Three Things Your College Bound Child Needs to Leave Behind

Do you have a child getting ready to head off to college?  Whether your child goes away to school or commutes from home, don’t let them start the school year without leaving behind these three documents:

Medical Power of Attorney.  If your child is over the age of 18, you no longer have the right to speak to their physicians, or make medical decisions for them.  If your child has an accident or becomes seriously ill at school and is hospitalized, medical personnel will not discuss your child’s medical condition or treatment with you without authorization. Have your child sign a medical power of attorney. Commonly referred to as a “patient advocate designation,” your child can appoint you to speak with doctors and make medical treatment decisions for them in the event they cannot do so themselves.

HIPAA Authorization.  Have your child sign a separate HIPAA authorization.   A medical power of attorney will only help you and your child if your child is incapacitated AND in a hospital or similar facility.  There may be situations where your child is either not incapacitated or is not hospitalized, but you still need to speak to medical providers on your child’s behalf regarding treatment he or she is receiving.  A HIPAA authorization will enable you to talk to them or obtain medical records and other information regarding your child’s medical condition.  You may not be able to make treatment decisions for your child, but you can at least monitor their care.  Remember, even though you are the parent, medical providers will not speak or release information to you without your child’s prior consent, regardless of your child’s medical condition.

Durable Power of Attorney. Finally, have your child sign a durable power of attorney. Parents of college students have all heard the privacy speech from school administrators – “Due to federal privacy regulations, we cannot discuss anything regarding your student without prior written authorization” – and they mean it. In order for you to discuss a tuition or dorm bill, dispute a lab fee, or discuss any of your child’s financial or other affairs with any third party, you need written authorization. That’s where the durable power of attorney comes in to play.

Under a durable power of attorney, your child can appoint you as their agent to handle their personal and financial and other non-medical affairs, whether they are incapacitated or not. Everything from banking and bill paying to tuition or room and board issues can be handled by you as your child’s agent. If your child becomes ill or has an accident while at school, as your child’s agent you will be able to keep their affairs in order until they regain the ability to do so.

Make sure you and your child are prepared for the coming school year by making sure they leave behind a medical power of attorney, HIPAA authorization, and durable power of attorney.  Good luck!

Does your student need these documents?  Give me a call.  I can help.

Transferring Company Stock From a 401(k) to an IRA? Don’t Forget The NUA!

So, you are newly retired and thinking about what to do with your employer sponsored 401(k) account.  The stock market has gone up quite a bit recently and you’re pleased with the value of your 401(k) (or other employer sponsored account) – especially the value of the company stock in your account. You may be thinking about transferring your 401(k) to an IRA for greater investment flexibility. Before you do, you may want to consider a nifty strategy to potentially save a bundle on income taxes.

The strategy involves the net unrealized appreciation (NUA) on the company stock in your 401(k). In a nutshell, NUA is the difference between the current market value of the company stock and the price originally paid for the stock (cost basis). This NUA may be eligible for favorable capital gains tax treatment when the company stock is sold.

If you roll over your 401(k) account, including the company stock, to an IRA, and then later take distributions from the IRA, the entire distribution (including any company stock) will be subject to income tax at your ordinary income tax rate. That rate could be as high as 39.6% just for federal income taxes depending upon your tax situation.

If, instead of transferring your account balance (including the company stock) to an IRA, you take a lump-sum distribution of the entire account balance, including the company stock (sometimes called an “in-kind” distribution), the distribution of the stock will be subject to income taxes, but you will only pay long term capital gains taxes (from 0% to 20%) on the NUA when the stock is sold (you’ll pay taxes at ordinary tax rates on the cost basis portion). If you are able to complete a tax-free rollover of the remainder of the distribution (less the company stock) to an IRA, the amount rolled over escapes income taxation. The NUA strategy will not work if the stock is liquidated inside the 401(k), or rolled over to an IRA.

In order to make the strategy work, you must take an in-kind distribution of the company stock from your company retirement account as part of a lump-sum distribution of the entire account balance.  The lump sum distribution must follow a “triggering event,” such as retirement or other separation from service, attainment of age 59½, death [yes, the beneficiary of an inherited 401(k) or other employer plan account can take advantage of NUA], or disability.  The entire balance of the account must be distributed – you can’t just take an in-kind distribution of the company stock.

