ISSUES FOR ADVISORS

It's Not About the Paper (It's ALL About the Service)

2009-11-25T11:11:00.000-08:00

Recently, a new client asked me to review an Estate Plan prepared by another attorney. Why would they be bringing it to another attorney for review? They had a nice folder full of documents, but more importantly, they had many unanswered questions and concerns. They weren't comfortable with their own estate plan!

The documents were reasonably well drafted, and contained language which clearly met the "industry standard." While my documents are different, and while maybe I could try to justify that they are somehow "better," the documents are not really the issue.

So what was the problem? It is a concern that seems to arise all too often. The attorney was unavailable to the client, not returning calls and not meeting with them after the first introduction and/or seminar. They were "boilerplate" and did not reflect a close connection with the client and their wishes. And perhaps most importantly, a significant source of frustration for the client was their lack of understanding of what the documents said, how they fit their particular circumstances, and what alternative provisions they might have.

"Legalese" in estate planning documents can be daunting, even as we have tried to make them more "plain English." But I don't think it is the documents, or the wording in them that is the real cause of the client's angst.

We are professional counselors and clients do not come to us just for document preparation. They come to us for our advice, experience, and expertise in applying the principles of our profession to their particular circumstances. They want, and deserve, some professional "TLC."

This is not a concept that is peculiar to lawyers. Lawyers, accountants, financial planners, bankers, brokers, insurance advisors and trust officers are subject to this concern. It is what separates us as professionals from technocrats. Certainly we produce and sell "products." And certainly, it is critical that the "product" that we produce for clients be superior. But it is not really the product that our clients seek. It is a personal relationship in which we impart some wisdom, borne of our years of training, experience and the relationships we have forged with clients.

As another year nears its end, I am moved to re-commit myself to provide superior service to clients. To me this means to listen carefully to their concerns and needs, to be responsive to their calls, questions and concerns, and to try to create and maintain that special relationship that makes us professional advisors. I hope you'll all join me in this commitment.

Critical Client Documents - Drafting for Precision and Flexibility

2009-09-20T08:27:00.000-07:00

Precision and flexibility may not be immediately apparent as common goals in legal documents. As my 25th year of estate planning and business law nears a close, I find myself reflecting on just those two thoughts. When writing documents for clients, my focus is more and more, drafting and planning for flexibility, and for precision in the meaning of words. Both are elusive!

Flexibility, is necessitated by the fact of change. I am consistently impressed by how much, and how rapidly change occurs. Laws change. Technology progresses, causing change we could never have anticipated. Client circumstances change (death, divorce, children maturing, employment). Views change for all of us as we experience life. As a practical matter, if 25 years of drafting has taught me anything, it is that there will be plenty of surprises -- things we did not anticipate. Nonetheless, I believe it is an important and primary goal to try to anticipate them.

Law students are drilled on using words precisely during their first year. It is a "sense" that over time, given all the other exigencies of the business of law seems to become "dulled." In an age of ever-increasing written communication (who would ever have dreamed 15 years ago that we would be "texting" instant messages around the world as a primary means of communication?), precision in written communication is arguably ever more important. Paradoxically, it is becoming less precise, between our always evolving slang terms and the abbreviations "texting" hath wrought.

I mention this, not because it has great relevance to writing legal documents, but because it underscores the difficulty in communicating precise, consensual ideas in writing!

Surprisingly, it has taken me years to come to the awareness that you and I may say the same words and mean something altogether different.

We live in a culture where multiple marriages are common. Use of terms like "spouse," "children" and "heir" in estate planning documents may be more ambiguous at the time of application than we considered at the time of writing the document. Terms like "in writing," and "signature" have taken very different (and unanticipated) meanings in the age of electronic commerce and communication. And terms of art in an industry may well have different meanings in different contexts. Use of precision by including "definition" language will perhaps be more and more called for in the drafting of business and estate planning documents.

How Much Diligence Should We Do?

2009-06-17T08:28:00.000-07:00

We all acquire new clients. A new client often comes with a specific task or request. How far do we go to collect sufficient information from them and to inform them of things that they need to do?

