| Decedents dying in | Exemption Equivalent | |
|---|---|---|
| 2006, 2007 and 2008 | 2,000,000 | |
| 2009 | 3,500,000 | |
You may download our Datasheet for Estate Planning in PDF format.
DO YOU KNOW OR KNOW WHERE TO FIND
DO YOU AND YOUR SPOUSE HAVE:
|
Yes |
No |
|
The responsibilities which follow are generally those of trustees, but in some cases also apply to personal representatives designated under wills. A trustee must:
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_______________________________________________________
(Signature of person completing Questionnaire) _______________________________________________________ (Typewritten or printed name of person completing Questionnaire) _______________________________________________________ (Address) _______________________________________________________ (Telephone Number) _______________________________________________________ (Date of completion of Questionnaire) |
In meeting with our clients regarding their estate planning needs over the years, many questions have arisen about Revocable Living Trusts. The following questions seem to be asked most frequently.
What is a Revocable Living Trust?
A Revocable Living Trust is a trust created by an estate owner during his or her life and may be as simple or complex as
desired. It may be altered, amended or revoked during the estate owner's lifetime. It becomes irrevocable upon the death
of the owner.
Why bother to create a Revocable Living Trust?
Although a comprehensive Estate Plan can be developed without the use of a Revocable Living Trust, several advantages
can be obtained through its use. Among these advantages are:
1. Avoidance of probate procedure and its associated costs and time delays;
2. Possibility of federal estate tax savings;
3. Long-term financial protection of children and grandchildren without continued court intervention;
4. Protection against the incapacity (physical, mental, or legal) of the person creating the Revocable Living Trust or a beneficiary;
5. Provides vehicle to plan for special needs of physically or mentally disabled beneficiaries;
6. Withholding of complete control of their inheritance by children until they reach a designated age;
7. No public disclosure of details of estate; and
8. Professional management, if desired, of trust assets.
To what extent will the existence of a Revocable Living Trust avoid probate?
To the extent that it is funded with assets of the estate owner which were
solely owned by the estate owner at the time of his or her death. These assets,
were it not for the Revocable Living Trust, would be subject to the jurisdiction
of the Probate Court, whether the estate owner died with or without a Will.
How large should our estate be before we consider the possible use of a Revocable
Living Trust?
For tax savings from a Revocable Living Trust, an estate should be approximately
$1,000,000 in 2002 and 2003, $1,500,000 in 2004 and 2005, $2,000,000 in 2006,
2007 and 2008, and $3,500,000 in 2009. Currently, the law provides that the
estate tax is to be repealed in 2010, only to return again in 2011 with an estate
tax exemption of $1,000,000 (rather than $3,500,000). The impact of inflation
and the resulting future growth of the estate are also factors in making the
determination of the appropriateness of the use of a Revocable Living Trust.
However, even where tax considerations are not of major importance, a Revocable Living Trust can be useful in making provisions for the future of a family member with particular needs, such as educational requirements or continuing physical problems.
What if I have minor children?
If your minor children inherit your estate through a Will or if you have no
Will and there is no trust to control the property, your children are entitled
to receive the property outright, without restrictions, at age 18 regardless
of their level of maturity. A Revocable Living Trust can be used to delay their
receipt of your wealth and to control the way in which the funds are used on
their behalf.
Can insurance be used to fund a Revocable Living Trust?
Yes. It is wise to name a trust as the beneficiary of the death benefits of a life insurance policy. The death benefits will
then be administered according to the terms of the Revocable Living Trust. This avoids the possibility that the proceeds
will become part of the probate estate of the insured. It may also reduce the impact of the Michigan Inheritance Tax. It
also ensures that the proceeds will be administered according to the desires of the owner of the policy.
How can a Revocable Living Trust save federal estate tax on the death of
a surviving spouse?
By dividing an estate into shares, one share of which is taxable on the death
of the surviving spouse and one share of which is not. The share which is taxable
on the death of the surviving spouse (the Marital Trust) may be fully and readily
accessible. The income and principal of the portion which is not taxable (the
Family Trust or Credit Shelter Trust) can be made available to the spouse, if
so desired. For example, by taking advantage of this arrangement (with an estate
of approximately $3,000,000), the estate taxes on the death of a surviving spouse
in 2005 (assuming the death of the first spouse in 2004 when the estate tax
exemption amount is scheduled to be $1,500,000) could be reduced from approximately
$695,000 to $0, a savings of $695,000. Of course, these numbers are subject
to change, depending on the type of Estate and Financial Plan adopted, changes
in the law, and growth of the assets.
