Michigan Estate Planning Blog

What Should You Do If Your Estate Plan is Out of Date?

 

Keeping up with life's changes is part of estate planning. For those who own farms, ranches, or other family businesses, trusts and estate plans created years ago are unlikely to serve the family today, says a recent article from Successful Farming, “How to Handle an Outdated Estate Plan.” Adding to the issue, adult children may not always agree with the plan their parents created.

The solution begins with a consultation with an estate planning attorney experienced with farms, ranches, or family businesses. They can see the whole picture in a way owners often cannot. The process begins, as it does for non-business owners, with an inventory of the family’s assets. The nextstep is to determine the family’s goal: keep the farm in the family and sell it to fund the owner’s retirement or another option. Review the old estate plan to see if it’s relevant. It’s better to address the issue and create a new estate plan.

Depending upon what kind of trusts were created in the past, they may still work with the updated estate plan. An estate planning attorney can help restate the trust's provisions if it’s a revocable trust. If it’s an irrevocable trust, it may need to be decanted and “poured” into a new trust if your state’s laws permit this.

What ownership entities were created by the original estate plan? If the parents hold controlling interests, they can modify operating agreements to update the plan. A centralized management system and exit strategy can be created as long as the numbers work.

Life insurance policies’ expiration dates need to be reviewed in case something can be done with them before they expire. If there is a cash value, it might be used to purchase a better policy. Cash benefits from life insurance are a means of expanding operations, funding buyouts, or equalizing assets between heirs.

Fluctuations in land value mean that farmers, ranchers and real estate owners need to change their purchase prices. Review the numbers periodically to ensure that the valuation model and funding strategies still work. It may be wise to set a fixed or maximum price, depending on the situation.

Getting children to agree with their parents’ plan for the future takes more than parents explaining the plan. Schedule a family meeting with advisors, including an estate planning attorney, accountant and financial advisor, to review the reasoning behind your decisions and how they will benefit. Having non-family members present for the discussion can often take the emotions out of the discussion, changing the dynamic and allowing the next generation to feel empowered for the future.

The worst option is not to act on an outdated estate plan. The cost and stress of leaving a thriving enterprise to the next generation without an estate plan or a succession plan could leave the family with no choice but to sell the business.

Reference: Successful Farming (Nov. 7, 2024) “How to Handle an Outdated Estate Plan”

 

End-of-Year Estate Planning Preparations Start Now

 

Once summer winds down, estate planning attorneys start thinking about end-of-year to-do lists. There’s a lot to consider, especially this year. A recent article from Forbes asks the question: “2024 Year End Estate Planning: Are You Ready?”

Pre-2026 planning needs to happen sooner than later. When the federal estate exemption is cut in half, it will be too late to act. Estate planning attorneys are recommending that their clients address this before 2024 ends. Your situation may be best served with a Spousal Lifetime Access Trust (SLAT). Avoiding IRS scrutiny by leaving time between various transfers funding accounts if both spouses have SLATs. Not enough time may make a SLAT strategy vulnerable to IRS scrutiny because of the Reciprocal Tax Doctrine—trusts being too similar can be undone. It is best to have this done in 2024.

Regardless of who wins the presidential election, you need to get your estate planning in place. Even if you don’t go forward with big changes to your estate plan, having everything prepared in advance will provide more opportunities. You don’t lose anything by taking steps now to retitle assets to facilitate planning. Grantor trusts are always a good option.

If you wait until after the election, you may find yourself in a long line of last-minute decision-makers. An inexpensive trust can be created with a family trustee and trust protector. If it’s necessary, the jurisdiction can be moved in the future. If gift or transfer documents are properly prepared, you could even sign them as late as December 31, 2024. However, these steps can only occur if everything’s set up in advance.

2024 saw a Supreme Court decision with implications for business owners known as “Connelly.” If a business entity bought insurance on the lives of the owners intended to fund a buy-out if the insureds die, the value of the life insurance must now be included in the value of the business. Pre-Connelly, business owners also used LLCs to purchase life insurance to keep the value of the insurance policy out of the value of the business. This appears to now be subject to the same rules. If you are a business owner, review insurance policy ownership and buyout arrangements to be sure that valuations are correct and address the implications of the Connelly case.

