Saturday, December 15, 2012

Wednesday, November 7, 2012

The timing of social security benefits

Bob is 61, working as a physical therapist, and is the owner of a clinic with two other therapists. He earns an average of $170,000 per year. His wife Carol, also 61, is a homemaker. She had worked as a medical secretary, full-time for 14 years before their first child was born, and part-time for the next ten years before her position was eliminated. She has not worked since. She made $30,000 per year in her last year of full-time work.

Both of them have earned enough credits to be eligible for social security benefits. They could begin as early as next year, when they reach age 62.

These are among the considerations:
  • If Bob retires at age 62 and begins collecting social security benefits, he will only receive 80% of what the benefit would be if he waited until 66, his "full retirement age." 
  • If he waits until age 70, the benefit he will receive will be 32% higher than the NRA figure, and 64% higher than the age 62 figure. 
  • The percentages of each will change each year. No one has to choose between age 66 and age 70. If Bob wants, he can decide to retire at age 68. 
  • When Bob begins collecting his benefits, Carol will be paid a spousal benefit that is 50% of Bob's benefit. That calculation, which uses his earning record, will be much higher than her own benefit, using her earning record. Essentially, the household will receive payments equal to 150% of his benefit. This is all the more reason to wait until he is age 70. 
  • If Bob dies, Carol will begin collecting benefits equal to those he was receiving, based on his earning record, in her own name. 
Carol cannot start receiving that 50% spousal benefit now. She has to wait until Bob starts collecting. But there is one step that she could take now. She could apply for a benefit based solely on her earning record now, and collect that (lower) monthly benefit until Bob decides to retire at age 66 or later. When he does so, she can then apply for the 50% spousal benefit.

Most people in her position should take that step. When Bob does retire, the total combined 150% figure will take effect, and it will not be affected by her decision to start taking her own benefits early. The cost-benefit analysis that goes into the personal decision on the question of when to retire does not enter into this question. If she does not begin collecting benefits on her own record now, that money will be forever lost.

As always, consultation with a qualified adviser is recommended.

Sunday, October 28, 2012

IRA distribution flowchart

This flowchart (PDF) is a handy reference for the rules that relate to distributions from IRAs to the owner (participant) and to beneficiaries.

Monday, October 15, 2012

The Medicare surtax on trusts and estates

In the Health Care Education and Reconcilation Act of 2010, Congress adopted a new 3.8% surtax to provide additional funding to the Medicare program. Codified at 26 USC 1411(a)(2), the surtax will generally apply only to investment income over $200,000 (single taxpayer) or $250,000 (married couple). Importantly for our probate and trust clients, however, the surtax will also be potentially imposed on trusts and estates, at a much lower income level.

The surtax is separate from the estate tax, which is currently imposed only on gross estates of over $5 million per person. It is an addition to the income tax which is imposed on trusts and estates.

The surtax will apply only to tax years beginning after January 1, 2013. For some estates and trusts, electing a fiscal year that ends in October or November could delay the imposition of this surtax for the first year.

The calculation could be a bit tricky. The statute provides that the 3.8% is applied to the lesser of
  • the estate or trust's adjusted gross income over $7,500 or 
  • the estate or trust's "undistributed net income."
(For some reason, many authors have said that the threshold is $11,600. A review of the statute's cross-reference to 26 USC 1(e), however, shows that it is $7,500.)

The estate or trust would normally avoid this surtax by distributing net investment income to the intended beneficiary. It should be noted, however, that this step could lead to:
  • in a high-value estate or trust, the investment income bringing a recipient over the personal investment income threshold, in which event he will be personally responsible for paying the 3.8% amount, or 
  • making the distribution available to creditors in the event that the recipient is experiencing financial difficulties.
For some trust beneficiaries, keeping net income within the trust is a good way of keeping the money out of the hands of the beneficiary's creditors, with a good spendthrift clause in the document. That protection will now have to be balanced against the potential imposition of the 3.8% surtax.

Tuesday, October 9, 2012

New DPOA requirements now in effect

A reminder: The new requirements for durable powers of attorney that we wrote about here went into effect for all POAs executed after October 1, 2012. Although a POA executed before that date is not subject to the requirement, it would be a good idea to update the forms, since it can be predicted that banks, financial institutions, and other custodians of funds will insist on having that language in place before they will accept a form.

Saturday, September 15, 2012

Life insurance on the young adult

Fox Business describes the strategy of purchasing life insurance if you have co-signed student loans for your college-age children.

Sunday, September 9, 2012

What is a disclaimer?

As the last item shows, courts sometimes have to deal with disclaimer issues. A disclaimer is a process by which someone who inherits property can essentially say “no, thank you” and decline to accept it. This can be done with property passing by a will, a trust, or other non-probate procedures such as joint tenancy or beneficiary designations.

If property is disclaimed, it then passes to the person who would have received it if the disclaiming recipient had not been named. A very important point is that the disclaiming recipient cannot specify who is to receive the property. If B wants to have property pass to C instead of to himself, he must accept the property and then make a gift to C. This may well use up some of his lifetime gift tax exemption. 

Disclaimers can apply to only a part of a gift. If a will calls for B to receive $100,000, he can accept $50,000 (or any other figure) and disclaim the rest.

Disclaimers are governed by both state and Federal law. The Internal Revenue Code provides rules that govern “qualified disclaimers” for Federal estate tax purposes. Both the Federal and the state statutes provide that a person cannot disclaim property if he has accepted it, gained any benefit from it, or if he has accepted any consideration from another person in exchange for the disclaimer. 

Disclaimers can be useful tools in succession planning. An example: a client who has a retirement account may designate his wife as the primary beneficiary and his brother as the secondary beneficiary, with the plan that 
  • his wife will take over the account if she needs the money, but 
  • she will disclaim it if she doesn’t (if other accounts and property she receives are sufficient to meet her needs), and thus allow the account to pass to the brother instead.

