This is a very difficult topic. Some families discuss financial and medical issues with ease. Many don’t. If your parents are the ones that don’t, it is still important to get the ball rolling.
First of all, if there is more than one child, this should be done in a family context. It is not a good idea for one child to approach his or her parents alone. It can be perceived by other siblings as lobbying for favors. It can be seen by parents as one child being greedy. The best way to do this is by all of the siblings being present during discussions such as these.
It might be good to start with the topic of medical directives, since this does not deal with money. Ask your parents if they have medical directives or power of attorneys in place. If they don’t, you might want to encourage them to do so by letting them know that if they were to get sick and unable to speak for themselves, the current regulations would not permit the hospital to speak with the children concerning any medical information. Since it is a good idea for every member of the family to do this, it could be a good family project for all members to take the time to do medical directives and appoint patient advocates. In that way, your parents may not feel as if they are the target of an unpleasant conversation.
Next, gently approach them about the issue of Wills and Trusts. If one of the children has already taken that step, it might be a good idea for him or her to lead off the discussion by pointing out that he/she had already taken care of that. Talk about what a relief it is to know that all your affairs are in order. Additionally, you might want to raise the issue of how much difficulty a friend had when his or her parents did not have any planning in place.
Once you get the ball rolling, try to make sure that your parents address all of the following issues and discuss them with all of you.
- Should they prepare a Will or a Trust? What would best meet their needs?
- Have they checked their beneficiary designations on all of their life insurance and IRA’s or 401K’s? Are they correct?
- Who should they chose as agents under their documents? Are some of you less willing than others to assume that responsibility?
- How should their personal property be distributed? Perhaps it would be appropriate for each of you to list several things that you really would like to have. That would give them a starting point for a distribution list.
- How would they like to spend their golden years? What are their goals? What are their concerns? Do they worry about having the financial assets available to live out the rest of their lives in comfort?
- Do they have long term care insurance? If they don’t, what would a plan be if they were to need skilled nursing care? They may believe that they can take care of one another, yet that may not be a practical plan. Who will care for the survivor when he or she is not able to care for him or herself?
- When do they plan on downsizing their living? Would they consider selling their home and moving into something smaller and easier to care for? Would they object to assisted living when the time comes?
- How would they feel comfortable deciding when they could no longer handle their own financial affairs? Would it be upon the recommendation of a doctor? Or two doctors?
- Where are all of the documents kept? Are they all in one place? This is important not only at the end of life, but in the event of a medical emergency.
If this is approached in an open and friendly manner, the discussion can benefit not only your parents, but all of the children as well. You will learn about your parents’ goals and wishes. They will be comfortable knowing that you understand these goals and desires.
For most people, this idea might seem unusual. After all, in the general scheme of things, parents will die first.
For individuals with minor children, this should not be a strong consideration as the primary focus of your estate plan is to provide for your children in the event that you are no longer here to care for them.
For people whose children have grown, or for individuals without children, this issue may deserve a stronger consideration depending on family dynamics and economics.
If your parents are individuals without significant assets and are “getting by” on their social security and a small savings, they may run out of assets in the event of a lengthy medical event. Additionally, while those without assets can apply for Medicaid for Nursing Home costs, that doesn’t hold true if an elderly parent needs assisted living.
If the time comes that your parents can no longer live independently at home, but are not eligible or appropriate for a skilled nursing home care, they may require assisted living. The problem is that this is a pay as you go system. What if they do not have the resources to afford assisted living?
If all of their children are alive and doing well, the children may decide to assist their parents financially by each contributing a monthly amount, thereby permitting the parents to live in assisted living. What happens, however, if you are contributing to your parents’ assisted living costs and your predecease them? Or perhaps, they are not yet at the point of needing assisted living, but could very well require it in the future. If you die first, they will not have the support they may need when the time comes.
This could be a good reason to include your parents as beneficiaries in your trust. The money could be structured so that it would include assisted living expenses during their lifetimes; however, the money if not used during their lifetimes would then flow to other beneficiaries.
This is a concept which should be discussed at a family meeting of all the siblings. The key is that with proper planning, your parents’ needs will be met while you are also addressing the needs of your own family.
Most people are in a state of confusion when a death occurs. What should they do? First, second, and so on.
Things for the family to do:
- Evaluate the emotional effect of the death on the surviving spouse, children or close relatives.
- If necessary, decide on procedures to care for dependent children and surviving spouse, if incapacitated.
- Evaluate the need for security at decedent’s residence and personal property.
- Cancel home deliveries
- Notify post office to hold mail.
- Decide on funeral arrangements
- Contact clergy
- Discuss donation of bodily organs to an organ bank.
- Arrange for mortuary and burial or cremation.
- Prepare obituary for publication.
- Consult the family lawyer or the lawyer the family wants to retain as either a legal counselor or as probate lawyer to handle the estate’s legal and tax matters.