Another Supreme Court Case, “Loper,” overruled how government agencies, like the Treasury and the IRS, may interpret statutes. Unless a law expressly states that the agency should issue guidance on the law, the courts no longer are required to give weight to what the IRS (or other government agency) has decided and can make decisions regarding ambiguous laws independently. This is still being figured out by the courts and attorneys. However, it would be wise to have your estate planning attorney review planning decisions if any might be scrutinized.

Final regulations for the SECURE Act have been issued by the Treasury, applying generally to calendar years beginning on or after January 1, 2025. This involves retirement plan rules, using trusts to hold retirement plan benefits for minors and other related issues. Your estate planning attorney will be able to explain whether any of these regulations impact your own estate plan.

The best way to be sure that your estate plan still achieves your goals is to meet with your estate planning attorney to review your plan. It may be fine. However, it’s best to find out if any changes need to be made before time runs out.

Reference: Forbes (September 10, 2024) “2024 Year End Estate Planning: Are You Ready?”

How Do I Give Assets to Minor Grandchildren in My Will?

 

If a married couple is creating its estate plan, then how does the couple leave the estate to non-adult grandchildren?
However, what if something were to happen to them before the grandchildren become adults? Can this couple make sure the minor grandchildren do not get control of any inheritance until they’re adults?
Can arrangements be made for any unborn grandchildren to be included?
Nj.com’s recent article entitled “How can I leave my money to my minor grandchildren when I die?” says that one way to solve these issues is to create a testamentary trust to provide for young beneficiaries whether they’re children, grandchildren, step-children, or unrelated beneficiaries. The terms of a testamentary trust are in your will. It is only established and funded after you pass away.
The terms of the trust generally provide instructions to the trustee about the ages at which distributions must be made, if any. These instructions also allow the trustee to make discretionary distributions of income and principal to the beneficiaries.
Beneficiaries do not need to be identified by name or need to be born at the time the will is written. However, they must be able to be identified upon your death. As a result, you can provide a bequest to all of your grandchildren, whether or not they are born yet.
It doesn’t matter where your grandchildren live as far as estate planning is concerned. However, if they live outside the United States and the bequest is considerable, the laws of their home country should be addressed. This is because a big gift may cause adverse tax implications to the recipient.
For children, some states’ laws allow you to add a term in your will that penalizes any interested person — like an heir or beneficiary — for contesting the will.
However, if there’s probable cause initiating a proceeding concerning the estate, then the clause will not be enforced.
When a person names another as primary beneficiary, they should also name one or more contingent beneficiaries, so that if the first person predeceases him or her, they will not have to revise the will.
If you do not designate a contingent beneficiary, and an heir predeceases, the assets pass according to the state’s intestacy statute rather than according to the will.
Reference: nj.com (Dec. 9, 2021) “How can I leave my money to my minor grandchildren when I die?”

The Estate Called “You” Saginaw, MI

Some assets are just run of the mill, while others are unique and hard to value. But how do you value assets unique to “you” and even assets that, for all intents and purposes, are you? From a human interest perspective, if nothing else, you will want to read about the estates of Michael Jackson and J.D. Salinger as reported in a recent article in The New York Times titled “Putting an Estate Value on the Assets Unique to You.” It seems there is a commonality between Michael Jackson, the late king of pop, and J.D. Salinger, the late author of The Catcher in the Rye. Beyond their fame and [relatively] recent passing, the value of both estates has been a moving target with the IRS solely as a result of their passing. In the case of Jackson, his estate was rather valuable at the time of his death. Nevertheless, the estate value has continued to skyrocket with ongoing IRS scrutiny. The initial valuation of the Jackson estate came to a mere $200 million. However, with the benefit of several intervening years of high sales driven largely by an improving image of the late Jackson (an image not driven by scandal, you might say) the IRS has come to value the estate at $700 million. The estate was not worth as much when he passed and only shot up in value because of his passing (and an economic upswing). So, which value is fair? If the estate value does not come until well after, or well before the time of death, at which time should it be valued and how do you plan for that? The Jackson estate value is newsworthy because of who he was, but the situation is not all that uncommon. Intangible assets often face radical valuation spikes. Think intellectual property and patents, as common examples. On the other side of the coin, there can be plummeting estate values, such as when a business owner dies. The sole-proprietorship may be valuable when the owner is alive, since the business is them. However, that is hardly a reasonable basis for valuation and taxation once they're gone. Indeed, the valuation of many estates can be more of an art than a science.

