Social Security marriage wrinkles

1. Are you approaching age 60?
2. Are you currently unmarried? 
3. Were you previously married for more than 10 years?
4. Have you been divorced for more than two years?
5. Did your ex-spouse have higher lifetime earnings than you did?

If you answered yes to all of these questions, or in some cases all but the second, then you may be entitled to a social security benefit payment that is higher than the benefit you would receive based on your own earnings.

If your ex-spouse is alive, you will be entitled to a benefit of one-half of what his or her benefit is, if that figure is higher than your own, beginning as early as age 60, or in some cases even age 50 if you are disabled. Taking that benefit will not reduce the benefit that the ex-spouse and his/her current spouse will receive.

If your ex-spouse is deceased, you will be entitled to a benefit that is 100% of his/her benefit, under the same conditions.

Normally, this benefit is available only if you have not remarried. If you remarry after age 60, however, it is available.

There are other wrinkles as well - other very rare exceptions to this divorced widow(er)'s remarriage penalty that will apply to those who remarry before age 60, based on the Social Security status of the new spouse. Contact us for additional details, if desired.

Declutteration

The Swedish term Döstädning, used by Margareta Magnusson in this book, literally means "death cleaning," a method to "declutter your home and minimize your worldly possessions so your loved ones don’t have to do it for you" after you are gone.

It is said by one reviewer to refer to "to putting your life in order—years or even decades before it becomes urgent," although the approach can also be useful for those of us who are young and healthy, just as an approach to simplifying our lives.

The Gentle Art of Swedish Death Cleaning: How to Free Yourself and Your Family from a Lifetime of Clutter
to be released in January 2018

IRS discontinues MyRA

The MyRA program that we described in our November 2015 post has now been cancelled by the IRS, citing "extremely low" participation by taxpayers.

Protecting against real estate fraud

Several Registers of Deeds in Michigan, including Marquette County, now offer a free Property Fraud Alert service. This will send you an alert any time that a document relating to your home or other real property is filed.

Surprising as it may seem, one of the ways that identity thieves can defraud banks and disrupt the accounts of individuals is to apply for a home equity line of credit in the name of a homeowner, without his knowledge. When a mortgage or other document is recorded, there is no legal requirement that notice given to the landowner that the recording has taken place. (The Register of Deeds will return the document, after recording, to the address as directed on the document itself.)

How often does this happen? The answer is not clear. There are several known varieties of mortgage fraud, and the reports indicate that this one is relatively uncommon. But it has been reported in several jurisdictions. 

If a fraudulent mortgage is given to a lender by a fraudster pretending to be the homeowner, there can be a long delay before it becomes apparent that the damage has been done. The thief will be long gone, and the issuing bank will often have accumulated a number of missing payments, before the issue comes to the attention of the homeowner. The first clue can be the discovery that the homeowner's credit rating has been seriously impaired. The work needed to convince the bank that the mortgage it thinks it holds was not in fact executed by the homeowner can take months.

The Property Fraud Alert service will provide a notice, by email or by telephone, of any filing made in the name of the subscribing participant. This will give him or her early notice and allow for corrective action before the problem grows to unmanageable proportions.

Only 13 of Michigan's 83 counties offer this free service. In the Upper Peninsula, this includes Marquette and Houghton counties.

If you want to find out right now what real estate documents are on file under your name, you can visit the Marquette County Register of Deeds DirectSearch page.

Court confirms creditor protection for life insurance

The Michigan Court of Appeals has issued a decision confirming that all elements of a life insurance policy, including the cash value of a whole life or universal life policy, are exempt from levy by a judgment creditor.

The plaintiff sued the defendant - for what is not disclosed - and recovered a judgment in the amount of $2.5 million. Plaintiff sought a writ of garnishment seeking to have the Prudential Insurance Company turn over the cash value of a policy that had been sold to the defendant. Defendant objected to the request.

