Virtually any newscast or newspaper continues to talk about the “tax increases” that will become effective January 1, 2011. While the general concept is widely reported there seems to be little attention being given to the specific taxes that will increase if no action is taken by the lame duck congress by the end of the year. The following information is not being offered as any political objection or endorsement but rather just factual information that I wanted to share with everyone for the express purpose of understanding the increases and encouraging everyone to consult with their tax consultants and legal counsel to determine whether any planning before the end of the year makes sense for you.

Please note the following three phases of taxes will roll out

First Phase: Expiration of 2001 and 2003 Tax Relief

In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011:

Personal income tax rates will rise.
The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates.

The full list of marginal rate hikes is below:

The 10% bracket rises to an expanded 15%

The 25% bracket rises to 28%

The 28% bracket rises to 31%

The 33% bracket rises to 36%

The 35% bracket rises to 39.6%

Higher taxes on marriage and family.
The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care tax credit will be cut.

The return of the Death Tax.
This year, there is no death tax. For those dying on or after January 1, 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savings and investments.
The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The top dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013.

Second Phase: Health Care Taxes.

There are over twenty new or higher taxes in the new healthcare law. Several will first go into effect on January 1, 2011. They include:

The Tanning Tax.
This went into effect on July 1st of this year. It imposes a new, 10% excise tax on getting a tan at a tanning salon. There is no exemption for tanners making less than $250,000 per year.

The “Medicine Cabinet Tax.”
Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).

The HSA Withdrawal Tax Hike.
This provision increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

Brand Name Drug Tax.
Starting next year, there will be a multi-billion dollar tax imposed on name-brand drug manufacturers. This tax, like all excise taxes, will raise the price of medicine, hurting everyone.

Economic Substance Doctrine.
The IRS is now empowered to disallow perfectly-legal tax deductions and maneuvers merely because it judges that the deduction or action lacks “economic substance.” This is obviously an arbitrary empowerment of IRS agents.

Third Phase: The Alternative Minimum Tax and Employer Tax Hikes

When Americans prepare to file their tax returns in January of 2011, they’ll learn the AMT won’t be held harmless, and many tax relief provisions will have expired.

The major items include:

The AMT will ensnare over 28 million families, up from 4 million last year.
According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families – rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers.

Homeowner Paperwork Tax Burden.
President Obama recently signed a small business bill which has several tax hikes and tax breaks. One of the tax hikes requires the 10 million homeowners who rent out second homes and vacation homes to issue burdensome “1099-MISC” forms to everyone with whom they do more than a small amount of business. This will result in millions of wasted hours filling out paperwork and being chased by the IRS. 90% of people who rent out homes make less than $200,000 per year.

Taxes will be raised on all types of businesses.
There are literally scores of tax hikes on businesses that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.

Tax Benefits for Education and Teaching Reduced.
The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.

Charitable Contributions from IRAs no longer allowed.
Until this year, a retired person with an IRA could contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.

Please feel free to pass this information along. Everyone needs to understand that the increase in taxes will affect many of us.

Dan A. Penning

Recently, a business client contacted our office because he received a request from someone claiming to have Power of Attorney over one of his customers (let’s call her Jane). This individual was looking for copies of Jane’s personal records and prior purchase information. Jane is an elderly woman, who had been a long-time customer of the Business. To the best of the Business Owner’s knowledge, Jane did not have any close family or friends in the area.

Requests for personal information
The individual, a male, who contacted the Business “on Jane’s behalf” was forceful, discourteous, and seemed to suggest that the Business had sold goods to Jane for an amount greater than the actual value. This raised red flags for the Business, so we were contacted for advice on whether the Business should comply with the request for Jane’s personal information.

Use caution
These requests are not unusual, and many of you may receive similar requests at some point. If you are contacted by someone seeking another individual’s personal information, use caution. Always request a copy of the Power of Attorney document and ensure that the person to whom you are talking is the person nominated as Power of Attorney in the document. The following steps would also be prudent:

• Request a copy of the person’s driver’s license or other identification. Don’t assume that the person requesting information is who they say they are.
• Ask an attorney to review the Power of Attorney to ensure that the person claiming to have power of attorney is authorized under the document to accomplish the task he or she is attempting.
• Ask an attorney to prepare a short affidavit for the individual to sign, certifying that:
  • The person is who they say they are;
  • The person has personal knowledge that the other individual is not deceased (powers of attorney are only valid if the individual is alive);
  • The Power of Attorney is effective;
  • The person has no knowledge that the Power of Attorney has been revoked or is otherwise invalid.

