ESTATE TRANSFER SUMMARY A Brief Summary of Estate Transfer Tools

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1 ESTATE TRANSFER SUMMARY A Brief Summary of Estate Transfer Tools Field Staff Paper #0909- September 1, 2009 PROPERTY OWNERSHIP The form of ownership of an asset is a critical element in estate planning, implication of the plan, and desired transfer of the asset. When assets are owned jointly by two or more persons, the type of joint ownership must be determined. FEE SIMPLE- Ownership by one person who can buy, sell, give, or mortgage as he or she sees fit. When the owner is married, real estate is subject to a spouse s dower rights and therefore, any transactions require their signature. At death, the fee simple property becomes part of the probate estate. TENANCY IN COMMON- A conveyance or devise to two or more persons who are not husband and wife creates a tenancy in common (no rights of survivorship). The ownership is by two or more individuals who own an undivided share of interest of the whole property. At death, each tenant s share of ownership becomes part of the decedent s probate estate. JOINT TENANCY WITH RIGHTS OF SURVIVORSHIP- A conveyance or devise to two or more persons as joint tenants or as joint tenants with rights of survivorship creates a form of ownership with survivorship. Ownership by two or more individuals, in which all owners must agree to any transactions involving sale, gift, or use of borrowing purposes. At death, the surviving joint tenants take title to the property without probate proceedings. TENANCY BY THE ENTIRETY- A conveyance or devise to two persons who are lawful husband and wife creates a tenancy by the entirety, unless a contrary intent is indicated in the deed, devise, or ownership instrument. This type of ownership is ownership similar to joint tenancy with rights of survivorship between the husband and wife. At death, the surviving spouse takes title to the property without probate proceedings. PROPERTY DISTRIBUTIONS WITHOUT A WILL If a decedent dies without an estate plan or without having implemented a simple Will, the assets will first transfer according to joint ownership, (as outlined above), if applicable. The remaining assets will transfer as part of the decedent s probate estate and according to the Michigan s Estates and Protected Individuals Code ( EPIC ) MCL , et. al. ( Act ). Any part of a decedent s estate not effectively disposed of by Will passes by intestate succession to the decedent s heirs as prescribed in this act, except as modified by the decedent s Will. Briefly, the following outlines a typical scenario and transfer of a decedent s estate without a Will and under the Act: MARRIED WITH CHILDREN- Property distributions for a married person with child, children, or descendants, is divided between the surviving spouse (who is mother of all the children) and the surviving child/children. The division is not entirely equal and the surviving spouse receives the first $150,000.00, plus one half of the remaining balance of 2008 ESTATE TRANSFER SUMMARY Page 1

2 the property. The child/children receive one half of the remaining balance (divided equally amongst the children and less the first $150,000.00). Therefore, if an estate is less than $150,000.00, the surviving spouse takes it all. a) For a decedent who has children surviving who are not children of the surviving spouse, the spouse still receives the first $150,000.00, plus one half of the remaining balance of the property and the decedent s children divided equally the one half remaining balance. This is the case if at least one child is a child of the decedent s and surviving spouse. b) If none of the decedent s surviving children are children of the surviving spouse, then the surviving spouse takes the first $100,000.00, plus one half of the remaining balance of the property and the decedent s children share equally in the remaining one half of the estate. MARRIED WITHOUT CHILDREN- If a married person dies without child/children or descendants (including no surviving parents of the descendants), then the entire intestate estate transfers to the surviving spouse. If the decedent dies without children but with parents and a surviving spouse, then the surviving spouse takes the first $150,000.00, plus three-quarters of the remaining balance of the property and the decedent s surviving parents takes the remaining one-quarter equally amongst themselves. WIDOW OR WIDOWER WITH CHILDREN- If a decedent dies widowed with children, the decedent s children take equally the entire estate. If a child or children predecease the decedent, the grandchildren take their deceased parent s share equally. If there are no surviving children, the decedent s parents take the estate equally if both survive or to that parent that does survive. If there are no surviving parents to the decedent, then the descendants of the decedent s parents or of either of them by representation take the decedent s estate. The estate continues to be divided to surviving lineal descendants in the same manner and according to statute when no direct beneficiaries survive the decedent. UNMARRIED AND NO CHILDREN- In cases of an unmarried person, or widow or widower without or descendants, the distribution is as follows: If the parents survive, all to the parents or survivor. If no parents survive, all property goes to brothers and sisters, divided equally. Nieces and nephews take their deceased parents share. If no parents, brothers, or sisters survive, the property is divided ½ to the nearest kin of maternal grandparents and ½ to the nearest kin of paternal grandparents. If no kin, the entire estate will then go to State. FEDERAL ESTATE AND GIFT TAX The Federal estate and gift tax law has a single tax schedule. While living, a person may make a gift of $12,000 per year per person to any number of individuals without filing return or paying a tax. The value of property given is its fair market value. Husband and wife can combine their exemption and therefore give $24,000 per person per year. Any gifts in excess of the annual exemption are taxed according to the following rate schedule. The Estate Tax is currently under a $3,500, exemption for assets of each individual s estate, before kicking in applicable tax ESTATE TRANSFER SUMMARY Page 2

