Topics included in this issue:
For an estate planning attorney, there is little that is more frustrating than having a client's desires, as set forth in his/her will or trust, undermined by "inadvertent" estate planning. If you have executed a will or trust, it is important to review the following to avoid inadvertently sabotaging of your intended estate plan.
Improperly Titling Assets
Many estate plans will work as desired only if title to your assets is coordinated with your plan.
Joint Ownership. Joint ownership of property can work great in some circumstances and create havoc in others.
Property that is joint with rights of survivorship passes directly to the surviving tenant. Thus, joint assets will not pass as you provide in your will or trust. Make sure this does not result in an unintended benefit to or exclusion of beneficiaries.
Joint property is fully taxed in the estate of the first tenant to die, unless the surviving tenant can show his/her contribution. In addition, placing property in joint name may be a current gift to the other joint tenant of the value of the entire property, which may result in a taxable gift.
Joint property is exposed to the creditors of both owners. For instance, if you own property jointly with your children, the property is exposed to both your and your children's creditors.
Equalizing Estates. For married couples, improper titling of property between you can waste some of your estate tax exemption. Generally, it is recommended to have assets in each spouse's name (or trust) at least equal to each spouse’s estate tax exemption.
For example, if a couple had a combined net worth of $2,000,000, each spouse should have assets worth $1,000,000 in his/her name (or trust). If, instead, one spouse had assets worth $400,000 in his/her name and that spouse died first in 2003, only $400,000 of that spouse's $1,000,000 estate tax exemption is used. When the second spouse dies (in 2003), of that surviving spouse’s $1,600,000 estate, $1,000,000 will be exempted from estate tax and $600,000 will be subject to an estate tax of roughly 45 percent. If both spouses had assets worth $1,000,000 in their name (or trust), there would be no estate tax.
Improperly Designating Beneficiaries
Similarly to jointly owned property, assets passing by beneficiary designation do not pass as you direct in your will or trust. Rather, the assets will pass to the beneficiary identified in the beneficiary designation. Retirement plans, IRAs, transfer on death accounts, and life insurance are a few examples. Neglecting your beneficiary designations may result in an unintended division of assets among beneficiaries.
Neglecting Business Issues
Owners of businesses must determine how their businesses should be handled upon their incapacity and after their deaths. Who will vote your stock? Who will provide day-to-day management of the business? Who will decide whether the business should be sold and at what price? How will business interests pass to beneficiaries? These decisions can have a major impact on family harmony and the success of your business.
Don't let procrastination write your estate plan for you. Updating your estate plan is important in at least two situations.
First, revisit your estate plan when there is a change in the people in your life. Has there been a birth, marriage, divorce or death in your family that impacts your plan? Most WN&J documents automatically include subsequently born children; thus, births of additional children generally do not require revisions.
Second, has there been a substantial change in your assets? Your attorney should review your plan to determine the impact on your estate plan, if any.
Disregarding Gifting Opportunities
Each person in the U.S. may currently give, without gift tax, up to $11,000 per year per person. Gifting during lifetime to persons in a younger generation can be an effective way to reduce your estate, thereby reducing or avoiding estate tax. To fully take advantage of this opportunity, you should gift early and regularly.
Ignoring Choice of Residence
When you own a residence in more than one state, you may be able to choose your state of residence. States have diverse income, real estate, intangible, inheritance and estate taxes. Choosing a different state of residence may result in tax savings.
By Mark K. Harder
Family business succession planning inevitably requires planning for the transition of management of the family business. Doing so presents its own challenges. Two of these challenges are dealing with nonfamily managers and dealing with the family member who is not suited for a leadership role in the business.
Dealing With Nonfamily Management
In circumstances where nonfamily employees occupy key management roles but family members are anticipated to assume leadership of the company down the road, retaining nonfamily management can present special challenges. Nonfamily managers may fear the loss of their positions or the blocking of their career paths and development. Consequently, the nonfamily employee may be tempted to seek positions elsewhere. If this occurs before the family member is ready to assume a leadership role, the loss of the nonfamily employee can damage the prospects of the business.
Making nonfamily employees feel valued and creating an atmosphere where their contributions are appreciated and respected is essential. However, even in cases where nonfamily employees feel valued, management may "see the writing on the wall" that Junior will displace or occupy positions otherwise on the career path of senior management.