The law allows an alternative method of providing for a spouse. This alternative
allows certain interests in property, known as "qualified terminable interest
property," to pass to a surviving spouse without the imposition of an estate
tax at the time of death of the first spouse. Specifically, it permits a spouse
to give the surviving spouse a life-long income interest in property, and, yet,
allows the first spouse to control the ultimate distribution of the property
at the time of death of the surviving spouse. This type of transfer qualifies
for the unlimited marital deduction.
However, these transfers will be included in the estate of the second spouse
to die. In summary, use of the "qualified terminable interest property" provisions
allows the first spouse the opportunity to control the ultimate distribution
of the family's assets. In this fashion, for example, children of a current
marriage can be protected from being disinherited as a result of a second marriage
of the surviving spouse.
Certain problems this alternative creates are the following:
(1) Conflicts may be created between husband and wife, since the first spouse to die can effectively limit the ultimate
control of the surviving spouse over a substantial portion of the first spouse's estate.
(2) Increased need for life insurance on the surviving spouse to protect against liquidity problems caused by a larger
taxable estate upon the second spouse's subsequent death.
Are there other kinds of trusts?
Yes. One type of trust which can be used in certain situations is an "Irrevocable
Life Insurance Trust." Typically, in this type of trust, an individual irrevocably
assigns to the trust all of the right, title and interest in insurance policies
on the individual's life. The principal of the trust will consist of the proceeds
of the policies at the insured's death. After the insured's death, the income
will be payable to the insured's spouse. Upon the spouse's death, the proceeds
will be payable to their children. For estate tax purposes, the value of the
insurance is removed from the estate of both the insured and the spouse. There
may be gift tax consequences connected with the establishment and maintenance
of an Irrevocable Life Insurance Trust, but these can generally be minimized
and certainly do not out weigh the estate tax benefits.
Prior to the passage of the Tax Reform Act of 1986, several other alternative
types of trusts were available for use as income shifting devices. These alternatives
are no longer available.
GENERAL TAX AND FINANCIAL PLANNING
Finally, we want to remind you that the proper time to review your tax, estate and financial planning situation is NOT on
December 31 or April 15. The proper time to seek advice regarding these matters is throughout the entire year so that
appropriate, economically-sound, unhurried decisions can be made.
Generally, the advantages of incorporation are as follows:
1. Limited Liability. A corporation is treated as an entity separate from its owners. This "separate entity" concept results in insulation of the owners from liability for corporate debts. The amount of risk is never more than the owners' investment in the corporation. Although the directors and shareholders of a corporation have the responsibility of insuring that there is adequate capital in the corporation, they can protect their personal estates against claims arising from business operations by prudent and responsible business planning. However, this concept does not protect a shareholder, who is an employee of the corporation, from liability for his own negligence or the negligence of another employee acting as his agent, pursuant to the general principles of negligence law.
2. Continuity. Unlike a sole proprietorship or partnership, a corporation continues in existence in the event of death of one of its shareholders. Therefore, although the death of one of the shareholders may result in a loss to the corporation of that person's skills or expertise, the corporation may continue its business, without interruption, upon said death.
3. Central Management. The business of the corporation is handled by its officers who are elected by and given direction by the board of directors or a committee appointed by the board of directors. Therefore, certain responsibilities can be delegated to individuals, who may act on behalf of the corporation, thereby preventing duplication of effort and providing more time for each individual to perform his duties.
4. Transferability of Interests. Since ownership in a corporation is evidenced by stock certificates, that interest can be transferred merely by transferring or assigning the stock certificate. Furthermore, the corporation and its shareholders may enter into a stock purchase agreement which provides for restrictions on who may purchase the stock, requirements that the stock be offered for sale to the corporation or the other shareholders upon the occurrence of certain events, or otherwise limit or compel the disposition of the stock.
5. Tax Advantages. Additionally, there are several tax advantages to the corporation form of doing business:
(a) The corporation is a separate entity for tax purposes and, therefore, it is taxed on its income at special corporate income tax rates, which generally range from 15% to 38%. However, compensation can be paid to the employees and taken as a deduction by the corporation which results in a situation where the employee pays income tax only on the amount of compensation he is paid, regardless of the amount of profit made by the corporation. There are limits on the amount of capital which corporations may retain, as opposed to paying dividends to its shareholders. However, proper tax and business planning can result in aggregate lower income tax liabilities.
(b) Pursuant to Internal Revenue Code Section 351, a sole proprietorship or a partnership may transfer its assets to a newly-formed corporation without gain or loss being recognized by the individual transferors if certain requirements are met.
