Saturday, December 10, 2011

Doctors and elderly patients

At Nexus, a doctor writes about the problem of miscommunication between doctors and patients, pointing out that the misunderstandings can occur on both sides.

A commenter (herself a physician) makes an excellent recommendation, based on her experience in helping her elderly parents as they visit their primary care doctors: she writes out her parents' medical history, including current medications and dosages. She lists the main complaint, any related complaints, how long the problem has persisted, the tests that have been done, and the results. The parent takes this sheet to the doctor's office, so it helps to guide him in his assessment of the problem.

Being a physician herself of course makes it easier for her to do this, but it can be done by any reasonably knowledgeable adult.

It would also be helpful for the doctor to do the same thing: prepare a written sheet, providing his diagnosis (and an explanation about it), his recommended treatment, and when to return for followup, that his patient can take with him to help with discussions with his family.

Tuesday, November 22, 2011

Case report: IRAs and money judgments

We have previously noted on this page that Michigan has a statute which exempts funds held in an IRA from execution on a money judgment entered against the IRA owner. On November 1, 2011, the Michigan Court of Appeals, in the unpublished case of Vinyl Tech Window Systems, Inc. v. Blodgett, held that this statute did not protect several IRAs owned by the defendants, and ordered the release of the funds in execution on a judgment. It thus upheld the ruling of the circuit court.

In conformance with the principle that "hard cases make bad law", the circuit court's ruling and reasoning were quite clumsy and difficult to decipher. The facts of the case were particularly egregious. Blodgett, who worked for Vinyl Tech as its comptroller, had embezzled large sums of money and diverted the funds to a company owned by her husband. The circuit court entered a judgment in favor of the employer in the amount of $1.72 million against Blodgett, her husband, and his company.

The circuit court opinion indicates that the husband had created a number of IRAs through some form of trust arrangement. It appears but probably was never proven that most of the funds ending up in the IRAs originated from the embezzled funds. It also appears that the circuit court had entered an early order freezing the funds held by the defendants; it noted that the creation of the IRAs had been done in violation of its order.

In its opinion, the Court of Appeals noted an early Michigan case, Long v. Earle, 277 Mich 505, 511-512 (1936), in which the Michigan Supreme Court had held that, despite the statutory homestead exemption from execution on judgment, one cannot embezzle money, buy a homestead with the proceeds, and then try to claim the exemption.

The problem in applying the Long case here may well have been the uncertainty whether the funds used to fund the IRAs were traceable to the embezzled funds. Since the embezzlement had gone on for many years, it is likely that that had been the case, but it does not appear that the plaintiffs were able to establish that that had occurred.

Rather than accept some of the questionable rationales pronounced by the circuit court, the Court of Appeals upheld its decision based on the defendants' failure to cooperate with a number of post-trial proceedings. They did not respond to discovery requests, they failed to appear for a creditors' examination, and they tried to prevent the discovery of assets that had been transferred to relatives. As a result of this behavior, the Court ruled, they had failed to meet their burden of proof of demonstrating that they were entitled to the exemption. The order that the funds be paid over to the judgment creditors was upheld.

Full text of case (PDF)

Saturday, November 19, 2011

Supreme Court upholds most of the pension tax

In an opinion released yesterday, the Michigan Supreme Court upheld the constitutionality of most of the changes to Michigan's income tax on pensions and IRA distributions. (We previously discussed it here.)

The court did find that the provision that phased out eligibility for the exemption for higher-income taxpayers did create a graduated income tax, in violation of Article 9, section 7 of the state constitution. This part of the new law will need to be redone or eliminated.

The state of state estate taxes

No one, it seems, pays attention to state-level estate or inheritance taxes when talking about what can pass to one's heirs free of tax on death. The North Carolina Estate Planning blog provides a list of the 19 worst states to die in - the states which have the lowest exemption amounts or the highest tax rate, as either estate tax (imposed on estates before distribution) or inheritance tax (imposed on beneficiaries when they receive the funds).

Michigan currently has neither an estate tax or an inheritance tax. To quote Shel Silverstein, Michigan "is tough on the living", but it leaves the dead pretty much alone.

The Federal government currently applies a $5 million per person exemption to its estate tax. There is no Federal inheritance tax.

