Michigan Estate Planning Blog

Pointers for Avoiding Family Estate Feuds Great Lakes Bay Region MI

When you begin planning for your estate, you are planning for your family. This very accurate statement hides a double meaning. Obviously, it means “planning for your family” (i.e., ensuring your family’s well-being financially) and, more subtly “planning for your family” (i.e., ensuring your family’s well-being relationally). You see, family infighting is a very real and present danger, even within families that are otherwise loving and respectful. Death and the resulting inheritance are fraught with emotional danger. How do you plan to avoid the family feud? Families are simply too complex to offer any silver bullet suggestions (each family is the sum total of each family member’s hopes, dreams, anxieties, and often petty obsessions). However, estate planning attorneys have ways to prevent estate litigation. Each attorney may have his or her own choice list of tactics. However, WealthManagement.com published a list worth consideration in an article titled “Avoiding Family Conflicts During Estate Planning.” The original article is worth reading, but here is the list of bullet points in summary: • Overcome the Concept of Fairness • Transfer Assets Based on a Natural Flow • Protect Family Assets • Make Major Decisions with Every Family Member in the Room • Do Not Wait for the Original Founder of the Family Business, or a Parent, to Pass Away • Evaluate What You Can and Can’t Afford to Transfer • Treat Estate Planning as an Ongoing Process • Pick the Right Professional Advisor It’s worth reading through the list and a few more like it. What does your family need and how will you plan “for your family” to head off squabbles, infighting, or outright litigation?

Reference: WealthManagement.com (May 15, 2013) “Avoiding Family Conflicts During Estate Planning”

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Life Insurance and Annuities - Tax Savvy Financial Products? Great Lakes Bay Region MI

Insurance and financial savings products exist to put you at ease, for the care of your loved ones and your own retirement. It should come as no surprise that two of the hottest financial products on the market today are life insurance and annuities. Turns out these products may be tax savvy, too. But are they right for you? Regardless, you really need to do your due diligence when it comes to life insurance and annuities. A recent article in The New York Times titled “Getting the Full Picture on Annuities and Insurance” points out the obvious – both of these products are heavily marketed. Beyond the hype, much of the marketing focuses on their tax savings characteristics. Can these tools be tax savings devices? Indeed, if placed within a solid overall plan. Nevertheless, it is important not to lose sight of the true purpose behind these products and the cost-benefits of any particular policy. At the very least, it would be worth your time to read the original article. It will help you understand how powerful these products can be, how you can use them, and where they might fit into an overall plan.

Reference: The New York Times (May 10, 2013) “Getting the Full Picture on Annuities and Insurance”

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How To Collect Social Security Benefits … From Your Ex-Spouse

Today’s retiring generations face new challenges simply not seen much by past generations. The wax and wane of Congress for one, and the dramatic rise of healthcare costs for another. An additional challenge hits a little closer to home for other retirees – those who are divorced. If you have been divorced, it is critical that you understand how Social Security benefits take divorce into account. Demographically speaking, this is even more essential for retiring women. The role of Social Security benefits in the retired life of a divorcee can be crucial, as discussed in a recent Reuters article titled “Column: Knowing Social Security rules can help divorced spouses.” Basically, Social Security payments are related to your paid work during your working years. As a result, many ex-spouses simply have not built up sufficient “numbers” because of how household incomes were split back in the day. Interestingly, you may be eligible for many of the same benefits as if you had remained married to your ex. But it is not automatic. Here are some threshold requirements: • You must be currently single, • You must have been married to your ex for at least 10 years, • Your divorce must be “final” for at least two years, • You must have reached the minimum Social Security eligibility age (62), and • You must not be currently collecting a benefit amount greater than that of your ex. Note: Your eligibility is completely independent of the benefits collected by your ex, but you will lose the benefits if you remarry. I recommend reading the original article for additional tips and traps. Call or visit your local Social Security office regarding the folder of paperwork you will need to gather for qualification.

Reference: Reuters (May 9, 2013) “Column: Knowing Social Security rules can help divorced spouses”

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Watch Out for State Death Taxes

The federal death tax has all but disappeared from the radar screen of most taxpayers. Why? The fiscal cliff-bridging budget set and made “permanent” the estate tax at a generous $5.25 million exemption amount. Unfortunately, there are still some states with their own death taxes.

Consider Connecticut, a state that enjoyed a bumper year for death taxes. As reported by The Hartford Courant in an article titled “Inheritance Windfall: Record-Breaking Year For Estate Taxes Helps Fuel Budget Surplus,” the tiny Nutmeg State raked in an unprecedented $428 million in inheritance taxes.

A good portion of this windfall is due to budget timing and estate planning, since this figure includes any gift taxes collected in 2012. Remember, that was a year of great gifting before the American Taxpayer Relief Act (ATRA), and Connecticut counts all transfer/inheritance taxes as one and the same. Then again, there were some notable deaths in Greenwich, CT, the richest little town in the U.S.

If you do not reside in one of the states with its own death tax, watch out. As state budgets continue to squeeze, death taxes may become more appealing to your state legislators.

