Saturday, October 6, 2018

Unexpected information from SSA

When you apply for Social Security benefits, the Social Security Administration will review the reports that it has received from former employers. If it finds information about a pension plan that you participated in during a period of employment, SSA will notify you of that plan and the fact that you might be entitled to benefits. One client of ours learned that she was entitled to $235 per month that she did not know about, in addition to her Social Security benefit.

Tuesday, June 26, 2018

In re Mardigian Estate

The Michigan Supreme Court has been considering this case for a long time. On June 21, 2018, it came down with its long-awaited decision. Except it was. . . a non-decision. The Court split by a 3-3 vote, resulting in an affirmance. The reason that all seven members did not rule is that Justice Wilder, one of the newer members of the Court, was on the Court of Appeals panel which ruled on the case earlier.

Mark Papazian drafted a will for a friend, Robert Mardigian. The will was remarkable because it left "the bulk of" his estate to Papazian and his children.

Rule 1.8-c of the Michigan Rules of Professional Responsibility prohibits an attorney from preparing a will or other instrument for his client if it gives him or his close family a "substantial" gift. But the Michigan Rules of Professional Responsibility provide a basis for attorney discipline, not for interpretation or application of the instrument.

The issue at all levels was whether (1) the will was automatically invalidated based on the violation of the rule and (2) whether the attorney-client relationship and the friendship between the two gave rise to a presumption of undue influence, requiring Papazian to produce evidence that there was no such undue influence. (Of interest, the presumption does not apply substantively, shifting the burden of proof at the time of the hearing. It applies only to the burden of production of evidence.)

Three members of the court (Markman, Zahra, and Clement) would find that the will was not invalidated, and that the presumption would apply. The other three (McCormack, Viviano, and Bernstein) would create and apply a new "per se" rule automatically invalidating the will.

The position of the Markman group was based on an earlier case, In re Powers Estate, 375 Mich 150 (1965), which had likewise allowed the application of a will in which the attorney's wife was a major beneficiary. The Powers rationale was encapsulated in the following: "the focus of the will contest is to determine the decedent’s intention and not to judge and discipline the attorney’s conduct."

This 3-3 split is very unfortunate. It permits the Court to escape making a definitive decision on this important point, to the detriment of the public's perception of the legal profession. This case will not have any precedential effect, but the 1965 decision in Powers will continue to apply as the controlling rule on this issue.

Tuesday, May 1, 2018

Sunday, January 14, 2018

Using retirement funds pre-retirement

It is common wisdom among estate planners and commenters on financial matters that people between the age of 60 and 70 should not touch their retirement accounts until they are required to do so, and that those who have reached the point at which they must take required distributions (around age 71) should take only the required minimum distributions (RMDs). While this is good thinking for many people, it will not work for everyone. 

The common recommendation no doubt arises from the assumption that most clients have a sizable retirement account and a sizable investment account comprised of non-retirement assets. The recommendation is based on the fact that non-retirement funds consist of money on which tax has already been paid, and thus using that money will not result in the recognition of income and the imposition of additional tax based on that income. 

But a client who has a very large retirement account and whose other assets are modest may benefit from a bit more liberal thinking about the use of the retirement funds. 

Let us do a bit of calculating for a moment. Let’s begin by assuming a client who 60 and who has exactly $100,000 in retirement funds. We know that 
  • His RMDs will begin in about 10 years. 
  • His accounts are likely to grow to about $138,000 in that time, assuming no additional contributions are made. 
  • His RMD for the first year, often his age 71 year, will be $5,223. 
A $5,000 annual distribution is of course not much. 

These calculations do “scale” perfectly, though. If we change one assumption, considering a retirement account with a current value of $1 million, it will change the following parameters. 
  • His accounts are likely to grow to about $1,380,000 in that time, assuming no additional contributions are made. 
  • His RMD for the first year, his age 71 year, will be $52,230. 
Now we are talking about a significant required minimum distribution. 

Let’s say that our client decides that he wishes to use the money to enhance his quality of life during the next ten years. Each year, he wants to use $7,500 of his accounts (probably netting about $6,000 after taxes) to do some traveling with his wife. What is the result? 

When he reaches age 71, he finds that 
  • His total retirement account is $1.3 million, or about $80,000 less than it would have been if he had not touched the money. 
  • His initial RMD is $49,000, or about $3,200 less than it would have otherwise been. Each successive RMD is also moderately smaller than it otherwise would have been. 
The differences, in all honesty, are not that great. And there is a real-life factor that seems to elude many who comment in this field. In general, our client is likely to be much better able to travel and get around in his 60s than he will in his 70s. The ability to use his money to travel and in general to enhance the lives of both spouses is likely to be greater in their 60s. In general, the money will be more useful to them in those years than it will be when they are 75, 80 or 85 years old.