Cottage Trust – Is this the answer for your family?  Part 3

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.

 

Disagreements

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?

 

Ultimate sale.

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?


Cottage Trust- Is this the answer for your family? Part 2

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?


Cottage Trusts – Is this the answer for your family? Part 1

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.

 

Budgeting:

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.


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IRA’s and How to Handle

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.


Property Taxes – New in Michigan

Linda Wasielewski LogoMichigan Property Taxes

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.


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Lady Bird Deeds – Part II

Linda Wasielewski LogoIn 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.

Medicaid Planning

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.


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Lady Bird Deeds – Part I

Linda Wasielewski LogoWhat is a Lady Bird Deed? A Lady Bird Deed is a Quit Claim Deed from the owner of property, to him/herself and others – usually close family members.  It reserves a life estate to the owners and the right to sell without asking the permission of the family members. Why do people use them? Real property left to family through a Last Will and Testament will go through the Probate Court process.  Many individuals do not want their family to be forced to use this process due to cost and time expended on the process.    Therefore, owners sought a manner to transfer their property to their family (usually children) without using the probate process. Years ago, it was common for individuals to execute a Deed from themselves to their children – but they would not record it.  It was to be kept with the Will and other documents, to be recorded at the death of the owners.  This often created problems as the deed would be lost or destroyed. The next phase of probate avoidance style deeds was a Quit Claim Deed from the owner to him/herself and the children as joint tenants with rights of survivorship.  This accomplished the goal of having the property pass to the children upon the death of the owner. There were, however, draw backs with this type of arrangement.  The children were actual joint owners during the lifetime of the original owners.  Therefore, when the original owners wanted to sell the property, it was necessary to obtain the signature of every one of the joint owners on the transfer documents.  Additionally, if one of those individuals did not want the property sold, the original owner was blocked from selling. Now, owners are using the Lady Bird Deed.  It accomplishes the goal of removing the matter from Probate Court and it gives the right to sell to the original owner. Under a Lady Bird Deed, the property actually transfers at the death of the original owners.  It therefore gets a stepped up basis for federal tax purposes.  In other words, the children’s “purchase price” is the date of death value, not the amount their parents paid for the property. Additionally, under the Property Tax changes in Michigan, the transfer at death to the children prevents the property from uncapping the property taxes. To summarize – the Lady Bird Deed accomplishes the following:

  • Avoids the Probate process
  • Leaves the property to family without a trust
  • Gives the owner the right to sell during his/her lifetime without interference of children
  • Children get a stepped up basis (fair market value at owner’s death)
  • Property taxes are not uncapped
  • All children have to do is to file a death certificate

 


Leaving a Road Map for your Family – At your Death

Linda Wasielewski LogoIn the prior article, I examined the ways to leave your family a road map in the case of your disability. Many of the same issues apply when you are doing your planning for end of life.

Execution of a Last Will and Testament or a Revocable Trust is necessary to pass your estate to those you care about at the time of your death.  As with the issue of disability, it is important not only to leave those documents, but to organize the other financial components so that they are readily accessible.

As with disability planning, you will need organize all of the papers into one location:

Income.  What are your sources of income and how are they paid? Are there direct deposits?  Into which account?  When is the money deposited?  If you receive social security, caution your family that the last payment can be taken from the account electronically without prior notice if the department determines that it should not have been paid.

Monthly expenses:  What are your monthly reoccurring bills?  List them: mortgage, utilities, auto payment, auto insurance, homeowners insurance, credit cards, etc. Some of these will need to be paid until your estate is settled.

Next show what the name of the company, the account number, the date of the month the bill is due and how the amount is paid.  Is it automatically deducted from your checking account?  Is it automatically charged to your credit card?  Must it be paid by check? Or paid on line?  If it is paid on line, include the user name and password for the account.

With the information listed above, your family will be able to continue paying those bills that are necessary.  Additionally, they will have the information necessary to cancel some of the bills such as cable television or internet services as they will no longer be required.

Financial Assets. The list of assets is critical for your family and/or Trustee or Personal Representative. If he or she does not know what you own, it is virtually impossible to get the bills paid and to distribute your trust or estate.

Place a copy of the quarterly statement for each asset account (savings, checking, financial institution) into one folder.  The balance in the account is not the critical piece of information here – the account number, contact information and institution is the key.

Real Estate. Make a listing of all real estate you own or have an interest in.  If there is a deed or land contract, place this with the listing.

Accounts Receivable.  Does anyone owe money to you?  If so, list this together with the documents that establish the debt.  In this manner, your Trustee or Personal Representative will know the details so that the money can be collected.

Accounts Payable.  Do you owe anyone money?  Are there any loans or loan documents which establish that you owe others a debt?  Place copies of this with your other estate planning documents.

Physical Assets.  Make a listing of the large personal property items that you have such as boats, automobiles, coin collections, wine collections, jewelry, etc.  What is their value?  Where are they located?  Who should they be distributed to?

Life Insurance Policies.  Put these in one folder.  If you can’t find them, neither will your Trustee or Personal Representative.

Outstanding Lawsuits.  Are you either a Plaintiff or Defendant in a lawsuit?  Put a copy of the pleadings with your estate planning documents.  While individuals pass away, the lawsuits will continue until they are concluded.  It may be that your estate may owe money at the conclusion or alternatively, money may be due to your estate.

Cash.  If you have hidden money, you need to put this information with your estate plan.  Otherwise, it may be over looked.  Is there money hidden in books?  Under rugs?  In boxes?  In pipes? Behind ceiling tiles?  It would be a shame for your hard earned money to be given away in a garage sale or thrown away because it was in an unlikely place.

