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Friday, June 4,2010

ESTATE PLANNING, PART III

Transferring Property And Reducing Taxes

by KRISTIN D. ARNETT

(This article is the last in a
three-part series which relates to estate planning paying special attention to
non-marital relationships.  The author,
Kristin D. Arnett, is a Lansing attorney specializing in estate planning. She
can be reached at KArnett@HubbardLaw.com.)


Balancing
the Estates: Ways to Shift Wealth


It is often
the goal in estate planning to balance the estates of both the members of the
couple to pay less overall Estate Taxes. For a married couple, the transfer of
wealth between spouses is covered under the unlimited marital gifting. However, the same will not apply to an
unmarried couple. The unmarried
couple is limited to the annual exclusion and the $1,000,000 lifetime exclusion
for gift-giving.


One important
consideration is that outright gifts to a partner result in the loss of control
over the asset for the gifting partner and gain of control to the partner
receiving the gift. This may cause
some concern to the one making the gift. Therefore, other means of transferring property may be more desirable. Some of the ways in which property
transfers can be accomplished without relinquishing too much control are
discussed below.


Limited Liability Companies


Using a
Limited Liability Company (“LLC”), a partner who has assets can transfer assets
to the LLC and gift interests in the LLC to his or her partner instead of the
actual property being gifted. Through the Operating Agreement of the LLC, the partner who is receiving
the interests in the LLC could be prevented from withdrawing funds from the
LLC. In addition, the partner
making the gift may be able to claim a discount on the gift, thus bringing down
the value and allowing for more to be transferred.


With the LLC
approach, creditors of the partner receiving the interests in the LLC may not
be able to reach the partner’s interest until the partner received a distribution. Finally, the Operating Agreement could
provide that should the couple terminate their relationship, the partner
gifting the interests in the LLC could buy-out the partner receiving the
interests under very favorable terms.


Grantor Retained Income
Trusts


Under a
Grantor Retained Income Trust (“GRIT”), the partner making the gift appears to
retain a phantom income stream from the GRIT based on the current 7520 Rate. The size of the gift will be based on
the donor’s age, the 7520 Rate, and the term of the Trust. The size of the gift
may be reduced thus again, allowing for a great amount of property to be
transferred. GRITs are not
available to married couples.


Qualified Personal Residence
Trusts


A Qualified
Personal Residence Trust (“QPRT”) works exactly the same as a GRIT, except that
the trust must be funded with the residence of the partner transferring the
property. This is a means of
transferring the residence to the partner.


Grantor Retained Annuity
Trust


A Grantor
Retained Annuity Trust (“GRAT”) is similar to a GRIT except that with a GRAT a
distribution must be made to the partner making the gift on an annual
basis. As with the GRIT and the
QPRT, the same factors (the 7520 Rate, the age of the gifting partner and the
term of the trust) will impact the size of the gift. With the GRAT, the donor can also impact the gift by
deciding how much the fixed annual annuity from the GRAT should be. In addition, there may be discounts
that can be taken for lack of marketability and lack of control if the interest
was in a LLC.


If any of the
techniques above are used to transfer property to a partner during the lifetime
of the grantor partner, the partner making the gifts will need to file a gift
tax return. Therefore, it will be
necessary to have appraisals done to value the gifts properly.


Gift, Real
Estate and Transfer Taxes


If an
individual adds a joint owner to a piece of property the IRS looks at that as a
gift to the added owner. For a
same-sex or unmarried couple, the IRS will include the entire value of the
property in the estate of the first partner to die, unless the surviving
partner can show that less than the full value should be included. Proving this would require detailed
record keeping unless a gift tax return had been filed.


Generally, in
Michigan, if real estate is transferred there will be transfer tax and/or an
uncapping of the taxable value. It
may be possible to avoid a transfer tax based on the married status of the
parties but there is no comparable provision for un-married co-owners. It is also possible to avoid the
imposition of a transfer tax based on a statement of the consideration for the
transfer being made being less that $100.00. However, that gets the unmarried couple back into the gift
tax issue mentioned above. However, it is possible, with care, to make a
conditional transfer of an interest in real estate to a partner which could
avoid uncapping the property until the death of the grantor and avoid the
imposition of a transfer tax.


Inherited
IRA’s


Under the Pension
Protection Act of 2006 – a non spouse beneficiary can roll the plan
participant’s IRA over to an “inherited IRA (a traditional IRA)” and have it
distributed over the beneficiary’s life expectancy instead of the 5 year
period. However, a partner in a
same-sex or unmarried relationship cannot roll the IRA into his or her own IRA,
as a spouse would be able to do. Distributions must begin right away – i.e. even if the beneficiary is
not 70 ', the distributions will have to begin immediately.


Agreements
to Arbitrate/Mediate the Dissolution of a Relationship


In Michigan,
implied agreements are not recognized. If you wish to have such an agreement, it should be in writing and
evidence permanence in the relationship and legal consideration. This may be especially important to
people who do not have the option of marriage at this time. This is an agreement that should be
done by an attorney and each party should have separate representation. Although there is no guarantee that the
agreement will be upheld, you can take steps to ensure it is as bullet-proof as
possible. Some suggestions are as
follows:


' Both
partners should disclose all of their assets and liabilities;


' The
partners should each attach their last three years’ tax returns to the
agreement as part of the disclosure of assets;


' The
partners should have separate legal counsel review the agreement;


' The
agreement should determine how common expenses will be paid;


' The
agreement should focus on the parties as “partners” rather than as “lovers”;
and


' The
agreement should cover how property is to be divided upon a termination of the
relationship (other than by death of one of the partners).



As an
unmarried couple, same-sex partners do not have the same protections when they
split up or divorce, as would a married couple. For example, when a married couple gets divorced, their
status as fiduciary for one another is revoked by law (patient advocate
designation, personal representative and agent). This also includes relatives of a former spouse. There is NO automatic
revocation for an unmarried couple. Therefore, after a relationship is terminated, those who were in an
unmarried relationship must revise their estate plans immediately.


I realize
there is a long way to go for equality. Even with certain benefits conferred on those who are in a civil union,
in states that recognize such as union, Federal benefits are not included, such
as social security benefits, immigration privileges, or the marriage exemption
to federal estate tax. Therefore, it
is important that you take the necessary steps to protect you, your loved ones
and your estate.


I hope that
you have a better understanding about what an estate plan is, the position you
and your loved ones are in if you do not have an estate plan, the tools used to
create an estate plan and how a comprehensive plan can provide for you and your
loved ones.


(The information above is meant to illustrate aspects only.  It is not meant to be construed as legal advice.  Prior to taking action, you should consult directly with an attorney for specific advice based upon full disclosure of your own legal situation.  The above information shall not be reproduced without specific authority obtained from the author of this article.   2010 Kristin D. Ar

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