- Evaluate the survivor’s cash needs for the next three (3) months.
- Evaluate the existence of and need to care for or sell perishable property.
- Keep records of all payments for funeral and other expenses
- Locate original Will and/ or Trust.
- Locate safe-deposit box.
- Locate life insurance policies.
- Meet with the lawyer you have selected
- Go to the safe-deposit box with the key. At least two bank officers will be at the box opening.
- Open the box
- List all contents in detail on letter size paper or on a form provided by the bank.
- Have all personals sign at the bottom of the list and date.
- Put contracts back, except for will, life insurance policies and Trust.
- If there is any danger of a Will contest or a conflict of interest between personal representative, family members or beneficiaries, do not go to the safe-deposit box without an attorney.
- Social security benefits
- Life insurance collection
- Union death benefits
- Veterans burial allowance
- Veterans benefits
- Employee payroll benefits including:
- Accrued vacation pay
- Employee death benefit
- Final wages
- Ira Accounts
- Retirement plan death benefits
- Deferred compensation
- Medical reimbursements to help pay for hospital and doctor bills.
- Refunds on insurance or canceled subscriptions or any refunds.
- Check for Keogh plan/ IRA accounts
- Meet with C.P.A. as to tax and financial planning issues
- Get death certificates, usually from funeral director. Depending on the situation, may need as many as 10 – 12.
- Meet with life insurance agent to collect proceeds or consider payment options.
- Notify liability insurance agent about fire, theft and public liability insurance on decedent’s assets.
- Do not pay any of decedent’s debts until the lawyer you have selected discusses them with family members or with the duly appointed personal representative.
First: Family Meeting
While you may think this is a great idea, the best practice is to gather the family for a meeting and discuss the concept. Find out how many children are interested in keeping the cottage.
If there is interest, then begin to examine all of the “problem” areas. Have the children discuss how they would administer the use of the cottage. Are they willing to commit their time to its upkeep? Their money for its care?
Next: Draft the Use Agreement
Can they draft up a set of rules upon which they can agree for the use of the cottage. If they cannot agree on the rule, it is a sure bet that they will not be able to use the cottage without it becoming a source of anger and discontentment instead of a joy.
If they are able to work through the issues previously set forth, then it is time to set the agreement in writing – have them all sign it.
Last: Amend your Estate Plan
Now it is time to incorporate the cottage plan into your estate plan. Have your trust direct the trustee to distribute the cottage to an LLC at the time of your death and to have the signed agreement for its use be a part of the Organizational Agreement.
This will not be a quick process. It will take the children time to decide what they can live with and what they cannot. There will be (hopefully) minor disagreements which cannot be avoided. Remember that you are still here to help mediate these disputes and bring them together for the common good.
We have examined a number of issues concerning the financing and use of the property. It is now time to address the legal L.L.C. issues that will be put into the Operating Agreement.
If the ownership interests are distributed equally among the grantor’s children, what happens when those children pass away? Can the membership interests only pass to blood relatives – children? Can a person leave the interest to his or her spouse?
If one of the children no longer wants to be part of the L.L.C., what is the mechanism to handle that? Are the other children forced to purchase his/her shares? Could the shares be sold to individuals other than family?
If a child dies, are his/her shares passed on to his/her children? Can the spouse have any interest in the shares?
If there are mandatory buy-out provisions, how would these be funded?
Should provision be made for ownership by grandchildren of the grantor? Is that too far in the future to worry about?
At first, it sounds like such a romantic idea for the family cottage to be passed on for many years to many generations; however, there are practical difficulties. It may be difficult enough for adult siblings to get along and cooperate with a family Cottage. It will be far more difficult with the next generation. Also, there will be more of them. If each child has two children, that is twice as many individuals to accommodate. There may not be enough weeks in a summer to go around.
There is often the situation where one of the grantor’s children does not have any children. If the shares are to be passed on only to grandchildren (blood relatives), it means that those without children lose a piece of their inheritance as they cannot pass it on.
There will be disagreements – that’s a guarantee. Each individual will see the cottage as something different.
Some will see it as a place where they can kick back and relax – do some fishing and swimming – no concerns. Others will treasure it as a holder of their memories – a place to be preserved and cared for.
How should these disagreements be handled? What will the process be?
All good things come to an end. At some point in the future, the family members will no longer want to own the cottage. There must be a practical and fair manner to come to that decision.
When can the property be sold? Will it require a unanimous agreement? Or a majority or super-majority agreement?
We previously addressed the issues of Management generally and of Budgeting for the family cottage. We will now address some other issues that must be considered.
Scheduling Use of the Cottage:
While money squabbles are disruptive, scheduling the use of the cottage may well be the real hot button topic.