For those with appreciated company stock in their 401(k) or other employer-sponsored account, taking advantage of the NUA rules can help save on income taxes when the stock is sold. But like any other income tax saving strategy, especially involving retirement plan distributions, it’s complicated, and it may not work in every situation. So, before you go ahead and transfer your 401(k) account with the company stock to an IRA, sit down and consult with a qualified professional who can help you determine whether the NUA strategy is right for you.

Think the NUA strategy may work for you? Give me a call, I can help.

“Beware the Ides of March”

On this day, March 15, 44 BC, Gaius Julius Caesar was stabbed to death at the Roman Senate by conspirators led by Marcus Junius Brutus and Gaius Cassius.  Julius Caesar was a Roman general and politician who played a pivotal role in the events that led to the end of the Roman Republic and the beginning of the Roman Empire.

The Setting: A Public Place –

[Flourish. Enter CAESAR; ANTONY, for the course; CALPURNIA, PORTIA, DECIUS BRUTUS, CICERO, BRUTUS, CASSIUS, and CASCA; a great crowd following, among them a Soothsayer]

Caesar. Calpurnia!

Casca. Peace, ho! Caesar speaks.

Caesar. Calpurnia!

Calpurnia. Here, my lord.

Caesar. Stand you directly in Antonius’ way,
When he doth run his course. Antonius!

Antony. Caesar, my lord?

Caesar. Forget not, in your speed, Antonius,
To touch Calpurnia; for our elders say,
The barren, touched in this holy chase,
Shake off their sterile curse.

Antony. I shall remember:
When Caesar says ‘do this,’ it is perform’d.

Caesar. Set on; and leave no ceremony out.

[Flourish]

Soothsayer. Caesar!

Caesar. Ha! who calls?

Casca. Bid every noise be still: peace yet again!

Caesar. Who is it in the press that calls on me?
I hear a tongue, shriller than all the music,
Cry ‘Caesar!’ Speak; Caesar is turn’d to hear.

Soothsayer. Beware the ides of March.

Caesar. What man is that?

Brutus. A soothsayer bids you beware the ides of March.

Caesar. Set him before me; let me see his face.

Cassius. Fellow, come from the throng; look upon Caesar.

Caesar. What say’st thou to me now? speak once again.

Soothsayer. Beware the ides of March.

Caesar. He is a dreamer; let us leave him: pass.

Julius Caesar, Act 1, Scene 2.

 

A New Estate Planning Tool – The Michigan Asset Protection Trust

On February 5, 2017, Michigan became the 17th state (along with Delaware, Nevada, Ohio, and others) to permit residents to use asset protection trusts in their estate planning. Michigan’s new law, the Qualified Dispositions in Trust Act (the “Act”), allows an individual to create an irrevocable trust known as a domestic asset protection trust (DAPT) that, if set up correctly, will shield the trust’s assets from the claims of the individual’s creditors.

Until recently, asset protection trusts were available only in foreign (offshore) jurisdictions. The Bahamas, Bermuda, the Cook and Cayman Islands, Nevis, and several other jurisdictions developed highly favorable asset protection legal environments featuring sophisticated banking and trust services for clientele. Offshore asset protection statutes typically feature very short statutes of limitations periods for creditors to attack the trust, high burdens of proof for creditors, and require the creditor to challenge the trust in the jurisdiction of the trust’s location. However, with our federal government closely scrutinizing transfers of money away of the U.S., DAPTs are become more popular here in the states. In 1997, Alaska became the first state to enact a DAPT law for Alaska-based trusts.

Under the Act, a Michigan DAPT must be irrevocable, it must have a trustee located in Michigan, and, while the person who creates the trust (the “grantor”) may be a beneficiary of the trust, the grantor cannot have unrestricted access to the trust’s assets.

If a Michigan DAPT is set up correctly, a grantor’s creditors will be prohibited from reaching the trusts assets if the creditor brings a claim more than two years after the assets are placed into the trust. (A longer period applies to claims brought in bankruptcy.)  A Michigan DAPT cannot be created to defraud one’s existing creditors. Therefore, the trust must be created and funded before creditor claims arise.

The Michigan DAPT will be a useful planning tool for people with significant exposure to creditors, such as business owners and those engaged in high-risk professions, such as doctors and lawyers, where insurance may not offer adequate claim protection. A DAPT will not generally be suitable in a typical estate plan.