Reference: The Hartford Courant (May 11, 2013) “Inheritance Windfall: Record-Breaking Year For Estate Taxes Helps Fuel Budget Surplus”

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Hospice Not Feeling the Love from Medicare

Healthcare in the U.S. has been in a state of transition since 2010. Unfortunately, many of the most important aspects of healthcare reform, those promising to protect the elderly and those in end-of-life care, have yet to take effect. As reported quite recently through the Kaiser Health News, hospice care has yet to be expanded under the Medicare project set out three years ago. The article titled “Medicare Lags In Project to Expand Hospice” examines the very real conflict between “curative” treatment and “palliative” treatment. The former is meant to cure a condition and thereby prolong life, and the latter is meant to ease the pain caused by a condition without a focus on effecting a cure. Naturally, the curative and palliative treatments are often considered opposites. In fact, choosing palliative care would mean giving up all hope on curative care. Consequently, it is only natural that rapidly declining patients delay their entry into palliative hospice care. The 2010 law was to begin inroads into exploring combined care, the possibility of both curative and palliative concurrently. Logically, this should ease transitions without forsaking hopes, likely reducing costs in the process. To date, however, this has not happened. Health care planning is complicated, and since so much is at stake be sure to consult a professional when exploring your options.

Reference: Kaiser Health News (May 9, 2013) “Medicare Lags In Project to Expand Hospice”

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Separate Marital Estate Planning Goals, Separate Attorneys?

Marriage is a partnership. Any partnership requires working together and, perhaps, compromise. But what if there is disagreement, especially when it comes to your estate planning? Marriage counselors stay in business because of marital disharmony. Commonly, they represent both spouses and seek to find common ground in a team approach. When it comes to estate planning, however, attorneys face a potential ethical dilemma. For example, estate planning attorneys cannot favor one spouse over the other, nor can they keep the secrets of one spouse from the other spouse in the course of “dual representation.” While there’s no sense starting trouble where there is none, nor in approaching anything in an overly legal or litigious way, sometimes spouses really do have different estate planning interests. It’s an ethical problem for the spouses and their estate planning attorney alike, as pointed out in a recent Forbes article titled “Ethics in Estate Planning for a Married Couple.” This certainly is an issue for attorneys (and their malpractice carriers) to fret about, but also for their clients to understand and appreciate. Indeed, at certain junctures it might be necessary for spouses to even engage separate counsel to wrangle their way through an estate planning impasse. This happens many times with prenuptial and postnuptial agreements, but in other instances as well. Do you not need separate counsel? Great! Still, take a moment to read the Forbes article about potential hazards. Above all, if you choose “dual representation,” make sure you both truly are represented – and included in all attorney-client communications.

Reference: Forbes (April 26, 2013) “Ethics in Estate Planning for a Married Couple”

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Remember to Take RMD from Inherited IRA Great Lakes Bay Region, MI

Not all assets are inherited in the same way. Take IRAs, for example. When does the IRA of your deceased spouse become “yours,” what should you do with it, and what do you need to know to stay out of tax trouble? The Slott Report recently addressed the consequences of when a surviving spouse inherits the IRA of their deceased spouse and both have reached age 70 ½, the age for Required Minimum Distributions (RMDs). The article titled “Inherited IRA: When do You Own It?” noted that one must be very careful. For starters, the inheriting spouse must be the “designated” beneficiary. Assuming that is the case, what happens when your spouse dies in December and has not withdrawn the required RMD? Must you as the surviving spouse calculate your RMD on both account balances, your spouse’s and your own? RMDs are always tricky because the penalties are steep, with a 50% penalty tax on the amount required but not taken. Bottom line: be sure to get competent legal and tax advice before proceeding if you are the designated beneficiary of an inherited IRA.

Reference: The Slott Report (May 6, 2013) “Inherited IRA: When do You Own It?”

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Giving Your IRA For Good Saginaw, MI

Not having enough retirement income from your IRA can be a pretty serious problem. On the other hand, having too much retirement income outside of the IRA can be a bit of a problem, too. Have you heard of the Charitable IRA Rollover? A Charitable IRA Rollover lets you give to your favorite charity while avoiding taxes on IRA distributions. Consequently, this is a very popular win-win strategy for taxpayers who would rather be “voluntary philanthropists” as opposed to “involuntary philanthropists.” A recent Kiplinger article titled “Who Can Transfer IRA Funds to Charity?” explains the ins and outs of Charitable IRA Rollovers. Essentially, not everyone has the option to transfer their IRA distributions directly to charity. For starters you must be older than age 70-1/2, the same age upon which you are required to take Required Minimum Distributions from your IRA. And not by coincidence. Read the original article for a better perspective on the politics behind the planning. Suffice it to say Congress has elected to give you a choice between taxation and charitable giving. The Charitable IRA Rollover gives you this option. Beware! All of this must be done According to Hoyle or you may get caught in a tax trap. Nevertheless, this alternative is well worth considering as part of your overall retirement, estate and charitable planning.

Reference: Kiplinger (April 30, 2013) “Who Can Transfer IRA Funds to Charity?”

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IRS Getting Greedy Over Old “Gifts”?

