Topics included in this issues:
Generational Considerations in Estate and Business Planning
Estate planning and business management involve individuals in multiple generations. Research has shown that adults living today fall into four generational categories, each of which has unique characteristics regarding money management, lifestyle, worth ethic, and communication style. While there are always exceptions to every rule, having an understanding of the general characteristics of each generation can be an invaluable tool to make your planning more effective and successful.
The four generational groups are roughly defined as follows:
The Mature generation lived through the Great Depression and World War II, and its values were fashioned accordingly. Matures are known for their dedication, discipline, respect for authority, and willingness to sacrifice. Typically individuals in this generation are loyal to employers and other local institutions. Matures tend to be polite and formal in their communications. They are famous for their conservative approach to finances and often find satisfaction in simple rewards.
Baby Boomers have an entirely distinct set of generational characteristics that were cultivated in the turbulent 1960s, when they came of age. Boomers are known for being positive, team oriented, innovative and somewhat rebellious. They are extremely dedicated to their jobs, and often described as workaholics. Interpersonally, Boomers are more casual and intimate than Matures, and the Civil Rights and feminist movements made them more politically responsive than their parents. As a group, Boomers are bigger spenders than the Matures, and Boomers also appreciate expensive rewards and public recognition for their efforts.
Generation X-ers embrace yet another set of values. X-ers were the first generation of latch key children, and they are known for their independence. They also tend to be skeptical of authority, and eager to eliminate unnecessary formalities. Generation X-ers are straightforward, casual communicators, and often prefer electronic channels to in-person contacts. They are loyal to individuals rather than institutions, and tend to value freedom more than money. Generation-Xers are typically tech-savvy, conservative with money, and are prepared to hold numerous jobs over the course of their careers.
Members of Generation Y resemble Generation X-ers in many ways: they value time and flexibility and also tend to be more loyal to individuals than organizations. Generation Y on the whole, however, tends to be more socially connected and optimistic than Generation X. Generation Y-ers grew up in a multi media world, and multi tasking is their specialty—in fact, many grow bored without it. They have excellent technological skills, and are especially adept at electronic networking. Generation Y-ers tend to be tolerant, determined, and entrepreneurial. They seek to earn enough to enjoy life, but are not compulsive savers or spenders.
While there are certainly individuals who do not fit a generational mold, generational characteristics can provide context for important decisions in estate planning and family business management. Sensitivity to generational differences can be especially helpful in the following areas:
- Communication Styles. Understanding communication preferences can help you facilitate more productive intergenerational interactions, which will make the planning process progress more smoothly. Understanding that Generation Y-ers prefer to multitask may lead you to restructure the next family meeting to include something more than presentations.
- Fiscal Philosophy. Knowing that a typical Boomer will have a tendency to spend while a Generation X-er will be more financially conservative may cause you to rethink the terms of the trust for their benefit to make sure resources are distributed in a manner that best meets your goals. Should the trust be restrictive as to when they can access funds, or should the beneficiary be given some control over decisions to withdraw funds?
- Lifestyle Preferences. Consciousness of X-ers' preference for freedom and flexibility versus Boomers' devotion to career achievement can assist in effective long-term business management. An X-er may be increasingly willing to assume responsibilities if he or she is able to have a flexible work schedule or telecommute.
Generational issues permeate estate and business succession planning. Considering the characteristics of the generations involved in your situation can significantly facilitate the planning process and ensure that your plans achieve their intended goals. For more information on generational differences, see the Generational Characteristics Matrix.
Reviewing Your Estate Plan Documents
Having an up-to-date estate plan is very important. With a proper estate plan in place, you can have peace of mind knowing that you and others named in your estate plan documents will be provided for upon your death or incapacity. Without a proper estate plan, your estate may be distributed in a manner contrary to your wishes. As the saying goes, "If you don’t have a will, the state will provide one for you." The estate plan provided by the state usually differs from your planning objectives.
Even if you have an estate plan, the documents you signed 5, 10 or 20 years ago may no longer reflect current personal and financial objectives and may be seriously out-of-date with current law and practice. Consequently, your estate plan documents, and the estate plan they implement, should be reviewed regularly. Keep in mind that the failure to change your estate plan documents to reflect changing circumstances may prove to be worse than not creating any estate plan documents at all!