3 Table 1. Federal Estate and Gift Tax Rate Schedule Taxable Estate and Lifetime Gifts From: To: ($) + (%) Of Excess Over: $0 10, ,000 20,000 1, ,000 20,000 40,000 3, ,000 40,000 60,000 8, ,000 60,000 80,000 13, ,000 80, ,000 18, , , ,000 23, , , ,000 38, , , ,000 70, , , , , , ,000 1,000, , ,000 1,000,000 1,250, , ,000,000 1,250,000 1,500, , ,250,000 1,500,000 2,000, , ,500,000 2,000,000 2,500, , ,000,000 2,500,000 3,000,000 1,025, ,500,000 3,000,000 3,500,000 1,290, ,000,000 3,500, ,455, ,500,000 The gift tax is calculated on the accumulated gifts over a person s lifetime, but no tax is paid until the unified credit is used up. The amount of the credit is $192,800 for 1987 which is an exemption equivalent of $600,000 of property. The lifetime gift exemption was $650,000 in 1999, is $675,000 in 2000 and 2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 2005, and $1,000,000 in 2006 and thereafter. The estate tax is assessed on the value of property in the decedent s estate after subtracting a unified credit against estate and gift taxes. There is a 100% marital deduction for a gift and estate transfers between spouses. At death the taxable estate includes all property owned by the decedent including life insurance and jointly owned property except to the degree the surviving joint tenant can prove monetary contribution towards acquisition. Any unified credit which has not been used for gifts during life is available to use against the tax at death. COST BASIS FOR INCOME TAX The cost basis in the hands of the heirs is the fair market value at date of death or alternative value if chosen on the Federal estate tax return. ALTERNATE VALUATION OF CERTAIN REAL PROPERTY (Code Section 2032A)-A special valuation rule applies to real property in a closely held business on the basis of the property s value as a 2008 ESTATE TRANSFER SUMMARY Page 3

4 closely held business. This special valuation cannot reduce the 2009 decedent s FMV gross estate by more than $1,000,000 (per, September Instructions). To qualify for this valuation: 1. The business real and personal property must be at least 50% of the adjusted gross estate, 2. The real property must be at least 25% of the adjusted gross rate. 3. The property must pass to a qualifying heir. 4. The real property must have been owned and managed by the deceased or his heir for 5 of the last 8 years prior to death. 5. The property must continue to be actively used by a qualified heir for at least 10 years after death or the foregone taxes will be recaptured. 6. The cost basis of the property will receive a step up in basis to the alterative valuation, not the fair market value. QUALIFIED FAMILY-OWNED BUSINES (Code Section 2057)- The qualifications for this exclusion are essentially the same as the valuation of certain real property rules, except business personal property is also included and real property, if any, does not have to be 25% of the adjusted gross estate. The maximum exclusion is the difference between $1,300,000 and the unified credit exemption. ($1,300, less $675, = $625, in the year 2000). Unlike the Alternative Valuation of Real Property, property under the small business exclusion will receive a full step-up in basis to fair market value. SPECIAL PAYMENT ALTERNATIVE- Code Section 6166 allows a 14 year period for payment of estate tax attributable to an interest in a farm or other closely held business of the value of the business exceeds 35% of the adjusted gross estate. You can defer paying estate tax for four years and then pay the tax (with interest) in 10 annual installments. The rate is 2% on the first $1,000, of taxable value above the exclusion amount and 45% of the underpayment of tax rate on the excess. ESTATE PLANNING TOOLS TO REMEMBER 1) Property Ownership----Transfer property by titling the property or asset jointly with a right of survivorship. 2) Estate Balancing----Divide the property ownership between individuals (especially married couples) with separate ownership (in trust, fee simple, tenancy in common) rather than joint ownership to ensure balancing of the estates and maximizing Estate Tax Exemption. 3) WILL---- Prepare a Will to transfer assets at your death with specific instruction to the Probate Court. A Will enables a person to name a Personal Representative to oversee the transfer and also enables the person to name other fiduciaries, such as a guardian or conservator for minor children. If an individual prepares a TRUST as part of his/her estate plan, a Pourover Will is still required to inform the Probate Court your intention to transfer all assets in Trust to the Trustee for further transfer and devise. 4) Gift----A transfer of property from one owner to another for no consideration or a consideration that is less than fair market value. This can be documented and transfers can occur as partial sales/partial gifting. 5) Sale----A transfer of property from one owner to another for a consideration at fair market value ESTATE TRANSFER SUMMARY Page 4