MCL 500.2207 protects life insurance policies from claims of this nature by creditors. But the plaintiff argued that this section was intended to protect only the death benefit that is payable to the beneficiaries named by the insured, money that the insured himself does not own and can not reach while he is still alive. The cash value, the plaintiff argued, is fully available to the insured and can be taken out by him at any time, although this would reduce the total amount payable under the policy to the beneficiary after the insured is gone.

The Court of Appeals rejected that argument, ruling that the intent of the Legislature was to protect the entirety of the policy. One important point that it noted was that the cash value, if untouched during the insured's lifetime, will add to the recovery by the beneficiary. Conversely, allowing a creditor to attach the cash value would diminish the amount ultimately received by the beneficiary.

DC Mex Holdings v Affordable Land, LLC, decided July 25, 2017

CFPB resources for clients

The Consumer Financial Protection Bureau is a Federal agency that was established under the Dodd-Frank Act in 2010. Its Ask CFPB page provides information on a number of financial topics and answers to questions that people have asked the agency over the years. If you have a question or issue, this page is often a good source of information that can prepare you before you consult with us about the issue.

Similarly, CFPB's Resources for Older Adults and their Families page provides useful information, including “Protecting against fraud and financial exploitation” and “Tools for financial security as you age.”

Asset protection trusts in Michigan

Michigan has passed a new Qualified Dispositions in Trust Act, joining a small number of states that allow an individual to create a self-settled asset protection trust.

Previously, an asset protection trust could not be self-settled in Michigan. Another person, such as a parent or grandparent, could place property into an irrevocable trust, grant the trustee the power to make discretionary decisions only, and thereby prevent the beneficiary's creditors from having any access to the trust property. Suppose that Ben's grandmother creates such a trust with assets of $500,000. If Ben cannot require the trustee to make a distribution from the trust, neither can his creditors. But Ben could not accomplish the same thing with $500,000 of his own money. If he tried to do so, even though the trust would be valid under Michigan law, it would not be effective to keep the trust property away from Ben's creditors.

His option would be to create the trust under the laws of another state or another nation that permit the creation of self-settled asset protection trusts. That is why wealthy people would often set up "offshore" accounts and trusts in places like Bermuda or the Cayman Islands.

The new Act changes that. Now, an individual can create his own asset protection trust, and he can do it right here in Michigan. So long as the requirements of the Act are followed, it will be valid and it will be effective to prevent creditors from gaining access to the funds.

The requirements include:

• When transferring property to the trust, the person transferring it must sign an affidavit that certifies:

• (a) The transferor has full right, title, and authority to transfer the property to the trust.
• (b) The transfer of the property to the trust will not render the transferor insolvent.
• (c) The transferor does not intend to defraud a creditor by transferring the property to the trust.
• (d) The transferor does not know of or have reason to know of any pending or threatened court actions against the transferor, except for those court actions identified by the transferor on an attachment to the affidavit.
• (e) The transferor is not involved in any administrative proceedings, except for those administrative proceedings identified on an attachment to the affidavit.
• (f) The transferor is not currently in arrears on a child support obligation by more than 30 days.
• (g) The transferor does not contemplate filing for relief under the bankruptcy code, 11 USC 101 to 1532.
• (h) The property being transferred to the trust was not derived from unlawful activities. 
  
  
  Creditors of the settlor may "avoid" (reverse) that transfer within two years after it is made, but only under certain conditions:

• If the claim arises after the transfer is made, the creditor must show that the transferor had an actual intent to defraud the creditor, and the claim must be brought within the first two years after the transfer was made.
• If the claim arose before the transfer is made, the creditor also has one year after he does or reasonably can discover the fact of the transfer to assert the claim.
• Any such claim must be made under the Fraudulent Transfers Act, with the new amendments made to that Act.
• All such claims must be brought before the probate court.
• The creditor must establish the fraudulent intent by clear and convincing evidence.

There are some uncertainties. The first deals with the effect of a false statement in the affidavit. Would that false statement invalidate the trust or simply result in a decision that the property for which the false affidavit was given would not enjoy the protections under the Act?  