Friday, November 4, 2011

Reasons not to do it

Many people believe that putting the family home or other real estate in joint tenancy with their children is the best way to provide for post-death succession, without the need for involvement of the probate court. There are several complications which suggest the need to act cautiously.
  1. Once a parent puts a child on the title of the home as a joint owner, the child is from that point forward a full joint owner. The parent cannot later decide to sell the house, rent it out, or seek a mortgage or home equity line from a bank or credit union, without the agreement of the child.
  2. An older parent who is facing the prospect of admission to a nursing home in the next few years will find that the act of adding a child as joint owner of the home will be regarded by the Department of Human Services as a partial divestment of property, and this will result in a period of ineligibility for Medicaid benefits.
  3. Depending on the circumstances, the creation of a new joint tenancy may result in the inadvertent “uncapping” of the taxable value of the real estate, resulting in higher property taxes. 
  4. If the child who is added as a joint owner later has a judgment entered against him by a court, the judgment will have to be paid if the house is to be sold - even though the parents were the ones who paid for the house. 
Balanced against these, the only reason to add one or more joint tenants on a home is to avoid having to have the home subject to probate on the death of the current owner. For many clients, the reasons not to do it will outweigh this one consideration.

Under the General Property Tax Act, there is a limit (“cap”) on increases to property tax assessments while the property remains under the same ownership. In most cases, a transfer in ownership removes that limit and allows for “uncapping” the assessment, often leading to a higher property tax liability. The law provides for a number of exceptions.

The March 2011 decision of the Michigan Supreme Court in Klooster v. City of Charlevoix changed the general understanding of how and when the creation, modification, or termination of a joint tenancy will uncap assessed value.

Under the newly clarified rule explained in that case, you will not uncap the taxable value of the property by adding one or more new joint tenants if
  • you or your spouse were an owner immediately after the most recent uncapping event and
  • you have remained as an owner continuously since then.
If, on the other hand, someone else (other than a spouse) added you as a joint tenant, and then died leaving you as the surviving owner, adding a new joint tenant will uncap the taxable value.

Update 1-24-15: John Payne's article The Curious Case of the Persistent Step-Up deconstructs a myth that misleads many lawyers. So long as the property is included in the decedent's estate, the surviving joint will still receive the step-up in basis. Thus capital gains considerations should not affect the decision on whether to use this probate avoidance technique. 

Sunday, October 30, 2011

State tax credits expiring in two months

There are two Michigan state tax credits that are expiring at the end of 2011: contributions to public agencies, including public radio and TV stations, and contributions to food banks and homeless shelters. Both of these credits are limited to 50% of the contribution or $100, whichever is less. Both will be discontinued beginning in 2012.

The fact that these are credits essentially means that you can redirect that much of your state tax payments to these recipients.

The complete listing of public agencies, from the instructions to the state tax return:

Gifts qualify for credit if given to:
• Michigan colleges or universities and their fund-raising organizations
• The Michigan Colleges Foundation
• The State Art in Public Places Fund
• The Michigan Historical Museum
• Michigan public libraries
• Michigan public broadcasting stations
• A Michigan municipality, or a nonprofit corporation affiliated with a Michigan municipality, for an art institute in that municipality or to benefit the art institute (art institutes are those whose primary function is the displaying and teaching of visual arts)
• The State of Michigan for the preservation of State archives.

Wednesday, October 26, 2011

Social security planning

Should you retire at age 62? at 66? at 70? The answer you give makes a big difference to how much you and your spouse will receive in Social Security benefits.

Did you know that the spouse of a worker whose earnings were much higher can elect to receive a benefit based on the worker's earning history?

How much will the lower wage-earning spouse receive as a spousal benefit? Should he or she choose to receive benefits based on his/her own earnings history or instead elect to receive spousal benefits?

We can assist with these issues. We can run a series of calculations based on the reports that you have received from the Social Security Administration, and provide a comparison of the amounts that you and your spouse will receive based on different retirement dates. We can calculate the "family maximum" that limits the amount that the worker and the spouse can receive if both draw benefits based on the worker's earning history.

This information will allow you to make more knowledgeable choices.

Thursday, October 20, 2011

Retirement plans and creditor claims

There are a number of laws that provide that money in a retirement plan cannot be attached by creditors, either in bankruptcy court or after entry of a civil judgment.

ERISA protects "qualified retirement plans", which include traditional defined benefit plans and 401(k) accounts. Under the ERISA "anti-alienation" provision, 29 USC 1056(d)(1), the funds cannot be "assigned or alienated", and are not subject to attachment to pay the debts of the participant.

For some time, there was uncertainty about the status of IRAs. Since they are not qualified plans and not governed by ERISA, the anti-alienation provision of that law does not apply. The Federal exemption under U.S. bankruptcy law, at 11 USC 541(c)(2), protects money in a "trust", including an IRA, that contains a "restriction on transfer" that is enforceable under "non-bankrutpcy law". In In re Yuhas, 104 F. 3d 612 (3rd Cir 1997), the court, drawing on a 1992 decision of the U.S. Supreme Court involving an ERISA plan, found that an IRA was protected under the bankruptcy law by virtue of the protection afforded under New Jersey law.

