Congress Read My Blog!

Dec 25, 2010

I am a realist. I assume only a few people read this from time to time. But Congress? I am flattered to no end. Back in February, I excoriated them, stating that their inability to deal with the Estate Tax as it existed was inexcusable and unacceptable:

"This result is symptomatic of the immovable, political partisanship at all costs, out of touch with reality we call "representative" government in Washington, D.C. It is a situation that is untenable for U.S. citizens–clients and planners alike. Most of us are weary of the fighting, infighting and grandstanding behind these "representatives'" abuse of the statement "the American People want . . . . " The reality is they lost touch with what we want years ago. Today, I will settle for a decision. Any decision. We can at least then know what to tell clients and how to plan their estates. Congress? Are you listening? (thought not)."

I suggested that they needed to give us something – anything – to rely on for planning for our clients. My remarks included the sentiment that it wasn't that difficult to pick a number for the exemption equivalent; that I never could make sense of the de-coupling of the gift exclusion from the estate exclusion; and that it only would make common sense to index for inflation.

On Friday, December 17, 2010, after carefully reading my blog (I am certain), Congress has actually made some law that I think is almost too good to be true. There is just too much right with the estate tax provisions of the so-called "Bush Tax Cut" extension! In 1967, for some personal reasons, my mom went all out for Christmas, getting each of her children everything on their "lists" and some additional nice surprises as well. Congress seems to have followed suit this year, with a pretty nice Christmas present for estate planners and their clients.

Here are some highlights. The estate and gift tax "applicable exclusion amount" is now set at $5 million for estates of individuals dying after January 1, 2010, and has been "reunified." It will be indexed for inflation (in increments of $10,000). An additional nice surprise is the concept of "portability" has been added. Married couples may now -- rather than having to proactively plan to use each $5 million for each by creating and funding separate trusts – use each other's unused credit. The mechanics of this are not completely clear, but it looks like a much more "forgiving" solution to this problem.

The "new date of death basis" rules ("stepped up basis") has been restored. The 2010 "carryover basis" rules were a nightmare. Because of years of "stepped up basis" and for other reasons, it was clear to us as practitioners that our clients were going to have poor or non-existent records of their basis in capital assets. And, Congress never made completely clear how the election was going to be made (although they did release and then withdraw a proposed form).

The new law is retroactive to January 1, 2010. Amazingly (yes, I am a cynic), Congress also recognized the practical aspects of their waiting until the proverbial "11th hour," to address these much needed provisions. For those persons who died between January 1, 2010 and the date of the new law, the executor or administrator may elect to use the new law, or to use the 2010 provisions. And normal filing deadlines for things like tax returns and disclaimers has been extended to 9 months after the December 17, 2010 enactment date.

Thank you Congress, and Merry Christmas to you, too!


Is Perception Reality?

Nov 26, 2010

Recently I heard an ESPN Sports Radio show suggest that "perception is reality" to high school athletes looking at which university to commit to play for. The phrase has stuck with me lately, much like that song you just can't get out of your head.


Lately, it seems like we have gotten an inordinate number of client inquiries and telephone calls from people who ask us to do things for them that are simply not legally or practically possible. They have heard it – at seminars, from radio advertisements and programs, and from various "on-air" personalities and want to know if we can do that for them?


"These Individuals are making promises they simply cannot keep."


The true reality is no. We cannot and – truth be told – neither can the individuals who said they can. These advertisers and sometimes self-created luminaries are making promises they simply cannot keep. They are broadcasting false or at best deceptive information. But because of the power of the airways, and of repetition, they have created the perception that they are "experts." Therefore, what they say must be factual.


I am not naïve. The phrase attributed (rightly or wrongly) to P.T. Barnum – "a sucker is born every minute," is certainly no more the case today than in the past. Nor should it come as any surprise that there are many out there willing to embrace that thought and take whatever monetary advantage they can. The world has always had such players and always will. But what is disconcerting to me is some of my fellow professionals have resorted to these methods to create and sustain business.


Don't get me wrong. I have no quarrel with seminars (indeed, I conduct them myself on a regular basis). What I object to is that they are not being used as truly educational seminars, but in many cases are being used to "scare" or "high-pressure" attendees into signing up for follow-up sessions or worse, signing so-called legal and/or financial documents at the time of the seminar. Nor do I have a problem with tasteful and accurate advertising. But what we are seeing is the result of a program of consistent but inaccurate statements on radio, television and print media that purports to address the needs of many customers. And while these tactics are not limited to the elderly, they seem to target and attract their particular needs and circumstances.


