Topic History of: Trust
Max. showing the last posts - (Last post first)
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steve
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Estate planning considerations usually involve tax issues, non tax issues, creditor protection issues, and business succession planning.
Many people consider drafting a will or a trust when they become sick, their family grows, or they become advanced in age.
So, i would encourage the use of an estate plan for anyone who wants to control the dispositsion oftheir assets, appointment of a guardian for minor children, and for anyone with estate tax exposure.
Below is a brief discussion on estate planning basics. I hope this is helpful.
MICHIGAN TRUST & TAX, P.C.
ESTATE PLANNING AND TAXATION
Estate Planning Basics – Transferring Property at Death
Copyrighted © 2007 Steven M. Nofar, Esq.
I. If you die without a will:
1. Probate is required. If you die without a will (intestate) and you have property titled in your name alone, then at death your assets will be distributed according to a state created will. The probate court has the authority to create a will for you, appoint a personal representative, and if necessary appoint a guardian for minor children.
2. Undesired Disposition of Assets. If a person dies intestate, his probate assets will be distributed according to state law. Many clients have specific requests regarding asset distributions and whether the distributions to beneficiaries are equal or unequal. Also, state law does not provide for distributions to charities. Therefore, intestate succession may result in unintended distributions or unintended disinheritances to your beneficiaries.
II. If you die with a will:
3. Probate is still required. A will must be verified by the probate court before it can be enforced. A will only takes effect at death.
4. No Protection Upon Incapacity. A will provides no protection if you become physically or mentally incapacitated. Therefore, upon incapacity the probate court will have to appoint a guardian and/or conservator in order to make decisions for you and manage your assets. This is a concern for many older Americans.
5. Outright Distribution of Assets to Children age 18 or Older. The probate court will only hold assets for minor children until that child reaches the age of majority. In Michigan that age is eighteen. At that point, the property will be distributed outright to these young adults. With a Living Trust, you can hold assets in trust and distribute the assets periodically over a period of time, which you choose. In addition, you can hold property in trust for the benefit of grandchildren. Holding assets in trust will encourage children to develop their own skills and talents rather than relying on trust assets.
6. Assets in more than one county/state: “Ancillary Probate.” Many individuals have property in more than one county or state. At death a probate estate will need to be opened in each county and each state where your property is located. This can be financially burdensome to the estate. This type of ancillary probate can be avoided by creating a Living Trust and transferring all your assets to the trust during your lifetime.
III. Characteristics of Probate Court:
1. Privacy Concerns. Probate proceedings are public. This means that there is no privacy. So any “interested party” can see what you owned and what you owe.
2. Takes Time. Administering an estate through probate can take months or years depending on the size of the estate and claims made against it. In addition, nothing can be distributed or sold unless the court or a personal representative provides an approval. Family members will need to make requests for living expense money.
3. Expensive. Attorney and Personal Representative fees to probate the estate must be paid before assets are distributed to your beneficiaries. If you have assets in more than one county or state, then multiply the fees by the number of counties or states in which you hold assets.
4. No Control. The probate court determines how long it will take to administer your estate, and what information is made public.
5. Small Probate Estates. Only small estates (i.e. estates with $18,000 or less of assets) in Michigan can be probated in one day as a “small estate.” MCL 700.3982.
IV. Problems with Joint Ownership:
1. Delays Probate. There is no probate administration upon the death of the first joint owner. However, after the death of the first joint owner, the surviving owner now holds property in his individual name and the property is once again probate property unless the surviving owner adds another joint owner to the title. Probate administration may also be required if the joint owners die simultaneously.
2. Creditor Claims. If you own property jointly with someone else, such as a child, then your child’s creditors can claim an interest in the joint asset and prevent complete distribution of that asset. A joint owner’s creditors may exert rights against the jointly owned asset, particularly against joint held bank accounts which provide each joint owner with an “implied consent” to withdrawal. In Michigan, creditors may claim a right to such property under MCL 487.718, MSA 23.295(8).
3. Loss of Control. Closing an account or transferring a jointly held asset will likely require consent of all joint owners.
4. No Coordination of Entire Plan – Unintended Disinheritance. Assets titled in joint ownership are not subject to the provisions of your Last Will and Testament or Living Trust. It’s often the case where not all the intended beneficiaries are listed as joint owners. The effect is that some joint owners get an overall larger share than the non-joint owner beneficiaries. This is because joint tenancy overrides your will or Living Trust. After your death, you cannot depend on the surviving joint tenant to split the assets among non-joint owners as you originally desired. In fact, if the surviving joint owner transferred assets to non-joint owners after your death, there may be gift tax issues associated with such a transfer.