Under the bankruptcy system, a debtor is allowed to choose between Federal and state exemptions. Hence, when state exemptions are chosen, the protective provisions of state law must be examined.

In Michigan, the protection from attachment on a judgment is provided under MCL 600.6023(1)(k), and the state protection of IRAs for bankruptcy purposes is found at MCL 600.5451. The protection under both sections applies to both individual retirement accounts and individual retirement annuities. The protection does not extend to any contribution to the account made within 120 days of filing for bankruptcy.

There are some differences. The protection under section 5451 applies to Roth IRAs as well, while section 6023 is silent on Roths. Section 5451 also protects distributions from the accounts after they are made.

There are certain creditors against whom these protections are not effective. The IRS has the power to reach any retirement account of a delinquent taxpayer. Special provisions under sections 401 and 408 of the Internal Revenue Code provide for division or transfer of a qualified retirement plan and IRA by a court in the course of divorce proceedings. The Michigan provision regarding IRAs mentions this exception as well, and further allows the court to order that the funds be used to meet the participant's child support obligations.

For several years, there was an ongoing controversy about whether the protection of IRAs covers only the participant's account. Some litigants argued that the interest of a non-spouse beneficiary in an inherited IRA should not receive the same protection. There have now been a number of Federal and state cases which have held that an inherited IRA is entitled to the same protection from creditors. The most recent such case was In re Chilton, 426 B.R. 612 (E D Tex 2010).

Tuesday, October 11, 2011

A real bucket list

Other than a will and a set of substitution documents (power of attorney, patient advocate form), one of our basic recommendations is that you prepare a comprehensive listing of your assets and contacts - a personal and financial road map for your family to follow in the event of your death or disability. When unexpected disaster strikes, determining where to look and whom to call is one of the most difficult tasks for the family. The listing could include:
  • insurance policies, with policy numbers, names and addresses of agents, and locations of policies
  • bank accounts, brokerage accounts, and retirement accounts, with account numbers and contact information for custodians
  • e-mail logins, passwords for social sites and online accounts
Leave one at home where your spouse or family can find it, and leave one in your safe deposit box or with your attorney, in case the unexpected disaster involves the destruction of your home.

Sunday, October 9, 2011

Reasons to keep the home out of the trust

There are two common reasons not to include the home in the trust when creating a revocable living trust for the client.

Medicaid planning - if the client is concerned about qualifying for Medicaid in the event of a nursing home admission, the home held by a trustee is non-exempt in Michigan.

Home loans - for mortgages, refinanced mortgages, and home equity loans, the lender will not lend and title insurance will not insure a home held under a trust.

In both instances, the recommendation is typically to transfer the home out of the name of the trustee, finalize the needed transaction, then transfer the home back to the trustee. Unfortunately, as described in this item, clients sometimes forget to do the last transfer. Worse, sometimes they are not aware that the transfer took place. Either way, the client's planning has been disrupted, and this can often lead to undesired results.

For these reasons, it is often recommended that the home not be included in funding a revocable trust.

Sunday, October 2, 2011

I just inherited an IRA. Now what?

A designated beneficiary of an IRA has a couple of choices to make regarding distributions from the account, but most of the provisions of the law are mandatory. As always, unless it is a Roth IRA, distributions from the account are taxed as ordinary income. Unless a spouse inherits the account, mandatory annual distributions must begin by December 31 of the year after the death of the IRA owner.

The words and phrases that we use are defined as follows:
  • The participant is the original owner of the IRA, the person whose earnings were contributed while working.
  • The designated beneficiary (DB) is a person who has been properly named on the account. The DB must be a natural person or, if properly designed, a trust.
  • The contingent beneficiary is a person who has been named as such. If the DB predeceases the participant, the person named as contingent beneficiary succeeds and has the rights of the DB as described below. Note that the contingent beneficiary has no interest in the account if the DB dies after the participant.
  • The life expectancy of a participant or beneficiary is calculated using formulas and tables that the IRS has devised for this purpose.
  • The required beginning date is the date by which the participant is required to begin taking distributions from the account. It is defined as April 1 of the year after the participant "reaches age 70½".
The "stretch" effect, the ability to delay mandatory distributions of taxable income and allow the principal to continue to grow tax-free, is available to the successor of a participant under age 70 only if he was properly named as a DB by the participant. (A 50-year-old DB of an IRA worth $100,000 is required to take a distribution of $3,021, for example. The required distribution to a 20-year-old DB would be less than $2,000.)

