The Michigan Property Tax Personal Residence Exemption

The Michigan General Property Tax Act authorizes municipal entities, including cities, townships, villages, schools, and municipal "authorities" to levy taxes real and personal property in Michigan. There are two principal exemptions from part of the taxes that routinely impact our clients. The most commonly invoked exemption is the "personal residence exemption" (a/k/a "homestead exemption). The second important exemption is the "qualified agricultural property" exemption (see, Navigating The Michigan General Property Tax Qualified Agricultural Property Exemption). Both exempt the subject property from the school tax. The mechanics of their application differs somewhat.

There is a lot of misinformation out there, much of it by word of mouth. This is an important exemption, as the school tax tends to be one of the highest taxes levied. So, understanding its applicability is worth a few moments' reading.

The personal residence exemption applies to property which is classified by the tax assessor as "residential property." Classification as "residential," does not by itself qualify the property for the exemption. The owner must demonstrate, to the satisfaction of the taxing authority (or – ultimately – the Michigan Department of Treasury), that the property for which they are seeking the exemption is their one, true personal residence.

Obtaining the Exemption

In order to qualify for the principal residence exemption, a homeowner must file an Affidavit of Personal Residence, (Form 2368), which may be obtained on line at the Michigan Government Website (www.michigan.gov/treasury). The affidavit must be filed – in most cases – not later than May 1 of the year the exemption is sought. The Affidavit is filed with the Local Assessor, not with the Treasury Department.

There are instances when a "late" filing can be sought by appearing before the tax board of review (which convenes in most municipalities in July and again in December). It probably makes sense to seek some professional assistance at that point, as there are rules and deadlines that must be carefully observed.

The greatest area of concern is when a residence is purchased after the May 1 deadline. In most instances, the prior homeowner has already filed the affidavit and qualified and the exemption will remain in effect until December 31, after which you may file to meet the May 1 deadline for the following year. The Affidavit need only be filed once and the exemption remains in effect as long as the residence continues to qualify for that owner.

Qualifying For the Exemption

This is the area where the most confusion (and frankly, a fair amount of "license" with the rules) usually arises. This exemption is intended to apply to one personal residence where a resident of Michigan intends to permanently use as their primary home. There are certain indicia that the Department of Treasury (or the local assessor) uses as "proof" of residency. The statutory provision makes clear that it is a matter of intent on the part of the owner. But proof of such intent is sometimes difficult. The authorities will look at things like voter registration address, address on Michigan Driver's License or other Michigan I.D., where the applicant has his or her mail sent, where bills are mailed and the address they use on official tax filing. None of these items alone will be determinative, but they will be used as evidence of intent.

The Michigan Department of Treasury publishes a pdf pamphlet called "Guidelines for Michigan Principal Residence Exemption Program." It is worth noting that in the guidelines, they specifically address the vacation home or cottage issue. Up until just recently, most lakefront vacation property in Michigan was appreciating much more rapidly than suburban or urban residential property. The tax pressure on owners of these properties was enough that many such owners have attempted to make them their personal residence in order to have the exemption apply to their higher value property. Some even attempted to claim both residences as their principal residence. About 10 years back, there was a strong push by taxing authorities to seek out these "transgressors."

The Guidelines make it clear that the state will view this as a matter of reality. In other words, you cannot simply change your driver's license, voter registration and other "indicators," and automatically have the property qualify. You have to demonstrate in a meaningful way that you indeed intend to reside in the property as your principal residence. While there are obviously grey areas (e.g., the "snowbirds," who may spend 6 or more months in a warmer climate), this means that you "live" there – you spend the bulk of your time there.

Multiple Exemptions

It is clear that a homeowner is only entitled to one principal residence exemption. You must be a resident of the State of Michigan and you may not have claimed a similar personal residence exemption in another state, country or territory. You cannot have dual residency, for purposes of the exemption.

What if you are husband and wife? State and Federal laws are nothing if not unclear about this distinction. The general approach is that we treat married couples as a single unit. However there are exceptions. For purposes of the principal residence exemption, if a husband and wife file a joint income tax return, they are entitle to one exemption for their "marital unit." However, if they file separately, they may each claim an exemption. Beware, however, that they will still have to demonstrate the "intent" reality discussed above. In most cases, unless the parties are separated, that will be pretty difficult to do.

Much will depend upon the diligence of the local taxing authorities on all of the above issues.

The Ownership Requirement

This requirement may be among the most elusive – and confusing. Like much legislation, the language is not necessarily consistent, nor clear. For example, the General Property Tax Act refers to the term "person." Yet they don't necessarily consistently apply their interpretation. For purposes of the principal residence exemption, "person" is interpreted as its plain meaning, a "human." A residence that has been transferred into a Limited Liability Company, a Partnership, or some other legal entity will cease to be qualified for the principal residence exemption. While this may seem harsh, it is the law in Michigan. Where we see this application cause the most problems is in the family farm arena, where we are often structuring land-holding entities and family limited liability companies and partnerships. Because there are other complex rules and programs affecting farmland, and because the farmstead and family home are often part of a larger tract of land, family estate and succession planning can become problematic and complex, and attention to detail is important in that context.

You do not, however, need to be a 100% owner of the property. The law says a partial owner may claim the exemption (again, subject to demonstrating that it is their one true personal residence). This means joint owners, and holders of life estates may still claim the exemption.

The law does not specify the amount of ownership. This opens the door to some creative tax and estate planning. For example, a child, parent or sibling could legally own a fractional interest (as little as a 1% joint tenancy interest), but reside in the home and claim the exemption. This, combined with the "uncapping" protections we learned about in the Klooster case (see, "Some Family Cottage Strategies In Light of The Klooster Case") may present some very enticing family property succession strategies.


A residence that has been transferred to a grantor-revocable trust also qualifies for the exemption.  In that case, the grantor (in most cases) is deemed the "person" who is the owner and entitled to the exemption.

Finally, note that you may claim the exemption if you are a Land Contract purchaser. This makes sense because Michigan Law sees such a purchaser as the "equitable" owner of the property, subject to the security interest of the Land Contract Vendor (the so-called "legal owner").

What Property is Covered?

This is another area which is sometimes susceptible to confusion. Adjacent land parcels are often arbitrarily separated by legal description (e.g., by the way they are acquired by deed) or by tax parcel identification code. They may be separated by roads, ditches, waterways, or other natural or man-made obstructions.

The exemption covers all contiguous property to the occupied residence, as long as it is: (1) classified residential, (2) is vacant, and (3) is not used for non-residential purposes. The Guidelines provide several examples of what qualifies as contiguous. Essentially, it is property which is "touching" the property the primary residence is on. A road, ditch, stream, etc., does not destroy contiguity. Another parcel owned by another that is in between does (there is some thought that the state views a corner-to –corner touching as not contiguous, though I fail to see the logic in that view) .

Separately described or deeded parcels or parcels with separate tax code parcel identification numbers, will all still qualify, as long as they satisfy the contiguity requirement. You need not combine parcels in order to have the exemption. You do, however, need to file separate exemption Affidavits for each separate tax code parcel.

The state is dead-serious about the 3 limitations above. If a contiguous parcel has a separate structure on it, it is not "vacant" and does not qualify for the exemption. If any business use is occurring on the contiguous parcel, at least a portion of it will not qualify. The most common example of this latter occurrence is vacant farmland, which is being farmed for rent. In most cases, it will or can be classified as qualified farmland, which will solve the problem. In other cases, it will be important to seek qualified professional assistance.


 

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Some Family Cottage Strategies in Light of the Klooster Case

Nothing triggers emotions more than the family cottage. You may have raised children who spent all their vacations there. You may have grown up there yourself. All the best memories are often there. Yet this family "heirloom" often becomes the most difficult asset to pass to the next generation; and sometimes the most contentious.

As an owner-family, one of the first questions I have clients consider is whether they should even go down that proverbial road? There is simply no legal "GPS" for finding the right mix of ownership and management of multiply-owned family recreational property. Much has been written about this subject over the years, including "Saving the Family Cottage," by Stuart Hollander, a Northern Michigan Attorney who lived and practiced in Leelanau County; and "The Cottage Rules" by Nikki Koski. These books purport to help "solve" the problems arising in trying to pass a cottage from one generation to the next. Yet they admit that it is more of an art than a science. In the end, I usually counsel my clients that their own family "chemistry" will make or break the succession, no matter how good or clever our written documents and plans may be. And, a continuing problem is how, even after passing to the second generation, successive generations will be treated. This article is not really a piece addressing whether the family cottage should be passed. Nor is it really a road map illustrating how it should be done. Rather, it addresses some of the pros and cons of different ownership methods and when they might be considered, in light of the real property taxation.

In 2010, the Michigan Supreme Court decided Klooster v City of Charlevoix, defining under what circumstances a "transfer" resulting in "uncapping" for purposes of the Michigan ad valorem real property tax. "Capping" refers to a limitation placed on the ability of the taxing municipality to raise the "taxable value" of real property as its fair market value increases. The intent of the act was to keep current owners from being unfairly taxed in relation to increase and development of surrounding properties, during their tenure of ownership. It imposes a formulaic limit on tax increases. However, when the ownership is transferred, this "cap" comes off and the taxing authority is free to make a one-time (for each transfer) adjustment to reflect fair market value in the hands of the new owner. The Klooster decision put an interesting (and for some of us, unexpected) twist on the meaning of "transfer" of ownership for purposes of the act. See, Michigan Buys Supreme Court Buys Us Another Generation on Real Property Taxes.

Before addressing the pros and cons, it is appropriate to review ownership options for family cottage properties. Over the years, some different methods of ownership by the next generation have been prevalent.

Joint Ownership

Perhaps the most common (and the most fraught with problems) is joint ownership of property. Michigan law observes several different types of joint ownership. Among non-married owners, the most common and often presumed type is as tenants-in-common. In tenancy-in-common, each owner owns an "undivided" fractional interest in the property. The interest can be sold, or transferred freely. In the event a problem arises in co-ownership, a tenant-in-common may ultimately petition the Circuit Court for an action to partition. The court may, alternatively, order a sale or physical division of the property. A second type of concurrent ownership is as joint-tenants. This type of ownership presumes that on your death, your interest passes, automatically, to the surviving owner. But during lifetime, between non-married owners, the interests may be sold or transferred freely. Such a transfer converts the joint tenancy to tenancy-in-common. A third type of joint ownership is known as joint tenancy with full rights of survivorship (JTWROS). Here, the decedent's interest also automatically passes to the survivor(s). However, these interests may not be transferred or sold without the concurrence of all joint owners. The JTWROS tenancy may not be severed, even by a court.

You may note that I have prefaced each of these with "among non-married owners." In Michigan, when a husband and wife take title to real property, it is presumed that they do so as tenants-by-the-entireties (a special type of JTWROS ownership reserved for married couples). It should be easy to see that, depending upon the makeup of owners and their ability to (and perhaps live) together, each of these owner methods may have potential significant disadvantages.

It is permissible, and in my view, strongly recommended, that the parties have a separate, recordable and enforceable written agreement providing for use, management and succession issues.

A separate, written agreement providing for use, management and succession issues is strongly recommended

Trusts

Another ownership method is a Trust. Most often, a parent-owner will create a Trust for ownership during their lifetime which provides for "rules" and management of the property following their death. Trusts can create complexities and difficulties that may have been completely anticipated by the client and/or drafter. Someone or some entity must act as the Trustee, with the significant responsibilities impose by both the Trust Agreement and the Michigan Trust Code. Tax reporting at both the federal and state level is required. The allocation of the taxable (and deductible) attributes is not always simple. There are annual reporting and accounting requirements, sometimes to more "remote" individuals who may have no current involvement, but have a possible future interest. Trusts are generally a cumbersome method for continuing ownership and often will direct another form of ownership upon the death of the original owners/trustors and transfer to the next generation. The "uncapping" circumstances for trusts are quite complex.

Entity Ownership - Limited Liability Company / Partnership

For numerous reasons, the Limited Liability Company (LLC) has become the real estate owning entity of choice in Michigan. It is an outgrowth of the Partnership, which was perhaps the preferred method before the LLC. The partnership's "achilles heel" was the unlimited liability every partner had on all partner activities. The LLC effectively created a Partnership with the same limited liability that a corporation traditionally had. And, over time, the Michigan LLC Statute has evolved as the most flexible and creative business entity tool available for planning.

The LLC has become the Real Estate Owning Entity of Choice in Michigan – but it has "uncapping" Issues.

With an entity format, the owners can have an agreement for management and succession of ownership for multiple generations. A manager(s) can be designated and "branches" among the family can be defined, for purposes of voting. A "buy and sell" agreement can be put in place, providing for valuation methods and payment methods, as well as limitations on sales and transfers. Accounts can be established for payment of expenses. And, because the entity is the owner of the real property, as "members" come and go, the ownership stays within the company. Because of this structure, the LLC is, in my view, a better practical and legal planning alternative to the Joint Property Agreement.

There are negatives. There is a cost to set up the LLC, and a (generally nominal) cost of annual maintenance. Like the Trust, federal and state tax reporting is required. The LLC is a "public" entity, in that it is on file in Lansing, with a register address and agent. Perhaps the most significant negative is the "uncapping" issue mentioned above.

How Klooster Applies

The Michigan Tax Tribunal has ruled that transfers of real property interests to a LLC will automatically cause uncapping. While a reading of the statute does not, in my view, intuitively suggest that result, the rulings of the Tribunal have the force of law in Michigan until a court having proper jurisdiction says otherwise. To the best of my knowledge, at the time of this writing, no court has done so. Nor is the Klooster result, in my opinion, the intuitive result of a reading of the statute. But the Michigan Supreme Court is the highest legal authority in the state and they have spoken.

If "uncapping is an issue, consider Joint Ownership with a written agreement; If it is not, go the route of the LLC

In summary, if "uncapping" is not a significant issue, you should strongly consider the formation of a LLC. Conversely, if "uncapping" is a significant issue, you should consider joint-ownership with a Property Agreement. However, before spending too much time on the "uncapping" issue, it is probably worth looking at whether the "uncapping" issue is as significant at one might think. Currently, most vacation property values are at a long-time low here in Michigan. Thus, the "jump" from current taxable value and fair market value (loosely, SEV in Michigan) may not be as significant as it first appears. Even though the "value" looks like a substantial number, it is worth doing the math to see what the actual increase in taxes might be. It may be that "uncapping" in the current environment is a "window" that should be taken advantage of. Remember that once the "uncapping" occurs, the "cap" starts over again for the succeeding owners.

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Why and When Is a Trust Accounting Report Required?

Clients often ask why we need to report or account to beneficiaries. This is a particularly perplexing concept when the beneficiaries are remote (i.e., they are not currently due to receive anything from the trust and may never receive, unless they outlive the current beneficiary(s)). A related question is to whom we must report and when?

When the grantor is still alive and is serving as his or her own trustee, there is no duty to report. This makes sense, as it would be a duty for the owner who retains total and complete control over the assets in the trust to report to him or herself. These very common estate planning trusts are known under the Internal Revenue Code as "Grantor-Revocable Trusts." The get this name from the section in the Internal Revenue Code which exempts them from filing or reporting separately on an income tax return. Instead, the grantor simply continues to report these items on their personal tax return. However, on the death of the grantor (and in some circumstances, when the grantor no longer is acting as trustee, if though they may be still living), the duty to report and file income tax returns arises.

Perhaps the most direct answer to why we must do this is that the law requires it. But what, exactly does that mean? Estates, whether Probate Estates or Trust Administration, are mainly governed by the law of the state where the grantor is/was a resident, or where they stipulated in the Trust Agreement which state law would govern. So we must look to the Statutes of the State. At the same time, in an effort to achieve some uniformity from state to state, there are "unofficial," but very influential and persuasive guidelines to Trust and Estate administration. State statutes often follow the guidance of these "national" guidelines.The Restatement of Trusts (now in its 3^rd iteration) is one such uniform nationally recognized guideline. The Restatement (Third) of Trusts states that A trustee has a duty to maintain clear, complete, and accurate books and records regarding the trust property and the administration of the trust, and, at reasonable intervals on request, to provide beneficiaries with reports or accountings. Following on this, Michigan's new Michigan Trust Code contains provisions requiring a Trustee to report to beneficiaries.

The Trustee of a Trust is a fiduciary. That means that they have a special duty to all of the trust beneficiaries, of fair and honest dealing, and of sensible management and investment of the trust's assets. This fiduciary duty also includes the duty to keep beneficiaries apprised of the status of the trust's assets and investments.

Who are the beneficiaries entitled to an account or report? That is a bit less clear. It is clear that the current beneficiaries are entitled. But what about more remote (or contingent) beneficiaries? The commentary to the new Michigan Trust Code says the language of the code "clarifies" this formerly unclear area. I am not so sure. The Code uses the new term (new to us in Michigan, anyway), "qualified beneficiaries." It defines "qualified beneficiary" in what I think is a rather confusing way. What is clear is that current beneficiaries are entitled to an accounting and that more remote beneficiaries may be entitled. The code requires a reporting to the current beneficiaries (current generally meaning that they have some current rights to trust assets, either in the form of income distributions or the right to distributions of some or all of the principal in the trust). It then goes on to say that other "qualified" beneficiaries are entitled to an accounting on request.


The Michigan Trust Code authorizes the maker (grantor) of the Trust to limit the duty of the Trustee to report to certain beneficiaries. However, a Probate Court can override this and order reporting anyway.

In my view, what this tells us is that a Trustee should keep detailed records, and prepare a report at least annually, to keep in its records. While that does not necessarily mean provide each beneficiary with an account, it puts the Trustee (or successors) in a position to provide that information upon an order of the Court. It may serve a secondary purpose of highlighting for the grantor and/or Trustee any problems that might be lurking out there in terms of trust accounting and record – keeping.

Finally, on all but "grantor revocable trusts," the Trustee will be required to file an annual income tax return with the IRS and with any state or states in which it earns reportable income. So it doesn't seem like a huge inconvenience for the tax preparer and/or Trustee to simply put together some kind of accounting report each year as and when the tax return is prepared.

The Michigan Trust Code does not specify a format for the report. It does give guidelines, suggesting that the report should be thorough and detailed enough to fully apprise the recipient of the nature and status of trust assets. This means it should probably have a method for recording items of income as well as how they affect the capital or income side of the trust accounts, as well as items of loss and expenditure, for the same reasons.

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Michigan Supreme Court Buys Us Another Generation on Real Property Taxes

Thursday, March 10, 2011, the Michigan Supreme Court, in Klooster v. City of Charlevoix, seems to have granted us another "generation" on Michigan Real Property Taxes. In 1994, so-called "Proposal A" placed a cap on the amount of increase in Michigan Real Property taxes a municipality could apply, regardless of how much the actual market value increased, as long as there was not a "transfer of ownership." The devil is always in the detail, and the Klooster case centered on the definition of "transfer of ownership," and the meaning of one of the exceptions laid out in the act.

The Act, which allows the municipality to remove the "cap" in the tax year following a change in ownership, has a rather involved definition of transfer of ownership. It also has a long list of exceptions to the rule allowing the cap to be removed. The Klooster decision focuses on the so-called "joint-tenancy" exception. That exception provides that the creation or termination of a joint tenancy by one who is an original owner does not result in an uncapping event, even though it is a change of ownership. The court defines "original owner" as one who has ownership immediately following the last "uncapping" transfer. The court further explains that death of a joint owner (joint with rights of survivorship) results in a "transfer" by operation of law. So an original owner who has created a joint tenancy with another and then dies, effects a transfer of ownership, but it is within the exception and therefore not an "uncapping" transfer.

There has been some question about this since the exception of the act. Some of us (particularly municipalities) felt that the intent of the act was to prevent an unfair increase in taxation while the same original owners and spouses were alive and owned the property, but the when the last original owner in a generation died or transferred out of ownership, an uncapping transfer occurred. The Klooster opinion makes clear that, as a matter of Michigan law (now anyway J ), we were incorrect. The court carefully dissects the language of the statute and concludes that the uncapping will occur on the next transfer. In other words, my dad and mom could add me as a joint with right of survivorship owner to real property and after both of their deaths (which would be a "transfer of ownership" by operation of law), an "uncapping event" would still not occur until the next transfer (either by deed or by my death) happens. This means the cap can stay on for my lifetime, if no transfer of ownership occurs.

Great care must be taken in planning. Once my parents die, for example, I may want to plan for my own succession. If I add a joint tenant who does not come within one of the "not a transfer" exceptions in the statute (e.g., adding children or siblings), an uncapping transfer occurs (adding a spouse or conveying to a grantor revocable trust would probably not be viewed as a subsequent uncapping event). Also, presumably, on my death, an uncapping transfer occurs. This opens much proverbial "food for thought" in real estate succession planning transactions.

It will also be interesting to see if the Legislature takes any action to change the statutory language the Court interpreted.

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Trusts After 2010 Estate Tax Reform

Since the extension of the so-called "Bush Tax Cuts" by Congress on December 17, 2010, and the very favorable changes to the Federal Estate Tax, I have received numerous calls and e-mails, all asking essentially the same question: "Can I scrap my Trust?" My answer is, "of course not!" Indeed this question underscores the continued misunderstanding by clients and advisors alike about the part Trusts play in the Estate Planning Process. We too frequently view the process as only a tax-driven process. In one of my earliest Blogs here, I pointed out that Estate Planning is an overall process involving a number of tools, only one of which is a Trust, which covers only some portion of a well-thought out Estate Plan. So, with changes which eliminate estate taxes as a concern for the vast majority of our clients, I get very concerned that clients and their advisors will unwittingly abandon one of the more important and useful planning tools.

The function of a Revocable Trust Agreement in the estate plan is primarily as an administrative tool to manage and distribute assets, during lifetime, during incapacity, and after death. It most often acts as a Will substitute, and properly structured and maintained, can avoid the need of Probate Court proceedings. With proper drafting, a Trust can also restrict the scope of "outsiders" entitled to information on administration, and can manage assets for minors, and others who are not ready or capable of handling assets yet.

What the new Tax Law does do is, in my view, allow us to vastly simplify the Trust planning we have customarily done to avoid taxation, making it an even more palatable and powerful tool. As I read the new law provisions, even for the relatively rare clients who may have assets exceeding $5 million, we no longer need to set up separate Trusts for spouses and divide up assets before a death occurs. Thus, Trust planning has just become more flexible and inviting in my view.

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Congress Read My Blog!

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 "11^th 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!

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Is Perception Reality?

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.

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