Friday, December 1, 2006

Do You Really Want To Read About More Year End Strategies?

Rather than add to your stack of already informative “tips, tricks, traps” and other year end tax and financial strategies, I will make this an opportunity to reflect on some personal and informal issues.

Our firm held its annual meeting on November 17 and 18.  One topic involved marketing.  We have a diverse mix of areas of practice, and styles.  During our discussion, I was impressed by a recurring theme:  relationships.  Clearly, our most effective “marketing” approach has been the development and maintenance of quality professional relationships with our clients and, importantly, our professional colleagues.

 I want to thank all of you who have been sources of information and support (and in many instances, for your friendship) over the years.  I also want to thank you for providing our clients with top quality service when we have been able to refer them--and for the trust and confidence you place in us when you refer your important clients to us.

I would like to take this opportunity to do something I do not do often enough:  tell you a little about some of the services my firm can provide to you and your clients which I may not personally provide.

We are a 9-lawyer firm with offices in Saginaw and Frankenmuth.  In addition to the Business, Tax, Elder Law and Estate Planning, Probate and Trust Administration  you are accustomed to hearing me tout, we offer a number of other important services to our clients.

Our attorneys represent individuals, businesses and institutional clients in real estate, municipal, bankruptcy, and litigation.  We have trial lawyers in the firm who are highly skilled and have years of courtroom experience in commercial and personal matters (including accident and personal injury, construction, business disputes).  We do adoptions.  We represent clients in municipal matters, including zoning, condemnation and Michigan Tax Tribunal work.  We represent clients doing real estate development, and establish condominiums, but are equally able to assist individuals in personal real estate purchases, sales and leases.  And of course, we handle Probate and Trust Administration.

 I hope you will continue to consider us a resource for any legal problem or issue you may have.  I will be happy to discuss any of these issues which may arise for you or your clients from time to time and if I cannot address them directly, will refer you to one of my partners.

Finally, I want to wish you a blessed holiday season, and a happy, successful and profitable New Year.

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at:, or by Telephone at 989-652-9923.

Andy Richards


Friday, September 1, 2006

Annuities: Tricks and Traps

Annuities present some unique opportunities for your clients.  But for the unwary agent and client, they also present some dangerous pitfalls.  The Annuity enjoys its own multiple-page, multiple-subsection, provision in the Internal Revenue Code.

Annuities afford clients a way to “park” assets and let them grow tax deferred.  One of the most important aspects, therefore, is to make sure they maintain their tax-deferred status.  The tax code is very specific about the limited instances in which a Trust can be the owner of an annuity.  Generally, qualified retirement plan trusts and Grantor Revocable Trusts are the only ones which will not cause an annuity to lose its tax exemption.  Therefore, when using estate planning trusts as owners of an annuity, care must be taken to consider the consequences of the death of the grantor.

An annuity is a contract.  The tax code allows the contract to be structured in a way that causes deferral of taxation of growth.  But each annuity contract is created by the underwriting company.  Thus, the options available to the owner and/or beneficiary, and the consequences of either changes of ownership, or death of the owner and/or annuitant can vary from contract to contract.  Not knowing what those options and consequences are can come back to “bite” the advisor (as well as her/his client).

Some annuity contracts do not directly address what happens in certain circumstances.  Take, for example, an annuity in which the annuitant is someone other than the owner and beneficiary.  What happens if the owner of the annuity dies, but the annuitant and beneficiary are still living.  In one case I am aware of, though the contract did not address this issue, the issuer took the position that the annuity could only be transferred from the deceased owner’s probate estate, to his heirs.  One of the “selling” points of an annuity contract is generally its transfer-on-death character, usually avoiding the need for probate.

Another common concern involves how an annuity will be treated in the event the owner is required to go into a long-term care scenario.  For purposes of qualifying for Medicaid, annuities are usually countable assets.  Medicaid exempts only very specifically structured annuities, and current new law has now even made them no longer viable.  There is a misconception out there that an irrevocable annuity will be exempt from Medicaid.

Like any other financial or estate planning tool, the annuity is a powerful planning option in the right circumstances and with the right plan design.  But like any powerful tool, care and skill should be exercised when implementing it.

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at:, or by Telephone at 989-652-9923.

Andy Richards


Saturday, July 1, 2006

ILITS: Keeping “Crummey” Trusts from turning “Crummy.”

Financial advisors get to “sell the sizzle” of Irrevocable Life Insurance Trusts (ILIT) and their powerful estate tax avoiding leverage.  These trusts are a powerful tool which can provide your clients with near-unlimited estate tax savings, compounding their already impressive income tax free nature.