A more subtle issue also arises. Banks and credit unions are familiar with revocable trusts and are usually willing to lend money and take a mortgage on land owned under a trust, knowing that the land used to secure the loan can be foreclosed if the trustee does not keep up with the payments. But it is not clear how many financial institutions would be willing to extend a loan to a trustee who has the power but not the obligation to use trust property to make payments on the loan. Further, the right of the lender to enter a judgment against the borrower for any funds still owed after the land and home are sold after foreclosure - the "deficiency judgment" - would be futile when the court will not allow the bank as judgment creditor to have access to the trust property to satisfy that judgment.

In our area, investigation discloses that at least two banks will simply not make residential mortgage loans to the trustees of an irrevocable trust. Although perhaps overbroad, this policy has the merit of being both easy to understand and easy to apply. 

These and other complications will arise as practitioners adapt themselves to this new creature under Michigan law.

The change

Effective March 15, I am ending my affiliation with the law firm of Garan Lucow Miller, P.C. and will be thereafter associated with the Kitch law firm in its Marquette office. I will continue to be available to clients in Marquette and surrounding communities to assist with personal and family succession planning, probate and estate issues, wills, health care directives, real estate matters, trusts and trust administration, IRA and retirement account planning, Social Security planning, contested probate matters, and similar issues. I appreciate the confidence that Marquette County residents have had in my services, and I look forward to being able to assist with your needs in the future. 

All client files in this area of practice will continue to be maintained by me with my new law firm. 

Contact information after March 15: 

M. Sean Fosmire 
Kitch Drutchas Wagner Valitutti & Sherbrook, P.C.
1440 West Ridge Street, Suite C
Marquette, Michigan 49855
(906) 228-0001

Note that I will be working in the same office (behind Shopko) that I have been in for the last 15 years. 

Planning for digital assets

Joe Kissell, who has written numerous books in this series, has written Take Control of Your Digital Legacy, a guide to planning for digital and online assets. From the introduction:

"This book walks you through the process of digital estate planning. It helps you identify the important information you may want to pass on to future generations, document your wishes in detail, and make practical decisions about preserving your data."

The book is available as an electronic books, in PDF, EPUB, or Mobi format, for $15 from Take Control Books. 

Expected changes to inherited IRAs

Included in the Retirement Enhancement and Savings Act introduced last year is a proposal to modify the ability of a non-spouse designated beneficiary of an IRA or other retirement account to take mandatory distributions, after the death of the participant (the worker whose earnings originally funded the account), over a "stretch" period based on the life expectancy of that beneficiary.

This idea has been raised, in one form or another, several times in the past few years, by Federal officials eager to accelerate the release of these funds as distributions of ordinary income that will generate tax revenue. Most of the proposals made by the outgoing Obama administration had called for the outright elimination of the "stretch" distribution for all funds payable to a non-spouse beneficiary.

This more recent proposal offers more of a compromise. It would provide:

• The current right of the spouse of the participant to treat the account as his or her own after the participant's death to remain unchanged.   
• The current ability of a non-spouse beneficiary to take distributions from the account based on his or her own life expectancy to remain in effect for the first $450,000 in all accounts owned by him. 
• For amounts over $450,000, they are to be subject to a much faster distribution schedule. All such funds must be distributed, as ordinary income, within five years after the participant has died. 

On request, we can provide a model payout schedule that will demonstrate, for a given set of retirement accounts, how this proposal would affect distributions.

Knowledgeable observers expect that this proposal or something close to it has a good chance of passing in 2017. At this point, the bill has been approved by the Senate Finance Committee. There are still several steps needed before it is passed and enacted.

How much additional revenue this proposal would generate is uncertain. Commentators familiar with the issue have pointed out that most non-spouse beneficiaries do not leave the funds in place to continue to grow over the "stretch" period. Most, they say, take the money out, pay the tax on it, and spend it.