Protecting yourself
While you might not be in a position to contest the validity of the Power of Attorney, you can protect yourself in the event someone later questions your decision to provide confidential information to a third party. Taking the above actions, and keeping a record of those actions, will show that you acted prudently before disclosing the confidential information.

Dan A. Penning

Michigan’s Super Drunk Driving Law Takes Effect October 31,2010

On January 9, 2009, Governor Granholm signed into law a series of amendments to the Michigan vehicle code dealing with drunk driving and related offenses. Those amendments, referred to by many as Michigan’s “Super Drunk” driving law, take effect on October 31, 2010. In adopting these amendments Michigan joins some 45 other states that have adopted similar laws. Key provisions of the new law include the following:

1. Beginning October 31, 2010, drivers with a blood alcohol content (or, BAC) of .17 percent or greater will face significantly enhanced penalties. First offenders will face fines ranging from $200 to $700 (up from $100 to $500 under current law), up to 6 months in jail (up from 93 days under current law), up to 360 hours of community service and will be required to attend 1 year of substance abuse treatment, Alcoholics Anonymous or other community based support groups (only required for repeat offenders under current law.) The duration, frequency and type of treatment must be based on an assessment from a licensed alcohol assessor, paid for by the offender.
2. The new law and enhanced sanctions apply only to offenders convicted of offenses that occur after October 31, 2010. License and punitive sanctions for second and subsequent offenses remain unchanged regardless of the offender’s BAC.
3. The licenses of offenders convicted under the new law will be suspended for 1 year, and restricted licenses may not be granted for the first 45 days (referred to as a “hard” suspension.) Thereafter, for the next 320 days, the granting of a restricted license is contingent upon an ignition interlock device being installed in the offender’s vehicle, at their expense, including all charges for monthly monitoring of the device. Such devices are designed to prevent a vehicle from being started or driven by anyone with a BAC of .025 or greater (reduced from .04 under current law.) Under current law as applied, the Secretary of State recognizes the potential that these devices may not allow the vehicle to be started for reasons other than a BAC of .025 or greater. As a result, if a “startup” failure is followed by a “clean test” within 15 minutes, the startup failure is not recognized. Under the new law, after the first 2 months that the device is in use, all startup failures will result in sanctions; period.Any tampering or attempted tampering with the device, or, operating or attempting to operate a vehicle equipped with the device with a BAC of .025 or greater, will result in another 1 year suspension, including 45 days of no driving at all. If an offender who has been ordered to have a device installed in his or her vehicle is stopped driving a vehicle that is not equipped with the device, that vehicle may be impounded, the license plate may be confiscated and destroyed and the offender will face additional suspension and criminal sanctions, including up to 6 months in jail and up to a $5,000 fine. The interlock device must remain in the offender’s vehicle until the Secretary of State orders its removal.
4. The vehicle of anyone who is convicted of knowingly allowing an intoxicated person to drive their vehicle must be immobilized for 90 to 180 days, with the option of avoiding the immobilization if a monitoring device is installed.

Currently, the average BAC of a person arrested for drunk driving in Michigan is .16. It is therefore estimated that the new “Super Drunk” driving law is likely to impact almost half of all persons arrested for drunk driving. Will it result in reduced incidents of drunk driving and greater safety? Only time will tell. What is certain is that convictions for drunk driving will be substantially more expensive and more consequential under the new law.

Dan A. Penning

Michigan permits husbands and wives to own real estate as “tenants by the entireties.” This special form of joint ownership, recognized only in about half of the states, protects real property from the claims of creditors unless the creditor is the joint creditors of both the husband and the wife. In other words, the creditor of one spouse has always been powerless to force the sale or refinance of entireties property in order to collect a debt.

This was true for all creditors until 2002, when the IRS prevailed in a court battle over whether a federal tax lien may attach to a delinquent taxpayer’s interest in real estate owned as tenants by the entireties. The 2002 ruling essentially gave the IRS “super creditor” status, but there was some comfort for taxpayers in that the IRS could not actually force the sale or refinance of entireties’ property. Instead, it could only wait in the wings until the property was either sold or refinanced, at which time the delinquent tax debt would be paid.