The following events typically warrant a review of your estate plan documents:
Births or Adoptions - The birth or adoption of a child or grandchild may represent an additional person who needs to be taken into account in the distribution of your estate. You may also want to establish a trust for the benefit of that child or grandchild because he or she is too young to handle his or her financial affairs.
Deaths - A death in your family may also affect your estate plan and might require a reallocation of assets among surviving family members. Furthermore, the death of a person nominated as a personal representative, guardian, conservator, or trustee in your estate plan documents may also impact your estate plan and require the nomination of new fiduciaries.
Marriage - Your marriage should certainly be a reason to review your estate plan. Applicable state law usually provides an “elective share” to your new spouse if you fail to update your estate plan documents and provide for your new spouse prior to death. In addition, the marriage of a child or other beneficiary of your estate may require a review of your estate plan. For instance, a review may be warranted if you want to provide for the new spouse of the child or beneficiary, especially if the child or beneficiary predeceases you.
Divorce - A divorce is another event that requires a review of your estate plan. For example, it is very important that you review beneficiary designations on qualified retirement plan assets after a divorce. If a divorce decree eliminates a former spouse’s interest in those plan assets, then the beneficiary designations on those plans should be updated to conform with the decree. A tremendous amount of litigation has occurred over the years regarding the effect of a divorce decree or a prenuptial or postnuptial agreement on retirement plan benefits, and litigation can be avoided by updating beneficiary designations on those plans. Furthermore, when divorce occurs, the effect of a divorce upon the potential inheritance of a child or other beneficiary should not be overlooked. An existing gift program may also have to be modified to take into account the divorce. Alternatively, if the potential for divorce exists with someone in your family, that is usually good reason not to title your assets jointly with the person who may get a divorce.
Retirement - Your retirement usually has an impact on your estate plan. For instance, retirement planning often requires an evaluation of the different taxes applicable to your retirement plan benefits as well as a review of the so-called "minimum distribution rules" for those benefits.
Graduations - Graduation of a family member from high school usually signifies the start of costly college expenses. Does you estate plan provide adequate funds for your child's or grandchild's education? Will those funds keep pace with the continuing increases in college costs? A variety of vehicles exist to help you plan for college costs.
Change in Domicile - A move to a different state is usually a significant reason to update an estate plan. As a result of recent changes to the federal estate tax, many states have enacted their own death taxes with differing tax rates, exemption amounts, marital deduction requirements, and the like. Thus, state death tax planning is more important than ever, which is often dealt with in estate plan documents. The need to update an estate plan is especially important if you are moving to or from a "community property state." If the witnesses to your will or the fiduciaries named in your estate plan documents live in another state, consider the possible inconvenience and additional expense in the administration of your estate that may result by not updating your estate plan documents.
Changes in Size or Nature of Estate - If the size of your estate has increased or decreased by 20 percent or has been replaced by other assets since the last review of your estate plan, then you should probably review your estate plan to consider those items. Such changes can greatly influence estate planning objectives.
Change in Business Circumstances - If you are a business owner, then your estate plan should be reviewed if changes such as incorporation, recapitalization, liquidation, a merger or acquisition, or the addition or loss of key employees occur. These events may affect the value of your business and, therefore, the size of your estate. Similarly, your estate plan may need to be revised in conjunction with business succession planning. As you know, it takes hard work and planning to grow a successful business, but it also takes hard work and planning to successfully pass the business on to others. If you were to die or become incapacitated, how would your business operate? Is it time for a buy-sell agreement or some other arrangement between you and others involved in the business?
Charity - You may be thinking of leaving some of your estate to charity, especially if your family is provided for sufficiently. If you would like to leave a portion of your assets to a charitable organization or, perhaps, increase a charitable bequest, then changes may have to be made to your estate plan documents. Consider, too, whether a charitable pledge you made that will be satisfied over a period of years should be paid if you die in the interim.
Medical Expenses - If someone in your family has serious health problems, then you should review your estate plan. Long-term medical care is a major expense. If a family member needs such care, or will require such care in the future, you may want to consider making special provision in your estate plan documents to cover or supplement those expenses.
Credit Issues - Hard economic times often generate credit issues. If someone in your family is experiencing creditor problems and you intend to leave an inheritance to that person, then you should consider the asset protection benefits afforded by a trust or other estate plan vehicles. Asset protection planning is becoming a more significant factor today within the estate planning process.