(c) Pursuant to Internal Revenue Code Section 1244, the shareholders of a newly-formed corporation may issue stock in such a manner that, in the event of a realized loss in the value of the stock, said loss can be deducted in full against the shareholder's ordinary income, rather than being treated as a capital loss. Of course, there are certain requirements which must be met, as well as certain dollar limitations.
(d) Pursuant to the Internal Revenue Code sections relating to Subchapter S elections, the corporation may elect to be taxed as a Subchapter S corporation if it meets certain requirements. Said election results in the income or loss from the corporation's business being taxed directly to the shareholders in a similar manner to a partnership. This may be a useful tool when it is possible that a loss or substantial investment tax credit may result in the first years of business.
Additionally, there are several advantages of incorporation which apply to all corporations but are particularly useful to professional service corporations. In general, these advantages result in the corporation being able to pay certain expenses on behalf of a shareholder with pre-tax dollars, rather than having the individual shareholder receiving income, paying tax on that income, and then paying the expenses with his after-tax income. The advantages are as follows:
1. Qualified Plans. A corporation may establish a qualified savings and profit sharing and/or pension plan. The use of these plans permits a shareholder to defer a higher percentage of his income until later years than is permitted under Keogh plans. A corporation can contribute certain amounts to either or both of said plans and the shareholder will not be taxed on the amounts contributed until he actually receives them. Therefore, a tax savings will result if the contributions are not received by the shareholder until retirement when he is generally in a lower income tax bracket. Additionally, these plans may classify employees into different groups and provide for a different rate of contribution on behalf of each group.
2. Medical Expense Reimbursement Plans. A corporation may contribute to a medical expense reimbursement plan, or reimburse employees pursuant to a medical expense reimbursement plan, for medical expenses incurred by the employees and, in some instances, their families. The contributions, reimbursements and/or insurance premiums which are paid are tax deductible by the corporation and are not included in the income of the employee. However, the beneficial use of this type of plan has been limited somewhat by the Revenue Act of 1978. Important standards regarding the classification of employees have been imposed in order to ensure that key employees are not treated more favorably than other employees. The previous rules for plans which are funded by outside insurers remain unchanged.
3. Disability Income Plans. Pursuant to a disability income plan, a corporation may purchase disability insurance for its employees and deduct the cost of the premiums from its income. Furthermore, the premiums will not be taxed as income to the employee.
4. Group Term Life Insurance. A corporation may purchase up to Fifty Thousand Dollars ($50,000.00) of group term life insurance and deduct the cost of the premiums from its income. Furthermore, the premiums will not be t axed as income to the employee.
5. Death Benefits. Pursuant to the Internal Revenue Code, a corporation may pay up to Five Thousand Dollars ($5,000.00) in death benefits to the beneficiaries of an employee. The payment is not income to the beneficiary and is deductible by the corporation.
Although the law requires a corporation to comply with certain formalities, the tax and non-tax advantages that can be gained from incorporating, in many cases, may make a corporation a desirable form of conducting business.
We hope that this discussion will help you understand the desirability of conducting a business in the corporate form.
Sincerely
GOURWITZ AND BARR, PLLC
We discuss the fees for our services in advance with our clients. They are based on the type of services we are providing for that specific client and are then reduced to writing.
Specific examples of areas in which AIM and GOURWITZ AND BARR, PLLC, become involved for our clients are:
Taxation: Almost every facet of a client's business and personal financial life is affected by taxes. We continually counsel clients as to methods of saving taxes by recommending specific types of investments, alternatives for structuring a particular transaction, and by keeping clients aware of changes in the tax laws and new planning possibilities.
Estate and Financial Planning: GOURWITZ AND BARR, PLLC, has been involved in the preparation of numerous estate plans with an emphasis on preserving a client's estate from needless estate, gift and income taxes. A complete review of the client's finances is necessary to engage in this type of planning and, many times, the preparation of sophisticated wills and trusts, as well as other documents, is required. We are also prepared to handle the less-complicated situations where a simple will or asset transfer will accomplish the planning goals of the client.
Financing: We have been involved in transactions with major commercial banks and financial institutions. Many times, we are able to assist our clients in obtaining special financing arrangements.
Arbitration: GOURWITZ AND BARR, PLLC, represents numerous clients in various types of civil litigation and arbitration procedures.
Real Estate Matters: We are engaged in a wide range of representation regarding many forms of real estate matters which range from simple purchases and sales of real estate to the construction of apartment complexes, condominiums and shopping centers. No real estate matter is exactly the same, and the tax and legal ramifications of each transaction must be considered separately.
Insurance: AIM assists our clients in insurance planning to ensure that they are protected by life, disability, health and liability insurance which best meets their particular needs.