In northern Michigan, there are only 12 – 14 good summer vacation weeks available. Clearly, not everyone can have the week of July 4th. Depending on the number of children that you have, it may be impossible to accommodate everyone’s desires and schedules.
What is the mechanism for deciding on the use of the cottage? Should preferences be rotated? Should family members share the prime weeks (presuming that the property is large enough)?
Once the weeks have been assigned, another question is whether people may bring friends with them to the cottage. If so, how many at one time?
Getting it Ready and Keeping it Clean
How will the cottage get opened for the season and how will it be closed? Is that the job of the first and last to use it? Or is this a job that should be assigned annually? Much of this may depend on where your children live. It isn’t practical to expect someone who lives in California to come to Northern Michigan for a weekend simply to shut the cottage down. On the other hand, it is not fair to make this the responsibility of the kids that live nearby every year.
What will the rule be concerning clean-up after use? Everyone likes a clean and tidy place when they arrive. There must be a mechanism to assure that this is the case for each of the children when it comes time for his or her use.
Will the cleaning be done by contracting with a third party for cleaning and lawn services? Is that type of expenditure in the budget? If it is not affordable, will the children want to use part of their vacation week cutting the grass, washing the windows and cleaning the cottage when they are getting ready to leave?
Renting out the Cottage
If one or more the children cannot use the cottage on his/her week(s) in a year, should it be rented out?
If the answer is yes, should it only be rented to individuals that are known to the family? Or to anyone?
Should the rental income be put into the general fund to pay for taxes, expenses, etc., or should the individual who is not using the property be given a portion of the rental?
Northern Michigan is a beautiful place – lots of waterfront homes and vacation retreats. Many families look for ways to keep their properties in the family to benefit their children and grandchildren.
Is a Cottage Trust right for your family?
First, vacation properties are often placed into a family L.L.C. (Limited Liability Company) instead of an irrevocable trust. The L.L.C. will have an Operating Agreement which will bind the future members and it can set out the rules of ownership.
If the property has been in the family for a long period of time, it may not be a good idea to transfer the real property during the lifetime of the owners as the property taxes would uncap – leaving the current owners with a higher tax burden than they now have.
If the property is transferred to an L.L.C. upon the death of the owners, the property taxes will, however, uncap upon the transfer to the L.L.C. If the property were left instead directly to the children as joint tenants, the property taxes would not uncap. This often is not practical for families with more than two or three children. It may be better to forego property tax savings in order to have the structure necessary to guide the ownership of the property.
What are some concerns and discussion points that should be addressed prior to heading down this road?
Management of the Cottage:
Will the Cottage LLC be member managed, thereby giving each child equal input into the use and upkeep of the property? Or will it be manager managed, making one of the children the ultimate manager?
If your children have difficulty getting along, it may be unrealistic to believe that they will do so after you are no longer here to mediate. Property ownership and management can be difficult when it is among small numbers of people who get along well. It may be impossible with a larger number of people who are always at odds.
Should the management of the Cottage be broken into different jobs such as Operations/Maintenance Manager, Record Keeping/Scheduling Manager and Financial Manager? This would give different family members the opportunity to be involved in a meaningful way in the management of the cottage while separating the tasks so that no one individual has all of the power or all of the work.
How will the annual cost of maintaining the cottage be handled? There are many costs associated with a vacation property: Property Taxes, Insurance, Utilities, Maintenance and Repairs. Will this be paid for by a stipend that you leave for such purposes? Or are the children expected to each shoulder his or her pro-rata share?
If your children are expected to pay for the maintenance of the cottage, consider whether they all can afford this cost going forward. Have you asked them whether they want the cottage to be kept in the family – especially if they are going to be paying for it on an annual basis?
How will the issue of capital improvements be handled? Again it is important to consider how such repairs and improvements will be paid for. Homes need new roofs, new furnaces, etc. Another consideration will be the mechanism of deciding when those repairs and/or improvements are necessary. One child may want to be proactive while another may want to wait until the roof leaks or the furnace quits prior to making the repair.
What happens if one of the members either cannot or will not contribute his or her annual share? If there are costs to be borne by the children and one does not participate financially, should he or she lose some of the ownership interest in the LLC?
Who will be responsible for writing the checks and paying the bills and taxes? Even if the mechanism is in place to have sufficient money available – someone needs to be in charge of making certain that these bills are paid.
Clients are often confused about the manner of passing along IRA accounts upon their death to their family. Heirs are confused about how to withdraw the assets.
If you are married and name a spouse as the primary beneficiary of the IRA, he or she can roll it over into his or her own name.
If you are not married, it is important to understand the rules. If you leave it to your estate, it will be paid out in a lump sum and taxes will be due and owing by the estate. It is much wiser to name individual beneficiaries. In that way, the beneficiaries will have the maximum amount of flexibility for withdrawal.