5. Potential Loss of the Step-up in Basis. When you make gifts to persons during your lifetime, you as the donor transfer your cost basis in that property to the donee (this is also called “carry-over” basis in property). However, if you transfer property at your death, then your beneficiaries receive a “stepped-up” basis in the property (i.e. the stepped-up basis is the value of the property at your date of death). Therefore, gifting assets during your lifetime can create capital gain exposure to the recipient. However, please note, capital gains are subject to 15% tax and the federal estate tax is set at a maximum rate of 45% for year 2007. Therefore, if an estate has exposure to estate taxes, gifting property that is expected to greatly appreciate in value may be a good idea, because it removes that asset from your estate and subjects it to lower taxes. To find out which estate planning technique is appropriate for your estate; please consult with an estate planning attorney.
6. Medicaid Issues: Transferring an otherwise exempt asset, such as a primary residence into joint ownership, may result in disqualification of Medicaid benefits, unless the joint owner fits one of the exemptions (primary caregiver in the residence for at least two years, disabled child of owner, etc.).
7. Minors. Minors can own property, but the rules are complex and full of pitfalls.
8. Second Marriages. Real property owned as tenants by the entirety with a second (or new) spouse means that the surviving spouse becomes owner of the property and can evict your children from a prior marriage. This may cause the unintended disinheritance of your children from a prior marriage.
9. Dower. Michigan law still provides dower rights for married women (i.e. the use during her lifetime of one-third of all the property owned by her husband, whether acquired before or during the marriage). If a man is a joint owner, his surviving spouse’s dower rights may not attach to his property interest (unless he was the sole surviving joint owner).
V. Benefit of a Living Trust:
1. Living Trusts are Revocable. Living Trusts provide continued control, enjoyment & management of your assets during your lifetime. A Living Trust is revocable and you as the “grantor” or the “settler” (i.e. person creating the trust) retains the right to revoke, amend, alter any terms, or regain possession of the property held in the trust. You are also the initial trustee during your lifetime.
2. No Probate Upon Incapacity. Upon incapacity, whomever you name as successor trustee will manage your financial affairs according to the instructions in your trust for as long as is needed. Appointing a successor trustee in your trust will be enforced to a greater extent than naming an agent to act under a power of attorney.
3. Protection Against Creditors. Assets held in trust for beneficiaries are protected from their creditors.
4. No Probate at Death. Upon death, assets held in trust are transferred according to the Living Trust. Probate proceedings are not required. This minimizes administrative and probate costs.
5. Planned & Orderly Distribution of Assets When You Die. Your assets will be distributed to beneficiaries to whom you want, when you want, and how you want.
6. Plan for Minors and/or Incapacitated Children. Assets can be held in trust for minors.
7. Prevent Intentional and Unintentional Disinheritance. Preserve distributions to your children and grandchildren by setting-up a Marital Trust called a “QTIP Trust.”
8. Estate Tax Savings/Efficiency. Larger estates need to take advantage of utilizing each spouse’s applicable estate tax exclusion amount. This can be done by setting up a credit shelter trust (aka A – B Trusts) to hold the maximum applicable exemption amount.
VI. Basic Tax Considerations:
1. Federal Estate Tax. The federal estate tax is neither a property tax nor an inheritance tax. It is a tax imposed upon the transfer (at death) of the entire taxable estate and not on a particular legacy, devise, or distributive share. Decedents with adjusted gross estates that approximate or exceed the current exemption amount (or “estate tax free amount”) are required to file Form 706 within nine months of the decedent’s death (unless an extension is filed). Form 706 is essentially a net worth statement detailing your assets and liabilities.
2. Capital Gains. As stated above, inter-vivos or lifetime gifts transfer your cost basis to the donee. Hence, when a donee sells or transfers gifted property, his gain maybe subject to capital gain rates. Testamentary bequests (or gifts at death) give your beneficiaries a stepped-up basis in the transferred property, which may reduce the beneficiary’s exposure to capital gains. Please remember, the estate tax rates for taxable estates are higher than capital gain rates. To find out which estate planning technique is appropriate for your estate; please consult with an estate planning attorney.
3. Qualified Retirement Benefits. The entire value of a qualified retirement benefit, IRA, annuity and other tax-deferred asset is included in your estate for estate tax purposes. If these assets are paid to your spouse then they qualify for the unlimited marital deduction. In addition, for income tax purposes, your surviving spouse may roll-over the entire benefits under the same terms and conditions as applied to you (IRC 402©(9)). Beneficiaries other than the surviving spouse are not entitled to a tax-free roll-over and will have to report the distributions as income subject to ordinary income tax rates.
4. Charitable Giving/Deductions. Gifts to qualified charities at death can be claimed as a deduction for estate tax purposes. Unlike charitable deductions on your income tax return which are subject to adjusted gross income limitations, there are no percentage restrictions for estate tax charitable deductions.
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bigdaddy
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At what point in one's life should they consider and estate plan?
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