If the DB is the spouse of the deceased participant, he may elect to convert the account to his own name. If he does so, then his required beginning date and his life expectancy will apply. He will not have to take mandatory distributions until after he reaches age 70.

If the DB is a non-spouse, the rules are:

1. If the participant had not reached his required beginning date before his death, the custodian of the account must begin making annual distributions based on the life expectancy of the DB.
  • If there are two or more people named as DB, the life expectancy of the oldest must be used. Alternatively, the account may be divided into two or more separate accounts, and the separate life expectancy of each will govern his part.
  • Dividing the account is a way to keep the ability to stretch out distributions if a charity has been named as one beneficiary. There is a time limit for doing this.
2. If the participant had already reached the date on which he was required to begin taking distributions, then the distributions to a DB will also be based on that DB's life expectancy. (If the non-spouse DB was older than the participant, though, distributions will continue based on the participant's life expectancy.) If there is no DB, the distributions will continue on the same schedule that applied to the participant, using his life expectancy.

If the participant had not taken his required distribution for the year he died, it must be taken by December 31 of that year. It is taken by the beneficiary, not by the participant's estate.

The DB should always take steps to name his own beneficiary of the account and a contingent beneficiary. This person may not be a "designated beneficiary", as that term is used under the statute and regulations, but if not, he or should would continue the schedule of distributions that the DB had started.

If there was no DB on the account, such as a situation where the account is payable to the estate of the participant, the "stretch" is lost. A shortened payout period applies if the participant had not reached his required beginning date: the funds have to be distributed in full within five years of the participant's death to the person(s) entitled to them. If he had reached his required beginning date, however, the distributions may continue based on his life expectancy.

More: The Zucker Law Firm discusses the Five Options available to beneficiaries

Saturday, September 24, 2011

Scott Adams on investing and planning

At MarketWatch, Paul Farrell reproduces the nine-point, 129-word "Unified Theory of Everything Financial" originated by Scott Adams (of Dilbert fame) in "Dilbert and the Way of the Weasel," published in 2002. Farrell suggests that Adams should be considered for the Nobel Prize in Economics:

1. Make a will
2. Pay off your credit cards
3. Get term life insurance if you have a family to support
4. Fund your 401k to the maximum
5. Fund your IRA to the maximum
6. Buy a house if you want to live in a house and can afford it
7. Put six months worth of expenses in a money-market account
8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio.

You can quibble a bit. Somewhere on the list should be such things as "buy groceries" and "pay the light bill". But it is simple and elegant.

(Adams would be the first to tell you not to take financial planning advice from a cartoonist.)

Wednesday, September 21, 2011

Small estates

After the filing of a petition in probate court, a personal representative is appointed and given the task of marshaling the assets of the estate, providing for allowances to family, identifying and paying creditors, and distributing estate assets to beneficiaries. The term "estate" simply means the assets and property that belonged to the decedent that did not pass to others by law.

There are simplified administration processes and non-probate alternatives for those estates with very limited assets.

Small estate administration - Under section 3982 of the Estates and Protected Individuals Code (EPIC), if the total assets are less than $21,000 (current amount, annually adjusted for inflation) after payment of funeral and burial expenses, a family member may file a Petition and Order for Assignment and may distribute the funds to the spouse or surviving heirs. No estate is opened and there is no administration, so this method cannot be used to follow the directions under a will. If the recipient is a spouse or minor child, no creditor may assert a claim. For other recipients, the funds are subject to claims of the decedent's creditors for 63 days after the order is entered.

Summary administration - Under section 3987, if the total of the homestead allowance, family allowance, and exempt property allowance, plus funeral costs and the costs of the last illness, exceeds the amount of the decedent's probate assets, distribution may be done immediately after the estate is opened. The personal representative does not have to give notice to creditors. The estate may be distributed immediately and a closing statement filed with the court.

The following do not require any probate court filing.

Sworn statement - If no probate proceedings have been filed because of limited assets, the person who is the successor of the deceased may submit a sworn statement to establish that no probate proceedings have been filed, that the total value of the estate is less than $20,000, that the assets do not include real estate, that 28 days have elapsed since the death, and the names and addresses of all persons entitled to the property. This statement may be submitted to any person having custody of the decedent's personal property or who is "indebted" to him, including a bank or other financial institution. On receipt of the sworn statement and the death certificate, the custodian must deliver the property to the successor. No probate proceedings are required. The custodian may not refuse to follow this procedure. Section 3983 of EPIC.