Tax Laws - Significant revisions in federal and state tax laws occur frequently if not annually. While these changes may not affect the way in which you wish to distribute your estate, such changes may have an impact by adding or eliminating tax-saving opportunities. You need to know how these changes affect your estate plan, which may warrant a review. For instance, as the exemption amounts increase for federal estate tax purposes, the type of estate plan documents you may need are likely to change.
Have you recently experienced any of the events listed above? If so, it is probably a good time to review your estate plan to ensure that your wishes will be carried out as intended. In any event, a thorough review of your estate plan should be conducted at least every 4 to 5 years.
If you would like to review your estate plan or create or revise an estate plan, then please contact us. We stand ready to serve you and would be pleased to assist you in this important endeavor.
Benefits of Lifelong Generation Trusts are Many
By Karen L. Kayes
The current federal estate tax system taxes the value of an individual's estate upon death (the estate tax). As wealth passes down through the generations, it may be taxed multiple times, effectively dwindling the assets to a fraction of their original value. Skipping a generation or two reduces the tax burden.
Needless to say, Congress didn’t look kindly on this tax-free transfer of wealth and, in 1976, created the generation-skipping tax to penalize these transfers. Therefore, if assets pass to a generation below a child, they are subject to both estate and generation-skipping tax. The generation-skipping tax rate is equal to the maximum estate tax rate in effect at the time of the transfer. For 2006, this tax rate is 46%. Therefore, the two taxes together could exceed 70%.
For 2006, each individual has an exemption from estate tax equal to $2 million. Likewise, each person has an exemption from the generation-skipping tax equal to $2 million. Therefore, with properly structured and funded trusts, a married couple could effectively transfer $4 million of assets to grandchildren, free of any estate or generation-skipping tax. The savings can be significant.
A generation skip can be accomplished by a direct transfer to a "skip person," which is defined as a natural person in a generation below that of the transferor's child, or through a trust. A trust that skips a generation initially sounds undesirable to those whose primary object of accumulated wealth is their children. However, the label "generation-skipping trust" has more to do with the taxes that are avoided than the trust operation and can be a valuable means of protecting assets for future generations.
Rather than leaving assets directly to skip persons, a parent can transfer wealth to his or her child, through the use of a trust, who can then pass it on to further generations without being subject to estate tax.
There are numerous considerations in the drafting of a generation-skipping trust. The trust can provide an income stream to the child, for life, or may provide for income to be payable to the child and other descendants within a defined standard. The trust can also provide for distributions of principal for specific or generally defined purposes. The trust can also contain flexibility on asset purchases and distribution of the remaining fund upon the child's death.
Although much flexibility can be built into the trust, the restrictions placed on distributions should prevent the trust assets from being attached by creditors or through a divorce. Further, the appointment of a non-beneficiary trustee ensures that the trust assets are being protected and properly distributed pursuant to the trust terms.
The generation-skipping trust has many nontax benefits and is frequently created for reasons other than to minimize taxes, and even for those that do not have estate tax concerns. The issues that can be addressed with a generation-skipping trust include:
A child's lack of fiscal responsibility.
Preventing assets from being used by or distributed to a child's spouse through spousal pressures or upon a divorce.
Protecting assets for a child in a career with a high risk of liability or who has existing financial liabilities.
Retaining control of family assets for future generations.
Creating equality among the inheritances for children by establishing a trust for each, even though for very different reasons.
As with the estate tax, the generation-skipping tax is eliminated for generation-skipping transfers made in 2010, but is reinstated in 2011.
Whether a skip transfer occurs during life or at death, allocation of the generation-skipping tax exemption requires careful analysis of the circumstances under which a skip may intentionally or inadvertently occur. As noted above, if a skip occurs without having properly allocated the exemption, a significant tax can be incurred.
A generation-skipping trust is a unique tool available to minimize transfer taxes and also to protect wealth from nontax depletion. The complexities of the tax are nominal in comparison to the significant tax and nontax benefits that can be achieved.
Deferred Compensation Plans Require Action This Year
by Anthony J. Kolenic, Jr.
Congress has added a new tax law in response to deferred compensation abuses at Enron and other corporate scandals. Failure to comply with this new law can result in severe tax penalties for the participant of a deferred compensation plan or arrangement ("Plan"), including a 20% excise tax on amounts improperly deferred or paid. Recently proposed Treasury Regulations require many existing Plans to be amended by December 31, 2006. If you are a participant in a Plan, you should assure with your employer that your documents will be reviewed and, if necessary, amended by December 31, 2006.