So, how long does (or can) the IRS scour your financial history to find taxable gifts? Well, it seems they do (or can) go back some 41 years. Whether you are a billionaire or a regular “Joe,” a recent case is worthy of note. Enter the case of Sumner Redstone and a 1972 inter-family legal proceeding. The IRS has elected to call this “proceeding” a gift with much in past due taxes and penalties. Bloomberg recently reported on this unique fact pattern in an article titled “Billionaire Redstone Challenges IRS on Tax for 1972 Gift.” Normally the IRS is bound by a statute of limitations set to about three years. However, an exception to this rule includes the failure to file a tax return like the allegedly missing gift tax return of Mr. Redstone. Apparently, the difficulty arose over certain shares of National Amusements Inc., and a family legal agreement resulting in a “transfer” of shares. The IRS is now calling that “transfer” a “gift” with $1.1 million in taxes, penalties, and interest due and owing. According to Richard Behrendt, a former estate and gift tax auditor turned director of estate planning, “This is unheard of… I can’t remember ever hearing of anybody going back 41 years to raise an issue. It’s really unprecedented in my experience.” Note: Mr. Redstone may have become a target, given the fact he is the chairman of both Viacom and CBS, not to mention National Amusements and all the related subsidiaries of the three. Reportedly, Mr. Redstone is worth approximately $4.9 billion. Nevertheless, this 41-year-look-back is a strange precedent.

Reference: Bloomberg (May 1, 2013) “Billionaire Redstone Challenges IRS on Tax for 1972 Gift”

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Charging Order Challenges Great Lakes Bay Region Saginaw, MI

Choosing the structure of your business is about more than just taxation. You want a structure that protects you from liabilities of the business itself. In fact, the very structure of your business is a means to protect both you and your business, so it’s worth understanding and maintaining. Have you heard of charging orders? These are legal wedges creditors use to try and drive a wedge between you and your business. If your business is an LLC (Limited Liability Company) or an LP (Limited Partnership), then there is more you should know about charging orders, as detailed in a recent Forbes article titled “The Misunderstood Charging Order.” While this is a complex subject, basically a charging order is a creditor’s first and last tool to extract your interests and capital from your business (assuming they don’t try to pierce the veil). In a corporation, a charging order can allow a creditor to actually gain a debtor’s stock interests in the business. This can be disastrous. “Limited” company structures are specifically designed with charging order protection, something that could be important to you as a business owner. The original article goes into greater detail, but essentially the charging order protection means that while a creditor can place a lien on your LLC membership interests and claim any distributions, a creditor cannot claim the membership interest itself and sabotage the business. Certainly there is much more to know on the subject of asset protection, to include the subject of company structure. Although some of this discussion can become tediously academic, it’s important to understand where and how your asset protection vulnerabilities can arise.

Reference: Forbes (April 30, 2013) “The Misunderstood Charging Order”

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Have “The Talk” with Your Children Now

There are a number of “talks” you have with your kids. We all are familiar with the infamous “the talk” – and a few others that are more easily avoided than had. Add “the inheritance talk” to the short list of intergenerational talks too important to avoid. So, how do you prepare and execute this too-important-to-avoid chat? To be blunt: there is no easy answer. Why? Because so much of the talk depends on what you have to leave, who is going to manage it, who is going to inherit it, and how soon are they going to get it? The Wall Street Journal recently offered a pep-talk for estate planning parents in a recent article aptly titled, “The Inheritance Conversation. Ugh.” One of the key reasons for this essential intergenerational communication is to prepare the inheriting generation for the attending responsibilities. One challenge, of course, is that any “inheritance” carries the risk of robbing a developing person of their work ethic. In short, what makes you, your assets, and your heirs unique? That is what needs to be understood and communicated. The sooner you have the inheritance talk, the better it will be for all concerned.

Reference: The Wall Street Journal (April 19, 2013) “The Inheritance Conversation. Ugh.”

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Credit Shelter Trusts – The Tried and True Tool

There are some estate planning tools that are just basic and vital, regardless of tax law changes. Unfortunately, some of these tools may be ignored by taxpayers (to their peril) when they appear to be eclipsed by changes in the tax laws. For the prudent taxpayers, however, old standbys like the credit shelter trust should not be swept aside. Before the advent of portability as a method to maximize the full estate tax exemption available to married couples, such couples would oftentimes get caught in a marital deduction trap. In other words, the first spouse to die could pass all their wealth to the surviving spouse without triggering estate taxes, but upon the death of the surviving spouse only one spousal exemption (i.e., that of the surviving spouse) would be available to reduce estate taxes on the couples combined estate. Under the right circumstances, this was a recipe for disaster. Enter the credit shelter trust, also known as a bypass trust, which was a way of avoiding that marital deduction trap. Nevertheless, recent changes to the federal estate tax laws now allow a decedent spouse to pass their assets and their estate tax exemption to their surviving spouse. This portability of the estate tax exemption can now give a married couple the power to shelter as much as $10.5 million tax-free. So, no need for those credit shelter trusts? Not so fast! As addressed in a recent post in Elder Law Answers titled simply “Credit Shelter Trusts,” there is still plenty of life left in the this tried-and-true estate tax planning approach. For starters, many states still have their own independent estate taxes at much lower levels than the $5.25 million level exempted per spouse under the federal estate tax exemption. More importantly, portability does not apply to such taxes. In addition, credit shelter trusts not only shelter assets from estate taxes, but they can protect an inheritance from the unsuccessful remarriage of the surviving spouse and general inheritance protection. While there are myriad trust arrangements available to help you achieve your specific estate planning goals, the basic credit shelter trust is a proven tool that should be considered in the estate planning of every married couple.