"These tactics appear to unduly target the needs and circumstances of the elderly"


Is this phenomenon just perception on my part? I don't think so. Over the past couple years, I have reviewed documents presented in a printed form in a notebook with fill-in-the-blanks provisions, which my new client has told me was done at or immediately following the seminar. I have also reviewed, on a number of occasions, legal documents drafted by an attorney the client has never met (and who, from all indications, had no idea about either what he was doing, or at the very least, the circumstances and needs of the clients). Instead, the consulting, meeting, and document execution was being done by third parties (who—more often than not—were also selling financial products). And time and again, we have clients come into our office who have been told that the "cookie-cutter" documents they bring us to review have provided them some legal protection or accomplished some goal which they clearly and simply do not do! Regrettably, the documents have often been prepared, presented and executed by staff members other than the lawyer who puts his or her name behind them and upon whose perceived expertise has drawn the client in the first place.


It is distressing that a number of individuals have been able to create a perception—one of expertise and one of false solution—for their own personal economic gain. It is an illustration of that lately incessant "song in my head:" Perception is Reality.

Am I on a rant? Maybe.


"It is our professional obligation to tell our clients what they need to hear—not what they want to hear."


But perception is not reality. It is crucial that good, factual, common sense solutions be explained and applied to the legal problems and challenges presented in Estate Planning and in "Elder law" Planning. It is fair, in my view, for professional to charge a fee and benefit economically for their professional advice. It is, after all, what they do for a living. But we are professionals. That means we have an obligation to give more than "cookie cutter" documents and false hope to our clients. It means we must do our homework. It means we must spend personal, one-on-one time with our clients. It means, sometimes, that we must practice proverbial "tough love," and tell our clients, not what they want to hear, but what they need to hear.


The “Special Needs Trust” - Critical Planning for Family Members with Disability

Jul 11, 2010

Wills, Trusts, Durable Powers of Attorney, and Health Care Patient Advocate Designations are all basic tools used in the Estate Planning process. There are also some special purpose tools which are important to consider in any good planning process.

One of the areas we always cover in the initial client meeting is whether there are any family members who have a disabling condition. While we are generally exploring the immediate family, it is worth noting that the considerations important to this area can also be important to more remote family members such as parents, grandchildren, siblings and their children.

The Dilemma For Parents

The classic dilemma for parents of a disabled child is that under our current system of governmental support, the child may not own significant assets; yet caring parents know that one they are no longer their to take care of their child’s needs, there may be nobody else who can do that.
A traditional approach to such planning was to “disinherit” the child and leave his or her portion of the estate to someone else (usually siblings) with the tacit agreement for that person to hold the assets and use them for the child’s benefits. Leaving assets to the disabled child (even in trust) can have devastating impact on that child’s established benefit program (including among other programs, SSI, State Programs, and the all-important Medicaid), by disqualifying them from those benefits.

Traditional trust planning simply doesn’t work (even with a so-called “spendthrift” trust), because these all-important programs are often referred to in legal terms as “necessary services” and traditional trust law allows providers of such “necessary services” to reach even well-drafted spendthrift trusts.

The Special Needs Trust

Most states recognize a special purpose trust, however, generally known as a Special Needs Trust. In Michigan, a properly drafted Special Needs Trust (know as a Michigan Discretionary Trust under Michigan case law) cannot be reached by creditors: even the Michigan Department of Human Services, which administers Medicaid and SSI for Michigan residents. In recent years, estate planners working in the relatively new field of “Elder Law,” have used these trusts in their quest to assist elder residents of Long Term Care facilities to qualify for Medicaid, while protecting their assets. There has been a rather long history of government measures tightening the rules on these trusts so that their use has become much more limited.

However, Congress has carefully limited these measures’ application to the true, third-party Special Needs Trust for the developmentally disabled community. In this context they remain completely viable and are still (in most cases) the most effective planning tool to provide for disabled children. Indeed, in one of the more sweeping congressional acts, the legislative history not only specifically addressed the continuing viability of these trusts for disabled children, but actually enhance their use by creating another favorable exception.

The advantage of the Special Needs Trust is that parents can leave substantial assets, in Trust, for the benefit of their child without exposing them to the risks of the above-mentioned, more traditional approach. There were always the concerns that the sibling would die, become disabled themselves, have legal problems (such as bankruptcy or divorce), all of which would put the assets intended for the disabled child at risk. In a word, there was a lack of certainty. The Special Needs Trust provides that certainty, by assuring that the sibling can be “in charge of” the assets without owning them. It can provide also for succession of management.