A client was referred by their lender, for an estate plan. The family business had been transferred down several generations. The client’s father had died years back and the business was operated as an equal partnership between mother and son.

In addition to the work I did for the client, his mom asked me to do some work on her existing plan. Looking at historical documents, it turns out that there was never a transfer from the original partnership shares to the son creating the 50/50 partnership.

In the process of review of farmland for another new client, we discovered a large parcel which had been purchased on a land contract. The land contract had been paid off long ago, but the client had never gotten a deed from the original seller and the seller was now deceased. A Probate Estate became necessary to clear up the title issues.

Another client told me all about his business entity. Checking with the Michigan Department of Labor and Economic Growth’s (DLEG) website, I discovered that his business had been automatically dissolved for failure to file Annual Reports and pay fees.

My answer to the question posed is that there can never be enough due diligence! I have learned during my 25 years of practice, to ask many questions, to insist on evidence of ownership, review transactions, and conduct independent checking (looking on the DLEG site, checking with the County Clerk and sometimes with the County Register of Deeds and/or Tax Records). Client copies of deeds and tax bills may or may not be complete and accurate information. Particularly with real estate transactions, I increasingly advise clients to obtain title searches and even property surveys.

We can never ask too many questions, or gather too much information about our new clients. The point of our representation, no matter what professional discipline we are in, is to help our clients to achieve sound business and personal goals. In that endeavor, information is king, and we often find our advice branching past the original scope of our representation and sometimes referring them to other advisors. Learning to ask the next question, or look around the next corner is an art of diligence.

Why Should Clients Have Severance Agreements Reviewed?

2009-02-16T10:18:00.000-08:00

A sad, but current, reality is the “downsizing,” “right-sizing” and closure of businesses due to the severe economic downturn we are facing.

I have had the unfortunate occasion to review a number of severance agreements for clients during the past several months. In doing so, a number of relevant factors have come to my attention about these agreements.

Most severance agreements recommend that the employee have the agreement reviewed by counsel. This is not (generally) being done by some egalitarian sense of concern for the employee’s welfare. Under the Age Discrimination and Employment Act (ADEA), it is actually a requirement that they make that recommendation for employees over age 40.

Another reason is that it is more difficult for the employee to later argue that they did not understand the contract, if they have had it reviewed by counsel. I still believe review by an attorney is worthwhile.

Severance Agreements are not usually required because most employees are employed “at will” in Michigan. Nonetheless, employers are offering them in part, perhaps to assist the severed employee in a difficult time of transition.

A primary purpose of severance agreements is to induce the departing employee to waive any possible present and future claims they may have against the employer, including claims they may not even know exist.

Severance agreements typically exchange some form of extended pay or benefits, in return for the waiver. When the employer is a very large corporation, the likelihood that the client will have any bargaining ability to negotiate the agreement is small. So it is important to explore whether, and to what extent they may be giving up something of real value, to determine whether to sign the agreement at all.

It is also important that the agreement address benefits. There is some “grey” area regarding if, and what benefits may be waived under the federal ERISA statute. There may also be instances in which the waiver of claims should be mutual, i.e., the employer should waive any rights against the employee, under the same theory as the employee is waiving claims.

If you have clients, or know people going through this difficult time, who have severance agreements, encourage them to take some time to have these carefully reviewed.

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: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards

FDIC (and other) Federal Insurance Coverage For Bank Deposit Accounts

2008-12-01T10:14:00.000-08:00

If your experience has been like mine, you have received inquiries recently about "how safe" deposit accounts are. The FDIC rules for banks, the NCUA rules for Credit Unions and the FSLIC rules for Federal Savings and Loans, are essentially identical.

Generally, a depositor is covered up to $100,000 per institution for regular deposits and an additional $250,000 for IRA's, Keoghs, TSA's and self-directed 401(k) accounts. Joint accounts are covered up to $100,000 for each joint account holder. Co-owners must have signed the signature card, must be individuals, and must have equal rights to withdraw funds from the account. If account-holders have more than one account at a bank, they are aggregated, not to exceed to the limits above.

