586.498.8400
Contact Us

Keating Law Blog

Tuesday, October 22, 2013

Changing Uses for Bypass Trusts

Changing Uses for Bypass Trusts

Every year, each individual who dies in the U.S. can leave a certain amount of money to his or her heirs before facing any federal estate taxes. For example, in 2013, a person who died could leave $5.25 million to his or her heirs (or a charity) estate tax free, and everything over that amount would be taxable by the federal government. Transfers at death to a spouse are not taxable.

Therefore, if a husband died owning $8 million in assets in 2013 and passed everything to his wife, that transfer was not taxable because transfers to spouses at death are not taxable. However, if the wife died later that year owning that $8 million in assets, everything over $5.25 million (her exemption amount) would be taxable by the federal government. Couples would effectively have the use of only one exemption amount unless they did some special planning, or left a chunk of their property to someone other than their spouse.

Estate tax law provided a tool called “bypass trusts” that would allow a spouse to leave an inheritance to the surviving spouse in a special trust. That trust would be taxable and would use up the exemption amount of the first spouse to die. However, the remaining spouse would be able to use the property in that bypass trust to live on, and would also have the use of his or her exemption amount when he or she passed. This planning technique effectively allowed couples to combine their exemption amounts.

For the year 2013, each person who dies can pass $5.25 million free from federal estate taxes.  This exemption amount is adjusted for inflation every year.  In addition, spouses can combine their exemption amounts without requiring a bypass trust (making the exemptions “portable” between spouses). This change in the law appears to make bypass trusts useless, at least until Congress decides to remove the portability provision from the estate tax law.

However, bypass trusts can still be valuable in many situations, such as:

(1)  Remarriage or blended families. You may be concerned that your spouse will remarry and cut the children out of the will after you are gone. Or, you may have a blended family and you may fear that your spouse will disinherit your children in favor of his or her children after you pass. A bypass trust would allow the surviving spouse to have access to the money to live on during life, while providing that everything goes to the children at the surviving spouse’s death.

(2)  State estate taxes. Currently, 13 states and the District of Columbia have state estate taxes. If you live in one of those states, a bypass trust may be necessary to combine a couple’s exemptions from state estate tax.

(3)  Changes in the estate tax law. Estate tax laws have been in flux over the past several years. What if you did an estate plan assuming that bypass trusts were unnecessary, Congress removed the portability provision, and you neglected to update your estate plan? You could be paying thousands or even millions of dollars in taxes that you could have saved by using a bypass trust.

(4)  Protecting assets from creditors. If you leave a large inheritance outright to your spouse and children, and a creditor appears on the scene, the creditor may be able to seize all the money. Although many people think that will not happen to their family, divorces, bankruptcies, personal injury lawsuits, and hard economic times can unexpectedly result in a large monetary judgment against a family member.

Although it may appear that bypass trusts have lost their usefulness, there are still many situations in which they can be invaluable tools to help families avoid estate taxes.


Tuesday, October 15, 2013

C-Corporation Vs. S-Corporation

C-Corporation Vs. S-Corporation: Which Structure Provides the Best Tax Advantages for Your Business?

The difference between a C-Corporation and an S-Corporation is in the way each is taxed. Under the law, a corporation is considered to be an artificial person. Shareholders who work for the corporation are employees; they are not “self-employed” as far as the tax authorities are concerned.

The C-Corporation

In theory, before a C-corporation distributes profits to shareholders, it must pay tax on the income at the corporate rate. Then, leftover profits are distributed to the shareholders as dividends, which are then treated as investment income and taxed to the shareholder. This is the “double taxation” you may have heard about.

C-Corporations enjoy many tax-related advantages :

  • Income splitting is the division of income between the corporation and its shareholders in a way that lowers overall taxes, and can avoid or significantly reduce the potential impact of “double taxation.” By working with a knowledgeable tax advisor, you can determine exactly how much money the corporation should pay you as an employee to ensure the lowest tax bill at the end of the year.
  • C-Corporations enjoy a wider range of deductible expenses such as those for healthcare and education.  
  • A shareholder can borrow up to $10,000 from a C-Corporation, interest-free. Tax-free loans are not available to sole proprietors, partners, LLC members or S-Corporation shareholders.