Friday, September 7, 2012

In re Milmet Estate

Morris Milmet was the owner of an investment firm, M&S Investment, Inc. After he died, his estate apparently exceeded the then-applicable exclusion amount by a significant margin, and the estate would have been unable to pay the assessed estate tax without liquidating the company he had built. It appears that most of his estate consisted of shares in the company. (We are reading between the lines a bit, since the opinion does not provide much in the way of factual background.)

His will had called for the creation of a testamentary trust, dividing his assets between his wife (the marital share) and his other beneficiaries (the residuary share). Somehow, the customary provisions were not used or were not effective. Most estate plans are carefully worded to ensure that only an amount matching the applicable exemption amount passes to persons other than the spouse. This one apparently didn't. Enough passed under the residuary share that a significant estate tax liability would have been incurred. So the beneficiaries acted to avoid that result, avoid the estate tax, and allow the company to stay in business. The residuary beneficiaries executed apparently timely disclaimers of their interests, at least to the extent of the excess, allowing those assets to pass to the decedent's wife, and thus escape taxation under the marital deduction.

In exchange, the complaint alleged, the wife agreed that she would later "provide the Residuary Beneficiaries with the value of their interest in the Residuary Estate at a later date." How and when she would do so was not stated in the opinion.

The other beneficiaries later sued her for breach of contract, fraud, conversion, etc. for apparently failing to follow through. The complaint alleged that she "retained the 40% of the residuary estate" rather than passing it back to them.

The probate court dismissed the complaint for failure to state a claim. (Under that rule, the court considered only the allegations made in the complaint, and did not refer to any facts or documents.) The court reasoned that a disclaimer under section 2901 of the Estates and Protected Individuals Code is, by its very nature, a release of any interest in the subject property. The disclaimer would be inconsistent with the retention of any interest sufficient to support a breach of contract claim.

The Court of Appeals reversed. It found that enough had been alleged to raise a factual issue. In particular, it held, the probate court needed to determine whether the agreement had been made, and what the terms were. It went on to note, however, that if the facts as alleged were to be established, this would make the purported disclaimers void ab initio (from the outset). This would mean that they would be regarded as not taking effect, and the estate and its beneficiaries would be returned to the position they had been before this agreement was put into effect.

The court noted in a footnote that the purported disclaimer was likely ineffective for its intended purpose of avoiding estate taxes on the property. Quoting from Estate of Monroe v CIR, 124 F3d 699, 705 (5th Cir 1997), it noted that "the acceptance of any consideration in return for making the disclaimer is an acceptance of the benefits of the entire interest disclaimed." It also noted that section 2910 of EPIC provides, for state law purposes, that "The right to disclaim is barred to the extent provided by other applicable law."

Judge Murphy, concurring in part and dissenting in part, noted that the disclaimer agreements had expressly recited (to comply with IRS requirements) that "the petitioners had not received and would not receive any consideration for disclaiming their interests."

Ultimately, he concluded, whichever theory was eventually pursued by the parties and accepted by the court, the agreement was illegal and/or contrary to public policy.

What will happen next? The case was remanded back to the probate court. It appears inevitable that the estate will be reopened, the disclaimers invalidated, and the residuary property will pass to the intended beneficiaries under the will. An amended Form 706 will have to be filed, and the appropriate estate taxes paid. Late filing penalties and interest will undoubtedly be assessed. There would be a very significant chance of criminal charges being filed, at least for the filing of a fraudulent original Form 706. None of those prospective penalties was specifically mentioned in the opinions, but they were surely in mind as the Court of Appeals opinions were written.

The decision

Monday, August 27, 2012

The personal medical authorization

Estate planning web sites have recently identified a gap in the "typical" collection of planning documents: the plain HIPAA-compliant medical authorization that allows a doctor or hospital employees to provide information about your health condition to members of your family or a trusted friend in the event of a sudden illness or injury. A parent of a minor child who has been in an accident will be able to find out what his doctors are doing for him, but once he turns 18 he is legally an adult and the lines of communication shut down.

A doctor will usually be willing to talk with a patient's spouse about her care, and often to adult children of a single elder, but not to any other relative. 

In truth, all of these disclosures could be made, based on the language contained in the Final Privacy Rule that controls the release of medical information: 
"Limited uses and disclosures when the individual is not present. If the individual is not present for, or the opportunity to agree or object to the use or disclosure cannot practicably be provided because of the individual's incapacity or an emergency circumstance, the covered entity may, in the exercise of professional judgment, determine whether the disclosure is in the best interests of the individual and, if so, disclose only the protected health information that is directly relevant to the person's involvement with the individual's health care. A covered entity may use professional judgment and its experience with common practice to make reasonable inferences of the individual's best interest in allowing a person to act on behalf of the individual to pick up filled prescriptions, medical supplies, X-rays, or other similar forms of protected health information." 42 CFR 164.510(b)(3) 
But hospitals and physicians have been so shell-shocked by the shrill warnings about forbidden disclosures and the hefty penalties that can apply that none of them dare rely on language like this to disclosure medical information without an authorization. Thus, in just about every case, an authorization is needed. 

At his law firm's site, Jack Bolling of Milford, Michigan offers a humorous story from his own experience. 

We offer a simple HIPAA authorization form, for use by anyone who wants to plan ahead in case of emergency. While it is not guaranteed that it will be accepted everywhere, since each health facility seems to operate under its own rules, it has been drafted with the requirements of the HIPAA Final Privacy Rule in mind, and it offers the best chance for the parent of a young adult, the friend of a single person, or a relative of a vulnerable elder to get the needed information about his or her medical condition in the event of injury or illness. 

Sunday, August 19, 2012

Cash as a joint asset

A man in his 70s has, for his own personal reasons, taken $50,000 from his bank accounts and has placed it in his safe deposit box. He wants his son to have access to the money (or what is left of it) when he is gone, and to divide it between himself and his two brothers.

