Estate Planning
Many people believe that estate planning is only for people who are particularly wealthy, have elaborate schemes in mind for passing their money to their heirs, or for people who are acutely ill and contemplating their death. This could not be farther from the truth!
Estate planning is for every husband, wife, mother, father, grandparent, business owner, professional, or anyone else who has someone they care about, are concerned about providing responsibly for their own well-being and for the well-being of those they love, and for anyone who seeks to make a difference in the lives of others after they’re gone. Estate planning is not death planning; it’s life planning. Estate planning is an essential and rewarding process for individuals and families who engage in it.
When done properly, estate planning requires that a highly trained individual lead you through one or more in-depth meetings to uncover your hopes, fears, and expectations for yourself and for those who are most important to you. This process almost always requires the preparation of several sophisticated legal documents, but those documents themselves are not estate planning. Planning is a process, represented by a complete strategy that is properly documented and maintained by a professional who has taken the time to get to know you, and who is committed to continuing to serve you.
Asset Protection Planning
A revocable trust provides no asset protection for the trustmaker during his or her lifetime. However, upon the death of the trustmaker, or upon the death of the first spouse to die, the trust becomes irrevocable as to the deceased trustmaker’s property. The trust can provide asset protection for the beneficiaries, with two important caveats.
First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and could be subject to that beneficiary’s creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse’s creditor(s), or they may be available to the former spouse upon divorce.
Trusts for the lifetime of the beneficiaries provide prolonged asset protection for the trust assets. Lifetime trusts also permit your financial advisor to continue to invest the trust assets as you instruct, which can help ensure that trust returns are sufficient to meet your planning objectives. The second caveat follows logically from the first: the more rights the beneficiary has with respect to compelling trust distributions, the less asset protection the trust provides. Generally, a creditor steps into the shoes of the debtor and can exercise any rights of the debtor. Thus, if a beneficiary has the right to compel a distribution from a trust, so too can a creditor compel a distribution from that trust.
Irrevocable Life Insurance Trusts
Life insurance is a unique asset int hat it serves numerous diverse functions in a tax-favored environment. Life insurance proceeds are received income-tax free and, if properly owned by an Irrevocable Life Insurance Trust (ILIT), life insurance proceeds can also be received free of estate tax.
An Irrevocable Life Insurance Trust is one of the most popular wealth planning devices. It is a trust designed to own a life insurance policy, usually on the lives of you and your spouse. You gift funds to the trust periodically and the trustee uses the funds to pay premiums on the life insurance policy. The trust is designed to produce benefits for your family:
• Make current gifts to family members.
• Accumulate assets outside the client’s taxable estate.
• Protect assets from claims of creditors.
• Avoid income tax on the accumulation of funds.
• Avoid estate tax upon the distribution of funds to the family.
• Create a source of liquidity to cover estate taxes or expenses.
• Replace assets that may have been given to charity.
Special Needs Trusts
A Special Needs Trust is a trust that can supplement the needs of a special needs beneficiary while allowing the beneficiary to maintain his or her governmental benefits, including Supplemental Security Income (SSI), Social Security and Medicaid. With medical advancements, persons with disabilities are living longer and public benefits are often necessary, yet there is no guarantee that public benefits will provide adequate resources over the disabled person’s lifetime, or that existing public agencies will continue to provide acceptable services and advocacy.
If the special needs trust is established by you or someone other than the disabled person and the disabled person does not have the legal right to demand trust assets, the trust is not considered a countable resource for purposes of government benefits. Therefore, the special needs trust beneficiary can continue to receive benefits even though he or she is a trust beneficiary. The trust will give the trustee the discretion to make distributions to the beneficiary to the extent possible without reducing benefits, and trust assets are available if the beneficiary no longer qualifies for governmental assistance or that assistance is no longer available.
If the trust is established on the beneficiary’s behalf pursuant to a court order, for example as part of a personal injury settlement, the trust will not impact the beneficiary’s eligibility. It may, however, need to include a payback provision that reimburses the state for its assistance before trust assets pass to the trust’s other beneficiaries.
Common savings vehicles for children include Uniform Transfer to Minor Acts (UTMA) accounts, typical trusts, or designating a retirement plan, insurance policy or annuity directly to an SSI or Medicaid recipient. Use of these savings vehicles will cause a reduction or elimination of public benefits. Recognizing this, some parents make the difficult decision to disinherit their special needs children, but this severe action is unnecessary.