S-Corporation
S-Corporations pass income through to their shareholders who pay tax on it according to their individual income tax rates. To qualify for S-Corporation status, the corporation must have less than 100 shareholders; all shareholders must be individual U.S. citizens, resident aliens, other S-Corporations, or an electing small business trust; the corporation may have only one class of stock; and all shareholders must consent in writing to the S-Corporation status.

Depending on your situation, an S-Corporation may be more advantageous:

  • Electing S-Corporation tax treatment eliminates any possibility of the “double taxation” referenced above. S-Corporations pay no federal corporate income tax, but must file annual tax returns. Because losses also flow through, shareholders who are active in the business can take most business operating losses on their individual tax returns.
  • S-Corporations must still file and pay employment taxes on employees, as with a C-Corporation. An S-Corporation may not retain earnings for future growth without the shareholders paying tax on them. The taxable profits of an S-Corporation pass through to the shareholders in the year they are earned.
  • S-Corporations cannot provide the full range of fringe benefits that a C-Corporation can.

Friday, October 4, 2013

Probate vs. Non-Probate Property

Planning Pitfall: Probate vs. Non-Probate Property

Transfer of property at death can be rather complex.  Many are under the impression that instructions provided in a valid will are sufficient to transfer their assets to the individuals named in the will.   However, there are a myriad of rules that affect how different types of assets transfer to heirs and beneficiaries, often in direct contradiction of what may be clearly stated in one’s will.

The legal process of administering property owned by someone who has passed away with a will is called probate.  Prior to his passing, a deceased person, or decedent, usually names an executor to oversee the process by which his wishes, outlined in his Will, are to be carried out. Probate property, generally consists of everything in a decedent’s estate that was directly in his name. For example, a house, vehicle, monies, stocks or any other asset in the decedent’s name is probate property. Any real or personal property that was in the decedent’s name can be defined as probate property.  

The difference between non-probate property and probate centers around whose name is listed as owner. Non-probate property consists of property that lists both the decedent and another as the joint owner (with right of survivorship) or where someone else has already been designated as a beneficiary, such as life insurance or a retirement account.  In these cases, the joint owners and designated beneficiaries supersede conflicting instructions in one’s will. Other examples of non-probate property include property owned by trusts, which also have beneficiaries designated. At the decedent’s passing, the non-probate items pass automatically to whoever is the joint owner or designated beneficiary.

Why do you need to know the difference? Simply put, the categories of probate and non-probate property will have a serious effect on how plan your estate.  If you own property jointly with right of survivorship with another individual, that individual will inherit your share, regardless of what it states in your will.  Estate and probate law can be different from state-to-state, so it’s best to have an attorney handle your estate plan and property ownership records to ensure that your assets go to the intended beneficiaries.


Thursday, October 3, 2013

James Gandolfini Estate Gets Whacked

Wise Guy's Estate Plan Not So Wise

Most memorably known as mob boss Tony Soprano on the
HBO series The Sopranos, actor James Gandolfini died in
June at age 51. He left behind an estate worth an estimated
$70 million. But to many advisors, the way he divided his
estate would have gotten the fictional wise guy knocked
off for not shielding his millions from the IRS.
In Gandolfini’s will, he left $1.6 million to various friends
and relatives. (http://tinyurl.com/knyhf4w) He also left a
$7 million life insurance policy to a teenage son from a
previous marriage. He split the remainder among four
people: 30 percent each to his two sisters, 20 percent to his
11-month-old daughter and 20 percent to his wife.
It’s the combined 80 percent that didn’t go to his wife that
has experts calling Gandolfini’s planning clumsy because
of a possible tax hit. Up to $30 million could be taken
through federal and state estate taxes, says Forbes,.
(http://tinyurl.com/mxw24f5)


Whether these figures are true, only time will tell. But in
the meantime, Gandolfini’s example offers a cautionary
tale for your clients when it comes to planning.