Thoughts and discussions:
  • If his son is not listed as a person authorized to access the box, he may not be allowed by the bank to open it after the father dies, even if the son is given a key. The son should be added as an authorized user.
  • Even with the box accessible to the son, the money is still the father's asset and a probate estate will have to be opened. But a joint tenancy can be created for any property, not just money in bank accounts or brokerage accounts. Recommendation: a document, signed by the father, stating that the money is jointly owned between himself and his son, and will pass to the son as his survivor on his death.
  • The intent is that the son divide the money with his two brothers. That is essentially an oral trust. Dad intends that Son will get the money for the purpose of making the division. This can be effective, but it may not be enforceable. A written trust is better for the very reason that it makes clear that a trust is being established and what the trustee is directed to do. If Son decides that he wants to keep the money for himself, it may be difficult for his brothers to prove that Dad intended otherwise, if the trust is only oral. The written trust is much more enforceable than an oral trust. 

A note: The scenario is a hypothetical, based on a discussion that I had with another lawyer. It is a rule that actual clients' cases are not discussed at this site or in any other public forum. 

Thursday, July 12, 2012

The ACA and cost-sharing

The ACA will put limits on "cost sharing" - i.e., deductibles and co-pays - for all insureds. 

Section 1301(c) provides that employer-sponsored health insurance policies may not impose total deductibles and copayments over $2,000 for a single person or $4,000 for a family. That, and the prohibition on any cost-sharing for certain preventive services, discussed below, is the only limitation placed on coverage by medical insurance paid by the employer outside the exchanges. 

For coverage under the exchanges, the calculations are much more complicated. There will be limits which apply to all cost-sharing for most plans, and there will be separate "actuarial" requirements which will also affect the cost of coverage. This is from the Kaiser Foundation's "Questions about health insurance subsidies": 
PPACA sets maximum out-of-pocket spending limits (discussed below), but otherwise does not specify the combination of deductibles, copayments, and coinsurance that plans must use to meet the actuarial value requirements. So, for example, one plan may choose to have relatively higher deductibles but relatively low copayments for office visits and other services, while another plan may choose a lower deductible but higher copayments or coinsurance for each service. The Secretary of Health and Human Services may choose to address this issue through rulemaking. 
Section 1302(c)(1) provides that the annual limitation on cost-sharing for exchange-provided coverage is the amount specified in section 223 of the Internal Revenue Code, 26 USC § 223(c)(2), for high-deductible health plans under health savings accounts. That section imposes these limits: 
  • Maximum deductible of $1,000 per person, $2,000 per family 
  • $5,000 limits on total deductibles and copays
These cost-sharing maximums are then reduced (section 1402) for those with a household income under the "400% of Federal poverty limit" level - about $100,000 for a family of four in 2014 - when enrolled in a "silver" level exchange-provided health plan.  (No such limits are specified for other levels of coverage.) This is accomplished in a complicated three-step fashion. 

Step 1 - direct limits on cost-sharing - 1402(c)(1)(A)

The following chart shows how the reduced maximums are implemented for a family of four, again using the 2012 Federal poverty limit figures, and based on the $1,000 per person, $2,000 per family limits:


Thus, for a family of four with less than $46,100 in household income, the $2,000 maximum deductible is reduced to $667 per year. The $5,000 total cost-sharing limit for that family (not shown) would be reduced to $1,667 per year. 

Step 2 - coordination with actuarial value limits - 1402(c)(1)(B) 

This one is the most difficult to comprehend and involves a great deal of uncertainty and unpredictability. Much will depend on the details of the regulations to be adopted by the Department of Health and Human Services. The statute states "The Secretary [of HHS] shall ensure the reduction does not result in an increase in the plan's share of total allowed costs" above certain percentages, according to income: 
  • 90% for those between 100-150% of the FPL
  • 80% for those between 150-200%
  • 70% for those between 200-400%
The goal is to provide, on average, that the lower-income insureds will pay 10% of their medical costs, those earning a little more 20%, and almost everyone else paying 30%. The way that the statute is written, however, those insureds will have to pay at least 10%, 20%, or 30% of the cost of health care, and may have to pay more, as deductibles or co-pays. These provisions are not maximums on payments by citizens, they are minimums. 

Step 3 - lower income persons - 1402(c)(2)

There is a further reduction for "lower income insureds", those making less than 200% of FPL - $22,340 for a single person, $46,100 for a family of four. Roughly speaking, those with incomes from 100-150% of FPL will have cost-sharing reduced to approximate the platinum level coverage, and those from 150-200% the gold level, without having to pay the difference in premium.

We do not know whether anyone has yet noticed that each of these steps more or less accomplishes the same thing. Perhaps someone will figure it out. 

No cost-sharing for preventive services

For certain types of medical services, such as annual Pap smears and mammograms for women, prostate testing for men, blood pressure screening, lab tests to screen for high cholesterol or diabetes, prenatal care, well baby checks, etc., no cost-sharing is allowed. Those services have to be paid for by an employer health plan without applying the otherwise-applicable deductible, and without co-pays. (Section 1001) The same will apply to coverage provided through the exchanges. 

Wednesday, July 11, 2012

The ACA - Exchanges and coverage levels

Health insurance exchanges 

Section 1311 of the Affordable Care Act calls for each state to set up an American Health Benefit Exchange, with Federal grant money to assist. 

We will not try to explain the health insurance exchanges in detail. The high points are: 
  • The exchanges under the ACA will be run by one or more states. 
  • If a state does not set up an exchange, the Federal government will do it.  
  • The exchanges will not sell or place insurance. Instead, they will coordinate the offering of ACA-compatible coverage with private insurers. 
  • The exchanges will coordinate placement for individuals and for small businesses (under 100 employees). 
  • Each exchange will offer a choice of up to four levels of coverage, called platinum, gold, silver, and bronze. 
  • Michigan is one of a majority of states which have had legislation initializing compliant exchanges introduced but not passed into law. 
Details may be found at 


Coverage levels 

Coverage through the exchanges will be available to individuals who do not receive employer-provided coverage, or for whom the coverage that is available through their employers is not "affordable" under a program to be established by the Department of Health and Human Services (section 1411). A key provision is that exchange-sponsored coverage is divided into four categories, based on how much of the overall cost of health care they cover. Section 1302(d) specifies the four levels: 
  • bronze - 60%
  • silver - 70% 
  • gold - 80% 
  • platinum - 90% 
Each exchange will be required to offer at least silver and gold coverage. (Section 1301) The other two will be optional. Also optional will be a fifth choice, catastrophic coverage only. For some reason, that will only be available to citizens under the age of 30.

