Don’t Overlook Beneficiary Designations In Your Estate Planning

I’ve written previously about the importance of making sure that you have beneficiaries designated for assets such as life insurance and retirement accounts. Proper beneficiary designations are a key component of estate planning. Naming beneficiaries of certain assets, like life insurance or retirement accounts, is the most effective way to make sure assets pass to the intended parties upon your death in the most efficient way possible.

Unfortunately, many people make the mistake of overlooking this important aspect of estate planning. Failing to designate beneficiaries, or not keeping beneficiary designations up to date can result in assets being subject to the expense and delay of probate. has a short, but very good article on the importance of beneficiary designations in your estate planning. Please take a few minutes to read the article here.

Estate Planning Isn’t Just For Married People

The majority of my estate planning clients are married couples. For them, it just seems the natural thing to do. However, estate planning for singles is just as important. While a single person may have to do some things differently, they still need to have an estate plan to avoid problems that will naturally arise during times of incapacity or after death.

Most single people do not own assets jointly with another person. By contrast, married people will naturally add their spouse to financial accounts and real estate to ensure continued access to accounts upon the disability of one of them, and the efficient succession of ownership upon the death of one of them. For singles, adding another person’s name to a financial account or real estate may have unintended consequences that can be disastrous.

When a single becomes incapacitated, access to, and control of their assets become matters for the courts to determine in the absence of documents that will allow for someone to step into their shoes with legal authority to manage their assets and affairs.

Without a will or trust, the laws of the state of his or her residence will determine how their assets are divided and distributed after death. This will necessarily require the involvement of the courts along the way.

To avoid these pitfalls, it is important for singles to put together a estate plan, just like married people do. A comprehensive estate plan will consist of 5 key elements: a will; durable power of attorney; medical power of attorney; trust; and beneficiary designations.

The will is the cornerstone of any estate plan. It allows you to name the person who will guide the administration of your estate after your death; to specify how your assets will be distributed; and to name a guardian for your minor children.

A durable power of attorney lets you appoint someone (your “agent”) to manage your day-to-day affairs if you cannot do so for yourself. Whether this person is a parent, sibling, or close friend, it must be someone you trust implicitly.

A medical power of attorney lets you appoint someone to make medical treatment decisions for you if you cannot do so for yourself. This authority can extend to end-of-life decision making. Again, the person you appoint should be someone you trust to follow your wishes concerning medical care and to be a strong advocate for you.

A trust will allow for long term management and control of assets during your lifetime and simplify the distribution of your assets upon your death. Trusts are typically used to maintain privacy, avoid the probate courts, and minimize the effect of taxes on asset distribution after death.

Finally, beneficiary designations control the distribution of assets such as life insurance proceeds and retirement accounts. If you don’t have beneficiaries named, those assets are typically paid to your estate. In the case of retirement accounts, not naming a beneficiary can result in significant income taxes being levied. If the beneficiaries are out of date, those assets are still going to go to the people named, even if you no longer want them to receive those assets.

If you are single and don’t have an estate plan in place, it’s not too late to put one together. Work with an estate planning attorney who can develop an estate plan tailored to your individual circumstances.  Give me a call, I can help.

My Divorce Judgment Says My Ex Has to Pay a Joint Credit Card Debt, Why is the Bank Coming After Me?

I get calls from people who are being sued by banks or other creditors for joint debts that their ex spouse agreed to pay as part of their divorce. The question they ask: “If the divorce judgment says my ex is supposed to pay this debt, why is the bank coming after me?” They assume that since the divorce judgment says their ex has to pay the debt, they are no longer responsible.