Impact on Widow
Gandolfini’s widow's portion is safe from federal estate
taxes because federal law allows unlimited tax-free
transfers to surviving spouses, according to NBC News
Business. (http://tinyurl.com/kdn3o23) But other estate
bequests more than the $5.25 million lifetime exemption
are subject to federal estate taxes. The distribution to his
sisters and daughter with his second wife could be subject
to a combined federal and state tax rate of 55 percent.


Family drama due to Blended Family?
Besides tax ramifications, there are other considerations
clients should take into account. One potential problem is
treating children differently, The Wall Street Journal says.
(http://tinyurl.com/mz9zerc) By leaving different
inheritances for children in a blended family — without an
explanation— it could cause tension down the road.
To clear misconceptions, clients can draw up an “ethical
will,” or “legacy letter” that spells out what they want to
happen when they’re gone. It isn’t legally binding, but it
can provide insight into the reasoning of an estate plan.
Another red flag in Gandolfini’s will: He left his Italian
estate to his two children together, The Journal says. They
are allowed to sell it after they both turn 25, but the will
doesn't mention how it will be maintained. How could
anyone reasonably expect a 25-year-old — let alone two
children — to effectively maintain a lavish Italian estate?
One last issue, The Journal says, is that the actor’s will
gave his baby daughter control of her share when she turns
21. That’s too young. Our suggestion to clients is to name
children as beneficiaries of a trust that's managed by a
financial professional. Control can be handed over when
they are older or accomplish certain goals (i.e. a degree).


Other considerations
Gandolfini's missteps could have been avoided if he had:


• Kept it private. If it doesn’t need to go to probate,
keep it that way. If Gandolfini had planned better,
then his estate probably wouldn’t have hit news
sites, tabloids — or this newsletter!


• Used a revocable trust. Placing assets into a trust
avoids probate, helps with privacy and improves
control and protection issues we've mentioned.


• Used tax-efficient gifts and transfers. Poor
planning might cost the actor's estate over 30
million in taxes. His assets could have been
redirected to beneficiaries with better planning.
We hope this information was useful to you and your
clients. As always, if you have questions, call our office.


Thomas H. Keating has
actively practiced law for more than 30
years, focusing on business
and estate planning, with
emphasis on the automotive
and construction industries.
Mr. Keating belongs to the
State Bar of Michigan, the
American Bar Association
Section on Real Property,
Probate and Trust Law, the
State Bar of Michigan
Section on Probate and Estate Planning, NAIFA, and the
Michigan Forum of Estate Planning Attorneys. He is the
founder of the Financial and Estate Planning Keeping
Current Series as well as the East Side Business and
Financial Forum and is a member of the Financial and
Estate Planning Council of Detroit. Mr. Keating is a
member of WealthCounsel, a national forum of estate and
business planning professionals, multiple chambers of
commerce, and industry associations, and is a frequent
speaker at estate planning forums around Michigan. Mr.
Keating is co-author of Strictly Business, book written for
those facing business and succession planning challenges.

 


Thursday, September 26, 2013

Living Trusts and Probate

Living Trusts & Probate Avoidance

You want your money and property to go to your loved ones when you die, not to the courts, lawyers or the government. Unfortunately, unless you’ve taken proper estate planning, procedures, your heirs could lose a sizable portion of their inheritance to probate court fees and expenses. A properly-crafted and “funded” living trust is the ideal probate-avoidance tool which can save thousands in legal costs, enhance family privacy and avoid lengthy delays in distributing your property to your loved ones

What is probate, and why should you avoid it? Probate is a court proceeding during which the will is reviewed, executors are approved, heirs, beneficiaries, debtors and creditors are notified, assets are appraised, your debts and taxes are paid, and the remaining estate is distributed according to your will (or according to state law if you don’t have a will). Probate is costly, time-consuming and very public.

A living trust, on the other hand, allows your property to be transferred to your beneficiaries, quickly and privately, with little to no court intervention, maximizing the amount your loved ones end up with.

