Estate Planning Focus – Summer 2007

Topics included in this issue:

• Estate Planning:  Worth the Cost
• Governor Granholm's Tax Proposals Include an Estate Tax
• Employer-Owned Life Insurance Tax Trap
• Meyers Assumes T&E Leadership Post; Two Associates Join
• Organ Donation Update  

ESTATE PLANNING: WORTH THE COST

by T & E Practice Group

Contacting an experienced and well-trained estate planning attorney to assist you with your estate plan is smart and well worth the investment. Contrary to popular belief, estate planning is complicated and involves the intersection of legal issues in many areas, such as personal and real property, contract, tax, wills, probate, and trust. An attorney who is dedicated to estate planning commits to understanding the changing legal landscape in these areas. Furthermore, such attorneys are aware of the multitude of tools that can be used to best accomplish your estate planning desires.

Cheap estate planning options do not deal with issues other than a simple "one size fits all" will document. This planning will likely result in your assets being distributed in a manner contrary to your wishes and may generate unnecessary costs–legal costs if your estate plan is challenged and emotional costs if your family cannot ascertain your intentions (particularly if family members understand your intentions differently). A seasoned estate planning attorney will assist you with all aspects of your planning, such as:

• Your will is clearly written to carry out your desires most efficiently and economically and avoid disputes after your death.
• Your beneficiary designations for life insurance and retirement plans are coordinated with your estate plan.
• Titling of your assets is reviewed. Many people do not realize that the titling of assets affects how assets pass upon death and can undermine a well-drafted will.
• Taxation is considered. Even though estate taxes may not affect many individuals due to the current $2 million estate tax exemption, income taxes should be considered for every individual who has a retirement plan or desires to make charitable gifts, and gift tax issues may be present (for instance, if you name another as a joint owner of your assets).
• Disability documents that name someone to take care of your financial and medical affairs during your life are drafted. If such documents are not created, then expensive probate procedures may be needed if you cannot take care of your own affairs. These procedures can put undue strain on loved ones.

An experienced estate planning attorney also defers to experts in other areas when needed. For instance, when preparing documents to transfer real estate, a well-trained estate planning attorney will seek assistance from a well-trained real estate attorney. When the attorneys working together are in the same firm, the effort is particularly efficient and coordinated. Such cross-referrals ensure that your intentions are appropriately met.

Overall, hiring a qualified estate planning attorney to assist you with your estate plan is worth the cost. 

GOVERNOR GRANHOLM'S TAX PROPOSALS
INCLUDE AN ESTATE TAX

by T & E Practice Group

Michigan has had no estate tax since 2005. Prior to 2005, Michigan imposed an estate tax only if a decedent's estate had to file a federal estate tax return and pay federal estate tax. As the amount of the exemption from federal estate tax increased ($1 million in 2002 and 2003, $1.5 million in 2004 and 2005), the number of estates liable for Michigan estate tax decreased.

For example, if an individual died in 2004, his or her estate had to file a federal estate tax return only if the value of his or her gross estate exceeded $1.5 million. If the decedent's estate had to file a federal estate tax return and the return showed a federal estate tax liability, the liability could be offset by a number of available credits. Prior to 2005, a federal estate tax liability could be offset by death taxes actually paid to a state. The credit for state death taxes was limited, however. The maximum state death tax credit allowable was based on a percentage of a decedent's "adjusted gross estate," which ranged from 0.8 percent to 16 percent and increased as the value of the decedent's adjusted gross estate increased. Michigan imposed an estate tax equal to the maximum state death tax credit allowable on a decedent's federal estate tax return.

Congress phased the state death tax credit out from 2002 to 2004, and, after 2004, the state death tax credit vanished for federal estate tax purposes. The Michigan estate tax also vanished because it imposed an estate tax only if a state death tax credit was allowable on a decedent's federal estate tax return. In other words, no Michigan estate tax could be imposed if a state death tax credit was not available for federal estate tax purposes.

In response to Michigan's current economic climate and the repeal of the Michigan single business tax, Gov. Jennifer Granholm recently submitted a 22-bill tax package to the Michigan legislature. One of the bills is Senate Bill 314, which intends to reinstitute the Michigan estate tax for individuals dying after March 31, 2007. Senate Bill 314 will accomplish this by turning back the clock. In general, Michigan would impose an estate tax equal to what the maximum allowable state death tax credit would have been for federal estate tax purposes under the Internal Revenue Code as of Jan. 1, 2001. By adopting the Internal Revenue Code as of Jan. 1, 2001, Senate Bill 314 reactivates the state death tax credit concept as it existed in 2001. Consequently, if this bill is enacted, the Michigan estate tax will be imposed at graduated rates that increase as the size of the adjusted gross estate increases.