As simple as this technique is to illustrate, however, it is fraught with “devil in the details” issues.  First, a client must understand that, in order for transfers to the ILIT to be a completed gift (which is essential to the success of the technique), they must issue a so-called Crummey Notice (after the Crummey vs. Commissioner case) to each trust beneficiary each time they transfer funds to the trust.  This is an IRS - imposed rule, but clearly not one to be taken lightly, as the IRS has made clear in its acquiescence, that they will be asking for proof in the nature of copies of these notices, and proof they were sent.  This is an annual -- or more often-- hassle, which clients do not always understand when the technique is initially proposed.  The notice is just that--a notice.  The beneficiary must not sign anything that amounts to a “waiver” of their withdrawal rights.  Second, the client needs to clearly understand that the nature of the crummey notice is that they have the legal right to withdraw a portion of the monies transferred to the trust.  The client needs to know there is a very real risk that the beneficiary might exercise this right!

Third, the premiums on the insurance policy must be paid by the Trustee -- not by the grantor.  This has been the subject of litigation and it is not clear that the IRS has won on this issue.  But it is clear that they believe it to be an issue.  Best not to tempt fate.  

Fourth, because this is an irrevocable trust, it may have to report to the IRS on Form 1041 Income Tax Return..  As a general rule, life insurance (the main asset within the trust) does not earn “income” and this asset will not make reporting necessary.  However, in order for the Trustee to pay the premiums, the Trust will need a bank account.  Unless this is a non-interest bearing account (which we often recommend, in spite of the forbearance of interest), there may be taxable income, which triggers the reporting requirement.

These are all details which may “break” the trust if not properly attended to.  It is important, when advising clients, that they be made aware of the importance of these details, and the need to maintain vigilant observance during the life of the trust.

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at:, or by Telephone at 989-652-9923.

Andy Richards


Monday, May 1, 2006

Should Your Clients Review Their Powers Of Attorney?

Your clients already have their Durable Powers of Attorney and their Healthcare Designations of Patient Advocate done. Is there any reason they need to be reviewed or updated?

If a Power of Attorney is dated before 2004, it is likely out of date--particularly a Health Care Power. What do I mean by out of date? In April, 2004, the Health Care Portability and Accountability Act (HIPAA) became effective. One of its provisions deals with the privacy of clients' health care information. The Act creates some new terms of art.

These terms are broadly defined and their scope may reach unintended, or at least unsuspected "targets." Protected Health Information is a term for information about the client. It includes such things as billing and insurance information, as well as medical information. A Health Care Provider is any person or entity which has any Protected Health Information and transmits it in any manner electronically. This is a very broad definition. It means that, in addition to hospitals, doctors, dentists, clinics, etc., insurance companies, agents, CPA's, attorneys and many others may be treated as Health Care Providers.

If a Health Care Provider releases Protected Health Information without a specific, written authorization, they may face substantial penalties. An Agent acting under a Power of Attorney often needs just this information in order to make appropriate decisions.

HIPAA provides for the written designation of a "Personal Representative," who may authorize the release of Protected Health Information. This is a term of art which most Michigan Powers of Attorney which were executed prior to HIPAA do not address. These Powers of Attorney need to be updated to comply with the provisions of HIPAA.

Michigan Law also regards a Durable Power of Attorney with suspicion. The Common Law provided that a Power of Attorney was no longer effective when the Agent learned of his Principal's incapacity--exactly the time when an estate planning Power of Attorney is most needed. The Michigan Legislature created the Durable Power of Attorney, which is designed to remain effective. But our courts have said that, because this legislation differs from the Common Law view, these documents must be strictly interpreted. The practical significance of this is that if a power to do some act is not specifically recited in the document, it is likely that it will not be given effect. Over the past several years, we have found--more and more often--that a well-meaning third party will balk at the power. This is another important reason to review---and update your clients Powers of Attorney.

This Newsletter is intended to be informational only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at:, or by Telephone at 989-652-9923.

Andy Richards


About Issues For Advisors

About 3 years ago, I started publishing a Quarterly E-Newsletter targeted directly at professional colleagues and valued referral sources. The intent of the newsletter was to be a resource for professional advisors, including Accountants, Insurance Professionals, Financial Planners, Brokers, Bankers and Planned Giving professionals. The "Issues For Advisors," newsletters have 2 primary goals: (1) To provide timely, useful information about issues that are either of current significance, have caused a recent problem, or are of a recurring nature to our mutual clients, and (2) To keep the content brief (no more than a single page). It recently occurred to me that there is no "archive" where advisors can go to retrieve, or re-read prior Issues. Rather than "burying" them somewhere in the Smith Bovill website, I created an on-line Resource specifically dedicated to the Professional Advisors enumerated above. In addition to the "Issues For Advisors" Archive, Links to other resources (including, of course, the MICHIGAN ESTATE PLANNING BLOG and THE SMITH BOVILL LAW FIRM SITE), will be featured here.

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