ESTATE PLANNING, PART III

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

Balancingthe Estates: Ways to Shift Wealth

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

One importantconsideration is that outright gifts to a partner result in the loss of controlover the asset for the gifting partner and gain of control to the partnerreceiving the gift. This may causesome concern to the one making the gift. Therefore, other means of transferring property may be more desirable. Some of the ways in which propertytransfers can be accomplished without relinquishing too much control arediscussed below.

Limited Liability Companies

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

With the LLCapproach, creditors of the partner receiving the interests in the LLC may notbe able to reach the partner’s interest until the partner received a distribution. Finally, the Operating Agreement couldprovide that should the couple terminate their relationship, the partnergifting the interests in the LLC could buy-out the partner receiving theinterests under very favorable terms.

Grantor Retained IncomeTrusts

Under aGrantor Retained Income Trust (“GRIT”), the partner making the gift appears toretain a phantom income stream from the GRIT based on the current 7520 Rate. The size of the gift will be based onthe donor’s age, the 7520 Rate, and the term of the Trust. The size of the giftmay be reduced thus again, allowing for a great amount of property to betransferred. GRITs are notavailable to married couples.

Qualified Personal ResidenceTrusts

A QualifiedPersonal Residence Trust (“QPRT”) works exactly the same as a GRIT, except thatthe trust must be funded with the residence of the partner transferring theproperty. This is a means oftransferring the residence to the partner.

Grantor Retained AnnuityTrust

A GrantorRetained Annuity Trust (“GRAT”) is similar to a GRIT except that with a GRAT adistribution must be made to the partner making the gift on an annualbasis. As with the GRIT and theQPRT, the same factors (the 7520 Rate, the age of the gifting partner and theterm of the trust) will impact the size of the gift. With the GRAT, the donor can also impact the gift bydeciding how much the fixed annual annuity from the GRAT should be. In addition, there may be discountsthat can be taken for lack of marketability and lack of control if the interestwas in a LLC.

If any of thetechniques above are used to transfer property to a partner during the lifetimeof the grantor partner, the partner making the gifts will need to file a gifttax return. Therefore, it will benecessary to have appraisals done to value the gifts properly.

Gift, RealEstate and Transfer Taxes

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

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

InheritedIRA’s

Under the PensionProtection Act of 2006 – a non spouse beneficiary can roll the planparticipant’s IRA over to an “inherited IRA (a traditional IRA)” and have itdistributed over the beneficiary’s life expectancy instead of the 5 yearperiod. However, a partner in asame-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 isnot 70 , the distributions will have to begin immediately.

Agreementsto 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 andevidence permanence in the relationship and legal consideration. This may be especially important topeople who do not have the option of marriage at this time. This is an agreement that should bedone by an attorney and each party should have separate representation. Although there is no guarantee that theagreement will be upheld, you can take steps to ensure it is as bullet-proof aspossible. Some suggestions are asfollows:

Bothpartners should disclose all of their assets and liabilities;

Thepartners should each attach their last three years’ tax returns to theagreement as part of the disclosure of assets;

Thepartners should have separate legal counsel review the agreement;

Theagreement should determine how common expenses will be paid;

Theagreement should focus on the parties as “partners” rather than as “lovers”;and

Theagreement should cover how property is to be divided upon a termination of therelationship (other than by death of one of the partners).

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

I realizethere 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, suchas social security benefits, immigration privileges, or the marriage exemptionto federal estate tax. Therefore, itis important that you take the necessary steps to protect you, your loved onesand your estate.

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