A recent decision of the Michigan Court of Appeals illustrates a common misconception concerning the division and assumption of debts and liabilities in divorce judgments. The facts: Rod and his ex-wife, Kimberly, obtained a home equity loan from their credit union in 2003. In October 2011, the credit union sued them for nonpayment. The trial court entered default judgments against Kimberly and Rod in 2012. A few months after, Kimberly and Rod divorced. Their divorce judgment ordered Kimberly to pay the credit union debt and indemnify Rod against the debt. In June 2013, the trial court issued a writ of garnishment against Rod. Rod objected to the writ on the basis that Kimberly assumed the debt in the divorce judgment, which Rod argued absolved him of any liability on the debt. After a hearing, the trial court sustained Rod’s objections, holding that the divorce judgment precluded the credit union from seeking garnishment against Rod.

Now, most of you are probably thinking “that sounds right.” After all, Kimberly agreed to pay the debt, why should Rod be liable. On appeal, the Court of Appeals reversed the trial court, finding that Rod was still liable on the credit union debt though Kimberly had agreed to pay it. How can that be?

Well, like a lot of legal issues, it’s complicated. You see, the credit union was not a party to Rod and Kimberly’s divorce. And because of that, the credit union was not bound to the terms of their divorce judgment. Legally, BOTH Rod and Kimberly were still liable to the credit union, regardless of the terms of the divorce judgment.

Rod does have a remedy: the divorce judgment’s indemnity clause. An indemnity clause shifts the loss from the party forced to pay a debt (Rod) to the party who should have paid it (Kimberly). Rod has the right to sue Kimberly to reimburse him for any money he may have to pay the credit union.

So, what does this all mean for you?

  • First, even though your ex agreed to assume payment of a joint debt, that agreement doesn’t absolve you of your liability as to the creditor holding the debt. If your ex defaults on the payments, the creditor can still go after you for full payment.
  • Second, indemnity clauses in divorce judgments are important. If your ex stops making the payments and the creditor sues you, you can go after your ex to reimburse you for your loss. An indemnity clause may still be enforceable if your ex files bankruptcy.
  • Third, be vigilant. The time to find out your ex has stopped paying a debt is not when the process server is pounding on your door. Keep an eye on your credit report to see if your ex has been paying late, or or has stopped paying altogether. You can take your ex to court to enforce the agreement before the creditor comes calling.

The case is DFCU v Monts. You can access the Court of Appeals opinion here.

We Did Our Trusts When Estate Taxes Were an Issue, Do We Still Need Separate Trusts?

New clients came in to review and update an estate plan they had set up several years ago. The estate plan included separate trusts for each spouse, which contained provisions to lessen the potential impact of federal estate taxes on their estates after their deaths. The trusts were drafted at a time when the federal estate tax exemption limit was much lower than it is today. In light of this they wondered if they still needed to keep the separate trusts or could they shift to a joint trust, combining all of their assets into one trust that they would both manage as co-trustees.

As with most legal questions, it depends. Most married couples assume the sole reason to use separate trusts in their estate plan is to reduce or eliminate estate tax liability after they die. But taxes are just one of many reasons for married couples to use separate trusts. Let’s look at a few of them:

These assets are mine, not ours. Let’s consider property intended to “stay in the family.” In other words, is meant to be passed down to lineal descendants, or it’s inherited cash or other property that you just want to keep separate from your spouse. This is often the case with family hunting land that has been passed down from generation to generation. Clients may want to keep these assets separate so they don’t end up in the hands of a new spouse should the survivor remarry. Separate trusts can be handy to ensure that property stays within a bloodline.

It’s a second marriage. Each spouse has children from a previous union and they want to make sure that their children will not be disinherited upon their deaths. The concern is that when the first spouse dies, all of their assets end up in the hands of the surviving spouse and when the surviving spouse dies, all of the assets will go the children of the surviving spouse, leaving the children of the first spouse who died with nothing. This happens more often than one may think. Separate trusts can be a great way to provide financial support to a surviving spouse (especially where the bulk of the financial assets belong to the spouse likely to die first) during his or her remaining lifetime, while guarantying that any remaining assets will pass to the children of the first spouse upon the death of the survivor.

One spouse has trouble managing money. Separate trusts can be of benefit to ensure competent asset management, stable cash flow, and asset protection from the claims of the surviving spouse’s creditors should he or she have trouble managing money or credit.

