IRA to coordinate the transfer.

Reference: SmartMoney (August 9, 2012) “Rolling Over Uncle Henry's 401(k)”

                  Forbes (August 2, 2012) “IRA Rollovers - Let's Be Careful Out There”

Are Family Loans (Taxable) “Gifts” in Disguise?

Sometimes ensuring that a loved one has the assets they need – for a project or just for general use – will mean that you’ll be treading a fine line between making a “gift” and making a “loan.” The problem is that these are very different concepts, especially as far as the IRS is concerned. In brief, if you’re going to make a family loan, make it a real one or else consider an outright gift to be taxed by the IRS accordingly. The fine line between a loan and a gift is not a new one. This topic was explored in a recent article in SmartMoney titled “Making a Tax-Smart Family Loan.” Essentially, you need to remember that “loans” are what you make when when you aren’t interested in losing money and are probably trying to gain. To be a loan, the transferred amount must come with a standard interest rate. In fact, to be considered a “loan” the interest rate must be at least equal to the “applicable Federal Rate,” as determined monthly by the IRS. If you don’t charge the objective rate of interest, then you’ve essentially given that much away. Not surprisingly, that’s exactly how the IRS chooses to view the situation and, in return, it will hold you accountable for the interest not charged. As a result, this imputed interest can eat into your gift tax exemption amounts, whether annual or lifetime. Essentially, no loan to a family member should be considered a strictly off-the-books and casual affair. If you find yourself caught between making a gift or a loan, then you must choose one or the other and properly frame the transfer as such.

Reference: SmartMoney (June 13, 2012) “Making a Tax-Smart Family Loan”

Family Limited Partnerships – Worth Another Look (Especially This Year)?

Sometimes managing family assets is like, well, running a business. Then again, some families actually do run their families like businesses and have enjoyed significant tax advantages by doing so through the use of the Family Limited Partnership. A recent article in The New York Times titled “In an Unusual Tax Year, the Wealthy Turn to Partnerships” explores the power of the Family Limited Partnership (FLP). Properly structured, the FLP binds the family into a business arrangement (which is not always a good thing for a family) and, in doing so, allows for the longevity of a business entity, the decreased valuation allowable to private companies, and the simple ability to pool resources for higher investments. When used correctly, there is much to be said about the FLP structure. On the other hand, there also are limitations and even outright warnings. For one, no business can safely exist without a purpose, and to form your FLP without a discernible purpose beyond avoiding estate taxes will certainly raise the ire of the IRS. Furthermore, as already intimated, it means the family must act with the swiftness and assurance of a business in their investments. Unfortunately, not all families are capable of acting like a “business.” In the end, we face an uncertain and unpromising future in estate and gift laws (and a veritable “fiscal cliff” as a nation for related reasons). Nevertheless, at present we have extremely favorable lifetime gift tax exemptions ($5.12 million) for the remainder of 2012. This may be the perfect storm to consider harnessing this powerful tool to generate some security for your family and family investments.

Reference: The New York Times (July 6, 2012) “In an Unusual Tax Year, the Wealthy Turn to Partnerships”

Owners: Don’t Take Today’s Low Tax Rates for Granted

Planning is one thing, but taking action is another. Right now, when it comes to taxes, the time may be right for small business owners to take action. Forbes recently wrote an article titled, “Taxes are Low - Move it or Lose It!,” explaining that taxes may take a turn for the worse – and soon - once the calendar rolls over to 2013! Right now capital gains and dividend taxes max out at 15%. After the year’s end, however, these rates are set to lapse and skyrocket to 23.8% on long-term capital gains and 43.4% on qualifying dividends. So, what is a small business owner to do? The original article in Forbes provides some practical actions to take, including: • If you are selling all or part of your business, do it now. • If you have any qualifying dividends available for distribution, do it now. What else should be done? Certainly the original article offers some additional pointers, but the specific actions depend on your unique circumstances. Regardless, this is a perfect time to schedule that consultation with your financial, tax and legal advisory team, sooner rather than later.

Reference: Forbes (July 24, 2012) “Taxes are Low - Move it or Lose It!”