Reference: The New York Times (September 27, 2013) “Putting an Estate Value on the Assets Unique to You”

For more information, see www.jerryreiflawyer.com

 

Appraisals – There Must Be A Method To Your Madness Saginaw, MI

Giving, bequeathing and otherwise charitably donating cash is straightforward and easy. Cash embodies the very concept of economic value, after all. On the other hand, non-cash assets must be appraised to determine (and justify) the value claimed by the donor. In short, under such circumstances the appraisal must be a “qualified appraisal.” The issue of valuation and taxation is an entirely opaque matter, to the tax court and taxpayers alike. WealthManagement.com recently attempted to provide some clarity in an article titled ““Qualified Appraisal” of Façade Easement and Development Rights.” The article hinges on a fairly recent tax court matter known as Friedman v. Commissioner, but the issue of what qualifies as a “qualified appraisal” is age old. As you may well know, to give an asset that does not have a readily ascertainable monetary value requires a valuation for IRS purposes. This valuation, in turn, requires an independent expert to issue their “qualified appraisal.” Unfortunately, it is not always a simple matter. For instance, the qualified appraisal of stock in a privately held business is entirely different than the qualified appraisal of a unique piece of art. Moreover, neither the stock nor the art bear any resemblance to the fairly simple qualified valuation of a house. According to the WealthManagement.com article and the underlying tax case cited involving a façade easement (a fairly intangible asset, you could say), what makes a “qualified” valuation is the clarity of the underlying methodology. Translation: the tax court must at least understand how a value was determined and that a relevant method was used to get there. Understandably, the tax court is not an expert on any given asset valuation, just the tax law. That said, the tax court may engage their own experts for their own appraisals, especially with items like artwork. Whatever basis the tax court uses, it just goes to show how intractable the problem of value is to the law. As for you, one planning for your assets and estate, it also goes to show the absolutely essential need to engage a qualified expert to produce a “qualified appraisal” regarding the value of your assets.

Reference: WealthManagement.com (September 26, 2013) ““Qualified Appraisal” of Façade Easement and Development Rights”

For  more information, see www.jerryreiflawyer.com

 

IRS Sets Value Of Michael Jackson’s Image Saginaw, MI

Don’t judge a book by its cover, but apparently you can judge an estate by the face of its settlor. So says the IRS, which has begun to use “image and likeness” as a factor and real-dollar taxable asset in estate valuation. Unfortunately for the Michael Jackson estate, this valuation approach has brought the “King of Pop” estate back into the fray and the media. You can read all about this tax saga in a recent Bloomberg article titled “Protests Surge as IRS Sets Jackson Image at $430 Million: Taxes.” For most of us, the value of our “image and likeness” is not likely to push our estates into ever higher estate tax exposure. However, Michael Jackson’s image was not only recognizable, but outright valuable it seems. What was a blessing in life has turned out to be a curse after death. Now, the Jackson estate was not caught napping on this one. No, the estate offered up $2,105 in value to the IRS for his “image and likeness.” The IRS was not amused and its calculator came up with a value of $430 million - and then went to collect for penalties at the estate’s failure to anticipate such big numbers. While it is hard to deny that the Jackson image (at any stage of his career) is anything less than a cultural icon, this would seem to be a hard thing to properly own and even properly value. To help put things into perspective, too, remember that the “image and likeness” of the long-deceased Tupac made its return to the stage just a short time ago, causing havoc in estate planning circles even without the ire of the IRS. [If you missed that Forbes article it was titled “What Does Tupac's Hologram Mean For Other Celebrity Estates?”] This image valuation is a major point of contention in the Jackson estate and is instructive for the entire estate planning community. For example, the move is causing a pushback from estate planners and celebrities trying to keep their planning straight (how do you plan for your image?), and the original article explores how the battle lines are drawing. Whether you are a king of pop, likely to lead a music festival post-mortem and in hologram, or have a face that could launch a thousand ships (Helen of Troy), this case offers some insight into the role of value when it comes to IRS math.