Motor vehicles and boats - If there is no probate filing, the Secretary of State will transfer the title of any motor vehicle or boat registered to the decedent to his family. This title transfer process is subject to limits of
  • $60,000 in value for all motor vehicles, MCL 257.236(2)
  • $100,000 for all boats and watercraft, MCL 324.80312(3)
Personal effects - A hospital, nursing home, or law enforcement agency is authorized to release a decedent's clothing and property worth up to $500 to a spouse or other family member on a showing that no probate proceedings have been commenced. Section 3981 of EPIC. 

Decedent's pay - The final wages or salary payable to a decedent may be paid to his or her spouse, children, or other surviving family under MCL 408.480. 

Tuesday, September 20, 2011

Obama's plan to limit charitable contributions

The recent "Jobs Bill" proposed by President Obama famously includes proposals to increase taxes on "the wealthy" - those earning over $1 million per year. Most news sources do not provide any more detail.

One proposal that it includes, one which Obama has pushed before, is to limit the deduction that may be taken for charitable contributions to 28%. Almost no news source mentions that this limitation would apply to those earning far less than $1 million. It would apply to individuals making over $200,000, couples making over $250,000. It would begin in the 2013 tax year.

As stated by Lisa Chiu in Obama's Job Bill Includes Plan to Limit Charitable Deductions for the Wealthy, The Chronicle of Philanthropy (September 12, 2011), the practical effect would be:
  • A donor gives a public library a $1,000 gift.
  • Under current law, the $1,000 is a deduction from taxable income
  • The net effect is that he saves $350 on his taxes. The net cost of his gift is $650.
  • Under the proposal, the savings would be limited to 28%, or $280. The net cost of his gift is $70 higher.
Charitable organizations, predictably, are opposed to this idea, because they are concerned that it will reduce the incentive to give.

A side note: We recently discussed the tax changes in Michigan with respect to the taxation of pension distributions. One other change made in Michigan, effective with the 2012 tax year, is the outright elimination of the credit for contributions made to several recipients, including public radio and TV stations and community food banks. If reduction of a deduction is considered likely to reduce contributions, the complete elimination of the tax credit will undoubtedly have a severe impact on those recipients.

Tuesday, September 13, 2011

Divorce and IRAs

Under Federal law, an employee's interest in a qualified retirement plan (such as a defined benefit plan or a 401(k) plan) cannot be transferred to another person during the employee's lifetime. A major exception is a transfer under a Qualified Domestic Relations Order (QDRO). These are complex documents which must be drafted in compliance with a number of statutory and regulatory requirements, and must be entered by a court and accepted by the pension administrator before they can become effective.

Because IRAs are not qualified retirement plans (as that term is used in the Internal Revenue Code), they are not proper subjects of QDROs. Many lawyers who do divorce work will try to create a QDRO for an IRA, and many courts will enter them, unaware that the QDRO rules do not apply to IRAs.

The good news is that there is a statutory provision for the transfer of a participant's interest in an IRA, and the rules are much simpler than they are for QDROs. Section 408(d)(6) of the Code governs "transfer incident to divorce". It provides that the transfer does not result in the recognition of income, and that the account thereafter is to be regarded for all purposes under the Code as the IRA of the spouse. That means (among other things) that the funds held in the account cannot be withdrawn before the spouse turns 59½.

The requirements are:
  • The account must be transferred, not distributed. If the funds are paid from the account, it is a distribution, and this is a taxable event. A distribution from the account cannot be rolled over, as with an rollover from a qualified plan to an IRA.
  • The transfer must be ordered by a court, in
  • a decree of divorce
  • a decree of separate maintenance, in states which recognize such decrees
  • a written agreement "incident to" (incorporated in) a judgment of divorce or separate maintenance
  • A written separation agreement or a court's support order which is not incorporated into one of the orders identified above is not sufficient to meet the requirements of Section 408(d)(6).
Otherwise, there are no formalistic requirements. The following is satisfactory language for Michigan residents:
"It is further ordered that the interest of the Husband in the Individual Retirement Account number 94-98334 maintained with the Michigan National Bank is hereby transferred to the Wife and shall be held as her account as provided in Section 408(d)(6) of the Internal Revenue Code."
If it is determined that an account should be split between husband and wife, the IRA should be divided before the transfer is made. An assignment of a partial interest is not recognized under the Code.

The transferred account would best be entitled with a notation of the transfer, e.g., "Susan Smith, as transferee of John Smith". The Social Security number of the spouse should be used, since she will be receiving the distributions once she is eligible.