Estate Planning: Securing Legal Ties for Children of Same-Sex Couples

When same-sex couples become parents, regardless of where they live, they frequently are well-advised to establish strong legal relationships to bolster parental ties to their children. Take, for example, the legal complications surrounding same-sex unions as recently explored in The New York Times. The article, titled “A Family With Two Moms, Except in the Eyes of the Law,” found that many same-sex couples do start families and do bear children. As a result, very careful estate planning is essential, especially given current state and federal laws. For any couple with minor children, fundamental estate planning focuses on providing backup parents (i.e., guardians) to raise them and trustworthy stewards to protect their inheritance. When it comes to same-sex couples, making such provisions for minor children likely means navigating a dicey web of laws that may (or may not) tilt in their favor. To make matters even more complicated, a simple relocation from one state to another may upset your comprehensive estate planning and require a top-to-bottom review of your existing estate plans. In the end, not only must you fully define your own legal structure, but you must also do so well in advance and make changes as they inevitably occur in the law and in your life.

Reference: The New York Times (July 20, 2012) “A Family With Two Moms, Except in the Eyes of the Law”

Family Farmers Should Keep a Weather Eye on the Estate Tax Exemption

The Joint Economic Committee recently released a report on the devastating power unleashed upon family farms when an estate tax is triggered. Simply titled “Estate Tax Report Released,” the committee also considered the broader impact on the economy. The report, approved by the American Farm Bureau Federation and examined in Farm Futures, notes that, while farm owners may have a great potential wealth … such wealth is tied up in land (an illiquid asset) and is not necessarily cash-in-hand. However, the IRS will hold you accountable for the estate taxes due on your land, even if you have to sell the land to pay for it. "When estate taxes on an agricultural business exceed cash and other liquid assets, surviving family partners are forced to sell illiquid assets, such as land, buildings, or equipment to keep their businesses operating," said AFBF President Bob Stallman. "With 88% of farm and ranch assets illiquid, producers have few options when it comes to generating cash to pay the estate tax." If you (or a loved one) own a family farm, then there is no time like the present to make proper estate plans to protect and preserve the farm and the family wealth it represents. You have worked hard to make a living from your farm. Isn’t it common sense to spend some time and money protecting and preserving it?

Reference: Farm Futures (July 26, 2012) “Estate Tax Report Released”

Your Gait Could Be A Key Leading Indicator of Alzheimer’s Disease

Early diagnosis of Alzheimer’s is key to planning for and managing the disease. More treatment options are available when the diagnosis is made sooner, and certainly more estate planning options remain open with earlier diagnosis. Of course, Alzheimer’s and dementia are difficult to diagnose, but recent studies suggest that changes in a person’s walking gait can provide striking early evidence of cognitive impairment. Cognitive disease symptoms steadily destroy our ability to plan for the disease itself. This troubling fact carries over to the legal issues of “mental capacity” when it comes time to plan your estate. So, what are the outward warning signs of present or future issues? Some new studies have come to light about walking and dementia. The New York Times recently addressed this connection in an article titled “Footprints to Cognitive Decline and Alzheimer’s Are Seen in Gait.” According to recent findings, a person’s gait – the way he or she walks – can be an early indicator of oncoming impairment for some. It seems the more difficulty a person has walking, the more difficult it is to process certain information. In fact, the results of testing were even more dramatic when persons where required to engage in various mental exercises while walking. Although neither conclusive nor confirmed, there seems to be a link between exercise and cognitive impairments.

Reference: The New York Times (July 16, 2012) “Footprints to Cognitive Decline and Alzheimer’s Are Seen in Gait”

Estate Planning is an Ongoing Process: Is it Time for a Review?