A Savior Is Born Unto You

“And there were in the same country shepherds abiding in the field, keeping watch over their flock by night. And, lo, the angel of the Lord came upon them, and the glory of the Lord shone round about them: and they were sore afraid. And the angel said unto them, ‘Fear not: for, behold, I bring you good tidings of great joy, which shall be to all people. For unto you is born this day in the city of David a Saviour, which is Christ the Lord. And this shall be a sign unto you; Ye shall find the babe wrapped in swaddling clothes, lying in a manger.’ And suddenly there was with the angel a multitude of the heavenly host praising God, and saying, ‘Glory to God in the highest, and on earth peace, good will toward men.’“

Luke 2: 8-14.

Merry Christmas!

We Can Read Your Writing, We Can’t Read Your Mind

Lyle and his son, Steven, purchased a house in 2007, which became Lyle’s personal residence. The title to the property was conveyed to: “Lyle, a single man, and Steven, a single man.” Lyle passed away several years later. The Michigan Department of Health and Human Services (DHHS) filed a claim against Lyle’s probate estate for unpaid Medicaid bills in the amount of $48,084.95. DHHS sought to have the bills paid from Lyle’s share of the property.

Steven filed a petition to reform the deed to indicate a joint tenancy with rights of survivorship, arguing that Lyle intended to create a joint tenancy so that his interest in the property would pass to Steven upon his death – avoiding DHHS’s claim. DHHS responded arguing that by law, the ownership estate created by the deed between Lyle and Steven was a tenancy in common because there was no express language in the deed declaring an intent to create a joint tenancy or an intent to grant a right of survivorship.

The trial court agreed with Steven’s argument and found that the deed created a tenancy in common, but that a latent ambiguity existed regarding the survivorship right. On the basis of the ambiguity, the trial court reformed the deed to comport with Lyle’s intent to own the property with Steven as joint tenants with a right of survivorship. Under the trial court’s ruling, DHHS could not satisfy Lyle’s unpaid bill from Lyle’s interest in the property, because Lyle’s interest automatically passed to Steven upon his death. DHHS appealed.

The Court of Appeals reversed the trial court, holding that although the trial court was correct in finding that the deed’s granting clause (to “Lyle, a single man, and Steven, a single man”) created a tenancy in common between Lyle and Steven, the language of the deed, on its face, was not ambiguous and, therefore, the deed could not be reformed. The Court of Appeals ruled that based upon the clear and unambiguous language in the deed, Lyle’s interest in the property did not pass to Steven automatically upon his death and, therefore, DHHS could satisfy Lyle’s unpaid Medicaid bills from Lyle’s interest in the property.

Under Michigan law, a deed conveying title to two or more persons is presumed to create a tenancy in common unless the deed language expressly declares an intention to create a joint tenancy or a right of survivorship. As happened in Lyle’s case, the death of one co-owner under a tenancy in common does not extinguish the deceased owner’s interest in the property. That interest survives to his probate estate where creditors, like DHHS, can seize it to satisfy their claims. And the courts are powerless to help.

With any legal document, what you meant to say matters little – what matters is what your document actually says.  Deeds and other documents must be carefully drafted to clearly express and carry out your intentions.  Poor drafting can have disastrous consequences. In Lyle’s case, not having the correct language in his deed cost Steven tens of thousands of dollars ($48,084.95 to pay the DHSS claim, plus legal fees).

Work with competent legal counsel to ensure your documents are properly drafted. It can save you and your family a fortune in the long run.

The case is Steiner v DHHS, and you can read the opinion of the Court of Appeals here.

Critical Post-Divorce Estate Planning Moves

Divorce can be a traumatic event.  But you cannot rest once the divorce is final.  You must immediately take action to update your estate plan to reflect your new marital status. A short article in Forbes online does a good job of summarizing what must be done with an estate plan following divorce. You need to review and revise your existing estate planning documents with the help of a competent estate planning attorney. These include your will, trust, power of attorney (financial and medical), and beneficiary designations on life insurance and retirement accounts. Your ex-spouse should be removed as a fiduciary (executor, agent, trustee, etc.) in your estate plan. Further, your ex should be removed as a beneficiary of your estate plan (including life insurance and retirement accounts). If you do not, part of your estate could pass to your ex, which may not be your intent. However, you need to make sure that any changes are consistent with the provisions of your divorce decree. As a legally binding instrument, you cannot make a change to your estate plan that contradicts the divorce judgment. Read the entire article here.