The tax collection landscape changed dramatically this August when the U.S. Court of Appeals expanded the reach of the IRS by ruling that the government could foreclose a husband’s income tax debt by forcing the sale of the Michigan home he owned as tenants by the entireties with his wife. As a practical matter, this ruling means that any transfer of a marital home to one spouse or to that spouse’s living trust must be completed well before any tax dispute arises if the home is to be protected from the collection efforts of the IRS against the other spouse.

Dan A. Penning

Your College Student Needs a Financial and Medical Power of Attorney Form

As we have mentioned in previous emails and other communications from our office, it is important that children, once they reach the age of majority (18 in Michigan), execute a Financial Power of Attorney form and Medical Power of Attorney. A Medical Power of Attorney allows the individual nominated in the document the right to have access to medical records and be involved in medical decision making. A Financial Power of Attorney allows the agent designated to handle financial matters on behalf of the young adult. For students going to school out-of-state, the question arises whether to have legal documents created in the student’s home state, the state in which they attend school, or both. While the laws in most states are comparable so that a Power of Attorney created in one state usually will be respected in another, that is not always true.

People can have medical events at all ages. Not having appropriate legal documents in place can be a disaster. Of all the legal documents people are advised to create, Power of Attorneys are among the simplest and least expensive, but oftentimes the most important. Please contact us if you have a question or require assistance with creating a Power of Attorney document for your child.

Dan A. Penning

Recently, many of my estate planning clients have asked questions about Lady Bird Deeds and when it is appropriate to use these instruments in estate planning. Like any planning tool, a Lady Bird Deed can be helpful in some situations, but is not appropriate in all cases. The use of a Lady Bird Deed in the wrong situation can lead to unintended or negative results.

What is a Deed?
A deed is a legal instrument that conveys an interest in real estate (land and building) from one party to another. There are many types of deeds that are used to accomplish different objectives. The most common type of deed that people are familiar with is where there is an outright transfer of ownership from one party to the other, such as in the sale of a residence. This most common type of transaction utilizes a “fee simple” deed which is used to convey property from one (or more) owner to another. When Person “A” conveys real property to Person “B” by a “fee simple” deed, Person “B” becomes the owner of the property immediately upon the execution of and delivery of the deed.

What and How is a Lady Bird Deed Different?
A Lady Bird Deed is similar to “Life Estate” Deed in that it conveys the property to another person but reserves ownership to “grantor” for as long as the grantor is living. For example, if Person “A” conveys real property to Person “B” by a Life Estate Deed, Person “A” would continue to own the property for their life and it would only become Person “B’s” property after Person “A” dies.

The difference between a traditional Life Estate Deed and a Lady Bird Deed is that in addition to reserving a life estate in the property, the grantor of a Lady Bird Deed reserves the right to sell, mortgage or give away the property during their lifetime. This means that if Person “A” conveys real property to Person “B” by Lady Bird Deed, Person “A” would continue to own the property for their life and would only become Person “B’s” property after Person “A” dies and then only if Person “A” has not already sold or given it to someone else in the meantime.

When is a Lady Bird Deed Useful?
Advisability and use of the Lady Bird Deed arises in situations where people are looking to “avoid probate” and/or engage in “Medicaid planning.” A properly drafted Lady Bird Deed can be used to avoid probate in some situations. In many situations, the simplicity of a Lady Bird Deed gets in the way. That is, if a person’s estate plan is more complicated than, “when I die, the house goes to Joe,” the Lady Bird Deed may not work and actually provide a negative result in a situation involving a more complex estate plan.

In some situations, Lady Bird Deeds can also be used as part of Medicaid planning and, in fact, that is where they first became very popular. A Lady Bird Deed may work well where someone who is currently receiving Medicaid benefits as a way to pass the property at their death without the necessity of probate. This is true because Medicaid policy provides that a Lady Bird Deed is not a “divestment” (transfer of assets that results in a penalty).

Note: For a person who is not receiving Medicaid benefits, a Lady Bird Deed does not protect the property from being considered a resource if Medicaid benefits are later pursued.

What About a Quit Claim Deed?
Before the Lady Bird Deed became popular, clients often believed (or were led to believe) that “Quit Claim” Deeds could provide a beneficial result as part of an estate plan. Simply put, a Quit Claim Deed is a deed which conveys a person’s interest in real property to another, but makes no guarantees that the person conveying the property even owns the property to begin with. While Quit Claim Deeds are simple to draft, they are not an answer to every person’s estate planning needs with respect to transferring property and avoiding probate.