When was the last time you reviewed your estate plan? Whether because of changes in your own life or that of your loved ones … or the ever-changing estate tax laws, regular updates and reviews are essential. As recently reported in Reuters, failing to update your estate planning can be disastrous. Consider the case of the Tweten family as another example of the best-laid plans of mice and men going horribly awry. The article, aptly titled “Dramatic estate tax battle delivers fresh lessons,” should give pause to parents who may not wish to disinherit one another in favor of their ungrateful children. Leonard and Eileen Tweten built their $100 million fortune by founding and building the Magnolia Audio Video Company. In 2008, the Tweten’s made estate plans to maximize their estate tax savings using a “formula clause” that automatically utilizes the maximum exclusion amount to their children, with the balance passing to the surviving spouse. Had one of the Tweten parents died in 2008, it would have meant that $2 million passed to their children. (Under current law, this would have meant $5.12 million.) Problem 1: the Twetens did not anticipate a “zero estate tax” in 2010, the year of Eileen’s death. Unintended consequence 1: the entire one-half share held by Eileen passed to the Tweten children! Problem 2: Leonard and Eileen tried to correct this unintended consequence on her deathbed, but they were unsuccessful. Unintended consequence 2: Unfortunately, when the Tweten children were “content” with the unintended consequence following their mother’s death, the matter went to the courts – and became a mess. As the Tweten case illustrates, estate planning is a process, not an event. No fortune, large or small, is safe from the rules governing estate tax minimization as long as there is a sitting president, a Congress, and an IRS to enforce the tax collections. Particularly in uncertain times, politically and financially, your estate plans should be reviewed early and often.

Reference: Reuters (July 31, 2012) “Dramatic estate tax battle delivers fresh lessons”

Disaster Looms Without an Estate Plan

In the darker and more unfortunate corners of estate law, one doesn’t need to look far to find family squabbles, double-crossing, and intrigue. Accordingly, in a majority of states the courts have a term to describe those who would throw a monkey wrench into an inheritance. It is the tort of “Intentional Interference with Expected Inheritance,” or IIEI for short. The tort of IIEI was been recently recognized in California with the case of Beckwith v. Dahl (May 3, 2012). In fact, of the 42 states to consider the tort, 25 states have adopted it. While that is a majority, vast stretches of the country still have no specific legal context for the types of unfortunate fights that cripple so many families and level so many estates. Still, it should be noted that the vast majority of estate difficulties giving rise to IIEI issues result from unplanned estates. I recommend reading the analysis of this California case in a recent Forbes article titled “California Joins Majority Of States In Recognizing Tort -- Intentional Interference With Expected Inheritance.” The Beckwith case is yet one more example of a will never being committed to paper. In that case, the would-be planner had very specific concerns to address in the form of a same-sex relationship. However, due to his lack of estate planning, his partner was disinherited due to the prevarications of a family member and certain legal defaults. In general, the teaching point here is the old saying that “failing to plans means planning to fail.”

Reference: Forbes (June 30, 2012) “California Joins Majority Of States In Recognizing Tort -- Intentional Interference With Expected Inheritance”

Estate Taxes – The Gift That Keeps on Taking

Death does not necessarily mark the end of your estate. In fact, for some families, it may mean the beginning of your financial legacy. On the other hand, for other families, it may mean the beginning of some serious taxes. The prospect of future tax battles with the IRS was the subject of the recent case of U.S. v. Mary Carol S. Johnson. Forbes explored this case in an article titled “When Estates Don't Pay Tax, IRS Chases Beneficiaries.” The case recounts the story of Anna Smith, her fortunes in the Stateline Hotel, and the IRS audit that ultimately led to a battle over a lost fortune. Smith’s fortune was bound up in stock in the hotel, and it was worth enough at her passing to trigger an estate tax that the family elected to pay in installments over several years (which can be done). According to her estate plan, the family distributed the stock amongst themselves under with an agreement to set aside a portion to pay the estate taxes owed. Apparently that agreement was reached in the “good days” of the hotel. In fact, those days were so good that the IRS audit on the estate tax return, years later, came up with higher numbers and a greater tax. Of course, when the IRS finally got around to making that decision, the hotel was not doing so well. However, the family agreed to pay the higher tax as a matter of duty and paid on those rates for several years. Boom. The hotel value collapsed, the stock became worthless, and the estate had nothing left to pay for the taxes on the past wealth. The IRS, not being one to forgive and forget, didn’t forget and carried on the fight to the beneficiaries and personal representatives of the estate. In the end, the IRS held two members of the family acting as personal representatives to be personally liable, even though they did the right thing by the original numbers. The original article is an interesting read and a sobering reminder, albeit far from unique. The IRS can audit any taxpayer, even if it’s an estate, and sometimes it has good reasons to do so. As a sidebar, the case demonstrates the importance of an accurate valuation. Regardless, this U.S. v. Mary Carol S. Johnson serves as a lesson for those currently planning their estates. With the current lifetime gifting exemption pegged at $5.12 million, this may be a window of opportunity to pass significant wealth before the year’s end. Bottom line: If the estate doesn’t fully pay off any amounts due, the IRS turns to the estate beneficiaries, sometimes even for amounts forgotten until years later.