Wednesday, September 7, 2011

Using life insurance in cottage succession

One of the difficulties with passing ownership of a family cottage to the next generation is that the children of the owners may have different levels of interest and financial ability regarding its use. A child may live far away, making it difficult or impossible to use the cottage. Another may live nearby, and want to use it, but may be financially unable to contribute to the cost of maintenance.

The original purchase of a cottage, as with the purchase of any big-ticket item, is an economic decision. If you are looking at a cottage that will cost you $100,000, you may choose to buy if you want the cottage more than you want to keep your $100,000. You will do so, of course, only if you believe that you have the resources to make the payments that will be needed to keep it in good condition going forward.

Like most owners, you will want your children to enjoy it after you are gone. But what you want and what your children will want, when the time comes, may be very different.

A child who succeeds to the interest of the original buyer through inheritance may not feel he is making an economic decision with immediate consequences. He will soon find, however, that the costs of upkeep are a significant expense to him. And if he is not using it as often as his co-owners, he may resent being expected to share those costs equally.

One way of dealing with the acquisition in an inheritance scenario is to make the issue of succession an immediate economic decision for the beneficiaries by the use of life insurance. Make the beneficiaries decide, at the outset, whether they really want to participate in owning and using the cottage.

Let us assume that D has four children and owns a 100% interest in an LLC whose sole asset is a cottage worth $100,000. He buys insurance on his life with a $100,000 death benefit. The proceeds are payable to the LLC. The LLC is directed to use the funds to buy out the interests of those who do not want to inherit the cottage. The remaining funds will be used to pay for upkeep and repairs.

Using this approach, each child may opt to receive $25,000 in cash if he prefers to do so instead of continuing as a member of the LLC. Each beneficiary will decide at the outset whether a partial interest in the cottage is worth more to him than the $25,000 in cash. The beneficiaries who remain get a better deal: a partial interest in the LLC which owns the cottage and has the remaining funds.

Of course, once the funds are used up, the remaining member(s) will have to contribute to repairs and upkeep.

Friday, September 2, 2011

Focus on a graying America

The Columbia University Graduate School of Journalism's News21 Project has launched Brave Old World, an exploration of the issues and challenges that will be presented as the American population ages. The focus of the site, it appears, will be on health and finance. From the site:

"The team continued to explore the demographic shift that affects the country, traveling to eight states, interviewing gerontologists, economists, biostatisticians and other experts. The stories the reporters produced are told through text, photos, interactive graphics, video and audio. They raise questions about how people in this country live, work and support one another as we age."

The first story of the project is published today at the Washington Post web site: As workforce ages, industries struggle to prepare for wave of retirements

Wednesday, August 31, 2011

Family fight in a country song

Gerry Beyer of the Law Professors Blog Network posts the lyrics to a song from Hell on Heels, by the Pistol Annies, called Family Feud. The song describes a family fighting over the possessions of their recently deceased mother. A snippet:

I'm watching it all go down in shame
Wish the whole house would go up in flames
Who gives a damn about a cedar chest
When we just laid her soul to rest

Tuesday, August 23, 2011

Limited conservatorship?

Florida has an interesting process for assisting older adults: the voluntary guardianship. Rather than the all-or-nothing that applies to a conservatorship in Michigan, the Florida process permits an individual to go to the probate court and designate a voluntary guardian to handle only certain accounts for him or her. The authority to act can be withdrawn at any time.

In Michigan, a conservator is a person designated by the probate court to handle the protected person's money. A guardian handles personal decisions. It appears that the term "guardian" in Florida covers both concepts.

In Michigan, when the court has designated a substitute decision-maker, the protected person's authority on that subject is at an end. The conservator has all the authority to handle the PP's money; the PP has none.

A principle often heard in Michigan is that the court-imposed limitation on a protected person's autonomy should be limited to that which is necessary. Something like the voluntary guardianship concept would be consistent with that goal.

Sunday, August 21, 2011

Financing Medicare

An article by Richard L. Kaplan called Rethinking the Medicare Payroll Tax, posted at SSRN, starts off with a review of how the Medicare program is currently financed.

Part A - standard Medicare, pays hospital expenses and some home health - financed by a 1.45% tax on earned income (wages and salaries), plus another 1.45% on the employer - total 2.9% tax on earned income.

Part B - optional Medicare, pays doctors visits, ambulance, some durable medical equipment. Financed by a monthly premium charged to the beneficiary and deducted from social security benefits, subsidized by general Federal revenues. Premium $115 to $369 per month, depending on annual income levels. The graduation based on income was first introduced in 2006.

Part D - prescription drugs. Financed generally like Part B, but with various premiums based on a number of factors.