Charitable Planning
The Charitable Remainder Trust (CRT) is a type of trust specifically authorized by the Internal Revenue Code. These irrevocable trusts permit you to transfer ownership of assets to the trust in exchange for an income stream to the person or persons of your choice (typically you, your spouse, or both you and your spouse) for life or for a specified term of up to 20 years. With the most common type of Charitable Remainder Trust, at the end of the term, the balance of the trust property (the remainder interest) is transferred to a specified charity or charities. Charitable Remainder Trusts reduce estate taxes because you are transferring ownership of assets to the trust that would otherwise be counted for estate tax purposes.
A CRT can be set up as part of your revocable living trust planning, coming into existence at the time of your death, or as a stand-alone trust during your lifetime. At the time of creation of the CRT you or your estate will be entitled to a charitable deduction in the amount of the current value of the gift that will eventually go to charity. If the income recipient is someone other than you or your spouse there will be gift tax consequences for the transfer to the CRT.
CRTs are tax-exempt entities. In other words, when a CRT sells an asset it pays no income tax on the gain in that asset. Therefore, after a sale the trust has more available to invest than if the asset were sold outside of the CRT and subject to tax. Accordingly, CRTs are particularly suited for highly appreciated assets, such as real estate and stock in a closely held business, or assets subject to income tax such as qualified plans and IRAs. While the CRT does not pay tax on the sale of its assets, the tax is not avoided altogether. The payments to the income recipient will be subject for tax.
There are several types of Charitable Remainder Trusts:
- A Charitable Remainder Annuity Trust pays a fixed dollar amount to the income recipient at least annually. For example, $80,000 per year.
- A Charitable Remainder Uni-trust pays a fixed percentage of the value of the trust assets each year to the income recipient. For example, 8% of the value as of the preceding January 1.
- A third type, perhaps the most common, allows you to transfer non-income producing property to the CRT and have the trust convert to a Charitable Remainder Uni-trust upon the sale or happening of a specified event. For example, upon reaching a specified retirement age.
Estate Tax Planning
As of 2017, every American can transfer up to $5.45 million free of federal gift, estate, and generation-skipping transfer tax. Estate planners are doing everything they can to motivate their clients to take advantage of this unprecedented opportunity.
To understand why this is such a big deal, we only have to look at recent history. From 1987 through 2001, the federal estate tax exemption, the amount of assets an individual can leave to others without having to pay estate taxes, increased from $600,000 to just $675,000. Then the Bush tax cuts went into effect, and the exemption increased from $1 million in 2002 to $3.5 million in 2009. When Congress failed to change the law, the estate tax was repealed in 2010, so there was no estate tax on estates of those who died that year.
At the end of 2010, Congress and the President reached an unexpected agreement just before the exemption was scheduled to revert to $1 million in 2011. The result was a $5 million exemption for 2011 and 2012 that applied not just to estate taxes, but also to lifetime gifts and the generation-skipping transfer tax. This is important because even under the original Bush tax cuts, when the highest estate tax exemption was $3.5 million, lifetime gifts were limited to $1 million.
• Every American has a $5.45 million exemption in 2017, so a married couple can transfer up to $10.9 million out of their estates.
• You don’t have to die in 2017 to use this exemption. It can be used to make gifts and transfers now, while you are living.
• Transfers do not have to be made in cash or liquid assets. Non-liquid assets, like a business, home or other real estate can be transferred to a trust. If you transfer your home into a trust, you can continue to live there and take the tax deductions. If you transfer your business, you can do it in such a way that you can keep control and receive the income. Future appreciation of these assets will not be subject to estate tax, and current depressed values will result in favorable valuations.
• The full $5.45 million exemption does not have to be used in order to benefit. Those with $1 million to $5 million in assets can benefit substantially. Those with less than $1 million should consider some planning to prevent future tax liability.
• There are proven estate planning techniques available now (discounting, family limited partnerships, grantor trusts, etc.) that may soon be eliminated as Congress looks for more ways to raise revenues.