Tax laws are complex and subject to change. If a joint trust is used, property of the trust may need to be allocated between the deceased spouse and the surviving spouse for various tax reasons.  Understanding the terms of the joint trust dealing with post death property allocations, and determining what assets go where, when, and with what tax consequence, can be very difficult.  Many times these provisions and issues are ignored, creating serious tax problems.  Presented as being simple and convenient, joint trusts can become anything but.  Most clients I see will escape federal estate taxes upon their deaths under current exemption limits. However, future tax law changes may reduce the exemption limit. And if the limits are reduced, it will be easier to address the problem if spouses have separate trusts than if they had a joint trust.

These are just a few of the factors to consider in determining whether joint or separate trusts should be used in an estate plan. Every situation is different, which is why you must carefully consider your own circumstances with your attorney to determine the best way to go.

5 Points to Consider When Naming a Beneficiary

Who is a “beneficiary?” The word includes more than just the recipient of insurance funds or the inheritor of property. A beneficiary can be the recipient of funds or other property from a will, trust, retirement plan or life insurance. But there are differences with each beneficiary type. A recent article in the Chicago Tribune discusses 5 important considerations when naming a beneficiary.

1. A beneficiary of a will must wait until the will goes into probate before they receive any of their inheritance. Beneficiaries of a will can wait months or even years before receiving their inheritance, and court costs and fees can erode the amount they eventually receive. That’s why many people choose to incorporate a revocable living trust into their estate plan.

2. A beneficiaries of a life insurance policy or retirement plan account will receive the money directly. These assets do not (generally) go through probate. Rather, the proceeds are paid to the beneficiary usually upon proof of identity of the beneficiary and proof of death of the account owner.

3. Minors generally do not make good beneficiaries. While the beneficiary is under age 18, a conservator will manage money or property for them until they reach age 18, when they receive the money outright. Which means that there is no further direction or control over how the money is spent – goodby college fund, hello Corvette!

4. Chose beneficiaries with care. Naming the “correct” beneficiary of a retirement account could allow the account to grow tax deferred for many years.

5. Beneficiary designations have consequences and you need to consider them carefully. For instance, naming a disabled person as the beneficiary of a life insurance policy could render that person ineligible for valuable governmental benefits such as Social Security supplemental income and Medicaid.

Please take a few minutes and read the entire article here.

Court of Appeals Upholds Rejection of SSI Special Needs Trust

The 8th Circuit Court of Appeals recently upheld a decision by the Social Security Administration to reject a type of special needs trust, known as a “(d)(4)(A) trust” (a trust designed to hold the assets belonging to a disabled person). A (d)(4)(A) trust is commonly used in special needs planning to qualify a disabled individual for Social Security supplemental income (SSI) or Medicaid benefits. This type of trust must be created by a disabled individual’s parent, grandparent, guardian, or a court, to hold the disabled individual’s personal funds.  The disabled individual cannot establish this type of trust for themselves.

In Draper v Colvin, the parents of 18-year-old Stephany Draper, who had suffered a traumatic brain injury in an automobile accident, attempted to create a (d)(4)(A) special needs trust to hold and administer the proceeds of a personal injury settlement for her benefit. Stephany had granted power of attorney to her parents to settle her personal injury claim and transfer the settlement funds to a trust on her behalf. Her parents, acting individually, established the trust “pursuant to 42 U.S.C. § 1396p(d)(4)(A).” They then transferred the settlement proceeds (more than $400,000) into the trust by authority of the power of attorney.

In reviewing her claim for benefits, the Social Security Administration found that, despite the express language of the trust agreement to the contrary, Stephany’s parents were acting as her agents and not as her parents when they created the trust, and an agent is not a person authorized by the statute to create a (d)(4)(A) trust. Therefore, the settlement proceeds were countable assets in determining Stephany’s eligibility for SSI benefits. SSA rejected her claim because the settlement proceeds put her over the asset limit. The 8th Circuit Court of Appeals affirmed the SSA’s denial of benefits.