The new tax added under the Affordable Care Act is a combination of two items, to be effective in 2013.

1. An increase in the employee portion of the payroll tax from 1.45% to 2.35% for those earning over $200,000/$250,000. The employer contribution is unchanged.
2. A 2.9% tax on investment income (interest and dividends, rents, capital gains) over $200,000/$250,000.

Kaplan goes on to proposed that the payroll tax approach be abolished and that Congress change the Medicare program so that it is financed by general revenues. Don't hold your breath.

Thursday, August 18, 2011

Michigan's "new" state tax on retirement distributions

The article of faith among Republicans appears to be that new taxes of any kind are unacceptable, regardless of why or how. But that is not the case with Michigan's new Republican governor, Rick Snyder. Among the reforms that were put into place this year, the most prominent of which was the abolition of the Michigan Business Tax and its replacement by a state tax on corporate profits, Michigan modified the tax treatment of distributions from pensions and retirement programs.

Michigan has not adopted a new tax. Pension distributions were subject to tax previously, but there was a fairly high exemption. What Michigan has done is significantly lower the exemption.

One justification that has been made for this step is that the exemption of distributions was inconsistent with the overall structure of retirement plans. IRAs and 401(k) plans are built up with untaxed money. The contributions are not taxed at the time they are made. Rather, the funds grow (if the participant is fortunate) and then are taxed only when they are distributed. That is what happens at the Federal level. All such distributions are taxed as ordinary income. At the state level, where other income is taxed at a flat 4.35% after the application of the personal exemption, the distributions from those accounts were not taxed under previous law until they exceeded $45,120 per person, or $90,240 per couple.

The newly-adopted plan has several exceptions and limitations:

  • It does not apply at all to those who will be 67 or older by the end of 2011. For them, the current exemptions will remain in effect.
  • The exemption is reduced to $20,000 per person, $40,000 per couple. For those earning more than $75,000/$150,000, that exemption is phased out.
  • For those who are 60 to 66 by the end of 2011, those figures apply beginning in 2012.
  • For all others, that exemption will apply only after age 67. Any distributions between ages 60 and 67 will not have any exemption other than the small state personal exemption. (The thinking apparently is that most people will not be living on retirement income until age 67.)
  • After age 67, the taxpayer may elect to have the tax apply to his social security benefits instead of pension distributions.
  • Significantly, social security benefits (unless the election is made) and military pensions will remain entirely exempt.

There have been legislative proposals to add police and firefighter pensions to the exempt list.

More: The state's information site.

Monday, August 15, 2011

Responding to Buffett

At Forbes, two brief articles responding to Warren Buffett's call for higher taxes on the wealthy.

Warren Buffett's Very Strange Tax Argument, in which Tim Worstall notes that Buffett's comments ignore the effect of corporate income taxes, which are paid before dividends are paid to shareholders.

The Real Reason Warren Buffett's Taxes Are Low in which Peter Reilly makes a very simple point: Berkshire Hathaway, Buffett's company, simply does not pay dividends at all. The company's famous investment strategy is to buy and hold - seemingly forever.

No dividends, no income to tax. No sale, no capital gains to tax.

Another factor that I have not seen addressed in any article: Buffett is famous for limiting his own salary to $100,000 per year. That would again seriously limit his tax liability. If he were to pay himself a $1 million salary, things could be much different.

Saturday, August 13, 2011

Medicaid and home care

A pair of related stories on NPR on the question of whether the Americans with Disabilities Act requires that Medicaid pay for care at home for those who do not require care in a nursing home environment. The case of Olmstead v. L.C., decided by the U.S. Supreme Court in 1999, is cited in support of that position.

Care At Home: A New Civil Right (Dec 2010)

At 88, A Chance To Be Independent Again (Aug 2011)

Several law review articles on this topic by Michael Perlin, who has a penchant for titles based on Dylan lyrics:

Their Promises of Paradise: Will Olmstead v. L.C. Resuscitate the Constitutional Least Restrictive Alternative Principle in Mental Disability Law?
37 Hous. L. Rev. 999 (2000)

I Ain't Gonna Work on Maggie's Farm No More: Institutional Segregation, Community Treatment, the ADA, and the Promise of Olmstead v. L.C.
17 T. M. Cooley L. Rev. 53 (2000)

What's Good is Bad, What's Bad is Good, You'll Find Out When You Reach the Top, You're on the Bottom: Are the Americans with Disabilities Act (and Olmstead v. L.C.) Anything More Than 'Idiot Wind'
University of Michigan Journal of Law Reform, Vol. 35, Pp. 235-261, 2001-2002

Friday, August 12, 2011

To roll over or not

Most advisors recommend that an employee who departs from a company roll her 401(k) funds into a self-directed IRA. This article from Smart Money provides a few reasons not to follow that standard advice. The conclusion, probably accurate but not very helpful: "There's no universal right answer."