In these situations, communication is critical to addressing the concerns of nonfamily management. In some cases, the views of nonfamily management may be an inaccurate perception, and the concern can be alleviated if good communication exists regarding the family's plan, with a clear timetable and set of expectations spelled out. In other circumstances, this perception may be accurate. When this is the case, an equity-based compensation plan or a deferred compensation program (with an appropriate vesting schedule that increases the likelihood that nonfamily management will remain with the company for the needed period) can provide senior management with an incentive to remain with the business for the necessary period of time until the family member is groomed and ready to succeed to positions of leadership and responsibility.
What to Do When the Heir Apparent Isn't
What is a family to do when the heir apparent proves inadequate to the task and is not suited for the CEO position or other important leadership role? Hopefully the family has made it clear over the years that leadership roles must be earned and are not an entitlement by birth. A regular and rigorous review process for family members similar to that used with other employees also will provide needed objectivity and benchmarks against which performance can be measured.
Even where a family's formal or informal family employment policies make it possible to ease a family member out of a position or to redirect his or her career path, the question still remains what to do with the business when no family member is in line to assume leadership of the organization.
In many cases the family feels it has no choice but to sell the business, and in some cases this is the right response to the situation. However, many family-owned businesses are successfully operated as family investments and led by nonfamily members. In circumstances where the business becomes a family investment, changes may be required or appropriate in the management team, the governance structure, the company's approach to growth and sharing of economic returns, and to providing an adequate and tax-advantaged source of return on the family's investment.
Through the succession planning process families will address a variety of management succession questions and issues. The difficulties raised by these questions are not insurmountable, and, with careful planning, the family will have a stronger and more successful business and management team.
By Jeffrey B. Power
When a loved one dies, family members are confronted with dozens of decisions about the funeral--all of which must be made quickly and often under stress. What kind of funeral should it be? What funeral provider should you use? Should you bury or cremate the body? What funeral services and merchandise are you legally required to buy? How much is it going to cost? Ultimately, funeral arrangements should reflect a well-informed decision, as well as a meaningful one.
Funerals are frequently among the most expensive purchases many consumers will ever make. A traditional funeral, including a casket and vault, usually starts at about $6,000. Flowers, obituary notices, acknowledgment cards or limousines can add thousands of dollars to the bottom line. People frequently spend lavishly on a funeral because they think of it as a reflection of their feelings for the deceased or because they feel uncomfortable comparing prices or negotiating over the details and cost of a funeral.
This is the first installment of a two-part series on funeral planning to help you and your family make meaningful, well-informed decisions for a funeral.
Federal law makes it easier to choose only those goods and services desired or needed and to pay only for those selected. The Funeral Rule (FTC: Part 453-Funeral Industry Practices Revised Rule), enforced by the Federal Trade Commission, requires funeral directors to give itemized prices and other information about their goods and services in person and, if requested, over the phone. For example, if you ask about funeral arrangements in person, the funeral home must give you a written price list to keep that shows the goods and services the home offers.
Many funeral providers offer packages of commonly selected goods and services, but you always have the right to buy individual goods and services. If state or local law requires you to buy any particular item, the funeral provider must disclose it on the price list, with a reference to the specific law.
The purpose of a casket is to provide a dignified way to move the body before burial or cremation. No casket, regardless of its qualities or cost, will preserve a body indefinitely.
The Funeral Rule requires the funeral director to show you a list of caskets the company sells, with descriptions and prices, before showing you the caskets themselves. Caskets vary widely in style and price. Sellers often start out by showing you higher-end models. If you have not seen some of the lower-priced models on the price list, ask to see them.
Traditionally, caskets were sold only by funeral homes. You can, however, buy a casket directly from a third-party dealer at a lower cost and have it shipped directly to the funeral home. The Funeral Rule requires funeral homes to agree to use a casket you bought elsewhere and prohibits them from charging a fee for using it. Some states, but not Michigan, prohibit the sale of caskets by anyone other than morticians, so check first before you buy your own. The Funeral Consumers Alliance Web site at www.funerals.org has extensive information on caskets and a listing of independent dealers and wholesalers.
An obvious consideration when planning a funeral is where your remains will be buried, entombed or scattered. In the short time between the death and burial, unprepared families may find themselves rushing to buy a cemetery plot, often without careful thought or a personal visit to the site. It is often best to buy a cemetery plot before the need arises.
When purchasing a cemetery plot, consider the location of the cemetery and whether it meets the requirements of your family's religion. Ask whether there are any restrictions the cemetery places on burial vaults purchased elsewhere, the type of monuments or memorials it allows and whether flowers or other remembrances may be placed on graves.