The case turned on a very technical interpretation of the Social Security rules in regards to the language of the trust agreement and the way in which the trust was created and funded. The case underscores how careful one must be when it comes to qualifying for governmental benefits such as Medicaid or SSI and how easy it can be to run afoul of the rules despite careful planning.

You may read the entire decision here.

I Bought a Car Yesterday, Can I Cancel the Sale Today?

A client called me the other day and asked about canceling the purchase of an automobile. They thought they had 3 days to cancel the purchase. Unless the salesman came to their home and wrote the sale there, I told them, they had no right to cancel.

In general, when you buy something at a store or merchant’s place of business and later change your mind, you don’t have the right to return the merchandise just because you change your mind and no longer want it.   However, if you buy an item in your home or at a location that is not the seller’s permanent place of business, you may have the option to cancel the sale and return the goods for a full refund. Here’s how the rule works:

Under a Federal Trade Commission (FTC) rule know as the “Cooling-Off Rule,” you have three days to cancel certain purchases.  You do not have to give a reason for canceling – you have the right to change your mind.

The Cooling-Off Rule applies to sales that take place at your home, workplace, or dormitory. It also applies to sales that take place at facilities rented by the merchant on a temporary basis, such as hotel or motel rooms, convention centers, and restaurants. The Cooling-Off Rule applies even when you invite a salesperson to come to your home to make a sales presentation. Under the Cooling-Off Rule, your right to cancel for a full refund extends until midnight of the third business day after the sale. You do not need a reason to cancel your purchase under the rule.

The salesperson must tell you about your cancellation rights at the time of sale. (The contract or receipt should explain your right to cancel, too.) They must also give you two copies of a cancellation form (one to keep and one to send) and a copy of your contract or receipt. (If the seller did not give you cancellation forms, you can write your own cancellation letter.)

As with any rule, there are exceptions. The Cooling-Off Rule does not cover sales that: (i) are under $25; (ii) are for goods or services not primarily intended for your personal, family, or household purposes; (iii) are made entirely by mail or telephone; (iv) are the result of prior negotiations at the seller’s permanent business location where the goods are regularly sold; (v) are needed to meet an emergency are made as part of your request for the seller to do repairs or maintenance on your personal property (purchases made beyond the maintenance or repair request are covered).

In addition, sales exempt from the Cooling-Off Rule are those involving: (i) real estate, insurance, or securities; (ii) automobiles, vans, trucks, or other motor vehicles sold at temporary locations, provided the seller has at least one permanent place of business; (iii) arts or crafts sold at fairs, shopping malls, civic centers, schools, and the like.

A cancellation notice must be sent before midnight of the third business day after the contract date. (Saturday is considered a business day under the rule; Sundays and federal holidays are not.) Proof of the mailing date and proof of receipt are important, so one should consider sending the cancellation notice by certified mail with a return receipt request. If the merchant is local, the cancellation notice may be hand delivered. One must make sure to retain a copy of the cancellation form or letter.

If you cancel your purchase, the merchant has 10 days to: (a) cancel and return any promissory note or debt instrument you signed; (b) refund all your money and tell you whether any product you still have will be picked up; and (c) return any trade-in. Within 20 days, the merchant must either pick up the items, or reimburse you for mailing expenses, if you agree to send the items back.

You must make the purchased items available to the seller in as good condition as when you received them. If you do not make the items available to the seller, or if you agree to return the items but don’t, you remain obligated under the contract.

A Quick & Easy Guide to Basic Estate Planning

So, you’re thinking about putting an estate plan together (good for you!), but not sure if the timing is right, what to do, or what you need.  To help you get going, here is my quick and easy estate planning guide. Don’t worry, nothing complicated here, just basic information.

Is the time right? Well, estate planning is planning for the future. Planning for when you are not able to take care of yourself, and planning for what will happen after you die. I tell clients that as long as they’re alive it’s not too late. But remember, “tempus fugit” – time flies – and we don’t know what tomorrow will bring, so the best time to plan is now!

