Michigan Estate Planning Law Blog : Michigan Estate Planning Lawyer & Attorney : TJ Wall Law Firm : Southeast MI Wills, Trusts & Probate Issues

With the holidays in full gear, it’s time to do some planning that can help reduce your tax bill this year.  Recently, U.S. News & World Report published an article geared specifically to seniors.  Click on the link to view this article.  Always be mindful of both federal and state legislative changes when applying your traditional year-end tax planning techniques.  It is not too late to take advantage of some tax-savings opportunities that may not be around next year and, as always, consult with your preferred professional tax advisor for advice tailored specifically to your situation.

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Joe Paterno's transfer of homeownership to his wife in July most likely was not an attempt to shield assets before a sexual-abuse scandal hit Pennsylvania State University's football program.  Instead, the move by the legendary coach more likely was made to take advantage of expiring estate tax rules, lawyers said.  Mr. Paterno switched ownership of his ranch-style home in State College, PA from joint ownership with his wife, Susan, to her full ownership on July 21 in a $1 transaction, according to documents filed in Centre County, PA.

A New York Times story suggested that the move could have been an effort to shield the home from future lawsuits that may arise from the child abuse scandal that was first revealed early this month. But attorneys familiar with Pennsylvania law said that the property already was protected from creditors because it was jointly owned and therefore couldn't be subject to creditors of only one of the spouses. The only way that the house, valued at $594,484, could be exposed to creditors is if both Mr. Paterno and his wife were targeted in a lawsuit, lawyers said.

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After someone dies, the surviving family members will need to gather up all of the decedent's important papers. This will give the family members and/or probate attorney who will be assisting with settling the decedent's final affairs all of the pertinent information needed to complete the settlement process. Here's the list of documents that will be needed to settle an estate or trust. Copies of the documents will work just fine unless otherwise noted.

Asset information
Copies or originals of the following documents will be needed:
• Account Statements - including bank, brokerage, and retirement accounts for at least the three months prior to death
• Life Insurance Policies - note that some insurance companies will require the return of the original insurance policy
• Beneficiary Designations - for life insurance, retirement accounts, and payable on death accounts
• Deeds for Real Estate - there's a common misconception that the original deed is needed, but a copy will work just fine
• Automobile and Boat Titles - the originals will be needed to transfer legal title
• Stock and Bond Certificates - for stocks or bonds held in certificate form, the original certificate will be needed to transfer legal title

Business Documents
If the decedent owned a business, then copies or originals of the following documents will be needed:
• Corporate, LLC or Partnership Documents - this includes copies of the corporate charter or articles of organization and minutes; a copy of the shareholder's agreement, operating agreement, or partnership agreement; and original stock or LLC certificates to transfer legal title
• Account Statements - including bank, brokerage, and retirement accounts for at least the three months prior to death
• Automobile and Boat Titles - the originals will be needed if legal title will be transferred
• Contracts - including leases, loans, and employment agreements
• Business Licenses - including local and state licenses
• Income Tax Returns - past three years

Contracts
Copies or originals of the following contracts will be needed:
• Prenuptial Agreements - including any amendments
• Postnuptial Agreements - including any amendments
• Loans - including personal loans, lines of credit, and mortgages, along with the original promissory notes
• Leases - including real estate and automobile leases

Bills
Copies of the following bills will be needed:
• Utility Bills
• Cell Phone Bills
• Credit Card Bills
• Mortgages and Personal Loans - including lines of credit
• Real Estate Tax Bills
• Storage Unit Bills
• Medical Bills
• Funeral Bill

Estate Planning Documents
If the decedent had an estate plan, then copies or originals of the following documents will be needed:
• Last Will and Testament and Any Codicils - the originals will be required because if the originals can't be found, then it's presumed the decedent destroyed them
• Revocable Living Trust and Any Amendments - strangely a copy of the trust or amendment is all that's usually needed

Tax Returns
Copies of the last three years of the following tax returns will be needed:
• Federal Income Tax Returns
• State Income Tax Returns
• Gift Tax Returns

Death Certificates
Multiple, original death certificates will be needed to settle the decedent's affairs. I tell my clients to order at least ten.

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IRA owners turning 70-1/2 this year must comply with required minimum withdrawal rules -- or pay a costly penalty.