Reference: Elder Law Answers (updated: April 18, 2013) “Credit Shelter Trusts”

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Don’t “Escheat” Your Family Inheritance Saginaw, MI

Estate planning is not a do-it-yourself endeavor; there are plenty of opportunities to make costly mistakes. The biggest mistake is having no estate plan. Why? Because your life’s work may escheat to your state’s treasury by default. At the very least, a proper will can avoid legal landmines like the escheat rule. Escheat is the principle that there is no such thing as estate-limbo. Basically, an estate can sit in limbo for only so long before it gets swallowed up by the state where the decedent last resided. Consider the case of Roman Blum in New York, as reported in a recent Forbes article titled “N.Y. State Could Get $40 Million From Man Who Died Without A Will.” You can read all of the details in the original article, but Mr. Blum likely did not intend the State of New York to benefit from his life’s work as a real estate developer. For whatever reason, many otherwise responsible Americans do not take time to meet with an estate planning attorney to ensure the proper administration and distribution of their estates. The failure to make proper estate plans is really a plan to fail at your estate planning.

Reference: Forbes (April 28, 2013) “N.Y. State Could Get $40 Million From Man Who Died Without A Will”

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529 Education Savings Plans Proliferate

Planning for the next generation, and for what you will leave them, often varies depending on what you have and what your loved ones will need. In today’s economy, the rising costs of education are leading many families to choose the “gift of education” as a fundamental goal in their wealth transfer planning. As a result, it is no surprise that recent analysis by Morningstar Inc. found a sharp increase in contributions to Section 529 plans in 2012. Reuters reported on these findings in an article titled “Morningstar: 529 college savings plans up in 2012 despite some lags.” The article notes a 529 plan is a tax-advantaged account that encourages savings now toward exorbitant college costs later. That said, not all plans are alike and the study found some were far better than others, and some were even of questionable worth. The final analysis: although 529 education savings plans as a whole underperformed against some mutual funds, 2012 saw a 25% rise in 529 plan assets against a 13.4% gain in the S&P index.

Reference: Reuters (April 22, 2013) “Morningstar: 529 college savings plans up in 2012 despite some lags”

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The ESOP Way to Business Succession Win-Win

In the alphabet soup of company forms (S-Corp, C-Corp, LLC, LLP, LP, LTD., and so on and so forth) there is a growing turn toward a slightly more obscure acronym: the ESOP. So, what is an ESOP, what can it do, and is it right for your business? ESOPs, or Employee Stock Ownership Plans, are a tricky breed. Essentially, an ESOP is a tool recently highlighted by Congress and featured by The Wall Street Journal in an article titled “Founders Cash Out, but Do Workers Gain?” Planning to exit a business is all about doing one of two things; either restructuring the business or selling it outright. With an ESOP you accomplish both goals and build the company around the very employees that compose the company in the first place. Rather than going out and hunting for a buyer, the employees become vested in the stock ownership of their own company. In turn, the ownership stake simultaneously becomes a retirement asset while the ownership of the founder is bought out. Now, if you are already familiar with this approach, it may be worth reading the original article since there are certain limitations affecting the employees-turned-owners. The article gives examples of how an ESOP can work a win-win for all concerned under the right circumstances. These examples include Bob’s Red Mill, for example, or, from a different industry, Manson Construction Co. ESOPS have been a powerful tool in an otherwise soft market for business transfers. Accordingly, ESOPS are worth a good look, and then even a second look, as a unique and proven business succession strategy.

Reference: The Wall Street Journal (April 17, 2013) “Founders Cash Out, but Do Workers Gain?”

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IRAs Targeted in Obama Budget

Three budget plans are winding their way around the capitol, to include President Obama’s. While the details are thin and the pundits are still weighing in, self-employed professionals need to take heed. They are tax targets when it comes to their retirement savings. For retirement savers and those making powerful use of an IRA, here’s at least one tidbit the rumor mill has been circulating well before the budget’s release. If enacted, “wealthy” individuals would be pinched with a $3 million cap on their IRA holdings. Several sources have reported on this, to include Time Magazine in an article titled “Obama’s Budget Would Cap Tax-Advantaged Savings.” Although $3 million may sound like a lot, it may end up affecting more savers who otherwise might not be considered traditional tax targets: self-employed individuals like doctors, lawyers, and entrepreneurs. The self-employed all have unique abilities (and needs) to contribute large amounts to their IRAs. So, who is the intended target of this kind of a cap? One name keeps surfacing: Mitt Romney. Remember that fabled $100+ million IRA, as pointed out by the Boston Globe in an article titled “Obama budget would pinch IRAs of wealthy with $3m cap.” The analyses of the proposal are still being churned out, and there are some important details to be hammered out as well. At present, this cap is no more than a proposal and part of a budget plan none-too-well-liked by either side. Nevertheless, this kind of cap and its prying look at tax-advantaged plans is worth watching.'

Reference: 

Time Magazine (April 10, 2013) “Obama’s Budget Would Cap Tax-Advantaged Savings”

The Boston Globe (April 10, 2013) “Obama budget would pinch IRAs of wealthy with $3m cap”

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The “Permanence” of Portability

There may be battles aplenty over the budget, and many more to come. At least we have a set of solid laws set in stone under the recently passed American Taxpayer Relief Act of 2012 (ATRA), right? While it appears safe to breathe a bit easier, many people still don’t trust any tax law claimed to be “permanent” by Congress and the White House. When it comes to making estate plans, certainty is an essential. Any uncertainty can wreak havoc on even the most carefully crafted plans. One popular “permanent” part of estate planning under ATRA is “portability.” Is it here to stay and can we trust it? “Portability,” as you may well know, is the new ability of a spouse to pass their unused unified gift tax lifetime exemption and/or estate tax exemption on to their surviving spouse. It grew out of budget deals and then was made “permanent” under ATRA, also known as the bridge over the Fiscal Cliff. As a questioner over in a recent Wall Street Journal Q&A (“Is Estate-Tax Portability Permanent?”) pointed out, estate tax “portability” is a great option but an act of Congress could just as easily undo it. What then? The general consensus is that portability is probably here to stay and for a multitude of reasons. Assuming that remains true, the key to portability is to separate myth from reality. The first myth: portability is not automatic? The first reality: it can be rather complex, especially in terms of unintended consequences. For example, what happens when the surviving spouse remarries? For the time being, perhaps you can breathe easier as to portability. The larger question, however, is what do you and your spouse hope to achieve through your estate plan from both tax and non-tax perspectives?

Reference: The Wall Street Journal (March 31, 2013) “Is Estate-Tax Portability Permanent?”

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IRS Estate Audits Increase

Whether it’s Caller I.D. or the return address on an envelope in your mailbox, no one likes to hear from the IRS. Audits are never good news. And it’s not just income taxes that are subject to them. Estate tax return audits can be especially bad news. First, the estate tax return itself must be filed within nine months following the death of the loved one who owned the assets subject to the return. Second, to make matters worse, the IRS seems to be upping pressure on estate tax returns more than any other. With tax season dying out for most of us (if you haven’t filed for an extension), the last thing you might want to hear about are audits of any kind. Nevertheless, the fiscally-minded writers at AccountingWeb want to warn taxpayers about this apparent IRS interest in estate tax returns in an article titled “IRS 2011 Audit Rates Show Estate Tax Returns under the Microscope.” Bottom line: take this as fresh evidence to cross your “t’s” and dot your “i’s” when it comes to your own estate planning.

Reference: Accounting Web (March 27, 2013) “IRS 2011 Audit Rates Show Estate Tax Returns under the Microscope”

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Planning Prenuptial Priorities Properly

The air is still heavy from another tax season. However, if you lift your ears to the gentle spring breezes, you may hear distant bells announcing this year’s wedding season. With many of these weddings will come financial complications that require attention, well before the vows are exchanged. Marriage is not just “tying the knot,” so to speak. No, marriage by its legal nature includes tying together all of your financial resources and interests. Unfortunately, these days marriage also has a dark side too: divorce. For those couples with important financial resources and interests in the marital mix, they may elect to use a prenuptial agreement as sort of an “insurance” policy in the event the marriage doesn’t work out as planned. Prenuptial agreements are nowhere as exotic as they are portrayed in the popular imagination. They can be, nevertheless, useful and important documents when produced through a spirit of full disclosure, careful deliberation, and independent legal representation. Otherwise, as pointed out in numerous articles these days, no prenuptial agreement is ironclad unless it is done correctly and, essentially, treated like the contractual understanding that it is. Recently, Forbes provides some guidance to evaluate the effectiveness of your prenuptial agreement in an article titled “Five Reasons Your Prenup Might Be Invalid.” In addition, The Wall Street Journal offers some specific guidance to get your prenuptial agreement ship-shape in an article titled “Shoring Up Your Prenup.” Used correctly, a prenuptial agreement, or even a post-nuptial agreement as the case may be, can help a couple frame their financial resources and interests in the context of their life together come what may. That can provide great peace of mind, especially when blending families and the children from those families.

Reference: Forbes (April 2, 2013) “Five Reasons Your Prenup Might Be Invalid”

The Wall Street Journal (March 29, 2013) “Shoring Up Your Prenup”

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IRA Asset Protection Increases

The more you have, the more you have to lose. That’s a cardinal rule of asset protection planning. If you have accumulated savings in an IRA, then you should be aware of the asset protection legally afforded your IRA. As recently reported by the Slott Report, the IRA bankruptcy exemption has just increased. The article is titled “IRA Bankruptcy Exemption Amount Increases.” Background: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) cleared the way and exempted the first $1 million of IRA funds (including Roth IRAs) in the event of bankruptcy. Fortunately, this amount is subject to cost of living adjustments. Accordingly, the new number as of April 1, 2013, is $1,245,475. This is great news for most American savers, since the average IRA is less than $1 million. Still, it’s also a figure worth knowing for larger IRAs given the important function they serve in many retirement and/or estate plans. Caveat: what is just as important as the exemption are the limitations to the exemption. The safety of the exemption is only afforded in the case of filed bankruptcy, and might be voided in certain instances even then, but other events like divorce may easily trigger a levy on the IRA. The important lesson to remember is that there are existing IRA protections to be understood, but they need to be considered as part of a comprehensive asset protection strategy. Such a strategy will necessarily involve considerations of state law protections, asset titling and insurance coverage. Be sure to engage competent legal counsel, as proper asset protection planning is not a do-it-yourself project.

Reference: The Slott Report (April 9, 2013) “IRA Bankruptcy Exemption Amount Increases”

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Do You Really Have Enough Life Insurance?

It’s not too hard to properly insure a car or a valuable piece of art, because the value of the object can be determined, even in a shifting market. What about insuring your life for those who depend on you for financial support? How do you insure your life and how do you even begin thinking about life insurance? For starters, it is essential to note that life insurance can be a complex subject, especially when it comes to the right “kind” and the right “amount” of insurance. So what questions do you ask? Sometimes the important questions don’t come up when you click through those online life insurance calculators, and unfortunately, less so with some insurance brokers. Forbes recently addressed this important issue in an article titled “What A Life Insurance Calculator Can't Tell You.” Generally speaking, insurance exists so you can pay a “premium” now that you can afford to protect against the risk of a catastrophic event later that you cannot afford. When it comes to life insurance, of course, the risk is to your family and loved ones if you were no longer there to care for them. Life insurance is a potent tool in this regard, but it is far from the only tool to protect for your loved ones in the event of your death. The original article provides an excellent analysis of common “needs” that life insurance can protect. In the end, however, nothing can replace the advice and counsel of an experienced and qualified life insurance professional.

Reference: Forbes (March 28, 2013) “What A Life Insurance Calculator Can't Tell You”

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Later-In-Life Marriage Challenge

Some things just get easier with age, but marriage isn’t necessarily one of them. This especially is the case if yours is a “later-in-life” marriage. There may be some unique financial and legal shoals to navigate. If you’re no stranger to the game, then some of the later-in-life marriage challenges will be familiar, others less so. For example, do any of these issues have a familiar ring: shall we have “separate accounts or joint accounts?” is it better to “file individually or file jointly?” and shall we live in “your house or mine?” This subject was taken up in a recent MarketWatch article titled “Marrying after 50? Tackle these money issues first.” Essentially, young married couples simply don’t have as many accounts, assets, liabilities, health concerns, dependents, or complex family relationships. For them, marriage might be as simple as saying “I do.” Now that you’ve got all of that stuff and your own lifelong relationships, this can get complicated (and fast) when you add the stuff and lifelong relationships of your later-in-life spouse. If you haven’t thought through the potential challenges, here are a few to get you started: • Social Security and pension benefits • Healthcare, health needs, and Medicare benefits • Past marriages and alimony • Children and college financial planning • Your estate, your heirs, and your beneficiaries The original article goes into some depth regarding each of these points. Remember, however, they are complex and intertwined. When making your financial, tax and estate plans, don’t go it alone. Be sure to engage competent professional counsel.

Reference: MarketWatch (Feb. 27, 2013) “Marrying after 50? Tackle these money issues first”

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Business Transfers – Less Taxing is Less Taxing

Your business is more than a personal asset and the economic engine that provides for your family, your employees and yourself. Passing down the family business is one of the most important and difficult experiences. The good news is that there are plenty of tools for exiting the family business, with varying degrees of complexity. Sometimes, however, a simple buy-sell arrangement is the right tool for the task. This was the subject of a recent article in Forbes titled “Exiting The Family Business: Tax Tips And Techniques,” which included some important tax and planning pointers. At its most basic level, the simple efficiency of a buy-sell arrangement is easy to understand and appreciate. Commonly, the owner (and parent, likely) is going to need retirement income to retire. However, the family business was their only source of income and their greatest asset. As a result, selling the business within the family allows the successor generation to assume control in a way that guarantees the financial well-being of the retiring parent and the entire family. This transfer can be accomplished with an outright sale-purchase. On the other hand, a buy-sell agreement can work the sale-purchase over time in installments. Consequently, the founder may even gift some portions away and sell others. A key point, whether gifting or selling, is having an accurate valuation of the business. If the value is too low, then the “sale” price looks more like a “gift.” Problem: if the value is deemed too low, then this catches the interest of the IRS. This never is a good thing. A sale of anything carries with it tax implications. When it comes to selling (or gifting) a business, you will want to connect all of the dots. The original Forbes article discusses many of those dots and offers practical tax moves to stay out of trouble. While there are significant limitations to the buy-sell and there are other alternatives to evaluate, it is one means to kill two birds with one stone by providing retirement income to the seller.

Reference: Forbes (March 6, 2013) “Exiting The Family Business: Tax Tips And Techniques”

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When HIPAA Happens

No one likes hospitals, except when you need one. Unfortunately, families caring for their elderly loved ones are finding hospitals and other care facilities full of legal red tape that is increasingly difficult to navigate. Sometimes the red tape is simply hospital policy gone too far. Regardless, navigating the maze requires doing your homework ahead of time. For example, what do you know about HIPAA? HIPAA is the “Health Insurance Portability and Accountability Act of 1997.” The title of a recent article in the New Old Age Blog of The New York Times summarizes the issue well: “A Privacy Law Often Misinterpreted.” One purpose of the law is to ensure the privacy of medical data. Nevertheless, this doesn’t mean the hospital is intended to protect the privacy of the patient from their loved ones, especially when that loved one is present during an examination! In fact, HIPAA does not prevent health care providers from sharing relevant information regarding a patient with their family members, unless the patient objects. The original article is a worthy and enlightening read, whether you are a patient, a family member or even a medical professional. Apparently, there is a lot of misinformation leading to misinterpretation when it comes to HIPAA. Bottom line: make sure you have up-to-date Advance Health Directives that specifically provide your designated agents with current and future access to all of your medical information, verbal and written, with specific authority to execute HIPAA releases on your behalf.