A basic living trust consists of a declaration of trust, a document that is similar to a will in its form and content, but very different in its legal effect. In the declaration, you name yourself as trustee, the person in charge of your property. If you are married, you and your spouse are co-trustees. Because you are trustee, you retain total control of the property you transfer into the trust. In the declaration, you must also name successor trustees to take over in the event of your death or incapacity.

Once the trust is established, you must transfer ownership of your property to yourself, as trustee of the living trust. This step is critical; the trust has no effect over any of your property unless you formally transfer ownership into the trust. The trust also enables you to name the beneficiaries you want to inherit your property when you die, including providing for alternate or conditional beneficiaries. You can amend your trust at any time, and can even revoke it entirely.

Even if you create a living trust and transfer all of your property into it, you should also create a back-up will, known as a “pour-over will”. This will ensure that any property you own – or may acquire in the future – will be distributed to whomever you want to receive it. Without a will, any property not included in your trust will be distributed according to state law.

After you die, the successor trustee you named in your living trust is immediately empowered to transfer ownership of the trust property according to your wishes. Generally, the successor trustee can efficiently settle your entire estate within a few weeks by filing relatively simple paperwork without court intervention and its associated expenses. The successor trustee can solicit the assistance of an attorney to help with the trust settlement process, though such legal fees are typically a fraction of those incurred during probate.
 


Monday, September 16, 2013

Serving as an Executor?

What’s Involved in Serving as an Executor?

An executor is the person designated in a Will as the individual who is responsible for performing a number of tasks necessary to wind down the decedent’s affairs. Generally, the executor’s responsibilities involve taking charge of the deceased person’s assets, notifying beneficiaries and creditors, paying the estate’s debts and distributing the property to the beneficiaries. The executor may also be a beneficiary of the Will, though he or she must treat all beneficiaries fairly and in accordance with the provisions of the Will.

First and foremost, an executor must obtain the original, signed Will as well as other important documents such as certified copies of the Death Certificate.  The executor must notify all persons who have an interest in the estate or who are named as beneficiaries in the Will. A list of all assets must be compiled, including value at the date of death. The executor must take steps to secure all assets, whether by taking possession of them, or by obtaining adequate insurance. Assets of the estate include all real and personal property owned by the decedent; overlooked assets sometimes include stocks, bonds, pension funds, bank accounts, safety deposit boxes, annuity payments, holiday pay, and work-related life insurance or survivor benefits.

The executor is responsible for compiling a list of the decedent’s debts, as well. Debts can include credit card accounts, loan payments, mortgages, home utilities, tax arrears, alimony and outstanding leases. All of the decedent’s creditors must also be notified and given an opportunity to make a claim against the estate.

Whether the Will must be probated depends on a variety of factors, including size of the estate and how the decedent’s assets were titled. An experienced probate or estate planning attorney can help determine whether probate is required, and assist with carrying out the executor’s duties. If the estate must go through probate, the executor must file with the court to probate the Will and be appointed as the estate’s legal representative.  Once the executor has this legal authority, he or she must pay all of the decedent’s outstanding debts, provided there are sufficient assets in the estate. After debts have been paid, the executor must distribute the remaining real and personal property to the beneficiaries, in accordance with the wishes set forth in the Will. Because the executor is accountable to the beneficiaries of the estate, it is extremely important to keep complete, accurate records of all expenditures, correspondence, asset distribution, and filings with the court and government agencies.

The executor is also responsible for filing all tax returns for the deceased person including federal and state income tax returns and estate tax filings, if applicable. Additional tasks may include notifying carriers for homeowner’s and auto insurance policies and initiating claims on life insurance policies.

The executor is entitled to compensation for his or her services.  This fee varies according to the estate’s size and may be subject to review depending on the complexity as well as the time and effort expended by the executor.   


Thursday, September 12, 2013

Don't Bet the House on Tax Reform!

 

Don't Bet the House on Tax Reform!

If you or your clients are waiting for meaningful tax reform measures to be signed into law this year, don't hold your breath.