Section 1302(d) requires that the plan in each level will provide benefits that are "actuarially equivalent to" the specified percentage of "the full actuarial value of the benefits." Our best guess at what that means is that HHS regulations will direct the health insurers, by using a combination of deductibles, copayments, and coinsurance, to arrive at the specified rate of shared coverage between insurer and insured. One complication with that approach is that deductibles and copays are imposed by insurers, while coinsurance is a function of the employment agreement - many employers require their employees to contribute a certain percentage of the premium for their coverage. It is not clear how those separate concepts are going to be melded into one set of rules regarding "cost-sharing". 

It appears that the expectation is that most insureds will choose coverage at the silver level. The Act itself is designed to encourage the issuance of silver plans. Only enrollees in that level, for example, are eligible for limits on cost-sharing under section 1402. Further, those who earn under approximately $100,000 per year (family of four) and who are thus eligible for the premium assistance credit will receive that credit only based on the silver level of coverage. If they want to choose coverage at the gold or platinum levels, they will have to pay the entirety of the additional premium. But there are also provisions for those in the lower income levels (under $46,000 for a family of four) that will provide the approximate equivalent of the gold or platinum level as a result of a series of requirements on "cost-sharing". 

We hope to have more on the complicated issues surrounding cost-sharing in the next few days. 

Monday, July 2, 2012

The ACA - exemptions from the mandate

The ACA itself provides for a number of exemptions from its otherwise general requirement (going into effect in 2014) that citizens purchase health insurance. In addition, it authorizes the Department of Health and Human Services to approve additional exemptions.


Those who are covered under the VA, Tricare, Medicare, Medicaid etc. are regarded as in compliance and thus do not have to be concerned about the penalty or exemptions. 

The exemptions cover:
  • Members of Indian tribes 
  • Undocumented aliens 
  • Persons serving a sentence for a conviction of crime (but not those detained pending trial or sentencing) 
  • Persons earning so little that they do not have to pay taxes (about $9,500 per year) - but recall that persons earning up to $14,856 (single person) will be eligible for Medicaid in 2014 even if they do not qualify now 
  • Those whose health insurance premiums, even with the premium assistance credit, would exceed 8% of household income. 
What does this last requirement mean in practice? The Kaiser Foundation has an explanation accompanied by a graphic that needs a bit of interpretation.


The Kaiser Foundation calculation is based on 2016 projections for a family of four, and the graphic depicts the amount that the family will pay for health insurance - with the assistance of the premium credit, in the middle of the chart. 

From 0 to about $37,000, the family pays nothing for health insurance; they are instead eligible for Medicaid. From $37,000 to $100,000 (rough figures), an increasing percentage of income goes for premiums, but always under 8%.

At $100,000, the percentage suddenly goes up to 12% because the premium credit is no longer available. The projection for 2016 is that, without Federal assistance, the average cost of health insurance will be $12,000 per year for a family of four. (One could question that projection, given the fact that employer-provided group health insurance for a family is slightly higher than that figure at this time.) That is 12% of this family's income. From $100,000, the percentage goes down, and at $150,000, it meets the 8% limit on the declining slope. It is the group of citizens who are in that income range, those who make a good living but are not regarded as "rich", who will be exempt from the individual mandate.

The calculations could be done in the same fashion for other family groups. A single person hits the 400% mark (of Federal poverty level) at an income of $45,000, but his premium is much less because he is covering only himself.

Thus, one or the other Federal program will assist up to the $100,000 income level, using this hypothetical, and above that level and up to $150,000 of household income, the law provides an exemption from the individual mandate. Above $37,000 and below $100,000, the mandate applies but the credit helps. Above $150,000, the mandate applies.

Sunday, July 1, 2012

The Affordable Care Act - premium assistance

This is the first in what is expected to be a series of short pieces describing selected details of the Patient Protection and Affordable Care Act. Today, we will talk about how the "individual mandate" will affect working families who are not covered by health insurance provided by their employers and who are not eligible for Medicaid.

By now, everyone knows that the individual mandate will compel individuals and families to purchase health insurance. The states will be developing plans for statewide insurance exchanges to make coverage available from sources other than the currently-available commercial insurers, HMOs, and Blue Cross Blue Shield. If the uninsured individual fails to buy insurance, a penalty (which the Supreme Court has determined is a "tax") must be paid. This flow chart published by the Henry J. Kaiser Family Foundation helps to show how and where this penalty applies. For a family of four with a total annual income of $50,000, the penalty assessed would be:

2014 - $500
2015 - $1,000
2016 - $1,500

In addition, section 1401 of the Act provides for financial assistance for those for whom  buying insurance coverage is difficult. That section provides for a refundable and advanceable tax credit, called the "premium assistance credit", to assist with the cost of buying health insurance. A tax credit is a dollar for dollar reduction in tax liability. A refundable credit is one which generates a refund to the taxpayer who does not have any income tax liability because he does not make enough to require that he pay income tax. An "advanceable" refundable tax credit is a new creature in the law. It allows the taxpayer who will be eligible for it to receive the money during the tax year, rather than having to wait until his tax return is filed early the next year. How this will work out in practice has yet to be determined. (Section 1415 does say that the advances will be paid directly to health carriers, not to  individual taxpayers.)