Cemetery plots can be expensive, especially in metropolitan areas. Most, but not all, cemeteries require you to purchase a grave liner, which will cost several hundred dollars. Note that there are charges--usually hundreds of dollars--to open a grave for interment and additional charges to fill it in. Perpetual care on a cemetery plot sometimes is included in the purchase price. Clarify that point before you buy the site or service.
If you plan to bury cremated remains in a mausoleum or columbarium, expect to purchase a crypt and pay opening and closing fees, as well as charges for endowment care and other services. The Funeral Rule does not cover cemeteries and mausoleums unless they sell both funeral goods and funeral services, so be cautious in making your purchase.
All veterans are entitled to a free burial in a national cemetery and a grave marker. A veteran's spouse also is entitled to a lot and marker when buried in a national cemetery. There are no charges for opening or closing the grave, for a vault or liner, or for setting the marker in a national cemetery. The family generally is responsible for other expenses, including transportation to the cemetery. For more information, visit the Department of Veterans Affairs Web site at www.cem.va.gov.
Making Funeral Arrangements - Part 2
By J. A. Cragwall, Jr.
The IRS Examiner has just left. You're wondering what to do about the very expensive "adjustments" the Examiner wants to make to your tax return. Now what?
Ways to Deal With the IRS
You have several alternatives to just giving up. You can attempt to negotiate with the Examiner. Or you can try to make a better deal with the IRS Appeals Office. Or you can take the IRS to court.
In fact, you can take all of these steps, or any combination of them, if you want. But not every step is right for every case.
Negotiating With the Examiners
This is the least expensive and quickest route. The Examiner's job is to get the facts straight. If there are important facts the Examiner has overlooked, by all means show the Examiner. Most Examiners will listen (some won't).
A lot here depends on the nature of the issue. Examiners don’t have any authority to consider "litigating hazards." This means they can’t take into account the relative strengths of legal arguments. If the IRS has a legal position on an issue, the Examiners are supposed to assert it, even if they personally think it’s a loser.
If this is your situation--a good faith dispute over a factual or legal argument--then you should try IRS Appeals.
Going to IRS Appeals
The IRS Appeals Office has one job: to compromise tax cases. They assess the relative strengths and weaknesses of the taxpayer's arguments and try to make a deal. To get here you'll need to prepare a document called a Protest in all but the simplest cases. Since the Protest is your chance to make your best case in writing, you should get experienced help.
Usually the Appeals Officer will try to negotiate a compromise settlement with you. Sometimes people are pleasantly surprised at how reasonable Appeals can be. Appeals are independent of Examination, and if the Appeals Officer thinks the Government's case is weak, he can settle it for whatever he thinks it’s worth, regardless of what the people in Examination think.
Unfortunately, Appeals Officers often claim that the Government's case is worth a lot more than you and your advisers think it is. If you reach an impasse with them, it’s time to consider going to court.
You have three courts from which to choose. Selection of the right court is a critically important decision. The choice is entirely up to you. The Government has to go along with your pick.
Picking the Right Court
You have your choice of the Tax Court, the federal district court or the Court of Federal Claims. There are advantages and disadvantages to each.
The Tax Court has one huge advantage over the other two. You do not have to pay the tax until the case is over. If cash isn't a critical factor, then you might make your choice on some other factors:
- Case law--pick the court where you find the most favorable prior decisions. The Tax Court, district court and Federal Claims Court are independent of one another and often disagree.
- Jury trial--only available in district court.
- Place of trial--district court is local, Tax Court sits for this area in Detroit (or Chicago or Cleveland), and Federal Claims usually sits in Washington, D.C.
While every case is different, the Tax Court is often faster and less costly than the other two. The Tax Court judges are federal tax specialists, while the district court judges see everything. The Federal Claims judges get more tax cases than district court, but fewer than Tax Court.
Finally, there's your choice of opponent. Tax Court cases are handled by the IRS's own lawyers. District court and Federal Claims cases are handed off to the Justice Department. The Justice Department lawyers often bring a fresh perspective to a case. Getting them involved sometimes breaks an impasse with the IRS.
If you are interested in buying a Michigan Education Trust (MET) contract, consider doing so before August 30, 2003. Given state budget cuts, MET is projecting increases to MET contracts after August 30. You may contact MET at 1-800-MET-4-KID.
Estate Planning Focus
Editor: Susan Gell Meyers
Trusts & Estates Group Chairman: Mark K. Harder
Estate Planning Focus is published by Warner Norcross & Judd LLP to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the Firm's Trusts and Estates Group.