Coverage for Trust accounts is not measured by the account holder. Instead, Trust accounts are covered up to $100,000 per beneficiary, even if they do not have a current right to receive or withdraw from the account. "Trust Accounts" include Revocable Living Trusts, "T.O.D." and "P.O.D." accounts (irrevocable trusts have different rules). Beneficiaries must be "qualified" (spouse, child, grandchild--including step child--, siblings and parents). They must be the beneficiary who will receive upon the death of the grantor/owner (i.e., if a trust says to 2 children and grandchildren are named as contingent beneficiaries, the grandchildren are not counted). But if the trust says to spouse for life, then to my children, the spouse and children count.

Examples: Joint Trust with Husband and Wife as grantors and 2 children. The account could be covered up to $400,000 ($100,000 for each owner under the ownership rules above and $100,000 for each child). The same would be true for a joint account with husband and wife naming 2 children as P.O.D. beneficiaries.

A/B Trust where each spouse has their own trust naming surviving spouse as life income beneficiary and 2 children as residuary beneficiaries. The Grantor/owner is covered for $100,000 under owner rules above. The Spouse and 2 children are covered under beneficiary rules. Each trust gets $300,000 coverage for a total of $600,000.

These rules do not make complete sense to me, and my own advice to clients is to think about the reality of the situation. What guarantee is there that the FDIC will have the money to pay out these amounts? Does it make sense, in spite of these coverage limits, to "diversify" anyway?

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: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards

“Farm Bill” Creates a Short, but Wide Open “Window”

2008-08-01T10:09:00.000-07:00

Conservation Easements create an opportunity for a landowner to own and use their land, pass them to successive generations, and realize substantial tax benefits.

Traditionally, the Federal Tax Code has allowed deductions for the value of a “Qualified Conservation Easement”, for Income and Estate Taxes. These provisions apply to any landowner who creates an easement for permissible conservation purposes, as defined by the code and regulations. A “Qualified Conservation Easement” must be a permanent restriction on land, generally limiting its use to conservation (open space, wetlands, nature preserves, etc.), agriculture or historic preservation purposes. The easement itself must be donated to either a unit of government or a qualified charitable organization (often, a Land Trust). But the landowner continues to own and use the land.

The value of the easement, is eligible for a charitable deduction. The deduction may be taken in the year of the donation, and any unused amounts carried forward for additional years. Traditionally, this carry-forward has been limited to 5 years, and, because land is a capital asset, the amount of the deduction has been limited to 30% of a taxpayer's adjusted gross income.

The 2008 Farm Bill dramatically changes this, but only for a short time! "Qualified Farmers and Ranchers" may now deduct up to 100 percent of their Adjusted Gross Income, and may carry forward the unused deduction for 15 years. Unfortunately, this very favorable provision applies only to donations made before January 1, 2010. A "Qualified" Farmer or Rancher is one whose gross income from Farming is more than 50% of his total gross income in the year of the contribution.

There is good news for other landowners, too (subject to the January 1, 2010 deadline). Now other donors of “Qualified Conservation Easements” may deduct up to 50% of their adjusted gross income and may carry unused deductions forward for 15 years.

Other tax benefits from Conservation Easements still remain. A deduction from Federal Estate Taxes may be taken (even on easements created post mortem, by an estate or heirs). The easement, itself, should also reduce the value of the property for real property tax purposes (A 2006 Michigan State Tax Commission letter in fact, directs assessors to take this into consideration). And, there is currently pending Michigan Legislation which would allow a tax credit of up to $10,000 for a donated conservation easement.

Andy Richards

Michigan’s New Position on The Professional Corporation Act - "The Fix" - Part II

2008-05-01T10:05:00.000-07:00

What does the Miller decision mean to your clients and what can be done to “fix” the problem?

The case raises practical concerns. Who must now incorporate under the Michigan Professional Corporation Act? What existing corporations may be deemed to be improperly incorporated?

The Bureau’s current policy is that if the entity does not involve a traditional “learned profession,” and was incorporated prior to the court ruling in May of 2007, they will not require the entity to take any corrective action.