Funeral Plans.  Do you have a prepaid funeral contract?  If not, have you pre-planned your funeral.  Leave details.  This will assist your family in following your wishes.

Past Employers.  If you have worked for any companies that had benefits due to you, leave a listing of the company, its address, the years of service with the company.  In this way, if there are death benefits due, your family will be able to access them.

Veterans Benefits.  Are you a Veteran?  If so, place your DD 214 and other relevant information with your estate plan.  In this way your family can obtain any benefits to which you are entitled at death.

 

While your estate planning legal documents are a critically important part of your estate plan, it is also very important to leave a road map to all of the assets and benefits that you have accumulated during your lifetime.  This will make a very difficult time for your family just a bit easier.


Leaving a Road Map for your Family During a Disability

Linda Wasielewski LogoTraditionally, when we think of Estate Planning, we think of Trusts, Wills, and Durable Power of Attorneys.  There are equally important steps to take to assist your family to assist you.

In the case of your disability, you may have executed a Durable Power of Attorney for Financial and Legal affair; however, if you haven’t left a road map of those affairs, your agent may not be able to adequately assist you.

First – organize all of the papers into one location.  It could be a safe, a notebook or a filing cabinet drawer.

Prepare a monthly “budget”.  Not the type that shows how much you spend per month on milk or coffee but one that shows the following:

Income.  What are your sources of income and how are they paid? Are there direct deposits?  Into which account?  When is the money deposited?

Monthly expenses:  What are your monthly reoccurring bills?  List them: mortgage, utilities, auto payment, auto insurance, homeowners insurance, credit cards, etc.

Next show what the name of the company, the account number, the date of the month the bill is due and how the amount is paid.  Is it automatically deducted from your checking account?  Is it automatically charged to your credit card?  Must it be paid by check? Or paid on line?  If it is paid on line, include the user name and password for the account.

Without this information, many bills could be left unpaid if you do not receive a mailed billing each month.

Also create a listing of your assets.  This can be done easily by placing a copy of the quarterly statement for each asset account (savings, checking, financial institution) into one folder.  The balance in the account is not the critical piece of information here – the account number, contact information and institution is the key.

Create a listing of your medical information and providers.  The providers can easily be done by stapling a business card for each of your doctors, therapists, and dentists onto a sheet of paper.

Make a listing of all current medications that you are taking with a note as to the doctor who prescribed the medication.

Finally, make a notation as to where your original documents are located so that they can be accessed by those who need them.

This will go a long way to assist others in assisting you in a time of crisis.


Same Sex Marriage in Michigan – The current status

In 2004, Michigan Proposal 04-2 was passed by 59% of the voters. This Amendment to the Michigan Constitution makes it unconstitutional for the state of Michigan to recognize or perform same-sex marriages or civil unions.

Under other circumstances, our courts in Michigan would recognize legal rights granted in other states to that state’s citizens. Under this Constitutional Amendment, Michigan does not recognize legally performed marriages for same sex couples in states where the same is permitted. Therefore, a same sex couple legally married in New York, will not find that marriage legally recognized in the state of Michigan.

What does this affect?

Taxation. The federal government has recognized same sex marriage as legitimate for federal income tax purposes. Therefore, these couples may file their taxes on a joint tax return. However, if they happen to live in Michigan, they must have their taxes recomputed as each filing single and carry that information over to each of their Michigan Tax Returns.

Adoption. The Michigan Adoption Law requires that a couple be a man and a woman in order to permit a legal adoption by that couple. Therefore, if a same sex couple desires to adopt a child, only one partner may apply to be the legal adoptive parent of the child. Additionally, if one woman partner is the birth mother of a child, her female partner is not legally permitted to adopt the child.

This was the essence of the recent case in Michigan DeBoer v. Snyder, in which Judge Bernard Friedman held the Michigan ban on same sex marriage to be unconstitutional. The following day, approximately 300 couples obtained marriage licenses and were legally married prior to the Sixth Circuit Court of Appeals placing a stay on Judge Friedman’s ruling. These couple are now in limbo. The state of Michigan is refusing to recognize these marriages.

Status. This case is now on appeal to the Sixth Circuit Court of Appeals. This will be a very slow process.

Appeals are not a re-trial of the issues that were raised below. There will be no testimony taken again. The Appeals could will read the legal briefs submitted, read the applicable law, read the transcripts, and hear oral argument. The Court will then determine whether or not the ruling of Judge Friedman, holding the Michigan law unconstitutional, was correct or incorrect.

The initial submission of briefs by the Michigan Attorney General (the appellant or appealing party) and the women who originally brought the lawsuit (the appellees or defending parties) are not due to be filed until June. Thereafter, there will also be opportunity for Responsive Briefs to issues raised by the other parties.

Then, the case will be scheduled for oral argument. This matter will not be scheduled until late September or late November. Thereafter, the Court will then take significant time to make a decision which will be issued by a written decision or Opinion of the Court sometime in 2015.

That will not be the end of the case. The losing party will then file an appeal with the U.S. Supreme Court. Unlike the Court of Appeals, which must hear the cases which are appealed to it, the Supreme Court may decide to hear the case or not hear the case. This is called a writ of certiorari. If the Supreme Court decides to hear the case, this appellate process will start all over again with submission of briefs, oral argument and Opinion of the Court.

Both sides of this issue are hopeful that the U.S. Supreme Court will hear this issue because at the present time, there are 64 cases pending in 30 states challenging the constitutionality of gay marriage bans.

For now, for Michigan couples, it is a waiting game.


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Address

Linda E Wasielewski
attorney & mediator
3199 Logan Valley Road
Traverse City, MI 49684
Phone: (231) 933-0829
Email: linda@lindalawtc.com

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