If you own one or more traditional individual retirement accounts and will turn 70-1/2 this year, get ready to start taking mandatory annual payouts and paying extra income taxes. In fact, the whole reason our pals in Congress dreamed up the so-called required minimum distribution (RMD) idea was to force IRA owners to pay additional taxes sooner rather than later.

Unfortunately, complying with the RMD rules is not something you can afford to put off. If you fail to take at least the required amount each year, the Internal Revenue Service can assess a 50% penalty on the shortfall (the difference between what you should have taken out and what you actually took, if anything).

Keep in mind that simplified employee pension (SEP) accounts and Simple IRAs are considered traditional IRAs for purposes of the RMD rules. So you have to consider these accounts along with any garden-variety traditional IRAs set up in your name when figuring out how much you need to withdraw to avoid the dreaded 50% penalty.

If you have several accounts, you can take the required annual amount from any one account or from any combination of accounts. Here's the rest of what you need to know about RMDs and avoiding the penalty for failing to take them.

Initial Year Required Minimum Distribution (RMD)

For the year you turn 70-1/2 and for every year thereafter, you must take an annual RMD as long as you have any traditional IRA balances. The initial RMD for the year you turn 70-1/2 can be taken as late as April 1 of the following year. Alternatively, you can take it by Dec. 31 of the year you turn the magic age. Then for each subsequent year, you must take another RMD by no later than Dec. 31 of that year.

If you turn 70-1/2 this year, there is a good reason to consider taking your initial RMD by the end of this year rather than taking it next year by the April 1 deadline. Consider the following example.

Example 1: You turn 70-1/2 in 2011. You decide to put off taking your initial RMD until next year. That puts you in the double-dip RMD mode for 2012. You must take your initial RMD by no later than April 1, 2012 (that one is actually for 2011, the year you turned the 70-1/2). Then you must take your second RMD by Dec. 31, 2012 (that one is for 2012). If you have lots of IRA money, falling into the double-dip mode could push you into a higher tax bracket. For instance, say your IRA balance is $500,000, thanks to money rolled over from employer retirement plans. Being in the double-dip mode for 2012 would force you to take two RMDs totaling about $36,000 next year. If you instead take your first RMD in 2011 and the second one in 2012, the RMD for each year would be around $18,000, and you might pay a lower tax rate. Waiting until next year could also cause you to fall victim to various unfavorable rules that kick in at higher income levels. For instance, it could cause a higher percentage of your 2012 Social Security benefits to be taxable.

Bottom line: If you have lots of IRA money, you may be better off taking your initial RMD this year, even though that will trigger some taxable income that could otherwise be deferred until 2012. On the other hand if you don't have so much, waiting until next year is usually the right choice.

How to Calculate RMDs

The RMD amount for a particular year equals the combined balance of all your traditional IRAs (including any SEP or Simple-IRA accounts) as of the end of the previous year divided by a joint life expectancy figure found in IRS tables. As you get older, the life expectancy divisor becomes smaller, and the annual RMD amount becomes a higher percentage of your IRA balance.

The joint life expectancy divisor is based on your age and the age of a beneficiary who is automatically assumed to be 10 years younger. This rule applies even if you have no beneficiary or if the beneficiary is actually older than you. The only exception to the rule is when your spouse is designated as the sole IRA beneficiary and he or she is more than 10 years younger. In this circumstance, you're allowed to calculate RMDs using more favorable joint life expectancy figures based on the actual ages of you and your spouse.

The most important thing to understand is that IRA owners who have reached 70-1/2 cannot afford to ignore the RMD rules. The 50% penalty for noncompliance is too expensive. If you turn 70-1/2 this year, the other important thing to understand is you have an RMD choice to make before yearend. If you sit on your hands, you will be in the RMD double-dip mode next year, which might result in a higher tax rate that could have been easily avoided.
 

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When one spouse suffers from dementia, the other spouse often must take over managing the couple's finances, usually with the help of a power of attorney. But things don't always go smoothly with financial institutions. Just ask Chicago resident Eva Kripke, who has been handling money matters since her husband, Sidney, was diagnosed with Lewy body dementia four years ago.

Acting as agent for her husband under a power of attorney, for years Ms. Kripke had been going online to check her husband's Bank of America account and writing checks from it, until one day in April when the bank suddenly changed its security procedures and she was blocked from accessing his online account unless she supplied his Bank of America credit card number.