Saturday, August 6, 2011

Packers succession planning

An item of interest to many in the U.P.
These items have a tremendous value, just not much of a monetary value, if any. They can be inherited but they cannot be sold. Proper planning is essential. Packers season tickets have not been available for sale since 1960, and there are currently 87,000 people on the waiting list.

Tuesday, July 26, 2011

Planning for "virtual" assets

In the Fall of 2009, we published an issue of our Personal Planning newsletter entitled Death, Disability and the Online World (PDF), in which we made a number of recommendations and suggestions on the issue of dealing with online assets - e-mail accounts, weblogs, and the individual's presence on any of the expanding number of social media sites.

We ended with this:
"These. . . death and disability issues begin to arise when they were not previously anticipated. As time goes on, we can anticipate that online communities and document custodians will come to add new provisions to deal with the online property of deceased or disabled owners. Facebook’s new initiative is a start, but there are still several needs left unaddressed."
More and similar:
PINs that Needle Families - Wall Street Journal - 7-23-11
South Florida Estate Planning - 7-27-11 - includes materials from his presentation

Wednesday, July 20, 2011

Debts of the decedent

At, Steve Bucci answers a "debt advisor" question from a reader who had accumulated some $35,000 of gambling debts. The reader's father took out $35,000 in "unsecured loans" - i.e., cash advances on credit cards - and had begun paying off those advances, apparently with money from the son. The father then died unexpectedly. The reader's mother knew nothing about the loan arrangement.

The father left no assets and no will. The reader's concern is that the credit card companies would try to collect on the debts from his mother, who does have assets. He wonders if he should "continue to pay on these debts". This suggests that it was the reader, not the father, who had been making the payments on the credit card accounts.

Bucci's answer includes these points:
  • If the parents are residents of a community property state - Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin - then the mother would have a responsibility to follow up on these debts.
  • If they live elsewhere, then she has no legal responsibility for the debt.
  • She may still feel a moral obligation to make good on the debt.
  • She needs to know about the arrangement, because she is likely to be contacted by the creditors, and is likely to be give false information suggesting that she has a legal obligation to continue to pay on the accounts.
  • Both of them should consult with counsel regarding their rights and obligations.
He recommends that "the executor of the estate" make contact with the creditors, explain that the debtor has died, and provide a copy of the death certificate. He overlooks the fact that the father died with no will and no assets. There will not be an estate or an executor (in Michigan, a "personal representative"). But the advice is sound. Any family member can make the contact and provide the certificate.

When a debtor dies, the following applies in Michigan:
  • Any debt which is secured (car loans, mortgages) must still be repaid. If it is not repaid, the property securing the debt can be seized and sold.
  • Any debt which is unsecured must be repaid from the probate assets of the deceased, or from his trust assets.
  • If there are no such assets, then the creditor will not be able to collect.
"Probate assets" refers to any property that was owned by the debtor, in his own name, without any other person as co-owner. If the debtor dies without any probate assets, or without assets passing to others under a trust, then the creditors are out of luck. The death benefits of life insurance policies, money passing under an IRA or other form of pension to a designated beneficiary, or property passing by virtue of joint ownership are not subject to the claims of the creditors of the decedent. The sole possible exception would arise if it can be shown that the decedent took steps to defraud his creditors by moving personal assets into some form of ownership that would not have to respond to his actual and known debts.



Family Succession Planning refers to the use of legal documents and recognized strategies to ensure that your property and possessions will pass to your loved ones after you are gone, and to provide for management of your own affairs in the event of temporary or permanent disability.

The practice includes:
  • Wills
  • Intestate succession
  • Real estate ownership - joint tenancy, life estates, LLCs
  • Trusts
  • Conservatorships and Guardianships
  • Powers of attorney
  • Medical directives and patient advocate documents
  • Lifetime gifts to children, grandchildren and others
  • Probate
  • Estate administration
  • Trust administration
  • Asset protection
  • Charitable bequests
  • Retirement accounts (pensions, IRAs, 401(k) plans)
  • Retirement planning
  • Elder law
  • Medicaid planning
  • Medicare issues
Because a small business is most often a family business, Business Succession Planning is also a significant topic that we will address here.

Site editor:
M. Sean Fosmire, Attorney at Law
1440 West Ridge Street
Marquette, Michigan 49855
(906) 226-2524
sfosmire AT garanlucow DOT com

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