A key question is: How much will the credit be? The language of the statute is horribly impenetrable. The operative language is:
(A) Applicable percentage.
(i) In general. Except as provided in clause (ii), the applicable percentage with respect to any taxpayer for any taxable year is equal to 2.8 percent, increased by the number of percentage points (not greater than 7) which bears the same ratio to 7 percentage points as--
    (I) the taxpayer's household income for the taxable year in excess of 100 percent of the poverty line for a family of the size involved, bears to
    (II) an amount equal to 200 percent of the poverty line for a family of the size involved.
Most sites which try to explain this provision simply make reference to "150% of the federal poverty level," etc., without explaining what the actual dollar amounts are.


The Federal Poverty Level is redefined each year.  This year's FPL for a family of four is $23,870, and four times that amount is $95,480


The statute uses a sliding scale depending on income, up to 400% of the FPL. This means that every person or family with a total income over the 133% figure and less than the 400% figure will be eligible for this assistance. (Those who make less than 133% of the FPL, which comes to $31,747 for a family of four in 2012, and who are not covered by employer-provided insurance, will be eligible for Medicaid coverage under the ACA.) 

The following is a rough and oversimplified calculation (using the 2012 FPL figures) demonstrating how the premium assistance credit will work. For a family of four, the following amounts represent the amount that the family would have to pay for health insurance premiums, with the aid of the credit, if this plan were currently in effect:


This is the same calculation (again, rough and oversimplified) for a married couple with no children: 


This program will be effective in 2014, assuming no change before then. These calculations will need to be updated depending on the FPL figures in effect then. 

Wednesday, June 20, 2012

Making sure the document is right

If you make a large charitable contribution, say a series of weekly checks to your church totaling more than $25,000 in a year, if the church sends you one or several letters acknowledging the gifts, and if you keep meticulous records, including copies of the cancelled checks, you are in the clear on taking a  deduction if the IRS chooses to audit you, right? You would think so.

As described by the Rehmann Group's BWD Express publication, a recent Tax Court case involving David and Veronica Durden upheld an IRS disallowance of the deduction. The problems:
  • The church's January 2008 letter acknowledging the 2007 gifts did not include the required statement as to whether the taxpayer received anything of value in return for the gift. 
  • After this deficiency was pointed out by the IRS, a letter sent by the church in 2009 including the required language was not considered because it was not sent "contemporaneously" with the gift. Under the regulations, the letter (with the required statements) needs to be sent by the date that the taxpayer files his return, or is required to file his return, to be considered contemporaneous. 
Rehmann notes that taxpayers cannot simply rely on their charitable beneficiaries to know what the documentation requirements are.

Tuesday, June 12, 2012

Social Security information online

The Social Security Adminstration has announced that it will no longer send an annual statement to workers to list the earnings that have been reported on their social security numbers and to provide a projection of the levels of benefits.

Instead, it now offers an online service called My Statement. In addition to the information previously contained in the paper statement, it will give the registered visitor links to submit an application for benefits online.

The site also has other calculators which will help with estimating benefits for those who may not qualify for social security based on their earnings history.

Previously: We can help with Social Security Planning.

Friday, May 25, 2012

New DPOA requirements

Michigan has amended section 5501 of the Estates and Protected Individuals Code, governing durable powers of attorney. For any document executed after October 1, 2012, it must
  • be dated and either notarized or signed before two witnesses, and 
  • include an acknowledgement signed by the agent (the "attorney in fact")
The acknowledgement reads as follows: 
I, ____________________, have been appointed as attorney-in-fact for ________________________, the principal, under a durable power of attorney dated __________. By signing this document, I acknowledge that if and when I act as attorney-in-fact, all of the following apply:
(a) Except as provided in the durable power of attorney, I must act in accordance with the standards of care applicable to fiduciaries acting under durable powers of attorney.
(b) I must take reasonable steps to follow the instructions of the principal.
(c) Upon request of the principal, I must keep the principal informed of my actions. I must provide an accounting to the principal upon request of the principal, to a guardian or conservator appointed on behalf of the principal upon the request of that guardian or conservator, or pursuant to judicial order.
(d) I cannot make a gift from the principal's property, unless provided for in the durable power of attorney or by judicial order.
(e) Unless provided in the durable power of attorney or by judicial order, I, while acting as attorney-in-fact, shall not create an account or other asset in joint tenancy between the principal and me.
(f) I must maintain records of my transactions as attorney-in-fact, including receipts, disbursements, and investments.
(g) I may be liable for any damage or loss to the principal, and may be subject to any other available remedy, for breach of fiduciary duty owed to the principal. In the durable power of attorney, the principal may exonerate me of any liability to the principal for breach of fiduciary duty except for actions committed by me in bad faith or with reckless indifference. An exoneration clause is not enforceable if inserted as the result of my abuse of a fiduciary or confidential relationship to the principal.
(h) I may be subject to civil or criminal penalties if I violate my duties to the principal.
Signature: _______________________ Date: ______________________
In addition, a new subsection (3) provides limitations and imposes new duties on the agent:  
An attorney-in-fact designated and acting under a durable power of attorney has the authority, rights, responsibilities, and limitations as provided by law with respect to a durable power of attorney, including, but not limited to, all of the following:
(a) Except as provided in the durable power of attorney, the attorney-in-fact shall act in accordance with the standards of care applicable to fiduciaries exercising powers under a durable power of attorney.
(b) The attorney-in-fact shall take reasonable steps to follow the instructions of the principal.
(c) Upon request of the principal, the attorney-in-fact shall keep the principal informed of the attorney-in-fact's actions. The attorney-in-fact shall provide an accounting to the principal upon request of the principal, to a conservator or guardian appointed on behalf of the principal upon request of the guardian or conservator, or pursuant to judicial order.
(d) The attorney-in-fact shall not make a gift of all or any part of the principal's assets, unless provided for in the durable power of attorney or by judicial order.
(e) Unless provided in the durable power of attorney or by judicial order, the attorney-in-fact, while acting as attorney-in-fact, shall not create an account or other asset in joint tenancy between the principal and the attorney-in-fact.
(f) The attorney-in-fact shall maintain records of the attorney-in-fact's actions on behalf of the principal, including transactions, receipts, disbursements, and investments.
(g) The attorney-in-fact may be liable for any damage or loss to the principal, and may be subject to any other available remedy, for breach of fiduciary duty owed to the principal. In the durable power of attorney, the principal may exonerate the attorney-in-fact of any liability to the principal for breach of fiduciary duty except for actions committed by the attorney-in-fact in bad faith or with reckless indifference. An exoneration clause is not enforceable if inserted as the result of an abuse by the attorney-in-fact of a fiduciary or confidential relationship to the principal.
(h) The attorney-in-fact may receive reasonable compensation for the attorney-in-fact's services if provided for in the durable power of attorney.