However, Senate Bill 314 provides that no Michigan estate tax will be levied on taxable estates under $2 million as defined in the Internal Revenue Code as of Jan. 1, 2001. Therefore, Michigan estate tax rates would range from 7.2 percent for taxable estates of $2 million to 16 percent for taxable estates over $10.1 million. Although the $2 million exemption amount is significant, it is not tied to any cost-of-living adjustment that takes into account inflation. Thus, if inflation occurs over the next 10 years, a $2 million exemption amount today would be more valuable than a $2 million exemption amount 10 years from now.

Senate Bill 314 further provides that, in computing the state death tax credit for Michigan estate tax purposes, a decedent's adjusted gross estate will be reduced by the value of all "qualified family-owned business interests" included in the decedent's adjusted gross estate, as those interests are defined under the Internal Revenue Code as of Jan. 1, 2001. Although the reduction in the tax base for qualified family-owned business interests was probably intended to help estates with interests in small or family-owned businesses, the reduction is based on an Internal Revenue Code provision that was actually repealed in 2001. Congress believed this provision and others were unduly burdensome on estates, particularly estates with small businesses, family-owned businesses, and farming businesses. Nevertheless, if Senate Bill 314 is enacted, it appears that estate planning for Michigan residents will have to consider the qualified family-owned business interest concept for Michigan estate tax purposes, even though that concept was repealed for federal estate tax purposes.

In summary, debate has begun over whether Senate Bill 314 and the other 21 tax bills submitted to the Michigan legislature will stimulate the Michigan economy and provide an effective replacement to the single business tax. When all of the dust has settled and a package of bills has been enacted, estate planning will once again analyze how Michigan's tax system compares with the tax systems of other states. The current debate in the Michigan legislature reveals that state tax planning continues to be very important for estate planning purposes. Granted, taxes are not the only reason why people choose to reside in Michigan or elsewhere, but tax consequences are often instrumental in the decision-making process. We stand ready to assist those who are interested in considering the tax consequences of residing in Michigan or elsewhere. 
 

EMPLOYER-OWNED LIFE INSURANCE TAX TRAP

by Karen L. Kayes

For the policy beneficiary, proceeds from employer-owned life insurance are generally tax-free. Before the Pension Protection Act of 2006 (PPA), employers could also get tax-free death benefits from life insurance they purchased on the lives of their employees.

The PPA added a new IRS code section with a "catch" for employers who had purchased life insurance policies to fund buy-sell agreements, secure new loans, to insure the lives of key employees and other reasons.

Employers will now have to account for proceeds from employer-owned life insurance policies issued after Aug. 17, 2006, as ordinary income, minus premiums payments, unless certain requirements are met.

Companies can maintain income-tax-free-status, if the company provided the required notice and obtained necessary consent, in the following circumstances:

1. For policies covering individuals who were employed at any time during the 12 months prior to death,
2. For policies covering individuals who were directors, received more than $95,000 (as adjusted for inflation) of compensation during the previous year, were among the five highest-paid officers, or were among the highest-paid 35 percent of all employees, at the time the policy was issued,
3. For policies used to buy an interest in the employer from the estate, family members, or nonemployer-designated beneficiary of the insured (or from a trust for the family member or beneficiary),
4. For policies paid directly to the estate, family member, designated beneficiary, or trust.

For these exceptions to apply, the employee, before issuance of the contract, must:

1. Be notified in writing that the employer intends to insure the employee's life and the maximum face amount for which the employee could be insured at the time of contract issuance.
2. Provide written consent to being insured, even after the insured terminates employment.
3. Be informed that the employer will be the beneficiary of the policy proceeds.

In addition, employers owning life insurance contracts subject to this new provision must file a return with the IRS, reporting the total number of employees and the number insured under an employer-owned life insurance contract, the total amount of insurance, and other information.

Generally, these new rules are applicable to insurance policies issued after Aug. 17, 2006. However, certain changes to policies issued even before that date may result in the policy proceeds being subject to the new rules. Specifically, any material increase in the death benefit, or other material change except those considered administrative, will cause the policy to be treated as a new policy. Therefore, any changes to existing policies should be carefully analyzed.