The prospects are, in a word, dim. This isn't 1986, when President Reagan and House Speaker Tip O'Neill got together to overhaul the tax system. The chasm that divides the political sides is much greater than it was nearly 30 years ago, and The Washington Post says that's one of the reasons why passing meaningful reform this year will be difficult - if not impossible. Next year might hold a better promise of reform, but the issues that make it unlikely today will have to be dealt with before it can happen. (http://tinyurl.com/lby3cgg)

Three problems

Foremost among the sticking points is how the next tax codes will divide the money. Republicans, for the most part, want a new tax structure to remain revenue neutral, The Post reports, as was agreed upon in the 1980s. Neutral, in tax code political terms, means lowering the corporate tax rate and closing loopholes instead of generating money that could be used to plug holes in federal budget, support infrastructure or pay down the debt.

The process is also part of the problem. Sen. Max Baucus (D-Mont.) and Rep. David Camp (R-Mich.), two reform champions, haven't put together a full-blow bill, which the framers of the 1986 law did. Instead, Baucus and Camp have gone with a so-called "blank slate" approach in which special interests must justify their inclusion in a new bill. With so many competing interests to be weighed against each other, a political stalemate is nearly inevitable. Keeping corporate income tax within U.S. borders - and taxing it - is another thorny issue. With the growth in multinational companies and the global economy in the past 30 years, billions of tax dollars from U.S. companies are never collected. Republicans have pushed for a "territorial tax," and President Obama has shown some openness to it, The Post reports, but creating one that doesn't lose the treasury a lot of revenue will be difficult.

Other issues

Political races, specifically Senate elections in 2014, call into question how much meaningful tax reform can happen anyway, The Christian Science Monitor says. (http://tinyurl.com/k83xj9d) Sen. Mitch McConnell (R-Ky.) is facing a tea party candidate for the GOP nomination. There's also a credible Democrat who could pose a problem in the November 2014 election, something McConnell hasn't seen since first elected in 1984. If a tax reform bill were to pass, McConnell would have to defend his vote, and no matter what the vote was, opponents would use it against him. That's just politics. The Post says public opinion is partly to blame. Only 50 percent of Americans are unhappy with income tax rates, making the status quo easier for politicians to maintain. In the 1980s, more than 60 percent of the public was unhappy, and politicians - fearful of an angry electorate come voting time - made sure a bill was passed. Current administration idle Finally, President Obama hasn't tied himself to tax reform the way Reagan did. While Reagan toured the country, giving speeches with soaring rhetoric to drum up support, Obama has yet to put the full weight of the presidency into getting a deal done, The Post reports. Without a significant push from Obama to keep any deal moving forward or jump-start it when it looks dead, tax reform in 2013 is more theory than reality. We hope this information was useful to you and helps your clients and their families.

If you have a specific case or a question, don't hesitate to call our office.

 

 

 

 

 


Friday, September 6, 2013

Umbrella Insurance

Umbrella Insurance: What It Is and Why You Need It

Lawsuits are everywhere. What happens when you are found to be at fault in an accident, and a significant judgment is entered against you? A child dives head-first into the shallow end of your swimming pool, becomes paralyzed, and needs in-home medical care for the rest of his or her lifetime. Or, you accidentally rear-end a high-income executive, whose injuries prevent him or her from returning to work. Either of these situations could easily result in judgments or settlements that far exceed the limits of your primary home or auto insurance policies. Without additional coverage, your life savings could be wiped out with the stroke of a judge’s pen.

Typical liability insurance coverage is included as part of your home or auto policy to cover an injured person’s medical expenses, rehabilitation or lost wages due to negligence on your part. The liability coverage contained in your policy also cover expenses associated with your legal defense, should you find yourself on the receiving end of a lawsuit. Once all of these expenses are added together, the total may exceed the liability limits on the home or auto insurance policy. Once insurance coverage is exhausted, your personal assets could be seized to satisfy the judgment.

However, there is an affordable option that provides you with added liability protection. Umbrella insurance is a type of liability insurance policy that provides coverage above and beyond the standard limits of your primary home, auto or other liability insurance policies. The term “umbrella” refers to the manner in which these insurance policies shield your assets more broadly than the primary insurance coverage, by covering liability claims from all policies “underneath” it, such as your primary home or auto coverage.