Saturday, May 5, 2012

The Trustee In Training

On Monday, May 21, we will be presenting The Trustee in Training, subtitled "Lessons in Handling Other People's Money". This will provide information for people who are currently serving or who have been named to serve as personal representative of an estate (called the "executor" in most other states) or the trustee of a trust. Some of the information will also apply to persons who act as agent for another person under a Durable Power of Attorney or as a court-appointed conservator.

We will address some of the legal and financial requirements, including reporting, accounting, seeking professional assistance, and dealing with creditor's claims. Information on the Prudent Investor Rule and on the need for accounting for principal and interest will be included.

Date: Monday, May 21, 2012
Time: 6:30 pm
Location: Peter White Public Library, lower level

Free and open to the public.

Wednesday, May 2, 2012

Beware estate tax misinformation

We have seen this in a couple of different venues now, so it is not just a coincidence. Articles on the importance of estate planning in this election year, with its (revisited) uncertainty about the extension of or abolition of estate tax exemptions, are giving people misleading information.

Put simply, there is nothing that you can do in your personal planning documents now that will "lock in" the current $5 million exemption equivalent, so that you can guarantee that it will be available at that level in future years. All three of the major transfer taxes - estate tax, gift tax, and generation-skipping tax - determine their lifetime per-person exemption amounts as of the date of the decedent's death, not as of the date of the execution of planning documents.

(Yes, using life insurance and other financial vehicles outside of planning documents, you may be able to restructure your financial picture to approximate the same result. But that can be done at any time.)

Although gifts are taxed at the time of the gift, not at the date of death, it is the lifetime gift tax exemption that controls how much the decedent can transfer free of gift taxes, and the exemption amount that is in force at the time of his death controls. If Arnold makes a $4 million gift to his son Bert this year, it will not be taxed this year, because this year's exemption is $5.12 million, but if Congress later reduces the lifetime exemption to $3 million, only that amount of the gift will be free of tax. There is no doubt that opposition to any proposal to reduce the lifetime gift tax exemption amount below the current level will include stories of people who have already made substantial gift "in reliance on" the current levels. The experience of recent years, however, tells us that no one should put much reliance on stability in the transfer tax rules.

If you live past December 31 of this year, there is no way that you can use this year's exemption amount unless it is extended. For a decedent who dies in 2016, it is that year's applicable exemption amounts that will control for this purpose, regardless of what he does this year.

Saturday, April 14, 2012

Who has the right to decide the disposition of remains?

You may assume that statements made in a person's will would control whether his body is to be buried or cremated. You may assume that the person that the decedent nominated as personal representative has the right to make that decision. Both assumptions would be wrong.

This decision is controlled under section 3206 of the Estates and Protected Individuals Code. The legislature recognized that providing for a personal representative to make a decision would be too cumbersome in most cases, since the disposition decision has to be made very soon, but the process of naming a personal representative can take at least a couple of weeks, and sometimes many months. So, instead, section 3206 provides for a priority among family members to make this decision. (If the decedent was a member of the armed services, other provisions will now apply, as our last posting described.)

In order of priority, borrowing from section 2103 (the section which identifies which relatives will receive property when a person dies intestate - without leaving a will), section 3206 gives the decision-making authority to family members in the following order:
  • the surviving spouse  
  • the decedent's children 
  • the decedent's grandchildren 
  • his parents 
  • his siblings 
  • his nieces and nephews 
  • his nominated personal representative 
  • his guardian, if any 
  • the county public administrator 
At each level, if the person(s) cannot be located or chooses not to make the decision, the authority passes to the next priority level.

The section provides that, in the event two or more people having the same priority cannot agree, the decision of the majority controls. If a majority cannot be found, as would be the case if the decedent left two children who did not agree, a petition may be filed with the probate court under section 3207 to have the court make the determination, after a hearing. Section 3207 identifies some criteria to guide the court, including the important question of whether the person bringing the petition is "ready, willing, and able" to pay the costs of the intended disposition.

Any person who has created a will or a trust should be aware that neither the funeral home nor the court will consider the decedent's wishes as expressed in the document, if there are relatives with the established priority to make the decision. If a particular means of disposal is important to you, be sure to let your closest family members know your wishes.

Thursday, April 5, 2012

New law governing disposition of remains of deceased members of Armed Forces

The Governor has signed HB 4639, enacted as Public Act 63 (2012), amending the provisions of section 3206 of the Estates and Protected Individuals Code regarding the disposition of the bodies of decedents who were members of the armed services. A new subsection (11) is added, to provide that the "designated person" has the authority to direct the disposition of the remains if
  • the decedent was a member of the armed forces, a reserve branch, or the Michigan national guard;
  • the decedent made a designation under a Federal statute or a "regulation, policy, directive, or instruction" of the Department of Defense;
  • the designated person is his or her surviving spouse, blood relative, or adoptive relative.
There is nothing in Public Act 63 that limits its applicability to service members who die in the line of duty. It could apply to a reservist who is killed in a motor vehicle accident or who dies of natural causes.