Practice Areas
Estate Planning
Many people believe that estate planning is only for people who are particularly wealthy, have elaborate schemes in mind for passing their money to their heirs, or for people who are acutely ill and contemplating their death. This could not be farther from the truth!
Estate planning is for every husband, wife, mother, father, grandparent, business owner, professional, or anyone else who has someone they care about, are concerned about providing responsibly for their own well-being and for the well-being of those they love, and for anyone who seeks to make a difference in the lives of others after they’re gone. Estate planning is not death planning; it’s life planning. Estate planning is an essential and rewarding process for individuals and families who engage in it.
When done properly, estate planning requires that a highly trained individual lead you through one or more in-depth meetings to uncover your hopes, fears, and expectations for yourself and for those who are most important to you. This process almost always requires the preparation of several sophisticated legal documents, but those documents themselves are not estate planning. Planning is a process, represented by a complete strategy that is properly documented and maintained by a professional who has taken the time to get to know you, and who is committed to continuing to serve you.
Asset Protection Planning
A revocable trust provides no asset protection for the trustmaker during his or her lifetime. However, upon the death of the trustmaker, or upon the death of the first spouse to die, the trust becomes irrevocable as to the deceased trustmaker’s property. The trust can provide asset protection for the beneficiaries, with two important caveats.
First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and could be subject to that beneficiary’s creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse’s creditor(s), or they may be available to the former spouse upon divorce.
Trusts for the lifetime of the beneficiaries provide prolonged asset protection for the trust assets. Lifetime trusts also permit your financial advisor to continue to invest the trust assets as you instruct, which can help ensure that trust returns are sufficient to meet your planning objectives. The second caveat follows logically from the first: the more rights the beneficiary has with respect to compelling trust distributions, the less asset protection the trust provides. Generally, a creditor steps into the shoes of the debtor and can exercise any rights of the debtor. Thus, if a beneficiary has the right to compel a distribution from a trust, so too can a creditor compel a distribution from that trust.
Irrevocable Life Insurance Trusts
Life insurance is a unique asset int hat it serves numerous diverse functions in a tax-favored environment. Life insurance proceeds are received income-tax free and, if properly owned by an Irrevocable Life Insurance Trust (ILIT), life insurance proceeds can also be received free of estate tax.
An Irrevocable Life Insurance Trust is one of the most popular wealth planning devices. It is a trust designed to own a life insurance policy, usually on the lives of you and your spouse. You gift funds to the trust periodically and the trustee uses the funds to pay premiums on the life insurance policy. The trust is designed to produce benefits for your family:
• Make current gifts to family members.
• Accumulate assets outside the client’s taxable estate.
• Protect assets from claims of creditors.
• Avoid income tax on the accumulation of funds.
• Avoid estate tax upon the distribution of funds to the family.
• Create a source of liquidity to cover estate taxes or expenses.
• Replace assets that may have been given to charity.
Special Needs Trusts
A Special Needs Trust is a trust that can supplement the needs of a special needs beneficiary while allowing the beneficiary to maintain his or her governmental benefits, including Supplemental Security Income (SSI), Social Security and Medicaid. With medical advancements, persons with disabilities are living longer and public benefits are often necessary, yet there is no guarantee that public benefits will provide adequate resources over the disabled person’s lifetime, or that existing public agencies will continue to provide acceptable services and advocacy.
If the special needs trust is established by you or someone other than the disabled person and the disabled person does not have the legal right to demand trust assets, the trust is not considered a countable resource for purposes of government benefits. Therefore, the special needs trust beneficiary can continue to receive benefits even though he or she is a trust beneficiary. The trust will give the trustee the discretion to make distributions to the beneficiary to the extent possible without reducing benefits, and trust assets are available if the beneficiary no longer qualifies for governmental assistance or that assistance is no longer available.
If the trust is established on the beneficiary’s behalf pursuant to a court order, for example as part of a personal injury settlement, the trust will not impact the beneficiary’s eligibility. It may, however, need to include a payback provision that reimburses the state for its assistance before trust assets pass to the trust’s other beneficiaries.
Common savings vehicles for children include Uniform Transfer to Minor Acts (UTMA) accounts, typical trusts, or designating a retirement plan, insurance policy or annuity directly to an SSI or Medicaid recipient. Use of these savings vehicles will cause a reduction or elimination of public benefits. Recognizing this, some parents make the difficult decision to disinherit their special needs children, but this severe action is unnecessary.