With an umbrella insurance policy, you can add an addition $1 million to $5 million – or more – in liability coverage to defend you in negligence actions. The umbrella coverage kicks in when the liability limits on your primary policies has been exhausted. This additional liability insurance is often relatively inexpensive in comparison to the cost of the primary insurance policies and potential for loss if the unthinkable happens.

Generally, umbrella insurance is pure liability coverage over and above your regular policies. It is typically sold in million-dollar increments. These types of policies are also broader than traditional auto or home policies, affording coverage for claims typically excluded by primary insurance policies, such as claims for defamation, false arrest or invasion of privacy.
 


Wednesday, August 21, 2013

Coordinating Property Ownership and Your Estate Plan

When planning your estate, you must consider how you hold title to your real and personal property. The title and your designated beneficiaries will control how your real estate, bank accounts, retirement accounts, vehicles and investments are distributed upon your death, regardless of whether there is a will or trust in place and potentially with a result that you never intended.

One of the most important steps in establishing your estate plan is transferring title to your assets. If you have created a living trust, it is absolutely useless if you fail to transfer the title on your accounts, real estate or other property into the trust. Unless the assets are formally transferred into your living trust, they will not be subject to the terms of the trust and will be subject to probate.


Read more . . .


Tuesday, August 13, 2013

Should you withdraw your Social Security benefits early?

You don’t have to be retired to dip into your Social Security benefits which are available to you as early as age 62.  But is the early withdrawal worth the costs?

A quick visit to the U.S. Social Security Administration Retirement Planner website can help you figure out just how much money you’ll receive if you withdraw early. The benefits you will collect before reaching the full retirement age of 66 will be less than your full potential amount.


Read more . . .


Thursday, August 1, 2013

Top 3 Real Estate Tips for Small Business

Top 3 Real Estate Tips for Small Businesses

The only real estate transaction most small businesses engage in is to enter into a lease for commercial space. Whether you are considering office, manufacturing or retail space, the following three tips will help you navigate the negotiation process so you can avoid costly mistakes.

 

“Base Rent” is Not the Only Rent You Will Pay

Most prospective tenants focus their negotiation efforts on the “base rent,” the fixed monthly amount you will pay under the lease agreement. You may have negotiated a terrific deal on the base rent, but the transaction may not be the best value once other charges are factored in. For example, many commercial lease agreements are “triple net,” meaning that the tenant must also pay for insurance, taxes and other operating expenses. When negotiating “triple net,” ensure you aren't being charged for expenses that do not benefit your space, and that you are paying an amount that is in proportion to the space you utilize in the building. Another provision to watch for is tenant's responsibility to also pay a pro rata share of increases in real estate taxes. 

 

There’s No Such Thing as a “Form Lease”

Most commercial property owners and managers offer prospective tenants a pre-printed lease containing your name and various terms. They present these documents often with a rider, and adamantly explain that it is the landlord’s “typical form lease.” This, however, does not mean you cannot negotiate. Review every provision in the agreement, bearing in mind that all terms are open for discussion and negotiation. Pay particular attention to the specific needs of your business that are not addressed in the “form lease.”

 

Note the Notice Requirements

Your lease agreement may contain many provisions that require you to send notices to the landlord under various circumstances. For example, if you wish to renew or terminate your lease at the end of the term, you will likely owe a notice to the landlord to that effect, and it may be due much earlier than you think – sometimes up to a year or more. Prepare a summary of the key notice requirements contained in your lease agreement, along with the due dates, and add key dates to your calendar to ensure you comply with all notice requirements and do not forfeit any rights under your lease agreement.

 


Archived Posts

2019
2018
2017
2014
2013



© 2019 Keating Law, PLC | Disclaimer
24055 Jefferson Avenue, #101, St. Clair Shores, MI 48080
| Phone: 586-498-8400

Overview of Services | Trust Administration | Living Trusts and Wills | Business Law | Estate Planning | Advanced Estate Planning | Asset Protection | Probate & Estate Administration | Elder Law / Medicaid Planning | Civil Litigation | | Resources | Attorney Profile

Attorney Website Design by
Zola Creative