Do you need an estate plan? Estate planning isn’t just for the wealthy. You need an estate plan if you want to designate the person who will make financial and medical decisions for you if you can’t do so yourself (if you don’t a probate court judge will), or if you want to name a guardian for your minor children (if you don’t a probate judge will), or if you want to designate who will receive your property after you die (if you don’t, Michigan law will dictate who gets what). So forget those notions that estate planning is something only rich people need to do.

Do you need a lawyer? YES! Work with a competent lawyer.  It will cost more than you’d pay for a DIY kit, but it’s worth the additional expense and trust me, way cheaper in the long run.  Despite what you may have heard on the radio or seen on television, estate planning is not a “one size fits all” endeavor. Sure, those DIY documents may be legal in all 50 states, but will those cookie cutter documents be sufficient to carry out your wishes when the time comes? A lawyer can help you examine the big picture, give you guidance and recommendations, and most importantly draft custom, tailored documents to help you achieve your particular planning goals and objectives.

So what should be in your estate plan? There are five elements that form the basis of an effective estate plan.

Last will and testament. A last will and testament does primarily three things: Direct who will take care of minor children; Appoint someone to tie up all of your loose ends and file/pay taxes; Specify how your property gets distributed after you die. You can make a will as long as you meet certain legal standards. In Michigan, that means one has to be at least 18 years old and have sufficient “testamentary capacity” – basically the ability to understand the nature and gravity of what one is doing. As people age their mental capacity can become an issue. However, even if a person has diminished mental capacity due to mild dementia or other condition he or she may still have the capacity to make a will.

A last will and testament takes effect after you die, so it’s important to have planned in some way to ensure that someone will look after your affairs and make decisions for you if you become incapacitated during your lifetime. For that you need a power of attorney and a medical power of attorney (patient advocate designation).

Power of attorney. With a power of attorney, you appoint an agent to handle your financial affairs and other transactions if you become incapacitated. Everything from banking and bill paying to preparing and filing tax returns on your behalf can be handled by your agent. Your agent will be able to keep your affairs in order until you regain the ability to do so. A durable power of attorney can be designed to take effect the moment you sign it, or at some point in the future if and when you become incapacitated. The agent can be a spouse, family member, or trusted friend or adviser.

Medical power of attorney. In Michigan, the medical power of attorney, or patient advocate designation, is authorized by law. It allows you to appoint someone (your “patient advocate”) to make medical treatment decisions for you in the event you cannot make them for yourself. Your patient advocate can access medical records, talk to your doctors and make treatment decisions for you as long as you can’t make them for yourself. It may contain expressions of your desires concerning medical treatment at the point where your condition is such that there is no longer any prospect of a recovery, such as at the end-stage of a terminal illness. These instructions will ensure that you live your last days in dignity and peace.

Revocable, or living trust. Do you need one? It depends. What are your goals and objectives; what types of assets do you own; do you desire to avoid probate or minimize taxes; do you desire to maintain control of your assets even after you die? These are some of the issues to address in determining whether a trust will be a beneficial element of your estate plan. While you’re alive, a trust can be beneficial during times of incapacity. Assets that are held in trust can continue to be managed and controlled by someone you’ve designated as your trustee until you’ve regained the ability to resume managing them for yourself, without having to involve the courts.  After you die, a trust can help avoid probate on the transfer of assets, maintain privacy of your affairs, provide long term control and management of assets (especially helpful if you have younger children or other beneficiaries who may not be capable of managing an inheritance on their own), minimize the effect of taxes on the disposition of assets, and even take care of a beloved pet.

Beneficiary designations. What do beneficiary designations have to do with estate planning?  Many common assets do not pass through a will or trust.  Among them are life insurance benefits and retirement plan assets. These assets pass to the person(s) designated as beneficiaries. Even if a will says who gets the life insurance, it won’t matter if the life insurance policy has a beneficiary designated. So, as part of your estate plan, it’s important to make sure that you’ve designated beneficiaries for assets such as life insurance, annuities, and retirement plan accounts, and to make sure those beneficiaries designations are up to date.