Reference: Bloomberg (September 16, 2013) “Protests Surge as IRS Sets Jackson Image at $430 Million: Taxes”

For more information, see www.jerryreiflawyer.com

 

 

Conserving Land by Conservation Easement

Sometimes the greatest charity of all is simply doing nothing. At least that may be the case when it comes to being charitable with the land you own. Why? Because the charity consists in preserving the land from development instead of capitalizing on its highest and best economic use. Enter the conservation easement. The perennial problem with easements, however, is the question of valuation of the “potential value” of the land. The entire point behind an easement is that the land itself (or the façade, as the case may be with urban-dwellers) has intrinsic value worth saving. This can be hard to put into concrete numbers. But then again, there always remains the risk that certain persons may look to maximize the charitable deduction for an easement through creative valuation. This theme was picked up in a recent Forbes article titled “Conservation Easement No Deduction For Hypothetical Vineyard.” The lesson is less outlandish than the title suggests – not every problem comes from supposing the remote possibility of a vineyard, a stadium, or a skyscraper. Rather, when asking for the easement you need to settle upon one out of every possible use of the land and the IRS has to agree that potential use is the best and most likely use. The IRS has a presumption against any big dreams, you might say, and that can be difficult to overcome. Proper valuation is a key component of any purchase, gift, or act of charity. When it comes to easements, however, the subject of valuation may be more difficult to capture accurately. Placing an effective easement means building a case and an effective understanding of the true potential to any land given.

Reference: Forbes (June 5, 2013) “Conservation Easement No Deduction For Hypothetical Vineyard”

For more information, see www.jerryreiflawyer.com

 

The Valuation of Art … Or the Art of Valuation? Saginaw, Michigan

Giving things rather than dollars can be tricky, especially come tax time. Consequently, you really need a qualified appraisal on board to make it all work. When it comes to art valuations, however, you should know that the IRS certainly will not take your word for it, or even the word of a decent appraiser, until they get their own expert opinion from their own experts: the Art Advisory Panel. A fair question to ask, then, is how fair is the Art Advisory Panel? The question of the Panel and fairness was addressed in a recent Forbes article titled “Is Art Advisory Panel Giving Taxpayers A Fair Shake?” Here’s how the competing interests play out. First, if you are a taxpayer giving art to a loved one or bequeathing it as a part of your estate, then you likely want a lower valuation. Why? Because you want a lower tax bill. On the other hand, if you are selling that very same piece of art, then you will want to command the absolute top dollar. Likewise, a body in charge of taxation is pretty much always going to be interested in a high valuation because it triggers a higher tax bill. So, statistically, how much of taxpayer appraisals does the government Panel accept? Would you believe only 51%? In addition, the Panel “adjusts” the other 49%, and of that adjusted percentage generates a net 47% increase on items in estate and gift appraisals. Of whom are you more cynical, the IRS or the taxpayer? The takeaway is that any gift of art is something to be fully considered with your valuation ducks in a row. Remember: there’s nothing an expert likes better than disagreeing with another expert - and the IRS keeps them on staff.

Reference: Forbes (February 6, 2013) “Is Art Advisory Panel Giving Taxpayers A Fair Shake?”

For more information, see www.jerryreiflawyer.com

 

Do You Know the Value of Your Business?

What is your business worth to you? What is your business worth to a potential buyer? These are two entirely different questions. As a business owner, you should be able to answer both questions fully and truthfully. In other words, you should know the value of your greatest asset and boldest venture, both personally and on the open market, because there may come a day when you need to sell or pass down the business. Knowing the numbers today can also help make you a better manager. Valuations are difficult for business owners because there are so many variables to the process. That said, the ability of a business owner to fully understand their business from the outside – as the owner of an asset or as a prospector on the market – rather than from within the immediacy of running the business, is fundamentally important to managing the business well today and in the future. According to The New York Times, business owners are increasingly coming to terms with these issues. Their recent article, “Do You Know What Your Business Is Worth? You Should,” suggests that while most business owners put off getting a valuation until a sale is imminent, many are starting to treat the act of valuing their business as an integral part of running it. For example, valuations -- whether performed by your accountant on an annual basis or with the assistance of sophisticated software tools -- can help business owners pinpoint management practices that may be undermining business value. Isolating those variables, and acting on them, can drive your valuation higher. Tax time is a great opportunity for you as a business owner to crunch numbers with your tax adviser and start getting a handle on the true value of your business ... and some ideas for improvement.