MEYERS ASSUMES T&E LEADERSHIP POST; TWO ASSOCIATES JOIN

We welcome Susan Gell Meyers as the new chair of the Trusts and Estates Practice Group. Susie concentrates her practice in estate and tax planning for individuals, family and closely held businesses and professional entities. She serves on the Firm's Management Committee.

Active both professionally and in the community, Susie is a member of the American Red Cross of West Michigan, the United Way of West Michigan and the Community Advisory Council of the Renucci Hospitality House. She is a member of the West Michigan Estate Planning Council, Women Lawyers Association of Michigan, American Bar Association, State Bar of Michigan and Grand Rapids Bar Association.

We were blessed with Mark Harder's excellent leadership for the past five years. Mark remains in our Holland office with his practice focused on the representation of family and closely held businesses and their owners, including estate and succession planning. Mark is leading the effort for a new trust code in Michigan, and, at the national level, continues as a member of the board of directors of The Attorneys For Family-Held Enterprises.

A pair of associates also have recently joined the Trusts and Estates Practice Group. Amber DeLong and Ann Liefer are the newest T&E members.

Amber's practice is focused on tax and estate planning for individuals as well as family-business incorporation, planning and succession issues. Amber's practice also includes advising on employment agreement issues for all types of business, including professional corporations, executive compensation strategies and compliance and addressing taxation issues of exempt or nonprofit organizations. She is based in Muskegon.

Ann will join our Grand Rapids office as an associate in the Trusts and Estates Practice Group. Ann is a graduate of the University of Michigan and of Indiana University School of Law. Prior to going to law school she was a center manager for Consumer Credit Counseling Service. Following law school, she clerked with Judge Robert Holmes Bell in the U. S. District Court.

ORGAN DONATION UPDATE

by Jeffrey Power

Tip O'Neill said it best: "All politics is local." One's view on an issue is likely to be most strongly colored when personally affected. That is certainly true of organ donation.

The current national organ distribution policy generally directs an organ for transplant to the person who has been waiting longest in the region in which it becomes available. That seems fair, but is wasteful of a resource whose supply has been limited by the policy's prohibition against incentives encouraging donation.

Allocation under new policy now in development will likely rely significantly on the concept of "net benefit," which seeks to give the organ to the person who is likely to most benefit. Age and state of health would become major determinants of one's place on the list; the relatively aged and infirm would have low priority regardless of how long they had been waiting. No new incentives to donation are contemplated.

Furthermore, "transplant tourism" available to the wealthy and connected is likely to become much more difficult as China, the principal destination for this pupose as a result of supplies from executed prisoners, revamps its policy to favor its own citizens.

If there were enough organs to go around, none of this would matter. But because most transplantable organs are completely wasted due to failure to consent to organ donation, the transplant waiting list is about 100,000 people long and getting longer. More than half on the list will die before they receive a transplant.

People can decline to donate organs when they die but still get an organ transplant if they need one, even ahead of someone who had agreed years earlier to be an organ donor. A relative can even circumvent a loved one's wish to donate organs, resulting in the deaths of several potential recipients, and still get a transplant ahead of someone who has agreed to donate.

In response to this problem a nonprofit organization has been created that allows individual donors to impose their views on government rather than the other way around. Because your organs belong to you, you can decide who gets them when you die by joining with other willing potential donors who have decided they want their organs to be offered first to fellow organ donors.

The group is called LifeSharers. Membership is free and open to all at http://www.lifesharers.org. Nobody is excluded because of any preexisting medical condition, and parents can enroll their minor children. A six-month waiting period is required before getting preferred access to the organs of other members, to encourage people to sign up before they know they need transplants. LifeSharers currently has 9,000 members and has doubled its membership in the past year.

Reciprocity in organ allocation gives non-donors a powerful incentive to become donors, because agreement to donate organs may literally save the donor's own life. And as the number of reciprocating donors increases, the ability of "free riders" to get an organ goes down, thus magnifying the incentive to donate. If the consent rate from suitable postmortem donors was raised to 85 percent, just about everyone currently on the waiting list could get a transplant within three years and newly listed patients would get transplants much faster.

Reciprocity is unlikely to become national policy anytime soon, although Congress recently recognized a shortcoming of the current sclerotic national organ allocation process when it passed the Norwood Living Organ Donation Act making it easier for kidney exchanges to occur. Under the act a patient who already has a willing but biologically incompatible donor may trade with another mismatched couple so that both transplants can take place. Two lives are saved instead of none. One small step for mankind.

In the meantime, nothing is stopping each of us from taking another small but concrete step toward improving the organ allocation system by agreeing to reciprocal organ donation.