So there you have it. A quick and easy guide to basic estate planning.  (Nothing to it!)  Now that you’ve got some basic information, it’s time to get your plan in place.

If you’d like to get started, contact me, I can help.

4 Key Rule Changes Affecting Retirement Accounts You Need to Know.

What you don’t know can hurt you. And this truism is never more apt than when it comes to the rules governing retirement accounts. Several rule changes took effect recently that will have a significant impact on traditional and Roth IRAs, and employer sponsored retirement plan accounts. Individuals who own these types of accounts must become familiar with the following new rules now:

1. As of January 1, 2015, IRA owners are limited to one rollover per year.

Under this new IRS rule, an IRA owner can take a distribution from an IRA and roll it over into another IRA account only once per 12 month period, regardless of how many IRA accounts he may own. This rule aggregates traditional IRAs and Roth IRAs together, so one cannot perform a rollover between traditional IRAs and then perform a rollover between Roth IRAs within the same 12 month period. This is a significant change to the way the IRS has treated multiple rollovers generated by a 2014 United States Tax Court decision. Violate this rule and the second rollover will be treated as a taxable distribution, which will result in the imposition of income taxes (and the dreaded 10% early withdrawal penalty if the account owner is younger than age 59½).

Excepted from this new rule are direct trustee-to-trustee transfers, rollovers from employer sponsored qualified plans [such as 401(k), 403(b), etc.], and Roth conversions.

2. Inherited IRAs are not protected in bankruptcy.

In 2014 the United States Supreme Court ruled that funds in an inherited IRA are not protected in bankruptcy from the claims of the IRA beneficiary’s creditors unless a state law provides a specific exemption (currently only a few states provide this type of exemption, and Michigan isn’t one of them). Individuals with larger IRA or qualified plan account balances may need to rethink their retirement account beneficiary designations in light of this ruling. In circumstances where a child or other beneficiary may have financial trouble, it may be prudent to make other arrangements to enhance creditor protection for inherited account balances.

3. QLACs get the go-ahead.

What is a “QLAC?” It is a qualified longevity annuity contract, which can enhance income security for those  who may be worried about outliving their money in retirement. These deferred income annuities can be purchased through IRAs and qualified plans (within limits) and the contract values will be exempt from RMD rules until age 85, when distributions from the QLAC must begin. A QLAC will do two things: First, distributions from the account can be delayed until age 85, thus allowing for greater tax deferred growth and guarantying an income stream for life; and second, the value of the annuity will be excluded when calculating required minimum distributions (RMD) from other retirement accounts (and the payments from the QLAC are assumed to satisfy its RMD obligation).

To be eligible, a QLAC must meet the following criteria: i) Investment in the contract is limited to the lesser of 25% of all pre-tax retirement account balances aggregated together, or $125,000 (indexed for inflation); ii) The QLAC must begin its pay outs no later than age 85; iii) The QLAC must be irrevocable and illiquid (no cash-surrender value), but it can provide for a return-of-premium death benefit payable to heirs as a lump sum or life-contingent survivor annuity; and iv) it must be a fixed income annuity – variable annuities, indexed annuities, and similar type annuities will not qualify.

4. IRS Notice 2014-54 allows for the tax-free conversion of after-tax funds from a 401(k) account to a Roth IRA.

Under this IRS Notice, the IRS confirms that individuals with both pre and after-tax money in an employer sponsored retirement plan can convert the after-tax money to a Roth IRA tax free. However, one may not simply take out the after-tax money for the Roth conversion and leave only pre-tax money behind in the employer plan. If they do, the IRS will apply the traditional pro-rata rules to the distribution.

The rules governing IRAs and other retirement accounts are very complex and tricky. Even seemingly simple transactions involving an IRA or other retirement account can result in disastrous tax consequences. And the Internal Revenue Code is extremely unforgiving. Before making any move with any type of retirement account, consult your CPA or other tax adviser, or contact me. I can help.