Because of her husband's dementia, Ms. Kripke had torn up the credit card several years previously, but she was able to obtain the card number from her local Bank of America branch. But that wasn't enough -- the bank also wanted the security code and the expiration date, neither of which she or the bank had. Without that, even though she had all the other information about her husband's account, not to mention his power of attorney, she could not access it online.

"[The bank employees] told me that power of attorney was not accepted for online banking," Kripke told the Chicago Tribune's "What's Your Problem?" columnist, to whom she turned for help. "It did not matter that I had been accessing my husband's account for several years. There was no way I could have access to my husband's online account any longer."

Bank of America suggested Mrs. Kripke open a joint account with her husband, something her lawyer advised her not to do, saying it was better for the couple to keep their accounts separate. The bank also said she could go to her branch and get a printout of her husband's account and even offered to have a bank employee drop one off at her house.

"That's not satisfactory at all," said Mrs. Kripke, who noted that the deposits and payments for her husband's 24-hour care often require daily oversight. "I don't want to have to rely on constantly going over there. I doubt that someone would deliver it to me and I'd feel odd asking them to do that."

The American Bar Association Journal picked up Mrs. Kripke's story and asked its readers if they had any suggestions for her. So far, the leading ones are: 1. report the credit card lost or stolen and get a new one, or 2. find another, more accommodating bank. It can also sometimes help to use the financial institution's own power of attorney form, although executing a different document for every bank one has an account with can be time-consuming, and it is likely impossible in Mrs. Kripke's case now that her husband is incompetent.

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Wishing you an Independence Day filled with pride in our country, and the companionship of family and friends!

Many movies and television shows have a scene where a family gathers around a big table after a relative has died to listen to the reading of the will. While this is a great dramatic scene, it doesn't usually happen like that in the real world. There is no requirement that a will be read out loud to anyone. So what does happen with the will?

Once the will is located, it should be given to the estate's attorney. Instead of reading the will out loud, the estate's attorney sends copies of the will to anyone who may have an interest in it.  Obviously the person who is named as executor or personal representative is entitled to a copy of the will. He or she is in charge of applying for probate, managing the decedent's property, and making sure the instructions in the will get carried out. (For more information on an executor's duties, click here.)

The estate attorney will also send a copy of the will to anyone who is named as a beneficiary. If any minor children or incapacitated individuals are named as beneficiaries, then their guardians should receive a copy of the will. In addition, if there is the possibility of a legal challenge to the will, the attorney may want to send a copy to any legal heirs, close family relatives, or previous beneficiaries who aren't included in the will, so that they have notice. This will limit the time frame for them to file a will contest. (For more information on will contests, click here.)

Another person who may be entitled to a copy of the will is the estate's accountant, and if the estate is taxable, then the IRS may get a copy of the will as well. If the will funds a revocable trust, then the successor trustee of the trust is entitled to a copy of the will. Note that once a will is probated, it is available to the public and anyone can read it. For more information on estate administration, click here.

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Yes, a tax-deferred annuity can easily be converted into a Medicaid Compliant Annuity.

If the current carrier does not provide a Medicaid Compliant Annuity, the tax-deferred annuity can be "transferred" to the desired carrier by way of a 1035 exchange.

A 1035 exchange refers to the section of the tax code that allows investors the flexibility to exchange one annuity for another without incurring any immediate tax liabilities. Generally, the surrender of an existing insurance contract is a taxable event since the contract owner must recognize any gain on the old contract as current income. However, under IRC § 1035, when one life insurance, endowment, or annuity contract is exchanged for another, the transfer will be nontaxable, provided certain requirements are met.

Requirement One: Ownership
The owner and insured, or annuitant, on the new contract must be the same as under the old contract. However, changes in ownership may occur before the change is completed.

Requirement Two: Like for Like
Any type of contract cannot be exchanged for any other type of contract. The following rules must be followed in order to avoid tax consequences:

• Old Life Contract » New Life Contract
• Old Life Contract » New Annuity Contract
• Old Endowment Contract » New Annuity Contract
• Old Annuity Contract » New Annuity Contract

The exchange process can be initiated by simply completing a transfer form with the new Medicaid Compliant Annuity application.

These are highly specialized financial products and only a select few firms in the industry have expertise in this area. Because qualification (or potential ineligibilty) for Medicaid benefits and, possibly, one's life savings are at stake, you should only consult with a qualified professional advisor. The Wall Law Group welcomes your inquiries in this regard.