Post-Bankruptcy Mortgage Modification

A client contacted me regarding a potential home mortgage loan modification. The client had filed a Chapter 7 bankruptcy two years ago and received a discharge of all of her debts, including the mortgage loan debt. She wanted to pursue a loan modification under the federal government Home Affordable Modification Program, the “HAMP” program. Her concern was that by agreeing to a modification of the mortgage loan now, she would become personally liable for the mortgage debt that had been discharged in her bankruptcy.

If you file a consumer bankruptcy, you have the option to reaffirm (reinstate) a debt that would otherwise be discharged in the bankruptcy. By reaffirming a debt in bankruptcy, you remain personally liable for the debt after the bankruptcy, which means that if you later default on the debt, the creditor can sue you and recover the money owed through garnishment or other action. In general, bankruptcy lawyers do not recommend clients reaffirm debts since the point of bankruptcy is to shed the personal liability for the debts.

But what if, like my client, you didn’t reaffirm a mortgage debt in bankruptcy and later want to modify the loan. Does the mortgage modification reinstate the personal liability for the mortgage loan debt?

Even if you did not reaffirm your mortgage in your bankruptcy, you can work with your lender on a HAMP mortgage modification post bankruptcy, and the modification does not revive the personal liability for the discharged debt. The current HAMP Handbook, version 4.5 states that “Borrowers who have received a Chapter 7 bankruptcy discharge in a case involving the first lien mortgage who did not reaffirm the mortgage debt under applicable law are eligible for HAMP.” In addition, the following language must be included in the mortgage modification agreement: “I was discharged in a Chapter 7 bankruptcy proceeding subsequent to the execution of the Loan Documents. Based on this representation, Lender agrees that I will not have personal liability on the debt pursuant to this Agreement.”  Furthermore, Section 524 of the U.S. bankruptcy code prevents a debtor and a creditor from entering into any reinstatement agreement after bankruptcy for a debt that was discharged in bankruptcy.

A HAMP mortgage modification does not create a new loan  It changes the terms of the mortgage loan, and you are not agreeing to again be personal liable for the debt. (The only instance where personal liability on a modified loan survives bankruptcy is if you reaffirmed it during the bankruptcy.)

Understand that a loan modification is entirely different from a post-bankruptcy mortgage refinance, where an entirely new loan is being created after the bankruptcy. In that situation, you would have personal liability on the loan because it is a new debt that arose after the bankruptcy.

The HAMP morgage modification program is scheduled to expire December 31, 2016.

Critical Estate Planning Steps for College Students

College students are getting ready to head back to school. Whether your child goes away to school or commutes from home, don’t let them start the school year without taking these critical estate planning steps:

Have your student sign a medical power of attorney. If your child has an accident or becomes seriously ill, unless your child is under age 18, medical personnel will not discuss your child’s medical condition or treatment with you without authorization. Commonly referred to as a “patient advocate designation,” your child can appoint you to speak with doctors and make medical treatment decisions for them in the event they cannot do so themselves. It’s a good idea for the school’s medical clinic to have a copy on file, too.

Have your child sign a separate HIPAA authorization. Even with a valid medical power of attorney, medical providers may refuse to release your child’s medical information or speak to you regarding their medical condition. Doctors, hospitals, and other medical facilities fear the legal repercussions of unauthorized disclosures of one’s medical information. Even though you are the parent, they will not speak or release information to you without your child’s prior consent. I have handled cases where family members were forced to petition the courts to gain access to their student’s medical information in an emergency.

Finally, have your student sign a durable power of attorney. Parents of college students have all heard the speech from school administrators – “Due to federal privacy regulations, we cannot discuss anything regarding your student without prior written authorization” – and they mean it. To discuss a tuition or dorm bill, dispute a lab fee, or discuss any of your child’s financial affairs with any third party, you need written authorization. That’s where the durable power of attorney comes in to play.

Under a durable power of attorney, you child can appoint you as their agent to handle their personal and financial affairs if they can’t themselves. Everything from banking and bill paying to tuition or room and board issues can be handled by you as your child’s agent. If your child becomes ill or has an accident while away at school, as your child’s agent you will be able to access bank accounts, make sure their bills are paid, and keep their affairs in order until they regain the ability to do so.

This is a very exciting time for college students and parents. Make sure your student is fully prepared by making sure they give you their medical power of attorney, HIPAA authorization, and durable power of attorney.

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.