New entities are less clear. Entities listed under the Professional Service Corporation Act, under the Michigan Public Health Code and those services referenced as "professional" under the Michigan Occupational Code, must now incorporate under the Professional Service Corporation Act. Occupations which are and which are currently not included, can be found at www.michigan.gov/documents/cis/Website_update_re_Miller111_203547_7.pdf.

Occupations which may surprise, include Funeral Director, Mortician, Real Estate Appraiser, Real Estate Brokers and Salespersons. Notably (and perplexing to me) is the list of not included occupations including Insurance Agents, Insurance Counselors, Investment Advisors and Mortgage Brokers. It is unclear to me how these services are less professional and personal in nature than those included!

It should be noted that there is pending “corrective” legislation in the Michigan Legislature. It appears, however, that the legislature will wait until the case, currently on appeal in the Michigan Supreme Court, is finally decided, before acting.

Some advisors are concerned that third party litigants may attempt to use the Miller decision as a basis to “pierce the corporate veil” and find personal liability. One possible “fix” that has been suggested is for the corporate entity to form a subsidiary Limited Liability Company (LLC) and move its operations into the LLC. At this time, there has not been a court ruling regarding the improper organization of an LLC. Currently, an LLC is not subject to the Miller ruling (note that in “companion” litigation--Allstate v A & A Medical Transportation Services, Inc., in an unpublished opinion the court “sidestepped” the LLC issue when raised by the insurer). Again, the bureau’s official policy is that the Miller decision does not apply to LLC formation.

Obviously, “do not try this at home” is applicable here.

Andy Richards

Michigan’s New Position on The Professional Corporation Act - Who must be Incorporated as A Professional Corporation - Part I

2008-05-01T10:01:00.000-07:00

In what many believe to be an unfortunate trend by insurers to avoid payment for services otherwise properly and reasonably delivered, a Michigan Insurer sought to avoid payment to a provider of Physical Therapy Services under Michigan’s “No-Fault” insurance statute [Miller v Allstate, 275 Mich App 649 (2007)]. Claiming that the provider was “improperly incorporated” under the Michigan Business Corporation Act, the insurer argued that the provider was not entitled to payment.

What is important to advisors is that the case raised the question whether a particular occupation may incorporate only under the Michigan Professional Corporation Act. This law essentially provides that certain “professional services” are so personal in nature that the professionals will not be allowed to shield themselves from liability for negligence in the provision of such services by incorporating. The Professional Corporation Act allows them to take advantage of other corporate “advantages,” but limits the corporate protections. Traditionally, based on a 1968 Attorney General Opinion, this limitation was restricted to “Learned Professions.” The list was relatively short, including doctors, dentists, lawyers, accountants, etc.

The Michigan Court of Appeals did not decide the real issue brought before them: whether the payments were proper. Instead, they “remanded” the case for consideration of other issues under the “No-Fault” statute. In fact, they decided that it was unnecessary to determine whether the PT service was “properly incorporated.”

In a rather bizarre turn of “jurisprudence” which bewilders most observers, they then proceeded into the murky waters (some believe they were clear until churned up by this decision) of corporation issues.

Two important new developments come from their opinion. First, they ruled that a corporation that can be formed under the Professional Corporation Act cannot be formed under the general corporation act. This is a significant departure from existing law and the way the Michigan Department of Labor and Economic Growth’s Corporations Division has historically treated incorporation. They have announced that they will not accept for general incorporation, entities which can form under the Professional Corporation Act. Second, the Court significantly expanded the range of occupations which are considered “professional service providers” under the Professional Service Corporation Act.

So what does this all mean to advisors and their clients? Part 2 of this Article attempts to address that.

Andy Richards

Dismaying New Rules for Employer-Owned Life Insurance

2008-02-01T09:56:00.000-08:00

During the nearly 25 years I have practiced law in the area of Estate Planning and Business Succession Planning, No “technical” tax change has personally caused me more dismay or made less sense than Congress’ most recent blunt instrument approach to “fixing” a perceived abuse of life insurance policies. New IRC §101(j), added by the Pension Protection Act in 2006, is ostensibly directed toward major public corporations’ practice of insuring virtually any employee (so-called “janitor insurance”). It has, I believe, unfortunately unfair and far-reaching consequences for the 1000's of closely held business companies in the United States.