The procedure followed by the Defense Department is to have the member execute form DD-93, called "Record of Emergency Data", to identify the persons to be notified "if you become a casualty" and to designate beneficiaries for certain benefits. Under section 13a of the form, the member identifies a "person authorized to direct disposition" of his remains.

The purpose of Public Act 63 is thus to ensure that this form, if completed, will control in lieu of the other provisions of section 3206.

Wednesday, March 28, 2012

A doctor on the end of life

NPR profiles The Best Care Possible: A Physician's Quest to Transform Care Through the End of Life, by Ira Byock, M.D.  His advice to patients about advance directives:

"This is a way for you to take care of your family if a crisis happens and you're unable to speak for yourself, and they, those that you love, will be left to struggle with decisions about your treatment and care ... You can perhaps lessen the burden that they're going to feel as they struggle with these decisions by shouldering it a little bit, by telling them what you think you would want. They're still going to have to fit those values and preference to the particular condition and treatments being offered, but at least you can lighten the load a touch."

Saturday, March 24, 2012

New IRA proposal

Reuters reports that the Obama Administration's proposed 2013 budget includes a new provision for distribution from IRAs. If all accounts owned by the participant hold less than $75,000, he will not be required to take mandatory distributions even after the age of 70. Of course, many will take distributions because they need to, but if they have the option, they will be permitted to forgo the distribution. Ultimately, this will allow them to leave more to their designated beneficiaries. The beneficiaries (other than the spouse) will have to begin taking distributions beginning the year after the participant's death, as is currently the case.

Tuesday, March 20, 2012

Another scam reported

The Marquette Mining Journal reports:
Marquette Police Department officers are investigating a possible scam that relieved an 89-year-old Marquette woman of $30,000 this week and almost cost her an additional $20,000... Police said the woman had mailed out two packages containing more than $50,000 in cash to addresses in New York and Florida after scammers told her she had won a vehicle and $2.5 million. She was told she needed to post money up front to pay for federal taxes.
Detectives contacted the Marquette Post Office, which was able to recover one of the packages containing $20,000.
The second package, containing $30,000 had already been delivered.

Saturday, March 3, 2012

The Kochs and Cato

Charles and David Koch have sued the Cato Insitute and its president, Ed Crane in state court in Kansas, where Cato was organized, claiming violation of the non-profit's shareholder agreement. Prior to October 2011, there were four shareholders - the Koch brothers, Crane, and William Niskanen. Niskanen died in October 2011, leaving a great deal of uncertainty as to what will happen to his 25% interest.

Many non-profit corporations are organized and operated as non-shareholder entities. It is relatively unusual for a non-profit that has qualified as a 501(c)(3) entity to be owned by shareholders. Clearly the assets of the corporation cannot inure to the benefit of its shareholders, even if it is dissolved.

The value of the shares is not monetary. Their value lies in the ability of shareholders to nominate new members to the Board.

The shareholder agreement, which was first signed in 1977 and then updated in 1985, was attached as an exhibit to the Complaint. It was poorly drafted in several respects. Its essential provisons were:
  • Each shareholder has 16 shares, with a value of $1 per share. (In 1977, there were five shareholders, each owning 12 shares.)
  • Any shareholder who wishes to transfer his shares to any other person must first offer them to the corporation, which has a 30-day option to purchase them for the price paid for them - i.e., the $16.  
  • The agreement does not say what happens if the corporation does not exercise the option. The conclusion would be that the shareholder is then free to transfer the shares to another person. 
  • The complaint asserts that the remaining shareholders may exercise the option if the corporation does not do so. I do not see that in the agreement. 
  • A majority of the shareholders may buy out a shareholder involuntarily. (Effectively, with four shareholders, all of the other three would have to agree to buy out the fourth.) 
The complaint alleges that Niskanen's wife has not tendered his shares to the corporation. But if she is the executor of his estate, she has a period of several months while the estate is being administered before having to make any distribution of property. So the lawsuit may well be premature. If the widow wants to distribute the shares to any beneficiary of the estate as successor, she would have to make the resale offer to Cato before she did so.

The wife, Kathryn Washburn, is herself a member of the Cato board, and would certainly want to move cautiously.

Since the lawsuit is essentially aimed at forcing the executor to comply with the agreement, it is likely that it should have been filed in the probate court in D.C. where the estate was presumably opened.  (The Last Will and Testament of Niskanen was attached as an exhibit to the complaint, which means an estate has been opened and the will has been filed.)

The will provides for a cash bequest to Niskanen's children, and then the residuary estate is to be divided among his wife, the Cato Institute, and the Institute for Justice. It does not mention or direct the disposition of the Cato shares. Thus, if the executor makes the offer and Cato does not act on it, the 16 shares could have to be divided equally, or as close to equally as possible, among those three recipients. Thus the Cato Institute itself would succeed to the ownership of five or six shares.

The shareholder agreement does not even mention the death of a shareholder, which was a major omission. It should have provided for automatic redemption of the shares on the death of a shareholder. Then there would be no need to wait for the executor to do anything, and no need for the corporation to make any decision.

This situation leaves Ed Crane and the board in a quandary. If the shares are in fact absorbed by the company, this would leave the Kochs as two of the three remaining shareholders, amplifying their ability to continue their current course of adding members of their choosing to Cato's Board of Directors. If the Board declines to repurchase the shares, then the executor would be free to sell or transfer the shares to a person of her choice, assuming that she could get approval of the probate court or consent of the residuary legatees - one of which is the Cato Institute itself - to do so.

Theoretically, as this situation replays itself - and it will, as the current shareholders age - the number of shareholders could shrink until only one person is left. The last one alive would then have full control of the board of the organization.