It is important to understand the legal implications of this trust. “Disinheriting” a child is a very emotional hurdle. But good planning doesn’t really disinherit - at least not morally. Rather, it ensures that the child will continue to receive (often essential) governmental benefits, while the “inheritance” intended for them is preserved, to be used for those very things the parents are doing for their child while they are still living.

Care must be taken, both in the creation of a Special Needs Trust and in its administration. The primary important point is that the Trust language establish the intent of the grantor(s) that the asset not belong to the child, but that it be used for very specific and limited purposes for the benefit of the child. Once activated, the Trustee must understand the rules, in order not to jeopardize the status of the Trust. An “active” special needs trust will be scrutinized by the Michigan Attorney General’s office, so it is critical that it be drafted by someone with knowledge and experience in this area. And, because of this requirement (relatively recent), we currently generally structure these trust as “stand-alone” documents rather than as part of a general family trust document.

The Traditional Third Party Special Needs Trust

There are two different Special Needs Trust recognized by the government as effective. The traditional Special Needs Trust is a “third-party” trust. In other words, it is created by a person or persons who have no legal responsibility to provide for the beneficiary and is established in such a way that the beneficiary has no legal right of withdrawal for any reason. Distributions from the trust are solely at the discretion of the Trustee. It is critically important that such trusts never be “tainted” with assets that in any way or at any time “belong” to the disabled person (thus, benefit payments and inherited assets should not be used to fund the trust). There may be ways to use such assets creatively and that should be discussed with an expert.

The Payback Trust

The second variety is what I referenced earlier as an “enhanced” planning capability. The law now provides that a Special Needs Trust may be created with assets belonging to the disabled person; but with some tradeoffs. If the disabled person is under age 65, a Special Needs Trust may be funded with their own assets, as long as the trust provides for a “payback” provision. After the death of the disabled person (or on termination of the trust in some cases for other reasons) this “payback trust” must pay the governmental provider back for its expenditures, first, before distributing assets to other heirs. The benefit of a “payback trust” is that it allows the disabled person to qualify (or remain qualified) for governmental benefits without any interruption. In the meantime, the assets within the trust can be managed and used for the benefit of the disabled child during their lifetime.

It is important that these two types of Special Needs Trust be distinguished and where applicable done separately (it is not unusual to have both types in place for clients where it is appropriate). We have effectively established “payback trusts” to hold the proceeds of law suits. We have also had good success with our local Probate Court jurisdictions in converting Conservatorship and Guardianship assets into “payback trusts.”

Our standard trust documents contain a “catchall” provision that provides that any time a distribution is to be made to a person with a disabling condition, it may be paid to the trustee of an existing Special Needs Trust or held as a Special Needs Trust for that person.

If you have a family member with a disabling condition, have had concerns about their ultimate welfare, and have not consulted with an Estate Planning Professional about a Special Needs Trust, this is a clear opportunity to put some essential planning in place and achieve peace of mind.



Feb 4, 2010

On January 1, 2010, the Federal Estate Tax, as we have known it for nearly 30 years, was repealed. But what that means to us as clients and planners is completely unclear. This result is symptomatic of the immovable, poliltical partisanship at all costs, ouit of touch with reality we call "representative" government in Washington, D. C. It is a situation that is untenable for U.S. citizens--clients and planners alike. Most of us are weary of the fighting, infighting and grandstanding behind these "representatives'" abuse of the statement "the American People want . . . " The reality is they lost touch with what we want years ago. Today, I will settle for a decision. Any decision. We can at least then know what to tell clients and how to plan their estates. Congress?? Are you listening?

This result is symptomatic of the immovable, political partisanship at all costs, out of touch with reality we call “representative” government in Washington, D.C. It is a situation that is untenable for U.S. citizens–clients and planners alike. Most of us are weary of the fighting, infighting and grandstanding behind these “representatives'” abuse of the statement “the American People want . . . . “ The reality is they lost touch with what we want years ago. Today, I will settle for a decision. Any decision. We can at least then know what to tell clients and how to plan their estates. Congress? Are you listening? (thought not).
In 1981, Congress enacted the basic structure of the Federal Estate and Gift Tax we have worked with since then. A couple of years later, they “tweaked” the law, adding, among other items, a Generation Skipping Transfer Tax. The Estate Tax was imposed on the value an individual transferred on death. The Gift Tax was imposed on transfers during an individual’s lifetime. The Generation Skipping Tax (GSTT) was imposed--in addition to Estate and Gift Taxes–on transfer to generations further removed than an individual’s own children. This tax scheme contained a couple important exceptions. First, whenever assets are transferred between spouses, there is no tax on that transfer. This has been named the “Marital Deduction.” Mechanically this is a “deduction” on Estate and Gift Tax Returns, but in my view it is inaptly named. It really is a deferral–not a deduction. Because it is a deferral, it can be a trap for the unwary. If relied upon, a married couple might lose an entire exemption.

The second is the charitable deduction. This says that you get a dollar for dollar deduction from Estate and/or Gift Tax on every dollar transferred to charity. This can be a powerful planning tool. But there is a trap waiting for some who have used it in their trusts. I’ll address that below.

Effective in 1986, the maximum value an individual could transfer, during lifetime or at death, was $600,000 (we generally refer to this as an “exemption”). In the late 1990's the amount was incrementally increased from the original $600,000 to $1million. The $1million would have been reached in 2006.

When the “changing of the guard” from a Democrat-controlled Congress and Presidency to all-Republican control was completed in 2000, Congress passed the current law, which accelerated the incremental increases significantly, and eliminated the Estate Tax and the GSTT on January 1, 2010. Inexplicably, the Gift Tax remains in force, with a $1million dollar lifetime exemption. The big problem with this, however, is that the law that became effective in 2000, expires by its own terms on December 31, 2010.

Beginning January 1, 2011, unless Congress acts to change this, the maximum exemption will return to $1 million. In the meantime, we are in a proverbial “no man’s land” regarding planning.

What Should You Do?

If you have not done so already, you need to review your plans with your advisors, in light of this situation. In our practice, we have tried for a number of years, during this period of seemingly phrenetic change, to draft for flexibility. If your documents have not been recently reviewed and do not contain certain language providing for some of this flexibility, you, your spouse, or your children may be in for a rude surprise.

Formula Clauses in Trusts. This is an area which may catch some by surprise. The traditional trust (often referred to as a Credit-Shelter, Bypass, or A-B Trust) technique provides that on death, the maximum amount allowed to pass free of tax (historically, the amount of the exemption) is to be set aside in a trust which allows for limited use and benefit – but not transfer to the spouse and therefore not owned by the spouse. This is done to “bypass” the marital deduction and use all of the exemption (thus, the term “Bypass Trust”). If you are counting on a certain amount or certain specific assets transferring to the spouse, but have only this formula clause in the Trust document, under the 2010 rules, the entir amount of the decedent's trust estate will be held in the Bypass Trust, no matter how large the estate.

If you are counting on a certain amount or certain specific assets transferring to the spouse, but have only this formula clause in the Trust document, under 2010 rules, the entire amount of decedent’s trust estate will be held in the Bypass Trust, no matter how large the estate.

Charitable Formula Provisions. Some Trusts provide that the exempt amount will pass to children or other heirs and balance to a Charity. When there was an established amount and the estate size was modestly over the exemption amount, that probably worked to satisfy a client’s objectives. As the exemption increases or is eliminated, this may not work any more. In 2010, by defiinition, this clause will transfer the decedent's entire trust estate to the Charity and nothing to other heirs.

In 2010, by definition, this clause will transfer the decedent’s entire trust estate to the Charity, and nothing to other heirs!

Other Lurking Issues. Under the current law, the concept of “stepped up” basis is no longer effective. When a capital asset is transferred by gift during lifetime, the transferee “receives” the transferor’s basis (and eventual capital gain on disposition). Under old rules, when a capital asset was transferred “by reason of death,” the transferor’s basis was adusted so the transferee would have a brand new, fair market value, basis on receipt. The new rule, effective January 1, 2010, treats such assets whether inherited by reason of death or received by lifetime gift, the same. The transferor’s basis now “carries over” to the new owner. There is no longer an adjustment to fair market value. This may well have significant consequences and should be considered in planning.

One item of good news here is that the law retained an election by the executor or trustee to step up some of the assets under the old rule. There are rules and time frames, and an administrator will now have to be diligent about it. The amount which may be elected is substantial ($1.3 million).


It is uncertain where we are going with this and whether Congress will act this year–or not at all. It is certain that if you have not done so, you need to review existing plans and adjust where necessary. Earlier, I alluded to drafting for flexibility. There are “disclaimer” techniques and a technique using something called a Power of Appointment which may be very useful in these uncertain times. Your advisor should know about these techniques.


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