Ownership of life insurance on key participants has long been an important tool for funding Buy-Sell obligations. In many cases, it is the only way a business can insure that upon the untimely death of a participant, his or her family will receive fair payment for the decedent’s interest in the business.

Like life insurance proceeds in the hands of individuals, the proceeds of such business-owned policies have always been income tax free under §101(a) of the IRC. Now, Congress has set a major trap for the unwary!

New Section 101(j) reverses the time-honored rule that such proceeds are income tax free and replaces it, instead, with the presumption that the proceeds will be income taxable, unless the employer meets certain exceptions and new requirements created by the section.

Under §101(j), in order for such proceeds to be received by the business free of income tax, the insured employee must be (1) employed by the business during the 12 month period prior to death, or (2) a director or (3) a “highly compensated employee,” (4) or used to purchase an equity interest from the decedent’s family or estate.

It may seem that this will not be a problem in most cases. However, the section additionally imposes Notice and Consent requirements, which require that the employer give written notice to the employee of the intent to obtain insurance, of the maximum face amount of the policy, and that the employer will be the owner and beneficiary of the policy--and which require that the employee sign a written consent to such insurance, before the issuance of the insurance contract. It does not appear that the IRS would accept a confirmation of such intent at any time after the contract has been issued. This seems to go far beyond addressing the problem it was intended to address.

When advising your clients regarding the purchase of “Buy-Sell” insurance policies, it will be important that all the advisors are aware of this issue and that the written consent and notice requirements are followed and well-documented.

Andy Richards

Beneficiary Designations on “Tax-qualified” investments

2007-12-01T09:51:00.000-08:00

Wow. Its hard for me to believe is has been a year since my last newsletter! I owe readers a huge apology. About 9 months ago, I asked a number of you if you would like to receive this as a “pdf” document in your e-mail and the response was mostly affirmative. I had the best of intentions of sending out at least one last mailing asking for a choice between e-mail and regular mail. Obviously, the e-mail route is (currently) a more “economic” choice for me.

But I digress. The apology. I promptly dropped the ball and never produced a newsletter during the 2007 calendar year. What can I say that doesn’t ring of “dog ate my homework,” and acknowledge that the “road to Hell is paved by good intentions?”

Being near the year-end, it may be a good time for a reminder on beneficiary designations for qualified retirement plans, individual retirement plans, and certain non-qualified annuities.

Those of you who know me, have worked with me or heard me speak know that I am an advocate for the revocable living trust as a planning tool. However, every “rule” has at least one, notable exception.

In this case, these “investments” create a very significant exception which may militate against using the revocable trust with them. They are, as a general rule, the only assets clients have which have an “unpaid” income tax component to them. Qualified retirement assets are generally all income taxable to the recipient (whether the plan participant, or an heir). Non-qualified annuities are at least partially income taxable. Both are subject to regular income tax rates.

The problem arises because over the years the IRS has been less than clear about how these items will be taxed if payable to a trust. The regulations require special, often complex language be included in the trust document and perhaps in the beneficiary designation. They also require the Trustee or other administrator to be savvy about the elections necessary and the timing of those elections.

My “rule of thumb” advice to clients about treatment of these investments in the estate plan is that if you have responsible adult beneficiaries, you should name them directly, bypassing the trust on these assets. Only if there is a compelling reason (e.g., minor children or other incapacity), should you name a trust as beneficiary, and then only if the trust has been drafted or amended to include particular provisions for proper treatment of these assets.

As another year comes to a close, I want to thank all of you for our professional relationship and your support and friendship through the years.

Best wishes to all for a happy and healthy holiday season.

Andy Richards

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

2006-12-01T09:46:00.000-08:00

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.

Andy Richards

Annuities: Tricks and Traps

2006-09-01T09:40:00.000-07:00

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.

Andy Richards

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

2006-07-01T09:32:00.000-07:00

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.

Andy Richards

Should Your Clients Review Their Powers Of Attorney?

2006-05-01T07:49:00.000-07:00

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: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards