Michigan Estate Planning Blog

Home Sweet Home – Downsize Or Keep In Retirement? Saginaw, Michigan

For some questions, there will always be at least two sides to consider. When it comes to retirement and that fateful step into the golden days of life, there are many questions to ask, plans to make, and decisions to make. As you do your research, it seems at every turn you receive conflicting advice. For example, do you continue to stay in your present home or do you move and downsize? Even if you have yet to confront this fundamental retirement question, you ought to consult a recent article in The Wall Street Journal titled “When Should Retirees Downsize Homes?” The Journal asks, “when” not “if,” but that does not mean there is not another side of the story. Enter the DailyFinance with an article providing yet additional reasons to stay put. In fact, that article is aptly titled “7 Reasons Not to Move in Retirement.” While you will want to read both articles, here are the seven reasons to stay: • Save Money • Services You Like • A Social Network • Proximity to Family • Memories • An Advance Plan for Your Later Years • You Like It What place does your home occupy in your life and in the lives of your loved ones? To some families a house is an asset, to others it is a home, and to others it is an anchor (whether wanted or not). Whether you are planning for retirement or already in retirement, there is much at stake and the home can be a divisive issue. So, again, what is the house to you and yours? How are you planning for it?

Reference: The Wall Street Journal (January 25, 2014) “When Should Retirees Downsize Homes?”

                  DailyFinance (January 22, 2014) “7 Reasons Not to Move in Retirement”

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Challenges When Selling The Inherited Family Home Mid-Michigan

Selling a home is never an easy process. Even if it moves on the real estate market, there is still the fact of moving itself. What about when it is not your home at all? What if it is the home of your parents, and perhaps your sole inheritance, with or without siblings? In that case selling the house can be rather difficult indeed, practically, financially, legally, and yes, emotionally. When it comes to selling an inherited home, there are some complications to ride out and with which you must deal. For guidance, consider reading are recent MarketWatch article titled “How to sell an inherited home.” Get past the practical facts of getting to the home (maybe you live states away) and moving out all of the possessions or figuring out what to do with them. Get past the emotional problems, too. How do you even go about selling it? Can the property move on the market to begin with or, alternatively, is there a better market for a rental and can you manage it? Who owns it exactly and, especially if it is in probate, when will those who will own it actually own it? Are there any liens on the property or a mortgage that may or may not be underwater? The simple truth for some families is that it may be best not to inherit the house at all and to let it go into foreclosure. Are there creditors in line to receive from the estate? If yes, then you cannot take ownership from the estate until bankruptcy proceedings have finalized. A few of these issues are drawn out in the article and worth the general advice offered. In the end, inheriting and selling the family home can be the uncomfortable intersection of estate law, tax law and real estate law. Without a plan, a family can find themselves in a mess. Without competent counsel, they may have trouble getting back up and away from the problems. If you are planning your estate, real estate -- especially your home -- is an essential component that may be overlooked to the peril of your loved ones later if not properly addressed from all angles now.

Reference: MarketWatch (January 13, 2014) “How to sell an inherited home”

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Wisdom To Protect Your Windfall Mid-Michigan

The bigger the target the easier and more appealing the target. Sad, but true. Legally speaking, every financial gain brings with it a new amount of risk. Oftentimes, the legal risk is directly proportionate to the size of the financial gain. So, if you have come into a sudden amount of wealth – whether by windfall, asset sale, or inheritance, etc. – then now is also the time for some immediate asset protection planning. Structuring your ownership and protection of those assets is an important step you cannot afford to overlook. However, such structuring and protecting can get complicated. Much of what you can do (and cannot do) hinges on the very nature of the assets and the risks themselves. Thankfully, there are some common strategies worth exploring. Forbes recently offered six proven asset protection strategies to shield both you and your important assets. The article, titled “6 Asset Protection Strategies To Shield Your Wealth,” is worth a read. If you are pressed for time, here is a capsule summary: 1. Increase liability insurance: insurance is a product to solve risk, after all, and liabilities are exactly the kind of lightning rod to be struck. 2. Separate assets: shared assets, with a spouse or family members, means doubling the risk on those assets, so separating them into your own accounts (or entirely out of your estate and control) can shield them. 3. Consider a business structure: the business exists as an entity that is not “you” and its liabilities are not your liabilities, so owning special assets (like rental properties) through an LLC or corporation will work to shield you and your individual assets.

Reference: Forbes (October 9, 2013) “6 Asset Protection Strategies To Shield Your Wealth”

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Family Reunion Inheritance Incentive Saginaw, MI

There are gifts to leave your loved ones, to include mementos big and small to remember you by. Sometimes, however, the greatest legacy is not won with bequests and heirlooms. Just as in life, the greatest gift is truly made in values and in lessons that keep on teaching. For the creative and the forward-thinkers, this can be the goal of an estate plan. Consider a real-life example in the Ravenholt family of Minnesota. The Minneapolis Star Tribune tells the family story in a recent article titled “Man provides for his heirs, but there's a condition: They have to reunite every 2 years.” While the title should contain a “spoiler alert,” the Ravenholt family is still receiving from the largesse of the recently passed paterfamilias, Albert. Nevertheless, ongoing goodies are conditional. The entire clan of some 25 nieces and nephews only receive this largesse if they meet the right conditions. Here is the catch - every two years each family member is required to settle back in at the family hometown of Luck, MN for a family reunion. Consequently, only those who attend receive distributions from the family trust You see, Albert was a man of contradictions. While he had a wanderlust soul, he grew to have a firm appreciation for family. Albert believed that the many branches of a family can learn to wander and seek their own, but that these branches should never forget to come together. The individual annual distributions are not large (a thousand or so each time), but it is enough to bring most of the family back together just as Albert had hoped. So, take a look at Albert’s decisions and the story of the Ravenholt clan. It just might spawn a few ideas of your own. It is, if nothing else, one more testimonial to the power of creative planning and planning with the right tools. Albert knew what he wanted and found the right balance of incentive and security in the form of a trust, with some special rules to make it all work. You might not be throwing a family reunion in Luck every few years, or anywhere for that matter, but maybe you do have goals for your family and a way to incentivize their fulfillment.

Reference: Minneapolis Star Tribune (October 5, 2013) “Man provides for his heirs, but there's a condition: They have to reunite every 2 years”

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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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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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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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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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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”

Surprise – U.S. Is “Tax Haven” For Multinational Families?

Globalization has been an incredible force for a number of reasons, some good and some not so good. For instance, for the first time there are individuals and families that are, first and foremost, citizens of the world before they are citizens of any given country or tax authority. How can you be both? As a recent Bloomberg article points out, this is a growing concern. For many families hoping to pass on wealth, the solution is a careful system of offshore and U.S. based trusts or entities. As far as wealth transfer and taxation laws are concerned, there are two junctures. The first is the point at which wealth leaves one individual. The second is the point when wealth is accepted by another. Interestingly, at each of these points of wealth transfer, taxation is triggered when both occur under the same set of laws. In the U.S. this means the transferor gets a gift tax or an inheritance tax on whatever falls under U.S. jurisdiction, and the transferee may get hit with anything from income to capital gains to real estate taxes, and even their own estate taxes down the line once they bequeath the assets. Being a citizen of the world often means that a failure to plan will subject you and yours to any number of taxes, perhaps in multiple jurisdictions. However, careful planning also can yield some serious advantages. Determining what is best from a tax standpoint for you, your family and your international assets can be a high-wire act. Be sure to read the original article for additional information and ideas. Ultimately, as is usually the case, it really boils down to your unique situation and the various borders you, your family, and your assets casually touch and cross. If you are not careful, those borders (and their taxing authorities) can come back to bite you.

Reference: Bloomberg (March 5, 2012) “Tax Hunt Pushes Global Rich to Offshore Trusts for U.S. Children”