Charitable Planning
The Charitable Remainder Trust (CRT) is a type of trust specifically authorized by the Internal Revenue Code. These irrevocable trusts permit you to transfer ownership of assets to the trust in exchange for an income stream to the person or persons of your choice (typically you, your spouse, or both you and your spouse) for life or for a specified term of up to 20 years. With the most common type of Charitable Remainder Trust, at the end of the term, the balance of the trust property (the remainder interest) is transferred to a specified charity or charities. Charitable Remainder Trusts reduce estate taxes because you are transferring ownership of assets to the trust that would otherwise be counted for estate tax purposes.
A CRT can be set up as part of your revocable living trust planning, coming into existence at the time of your death, or as a stand-alone trust during your lifetime. At the time of creation of the CRT you or your estate will be entitled to a charitable deduction in the amount of the current value of the gift that will eventually go to charity. If the income recipient is someone other than you or your spouse there will be gift tax consequences for the transfer to the CRT.
CRTs are tax-exempt entities. In other words, when a CRT sells an asset it pays no income tax on the gain in that asset. Therefore, after a sale the trust has more available to invest than if the asset were sold outside of the CRT and subject to tax. Accordingly, CRTs are particularly suited for highly appreciated assets, such as real estate and stock in a closely held business, or assets subject to income tax such as qualified plans and IRAs. While the CRT does not pay tax on the sale of its assets, the tax is not avoided altogether. The payments to the income recipient will be subject for tax.
There are several types of Charitable Remainder Trusts:
- A Charitable Remainder Annuity Trust pays a fixed dollar amount to the income recipient at least annually. For example, $80,000 per year.
- A Charitable Remainder Uni-trust pays a fixed percentage of the value of the trust assets each year to the income recipient. For example, 8% of the value as of the preceding January 1.
- A third type, perhaps the most common, allows you to transfer non-income producing property to the CRT and have the trust convert to a Charitable Remainder Uni-trust upon the sale or happening of a specified event. For example, upon reaching a specified retirement age.
Estate Tax Planning
As of 2017, every American can transfer up to $5.45 million free of federal gift, estate, and generation-skipping transfer tax. Estate planners are doing everything they can to motivate their clients to take advantage of this unprecedented opportunity.
To understand why this is such a big deal, we only have to look at recent history. From 1987 through 2001, the federal estate tax exemption, the amount of assets an individual can leave to others without having to pay estate taxes, increased from $600,000 to just $675,000. Then the Bush tax cuts went into effect, and the exemption increased from $1 million in 2002 to $3.5 million in 2009. When Congress failed to change the law, the estate tax was repealed in 2010, so there was no estate tax on estates of those who died that year.
At the end of 2010, Congress and the President reached an unexpected agreement just before the exemption was scheduled to revert to $1 million in 2011. The result was a $5 million exemption for 2011 and 2012 that applied not just to estate taxes, but also to lifetime gifts and the generation-skipping transfer tax. This is important because even under the original Bush tax cuts, when the highest estate tax exemption was $3.5 million, lifetime gifts were limited to $1 million.
• Every American has a $5.45 million exemption in 2017, so a married couple can transfer up to $10.9 million out of their estates.
• You don’t have to die in 2017 to use this exemption. It can be used to make gifts and transfers now, while you are living.
• Transfers do not have to be made in cash or liquid assets. Non-liquid assets, like a business, home or other real estate can be transferred to a trust. If you transfer your home into a trust, you can continue to live there and take the tax deductions. If you transfer your business, you can do it in such a way that you can keep control and receive the income. Future appreciation of these assets will not be subject to estate tax, and current depressed values will result in favorable valuations.
• The full $5.45 million exemption does not have to be used in order to benefit. Those with $1 million to $5 million in assets can benefit substantially. Those with less than $1 million should consider some planning to prevent future tax liability.
• There are proven estate planning techniques available now (discounting, family limited partnerships, grantor trusts, etc.) that may soon be eliminated as Congress looks for more ways to raise revenues.
Practice Areas
Bossenbrook Williams
1600 Abbot Road, Ste. 200
East Lansing, MI 48823
Telephone: (517) 333-5789
Fax: (517) 999-5789
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