The scope of the new law is very broad. It impacts many arrangements you would not normally consider to be deferred compensation. Essentially any agreement that has compensation being paid after the year in which it is earned is affected. Some plans may require only an initial screening. Others will need full review and amendment.
Impact on Plans
Among other restrictions, the new law places limits on elections to defer receipt of compensation and the time and form of payment. Acceleration of deferred payments is generally prohibited. If you want to defer a scheduled payment, you must make an election at least a year in advance to delay the scheduled payment for at least five years.
There are a number of exemptions and exceptions to the new law. For example, some vested deferrals made before 2005 may be grandfathered so long as there is no material modification of the Plan provisions after October 3, 2004.
Types of Plans
The following are examples of some of the Plans affected by the new law. This is not a complete list of affected Plans.
Bonus and Incentive Compensation Plans and Arrangements
Nonqualified Deferred Compensation Plans
Supplemental Executive Retirement Plans
Stock Options (where stock options were or are granted at below fair market value or allow extension of the exercise deadline or deferral of payment on exercise)
SARs and Phantom Stock Plans (that provide deferred payments or allow a participant to choose when to exercise a stock appreciation right)
Restricted Stock and Stock Unit Plans (if such plans require or allow payment after the vesting date)
The information in this article is intended only to inform WN&J clients and friends of the general requirements of the new law. It is not legal advice on which you can rely for any purpose. We will provide advice on which you can rely regarding the new law and related tax matters only if you contact us and we agree to be engaged for that purpose.
by David E. Waterstradt
The rules on Medicaid qualification changed significantly on February 8, 2006. Under new law, any gifts made after February 8, 2006, and during the 5 years prior to a Medicaid application will result in a disqualification from Medicaid benefits. The period of disqualification is determined by a formula based on the size of the gift. Previously, the law provided for a 3-year look-back period. Perhaps even more important than the length of the look-back period, the new rules do not commence the period of disqualification until the applicant resides in a nursing home facility and the applicant is otherwise qualified (i.e., the applicant's assets are exhausted to certain minimal allowed limits). Previously, the disqualification period began as of the date of the gift. It is not clear who will be obligated to pay for the applicant's care if the applicant runs out of money but is disqualified because of gifts made within 5 years of the application.
Other changes include a limitation on eligibility for those with more than $500,000 in equity in their home, and annuities owned by an applicant must now name the state of Michigan as a remainder beneficiary to the extent of Medicaid funds used for the applicant's care.
Before applying for or taking any action to qualify for Medicaid, you should contact an attorney who can advise you on the current rules.
We are pleased to welcome a new member to our practice group:
Karen L. Kayes has joined Warner Norcross & Judd as Senior Trusts & Estates Council. Karen concentrates her practice on trust & estate planning, probate law, trust administration and business transition. She will practice in the firm’s Muskegon office. Prior to joining Warner Norcross, Karen was an attorney/director in the Muskegon law firm of Lague, Newman & Irish. She has also been a visiting professor at Thomas M. Cooley Law School and an Administrative Law Judge for the Michigan Department of Natural Resources.
Karen is a member of the American Bar Association, the State Bar of Michigan, Florida State Bar, the Muskegon County Bar Association, National Academy of Elder Law Attorneys and the Muskegon Rotary. She is a current board member of Goodwill Industries, Inc., Cornerstone Foundation - Hackley Hospital and White Lake Community Fund. She is also the past president of the Lake Michigan Estate Planning Council.
Karen may be reached directly at 231.727.2619 or e-mail her at firstname.lastname@example.org.
Mark K. Harder Election to ACTEC
We are pleased to announce that Holland Partner Mark K. Harder has been elected as a Fellow of the American College of Trusts and Estate Counsel (ACTEC).
ACTEC is a professional association consisting of approximately 2,700 lawyers from throughout the United States. Fellows of the College are nominated by other Fellows in their state and are elected by the membership at large. Fellows are selected for professional reputation and ability in the fields of trusts and estates and on the basis of having made substantial contributions to these fields through lecturing, writing, teaching and bar activities. This is a well-deserved honor for Mark, and we congratulate him on a job well done. Mark joins other Warner Norcross & Judd ACTEC Fellow John H. Martin, Mike Van Haren, Jay M. Smith and Carl W. Dufendach.