5 6) TRUST----Ownership and control of property bay a third party (trustee) who manages the property and pays the income to a named beneficiary according to the instructions given by the person setting up the Trust and who transfers property into it. a. Revocable Trust----a Trust that is included as part of the taxable estate, can be revoked any time, is flexible and most common form of advanced estate planning. The Revocable Trust can take on many different versions and may require special language to work through tax planning with a large taxable estate. b. Irrevocable Trust----a Trust which is irrevocable and is not counted as part of the taxable estate. This trust should be used sparingly and only if there are significant tax problems to the estate. Once assets are put into the Irrevocable Trust, they cannot be removed and the owner forever loses control, access, and the benefit of the items placed in an Irrevocable Trust. c. Life Insurance Trust----this is a special Irrevocable Trust that holds life insurance policies to exclude them from the taxable estate. When a policy is not in Trust and goes to a direct beneficiary, it is counted as part of the taxable estate. d. Special Needs Trust----this can be a Revocable or Irrevocable Trust that is formed for a special needs child, pet, business, real estate, or other property that requires specific and special attention post death. 7) Power of Attorney----This is a tool used for granting during life a fiduciary control of financial, monetary, investment, and other requested transactional powers of a person. The Power of Attorney is only valid during the person s life and can be written to be effective immediately, or upon certain events, such as incompetency or specified absence of the individual. 8) Medical Directive----This is a tool to advise medical care givers of a person s intent, wishes, desires in the event a medical catastrophe occurs. The Medical Directive may spell out specific wishes but also included an appointed fiduciary to make necessary medical decisions. The document should include proper medical release information to allow access to medical records for an informed decision. 9) Life Insurance---A contract between an owner of a policy and the insurance company which states that for a consideration (premium) the company will pay a given sum (face value of policy) to a named beneficiary in the case of a death of the named insured. Different degrees of savings may also be a part of the policy. The policies provide liquidity at death to pay obligations of the decedent. They also work well as a business planning tool and for the funding of buy/sell agreements. 10) Annuity----A contract in which a given sum of money is paid on a periodic basis to a beneficiary for life. 11) Reverse Mortgage---- A contract/mortgage whereby a company makes payment to a home owner based on the calculated value of a home, allows the individual to reside there until death, and takes title to the property upon issuing the loan as consideration and security for the loan. The loan is not required to be paid back in full in this type of arrangement, but the house is removed from the person s ownership and estate upon issuing the mortgage. 12) Marital Deduction----The unlimited exemption for the transfer of assets to a surviving spouse under the federal estate and gift tax legislation. 13) Life Estate----A transfer of ownership from an owner to a second party, with a reservation of some rights, such as life use of the residence. The property does not go through probate, but usually is still taxable in the estate of the deceased owner ESTATE TRANSFER SUMMARY Page 5

6 14) Deed in Escrow----Papers prepared to transfer real estate to another owner and given to a third party for delivery at a later date or when the specified conditions are met. There is no transfer until delivery is made. MICHIGAN INHERITANCE TAX (Michigan Estate Tax) For deaths after 9/30/93, the Michigan Inheritance tax will be the credit for State death taxes under the Federal Estate and Gift Tax. This amount is paid to the Michigan Department of Treasury and is subtracted from the amount of the Federal Estate Tax calculations sent to the Internal Revenue Service. MICHIGAN MEDICAID PLANNING In July of 2007, Michigan modified its law qualifying citizens for Medicaid and aligned the State s requirements with federal guidelines. As a result, there are some important Medicaid considerations to remember in the Estate Planning Process. These items may not be a concern for every individual, given the alternative avenues for assisted living, however, for many families these changes will impact your estate plan. a) All transfers carry a 5 year look back period. If a person makes application for Medicaid assistance, he or she may be penalized for any transfer that occurred within the 5 year window from the date of application. As a result, the divestment formula will be used to calculate when application for Medicaid will qualify the applicant for assistance. b) All property put into a Revocable Trust is considered personal property and will be counted towards the applicant s personal property limit. Homes will not qualify for the homestead exemption if held in a Revocable Trust. c) The Homestead Exemption amount has been reduced to $500, for the value of the home and contingent real property. This reduction significantly reduces the amount of contingent real property that may be exempt. Likewise, it may create more planning with homes that exceed the exemption value. d) A planning technique may be purchasing long term care insurance, especially for a 5 year term, the length of the Medicaid look back. Other alternatives exist, such as seeking a protective order for business assets (such as real property critical to a family farm) that may otherwise be counted against the person applying for Medicaid. Field Staff Paper #0909- September 1, Information compiled by: Trent Hilding, Agricultural & Rural Advocates, PLC 6824 E. Lake Montcalm Rd., Edmore, Michigan Reviewed by: Dennis Stein, Farm Management Educator, Michigan State University Extension; Van Varner, Business Management Educator, Michigan State University Extension and Roger Betz, Farm Management Educator, Michigan State University Extension. Statements based on information avaialble Feb and printed August MSU is an affirmative-action, equal-opportunity employer. Michigan State University Extension programs and materials are open to all without regard to race, color, national origin, gender, gender identity, religion, age, height, weight, disability, political beliefs, sexual orientation, marital status, family status or veteran status. Issued in furtherance of MSU Extension work, acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Thomas G. Coon, Director, MSU Extension, East Lansing, MI This information is for educational purposes only. Reference to commercial products or trade names does not imply endorsement by MSU Extension or bias against those not mentioned ESTATE TRANSFER SUMMARY Page 6