Reference: Forbes (June 28, 2012) “When Estates Don't Pay Tax, IRS Chases Beneficiaries”

Are Family Loans (Taxable) “Gifts” in Disguise?

Sometimes ensuring that a loved one has the assets they need – for a project or just for general use – will mean that you’ll be treading a fine line between making a “gift” and making a “loan.” The problem is that these are very different concepts, especially as far as the IRS is concerned. In brief, if you’re going to make a family loan, make it a real one or else consider an outright gift to be taxed by the IRS accordingly. The fine line between a loan and a gift is not a new one. This topic was explored in a recent article in SmartMoney titled “Making a Tax-Smart Family Loan.” Essentially, you need to remember that “loans” are what you make when when you aren’t interested in losing money and are probably trying to gain. To be a loan, the transferred amount must come with a standard interest rate. In fact, to be considered a “loan” the interest rate must be at least equal to the “applicable Federal Rate,” as determined monthly by the IRS. If you don’t charge the objective rate of interest, then you’ve essentially given that much away. Not surprisingly, that’s exactly how the IRS chooses to view the situation and, in return, it will hold you accountable for the interest not charged. As a result, this imputed interest can eat into your gift tax exemption amounts, whether annual or lifetime. Essentially, no loan to a family member should be considered a strictly off-the-books and casual affair. If you find yourself caught between making a gift or a loan, then you must choose one or the other and properly frame the transfer as such.

Reference: SmartMoney (June 13, 2012) “Making a Tax-Smart Family Loan”

Sympathetic Couple Dodges Bankruptcy Court Bullet

As Forbes recently reported in an article titled “Thomas: Pre-Bankruptcy Exemption Planning Survives And An IRA Is A Self-Settled Trust Or Similar Device,” any kind of asset transfer or protective measure taken leading up to a bankruptcy claim is suspect. Unlike the final shot in a basketball game, the shot (i.e., transfer) doesn’t count just because it left someone’s hand before the buzzer sounds. However, that is what happened in case of In re Thomas. In that case, a married couple discovered that the total sum of a life insurance policy wouldn’t fall below the low exemption set by their state ($5,000). As a result, they transferred enough cash value from the policies to reduce the value below the state exemption. Then, the couple transferred the cash withdrawn into separate IRA accounts before filing for bankruptcy. Not surprisingly, the trustee caught on. Eventually, however, the court took pity on the unemployed couple, one of which had been diagnosed with cancer, and no reprimand was made over the relatively small amount (less than $20,000 in all). Nevertheless, this end result is not guaranteed on future cases with similar facts. As a rule of thumb, proper asset protection requires engaging competent legal counsel before rearranging your assets. If you fail to do so, then you run the risk of creditors successfully challenging your activities as improper at best and fraudulent at worst.

Reference: Forbes (July 17, 2012) “Thomas: Pre-Bankruptcy Exemption Planning Survives And An IRA Is A Self-Settled Trust Or Similar Device”

Estate Planning and Your Heirs – How Much Should You Disclose?

While the decision to leave wealth to your loved ones is typically an easy one, more difficult issues can be what to leave, to whom, and how. To further complicate matters, you should be asking yourself a couple of questions. Should you talk to your loved ones now about your plans and their future inheritance? If yes, then how and when should you talk about the matters? Fortunately, The New York Times has addressed these circumstances with an article titled “What to Tell the Children About Their Inheritance and When.” Unfortunately, the article does not solve these inquiries for you. The questions of if, how, and when to inform your heirs are solely yours to resolve. They are entirely dependent upon your and your loved ones’ unique circumstances. Nonetheless, the article does provide firsthand accounts of others’ similar situations. It seems as if more and more heirs actually want to know what is going on, and some even need to know for various reasons. Either way, there are risks involved. A sensible approach would be to seek the counsel of your estate-planning attorney who undoubtedly can provide experience-based insights. It is prudent to learn from the successes and mistakes of others.

Reference: The New York Times (July 20, 2012) “What to Tell the Children About Their Inheritance and When”