Reference: The New York Times – The New Old Age Blog (March 27, 2013) “A Privacy Law Often Misinterpreted”

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Asset Protection – Substance Over Form

Asset protection, for better or worse, is not a game of silver bullets or invincible armor. Unfortunately, this fact of life will never stop certain salesmen from marketing asset protection that way and certain debtors from buying into it. A tale of gullibility, faked complexity, and predictable endings can be found in a recent Forbes article titled “Bill 'Bulletproof A$$et Protection' Reed's Complex Plan Pierced By Nominee And Alter Ego Theories.” The case of U.S. v. Cohen, C.D.Ill. Case No. 08-3282 (Mar. 8, 2013), chronicles an asset protection plan so frightfully poor it could only be described as the “Bulletproof A$$et Protection.” Just the label used to market this “asset protection” scheme should give pause to the prudent. Asset protection is all about understanding the legal nature of your assets and the potential risks that may threaten your future use and enjoyment of those assets. Certainly state and federal laws offer varying degrees of protection, as do time-tested legal strategies. It’s as much art as science, but not magic. This is not a do-it-yourself program. Seek qualified legal counsel for assistance.

Reference: Forbes (March 31, 2013) “Bill 'Bulletproof A$$et Protection' Reed's Complex Plan Pierced By Nominee And Alter Ego Theories”

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“Fair Or Equal” Inheritance – It’s in the Eye of the Beholder

If you are planning your estate, or have already inked your planning, how will your loved ones react to their inheritance? Are you providing a “fair” or an “equal” inheritance? While it is your estate, it may be helpful to communicate your wishes and rationale now to avoid misunderstandings (or worse) later on. The Washington Post recently explored this subject in an article titled “Dividing up money can cause divisions in families.” The article tracks the case of a certain individual who can’t help feeling resentment over the estate plan his parents have created. He believes the basis for the estate plan is his chosen “lifestyle.” He is gay and his married sister is not. He has no children and she does. The parents of these adult children have chosen to leave an inheritance “directly” to their grandchildren, instead of “through” their daughter. The grandchildren are set to each inherit one-sixth of the estate, with the children splitting the remaining two-thirds. The author of the article concludes thusly regarding the inheritance planning of these parents: “And yet, this is their prerogative. It’s their money.” What about your own family and heirs – will they understand? What can you do to make yourself understood? Then again, if instead you are the one inheriting, have you thought it through from everyone’s perspective? Properly thinking through your estate planning objectives and then committing it to proper legal instruments can be an arduous task. That is why too few otherwise responsible adults actually follow through on their intentions. One of the most common estate plans is one that lies unsigned in a desk drawer. When all is said and done, it is your estate and you may distribute it as you wish. Period. Nevertheless, long-term family harmony often hinges on communicating your wishes while you are alive and able to explain them. Surprise is only a good thing when it comes to birthdays and military maneuvers.

Reference: The Washington Post (March 29, 2013) “Dividing up money can cause divisions in families”

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At Death, Cash is Still King

When you breathe your last breath, which would your heirs (likely) need – a million dollars in cash or a million dollars in illiquid art? The family of Merton D. Simpson can clarify any uncertainty you may have, especially when it comes to having enough cash to bury you. In short, “illiquid assets” can present a great challenge to proper planning for you, your family, and your estate. While there are countless examples, a very recent and public one is the case of the aforementioned Merton D. Simpson. As reported by The New York Times in an article titled “Art Worth Millions, Yet No Cash for Burial,” careful planning is required to meet “liquid” cash needs virtually every estate encounters. Whether paying last health care expenses or other debts, you at least want to have enough cash for your funeral. Mr. Simpson’s entire estate was worth millions in a vast collection of African and modern art, not to mention art in his own name as an artist of no little esteem. Tragically, in the end there was no money for the funeral. In addition, what happens if and when the taxes come due? That’s when expensive collections of illiquid assets are sold at auction, oftentimes for pennies on the dollar. Now there’s more to the story of Mr. Simpson and many more lessons to be gleaned regarding proper financial and estate planning, as well as a bit of family intrigue. The takeaway: if one dies with an estate of priceless, illiquid assets – then one’s estate may find itself deep in the desert with a purse full of gold, but not a drop of cool water to drink.