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Congress has passed and President Obama has signed into law the deal extending the Bush tax cuts that he struck with Congressional Republicans. The legislation restores the estate tax for two years at a 35 percent tax rate, with estates up to $5 million exempt from paying any tax ($10 million for couples). If Congress does not change the law in the interim, in 2013 the estate tax will revert to what it was scheduled to be in 2011 -- a 55 percent rate and a $1 million exemption. The $801 billion tax-cut bill makes several other significant changes to wealth transfer taxes:
 

•The new $5 million estate tax exemption and 35 percent rate are retroactive to January 1, 2010. The heirs of those dying in 2010 will have a choice between applying the new rules or electing to be covered under the rules that have applied in 2010 -- no estate tax but only a limited step-up in the cost basis of inherited assets. This will benefit the heirs of tens of thousands who died in 2010 with relatively modest estates and who would have been subject to capital gains tax on inherited assets above a certain threshold.

•The law makes the estate tax exemption "portable" between spouses. This means that if the first spouse to die does not use all of his or her $5 million exemption, the estate of the surviving spouse could use it.

•The law unifies the estate, gift and generation-skipping transfer tax exemptions at $5 million. (For 2010 there is no generation-skipping tax, while the gift tax exemption has been $1 million for a number of years.) A 35 percent tax rate will apply to gifts or transfers over the $5 million threshold. (There is no change in the $13,000 annual exclusion amount for gifts.) These high exemption levels mean that "[t]he rich will have a two-year window in 2011 and 2012 to protect huge amounts of their estates from taxation for generations," wrote estates attorney Kevin Staker on his Estate Tax News Blog.

But that window is open even wider than was previously assumed because of an additional loophole for the wealthy in the new law. Although taxpayers have until December 31, 2010, to transfer funds outright to grandchildren and avoid the generation-skipping tax, there's the risk that the grandkids will squander the sudden influx of cash. As Forbes blogger Janet Novak explains in a recent post, "the money doesn't (as most planners had believed) have to be distributed outright to the grandkids to qualify for the 0% rate. Instead, according to the fine print in the tax deal, it can be put in a trust for them, [noted estate planning lawyer Jonathan] Blattmachr says. That means, he explains, that money can be taken from an existing multigenerational trust, declared subject to the 2010 GST tax, and deposited in a new trust for grandkids' benefit, with the GST tax now pre-paid at a 0% rate." Novak says Blattmachr has been telling his estate planning attorney peers, "Cancel your ski trip or trip to Hawaii. This is a once-in-a-lifetime opportunity."

The generous estate tax provisions were the main sticking point for progressive Democrats. A vote in the House on an amendment to increase the estate tax, including lowering the exemption to $3.5 million, was defeated by a vote of 233 to 194. After some minor changes to the bill were made, it passed the House by a 277 to 148 margin, after having been approved overwhelmingly by the Senate 81 to 19.

The site Politico quotes one senior House Republican aide as saying, "I'm trying to remember something that we passed under Bush that was this good." The new tax law presents previously unavailable planning opportunities, especially for the well-off. 

Just click on the following link to read the full legislation, titled the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" as originally introduced.
 

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The after-effects of the Great Recession are about to squeeze retirees where it hurts: the monthly Social Security check.

If you have not yet heard, for the second consective year, seniors won’t get a Social Security cost-of-living raise in 2011.  A recent article in retirementrevised.com explains the rationale behind the governmment's decison to keep social security payments at their present levels.

By law, Social Security passes along an annual cost of living adjustment-or COLA-to recipients. The increase is tied to a broad measure of inflation in the economy and, up until 2010, a year had not gone by since Social Security was created in the 1930s without a COLA.

The situation might look like a wash at first glance; if consumer prices are down, seniors don’t need a raise, right? But retirees are impacted disproportionately by a sub-set of prices that tend to rise more quickly than inflation in the broader economy-health care, energy and transportation. They’re also grappling with the bad timing of falling home values and investment losses at a time when many need to tap those assets.

The result is that the vanishing COLA will squeeze many retirees hard. Social Security provides, on average, about 39 percent of income for retired households, according to AARP. More than 50 million people receive benefits.

A general decline in the financial picture of seniors is well underway; a recent survey by the Pew Research Center showed that more than a third of seniors have cut their household spending in the past year; nearly 40 percent said the recession has caused stress in their families; a majority (56 percent) said the recession “probably will make it harder for them to take care of their financial needs in retirement.”

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