If you name, for instance, you children as the beneficiaries, they will be obligated to start withdrawals from the account by December 31 of the year following the year they inherited the IRA. The benefit is the fact that they can stretch the amount of time they will have to withdraw the IRA. The Required Minimum Distribution (RMD) that they will have to take each year will be based upon each of their life expectancies. In this way, they can stretch the IRA withdrawals over their lifetimes. They can, however, withdraw more in any given calendar year if they chose.
While gifts and inheritances are not income, and thus not taxable, to the individual receiving the gift or inheritance, this is not true in the case of IRA’s. Since no income tax was paid initially by the owner of the IRA prior to placing the money into the account, the amounts withdrawn are taxable. This is true whether the money is withdrawn by the original owner of the account or by a beneficiary.
These rules do not necessarily apply to 401K and other employer established or funded plans. The manner of distribution will ultimately be controlled by the employer who established the fund. It is possible that children can stretch out the payments; however, this is not always true. The beneficiaries may have to transfer his or her share of the inherited 401K into an IRA. It is important to ask your employer or plan administrator.
In Michigan, the value of your real property is assessed by the local municipal assessor. This State Equalized Value is 50% of the value of the property.
Prior to 1994, the taxable value of your property went up and down on a yearly basis depending upon the increase or decrease in value of the home and/or the neighborhood.
The biggest problem was created for individuals who held their property for many years. While their property remained as is, others near-by could build new homes or greatly remodel the home so that the value of the neighborhood went up dramatically. This was especially true with waterfront homes. In more underdeveloped areas, cottages were eventually replaced with very large homes. As the values around the lake went skyrocketing, so too did the tax bill for the small cottage that remained unchanged. Many individuals were faced with selling the property because they could no longer afford the property taxes.
In 1994, the voters of Michigan approved Proposal “A”. This capped the amount that property taxes could increase on an annual basis. Therefore, the property tax upon a parcel of real property cannot increase more than 5% per year.
This leads to two separate values for a parcel of real estate: the state equalized value (actual value) and the taxable value. For parcels held on a very long term basis, the difference between the two values can be dramatic.
The property taxes are uncapped (or pop-up) upon the sale or transfer of the property by the owners. This included the transfer of property by gift or at death to children or siblings.
Often long held farms or family cottages which the owners wanted to pass down to their children had to be sold after the children found an increase in taxes of up to three or four times what their parents had been paying.
Effective December 31, 2013, this has changed. Now, the transfer of property by the original owners to individuals who are children, parents or siblings, will not uncap the property taxes.
In Part I, I discussed the use of Lady Bird Deeds as a Probate avoidance method to transfer property from the original owners to their family.
There are other reasons that individuals might select a Lady Bird Deed:
Revocable (Living) Trusts
As a part of funding a revocable trust, real property is usually transferred into the revocable trust. Property held in a Revocable Trust which transfers the property to children/family upon the death of the Grantor/Owner will not get the benefit of property taxes remaining capped.
The law requires that the transfer be from individuals, to other individuals (within one degree) to qualify. A revocable trust becomes irrevocable upon the death of the Grantor(s) and is then an entity. Even if the terms of the trust call for an outright transfer of real property to the Grantor’s children, the property will become uncapped.
This may not matter if the property will be immediately sold, or if the property has not been held for very long.
This result will be damaging if the property was purchased long ago and is meant to be held by the children – a family farm or a family cottage. The uncapping of the property tax could force a sale of the property if the children are unable to afford to pay.
This leads to the use of Lady Bird Deeds. The property is transferred out of the trust back to the original owners. It is then transferred by the owners to themselves and their family as joint tenants with full rights of survivorship. At the owners’ deaths, the property will belong to the children, the property taxes will not uncap, and the children will get a stepped up basis in the value of the property for federal tax purposes.
Lady Bird Deeds have become important for Medicaid Planning today.
A married couple is able to claim their homestead as exempt property when one of them enters a nursing home and they apply for Medicaid. In this way, the property may be held and used by the spouse who does not receive nursing home care.
In the last few years, Michigan has gotten on board with the federal mandate for estate recovery. What this means is that the state government is permitted to seek reimbursement for sums expended on nursing home care. Since the marital home was claimed as exempt property, this is the largest asset upon which the states could recover.
In Michigan, it was decided that the estate recovery would only be against the exempt homestead at the death of the second spouse to die, if the property goes through probate court.
Since a homestead is not exempt if it is held in a trust, the real property would pass to the children and/or family through a Last Will and Testament. Since this would go to Probate Court, this would enable the state of Michigan to pursue recovery against the value of the homestead.
The alternative currently used is a Lady Bird Deed. The property is still considered an exempt asset for purposes of Medicaid qualification. Since the property passes to the children and/or family without the need to go through Probate court, the state of Michigan does not then have the ability to recover the value of care.
As with many regulations concerning Medicaid, this could change in the future.