Reference: The New York Times (January 30, 2013) “Do You Know What Your Business Is Worth? You Should”

For more information, see www.jerryreiflawyer.com

 

The Valuation of Art … Or the Art of Valuation? Saginaw, Michigan

Giving things rather than dollars can be tricky, especially come tax time. Consequently, you really need a qualified appraisal on board to make it all work. When it comes to art valuations, however, you should know that the IRS certainly will not take your word for it, or even the word of a decent appraiser, until they get their own expert opinion from their own experts: the Art Advisory Panel. A fair question to ask, then, is how fair is the Art Advisory Panel? The question of the Panel and fairness was addressed in a recent Forbes article titled “Is Art Advisory Panel Giving Taxpayers A Fair Shake?” Here’s how the competing interests play out. First, if you are a taxpayer giving art to a loved one or bequeathing it as a part of your estate, then you likely want a lower valuation. Why? Because you want a lower tax bill. On the other hand, if you are selling that very same piece of art, then you will want to command the absolute top dollar. Likewise, a body in charge of taxation is pretty much always going to be interested in a high valuation because it triggers a higher tax bill. So, statistically, how much of taxpayer appraisals does the government Panel accept? Would you believe only 51%? In addition, the Panel “adjusts” the other 49%, and of that adjusted percentage generates a net 47% increase on items in estate and gift appraisals. Of whom are you more cynical, the IRS or the taxpayer? The takeaway is that any gift of art is something to be fully considered with your valuation ducks in a row. Remember: there’s nothing an expert likes better than disagreeing with another expert - and the IRS keeps them on staff.

Reference: Forbes
(February 6, 2013) “Is Art Advisory Panel Giving Taxpayers A
Fair Shake?”

For more information, see www.jerryreiflawyer.com

 

Do You Know the Value of Your Business? Saginaw, Michigan

What is your business worth to you? What is your business worth to a potential buyer? These are two entirely different questions. As a business owner, you should be able to answer both questions fully and truthfully. In other words, you should know the value of your greatest asset and boldest venture, both personally and on the open market, because there may come a day when you need to sell or pass down the business. Knowing the numbers today can also help make you a better manager. Valuations are difficult for business owners because there are so many variables to the process. That said, the ability of a business owner to fully understand their business from the outside – as the owner of an asset or as a prospector on the market – rather than from within the immediacy of running the business, is fundamentally important to managing the business well today and in the future. According to The New York Times, business owners are increasingly coming to terms with these issues. Their recent article, “Do You Know What Your Business Is Worth? You Should,” suggests that while most business owners put off getting a valuation until a sale is imminent, many are starting to treat the act of valuing their business as an integral part of running it. For example, valuations -- whether performed by your accountant on an annual basis or with the assistance of sophisticated software tools -- can help business owners pinpoint management practices that may be undermining business value. Isolating those variables, and acting on them, can drive your valuation higher. Tax time is a great opportunity for you as a business owner to crunch numbers with your tax adviser and start getting a handle on the true value of your business ... and some ideas for improvement.

Reference: The New York Times (January 30, 2013) “Do You Know What Your Business Is Worth? You Should”

For more information, see www.jerryreiflawyer.com

 

Valuation Discount Strategies

Oftentimes, proper planning is about the ability to offer proper proof. That’s my primary take-away lesson from the Ninth Circuit Court of Appeals and the case of Estate of Petter v. Commissioner, as assessed in a recent Forbes article. As many of you appreciate, when giving away assets it is important to get the most bang for your buck and that can be achieved by generating “discounts.” This was the plan of Ms. Petter when she transferred $22 million of UPS stock to a limited liability company (LLC) and then gave or sold units of the LLC to her heirs. Note: An LLC can help diffuse ownership and effectively transform the taxable value of the underlying assets. This transformation of value hinges on the “marketability” of the interests held by the LLC members and their degree of “control” over the assets. As a result, the lack of marketability and control makes the interests held by the LLC members less valuable. Accordingly, such interests are “worth less” than the face value of the underlying assets and their value inside the LLC may be “discounted.” Such was the case with the LLC established by Ms. Petter. Ms. Petter claimed a whopping 51% discount on the underlying assets of the LLC. Unfortunately, she was unable to support this discounted value and the IRS rejected that figure and approved a far more conservative discount of 36%. Not to be defeated, Ms. Petter tried another approach. She built a provision into her planning that were there a valuation dispute with the IRS, then any discounted percentage denied would automatically go to her chosen charity… instead of to her estate or an heir. Why? She wanted to avoid any gift or estate taxes. Naturally, the IRS challenged this fall back position, but the Ninth Circuit upheld it.

Reference: Forbes (September 30, 2011) “Fancy Appraisals Can Defeat IRS”