Sunday, February 12, 2012

Senator wants to raid inherited IRAs

Bloomberg reports that Sen. Max Baucus (D-Mont), chair of the Finance Committee, has proposed requiring that inherited IRAs and retirement accounts be paid out to beneficiaries within five years of the death of the participant. This would generate something in the neighborhood of $4.6 billion for the U.S. Treasury. Under current law, an IRA that is inherited by a properly-named designated beneficiary (other than the spouse) is usually paid out over the life expectancy of the beneficiary, a benefit that can significantly delay mandatory distributions of taxable income. Sen. Baucus, mischaracterizing the system that Congress created and that has been in place for many years, complains that beneficiaries are "abusing" the system by delaying distributions.  "They’re being used by some taxpayers to give tax-free benefits," he is quoted as saying. Tax-deferred, Senator, not tax-free. The money will be paid out, and tax will be paid.

Reports soon arose that Sen. Baucus was "backing off" a little bit on his proposal, but we can expect that legislators will continue to cast covetous glances at the accounts that are building wealth by keeping money out of the hands of the tax man for extended periods of time.

Update Feb 22: AdvisorOne reports that the provision, added by Sen. Baucus on February 7 during committee markup, remains in the bill. So much for backing off. The Financial Services Institute is "mobilizing" its members to press for the removal of this provision.

Thursday, February 2, 2012

Scams targeting the elderly

Local news is reporting another upswing in scams targeting elderly victims, particularly the "Grandma scam". In this one, the victim receives an e-mail, purportedly from a grandchild somewhere in Europe or Mexico, saying that he has been arrested or robbed, and asking for money to be sent by wire to help him get home. The message also conveys a sense of urgency - the money has to be sent right away.

A call to a local police department or the state police can help to confirm that these requests are not legitimate.

Another precaution: If the e-mail message says that it's from Johnny, call Johnny directly, or call his parents to ask them to contact him. In many cases, this step will help to reveal that the request is a scam.

The Marquette Mining Journal reported in its Police Log in the February 2 edition:
9:54 a.m. - Client wiring money to relative in Mexico claiming to be in trouble; believed to be a scam; advised client it is a scam, but they refused to believe it; officer warned them as well, but they sent the money anyway. 600 block of West Washington Street.  
Even with intervention from an astute clerk (kudos to Check and Cash for being alert) and the local police department, it is not always possible to prevent this kind of victimization.

And the Marquette Monthly published this in its February 2012 edition:
Marquette County Sheriff’s office warns of sweepstakes scam - 
An unknown caller from a 1-888 number recently advised a Republic Township resident that she had won a million-dollar sweepstakes contest. The caller identified himself as being a representative of Publisher’s Clearing House, in Las Vegas (Nevada). He advised the resident she had won a million dollars and wanted to set a date and time for an individual to appear at her residence to be awarded the prize; all she needed was a “Money Pack” or “Money Order” for approximately $400.00.
 Publisher’s Clearing House does not notify winners via telephone and will never request payment from a winner to claim any prize. Residents are reminded to use caution when dealing with unfamiliar telephone numbers and unsolicited contacts.
Update: See and listen to Stepping Up and Stepping In for an Aging Parent on American Public Media's Marketplace (played on Saturday, February 4).

Tuesday, January 31, 2012

Insurance and personal planning

Insurance coverage may not seem at first blush to have much to do with family succession planning, but succession planning starts with personal planning, and personal planning includes personal risk management, which makes extensive use of insurance.

Review your automobile insurance coverage

For liability coverage, make sure that you have coverage well above the minimum limits of $20,000 per person. Coverage of $100,000 per person is a minimum for anyone who owns more than $10,000 worth of assets. Coverage of $1 million per person is better for anyone who owns a business, real estate, or other more substantial assets. The marginal difference in premium between $100,000 and $1 million is usually a negligible amount.

Make sure you have uninsured (UM) and underinsured (UIM) coverage equal to the amount of your liability coverage. Liability insurance protects the world from your mistakes. Uninsured and underinsured coverage protects you from the mistakes of others when one of those mistakes is failure to properly insure a vehicle. You should protect yourself at least as well as you protect others.

UM and UIM are not mandatory under Michigan no-fault laws. Your insurer does not have to offer it, and you do not have to buy it. You have to pay a little more for it. The amount of the additional premium is not all that high.

Your insurer does not offer uninsured and underinsured coverage, or limits it to the $20,000 / $40,000? It has that right. You have the right to seek coverage from another carrier, one that will give you the level of protection you need.

Review your homeowners / renters insurance 

If you own your home, make sure that your casualty insurance is sufficient to cover the value of your home, outbuildings, and their contents. For particularly valuable individual items, such as jewelry or works of art, ask your agent about a special floater to cover them.

If you rent, renter's insurance is an excellent idea.

Both homeowners insurance and renter's insurance offer one of the best buys available: "floating" liability insurance. You are not only covered if someone is injured on the premises you own or rent. If you are sued based on something that you did anywhere else - at a baseball game, walking down the street - you will often be covered by this insurance as well.

Review your life insurance coverage 

For protection of a spouse and young children, life insurance equal to about 10 times your annual income is essential. If you are young and healthy, a term policy paying 15-20 times your annual income can be an excellent value.

Life insurance offering investment features may be worth consideration, but term insurance to ensure that those who depend upon you for their support will be supported is essential.

Make sure you have long-term disability insurance

The disability salesmen will remind you incessantly that the risk of disability is much higher than the risk of death for those in their 30s to 50s. They may sound like they are harping, but they are right. The proper long-term disability policy, purchased in your 30s and guaranteed renewable at the same level premium until age 65, will be an amazing bargain when you are in your 50s.

Saturday, January 14, 2012

Transparency, long ago

This post from Ann Althouse's weblog, intended to make a humorous point, depicts a practice from long ago: publishing the last will and testament of a recently deceased person on the front page of the local hometown newspaper. Once filed with the probate court, it is a public record, after all.

Monday, January 2, 2012

Slight increase in exemption amounts

The per-person exemption for estate and gift taxes has gone up to $5.12 million. It reverts to $1 million per person at the end of this (election) year, if Congress does not act in the interim.

The top tax rates on taxable estates and gifts remains 35%. In 2013 it is slated to increase to 55%.