Reference: The New York Times (March 26, 2013) “Art Worth Millions, Yet No Cash for Burial”
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Don’t “Escheat” Your Family Inheritance Great Lakes Bay Region MI

Estate planning is not a do-it-yourself endeavor; there are plenty of opportunities to make costly mistakes. The biggest mistake is having no estate plan. Why? Because your life’s work may escheat to your state’s treasury by default. At the very least, a proper will can avoid legal landmines like the escheat rule. Escheat is the principle that there is no such thing as estate-limbo. Basically, an estate can sit in limbo for only so long before it gets swallowed up by the state where the decedent last resided. Consider the case of Roman Blum in New York, as reported in a recent Forbes article titled “N.Y. State Could Get $40 Million From Man Who Died Without A Will.” You can read all of the details in the original article, but Mr. Blum likely did not intend the State of New York to benefit from his life’s work as a real estate developer. For whatever reason, many otherwise responsible Americans do not take time to meet with an estate planning attorney to ensure the proper administration and distribution of their estates. The failure to make proper estate plans is really a plan to fail at your estate planning.

Reference: Forbes (April 28, 2013) “N.Y. State Could Get $40 Million From Man Who Died Without A Will”

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Credit Shelter Trusts – The Tried and True Tool Saginaw, Michigan

There are some estate planning tools that are just basic and vital, regardless of tax law changes. Unfortunately, some of these tools may be ignored by taxpayers (to their peril) when they appear to be eclipsed by changes in the tax laws. For the prudent taxpayers, however, old standbys like the credit shelter trust should not be swept aside. Before the advent of portability as a method to maximize the full estate tax exemption available to married couples, such couples would oftentimes get caught in a marital deduction trap. In other words, the first spouse to die could pass all their wealth to the surviving spouse without triggering estate taxes, but upon the death of the surviving spouse only one spousal exemption (i.e., that of the surviving spouse) would be available to reduce estate taxes on the couples combined estate. Under the right circumstances, this was a recipe for disaster. Enter the credit shelter trust, also known as a bypass trust, which was a way of avoiding that marital deduction trap. Nevertheless, recent changes to the federal estate tax laws now allow a decedent spouse to pass their assets and their estate tax exemption to their surviving spouse. This portability of the estate tax exemption can now give a married couple the power to shelter as much as $10.5 million tax-free. So, no need for those credit shelter trusts? Not so fast! As addressed in a recent post in Elder Law Answers titled simply “Credit Shelter Trusts,” there is still plenty of life left in the this tried-and-true estate tax planning approach. For starters, many states still have their own independent estate taxes at much lower levels than the $5.25 million level exempted per spouse under the federal estate tax exemption. More importantly, portability does not apply to such taxes. In addition, credit shelter trusts not only shelter assets from estate taxes, but they can protect an inheritance from the unsuccessful remarriage of the surviving spouse and general inheritance protection. While there are myriad trust arrangements available to help you achieve your specific estate planning goals, the basic credit shelter trust is a proven tool that should be considered in the estate planning of every married couple.

Reference: Elder Law Answers
(updated: April 18, 2013) “Credit Shelter Trusts”

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Daughter Experiences Estate Plan Nightmare as Executor Saginaw, Michigan

In many respects, understanding “personal finance” is easy when it is about annual year-ends and accounts balances. On the other hand, it is quite another matter when you look at personal finance over the life of an individual, and yet another still when you become the executor to that individual’s estate. Since we will not live long enough to make all of life’s mistakes, it is prudent to learn from the mistakes of others. In this spirit, there is much wisdom to be gleaned from a recent autobiographical article in Forbes titled “What My Dad's Death Taught Me About Money.” As you read this article, there are many lessons the daughter and only child of the decedent learns in her role as executor. The unfortunate fact is that these lessons were learned the hard way and unnecessarily. I highly recommend reading the full article, but her are the essential takeaways: Lesson #1: Everyone Should Have an Estate Plan … or at Least a Will Lesson #2: Adequate Medical Insurance is a Must Lesson #3: Mental Breaks Trump Burgeoning Bank Accounts It is less painful and less expensive to learn from the mistakes of others, especially when it comes to estate planning. One of the best and last gifts you can leave your loved ones is a well-planned and organized estate.

Reference: Forbes (April
19, 2013) “What My Dad's Death Taught Me About Money”

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The ESOP Way to Business Succession Win-Win Saginaw, Michigan

In the alphabet soup of company forms (S-Corp, C-Corp, LLC, LLP, LP, LTD., and so on and so forth) there is a growing turn toward a slightly more obscure acronym: the ESOP. So, what is an ESOP, what can it do, and is it right for your business? ESOPs, or Employee Stock Ownership Plans, are a tricky breed. Essentially, an ESOP is a tool recently highlighted by Congress and featured by The Wall Street Journal in an article titled “Founders Cash Out, but Do Workers Gain?” Planning to exit a business is all about doing one of two things; either restructuring the business or selling it outright. With an ESOP you accomplish both goals and build the company around the very employees that compose the company in the first place. Rather than going out and hunting for a buyer, the employees become vested in the stock ownership of their own company. In turn, the ownership stake simultaneously becomes a retirement asset while the ownership of the founder is bought out. Now, if you are already familiar with this approach, it may be worth reading the original article since there are certain limitations affecting the employees-turned-owners. The article gives examples of how an ESOP can work a win-win for all concerned under the right circumstances. These examples include Bob’s Red Mill, for example, or, from a different industry, Manson Construction Co. ESOPS have been a powerful tool in an otherwise soft market for business transfers. Accordingly, ESOPS are worth a good look, and then even a second look, as a unique and proven business succession strategy.

Reference: The Wall Street
Journal (April 17, 2013) “Founders Cash Out, but Do Workers Gain?”

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