What About the Execution of Deeds and Michigan Real Estate Law?
Some individuals forget that transferring ownership in property can have negative consequences with respect to the amount of property tax they pay on their real estate. For example, an individual transferring real estate to certain parties, for instance children as opposed to a spouse, is not “exempt” transfer for property tax purposes and a portion of the property can actually be uncapped in value and the taxable value of a property can be increased based on the transfer of ownership. In addition, certain transfers invalidate the ability of an individual to claim a homestead exemption in the state of Michigan with respect to their residential property taxes.

Conclusion.
Despite the perception of some that deeds are simple, legal instruments that can be done with minimal thought or effort, the truth is that there are many tax, Medicaid, and other implications associated with deeds and that choosing the wrong deed or using it at the wrong time, can have significant negative or unintended consequences. As always, the best answer to any question about estate planning and the transfer of real estate will be based on the unique facts of any specific situation and should be analyzed and resolved by consulting with a qualified attorney. If you have transferred real estate in the past as part of your estate plan or are contemplating transferring real estate in the future, please do not hesitate to contact us to discuss your transfer in further detail.

REMINDER:
Your College Student Needs a Financial and Medical Power of Attorney Form

As we have mentioned in previous emails and other communications from our office, it is important that children, once they reach the age of majority (18 in Michigan), execute a Financial Durable Power of Attorney form and Medical Power of Attorney. A Medical Power of Attorney allows the individual nominated in the document the right to have access to medical records and be involved in medical decision making. A Financial Power of Attorney allows the agent designated to handle financial matters on behalf of the young adult. For students going to school out-of-state, the question arises whether to have legal documents created in the student’s home state, the state in which they attend school, or both. While the laws in most states are comparable so that a Power of Attorney created in one state usually will be respected in another, that is not always true.

People can have medical events at all ages. Not having appropriate legal documents in place can be a disaster. Of all the legal documents people are advised to create, Power of Attorneys are among the simplest and least expensive, but oftentimes the most important. Please contact us if you have a question or require assistance with creating a Power of Attorney document for your child.

Dan A. Penning

Legal questions remain about accessing personal text messages

The text message scandal that toppled former Detroit Mayor Kwame Kilpatrick highlighted the potential uses and abuses of employer provided cell phones and handheld devices. Notwithstanding Kilpatrick’s fall from grace, legal questions remain about whether an employer can access an employee’s personal text messages — even if those messages were sent or received on an employer provided electronic device. In a case now pending before the United States Supreme Court, Quon v. Arch Wireless, a California police officer successfully sued his municipal employer, as well the municipality’s electronic communications service provider, after supervisors accessed sexually explicit text messages between the officer, his wife, and his mistress. The police officer had failed to reimburse the city for text charges that exceeded the city’s stated monthly character limit. As a result, his supervising lieutenant started to monitor the officer’s text messages to separate personal charges from work-related charges. The supervisor soon learned of the police officer’s steamy love triangle, and, “somehow,” this information was leaked to the public.

The Fourth Amendment:

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

An expectation of privacy
Reviewing the claims against the employing municipality, the federal appeals court determined that the cop had an “expectation of privacy” in his personal text messages and that, consequently, the employer had violated the Fourth Amendment’s restrictions against unreasonable searches and seizures when it accessed those messages. Even more surprising, perhaps, was the court’s decision to hold the third party service provider liable under the federal Stored Communications Act for disclosing the text messages to the employer in the first place. The Supreme Court has agreed to review the Fourth Amendment claim, but it will not revisit the decision against the service provider under the federal statute.

Problems employers continue to face
We’ve used this forum in the past to remind employers of the need for clear, written policies that explain the employer’s expectations regarding computer and electronic media use. The Quon case underscores the problems employers continue to face when handling these issues. Although non-governmental employers do not fall under the Fourth Amendment, they still need to stay clear of employees’ reasonable privacy expectations. Additionally, they need to be aware that — unlike email messages — text messages are typically run through a third party provider, not the employer’s own network server. Consequently, both the provider and the employer face greater risks if they access or disclose those messages without the employee’s explicit permission.

Establish and publish broad policies
The bottom line? Establish and publish broad policies governing the use of employer provided electronic equipment and media, and consult with corporate counsel before peeking at potentially private emails and text messages.

Dan A. Penning

New EPA Rules Regarding Lead-Based Paint

When it comes to lead-based paint, the Environmental Protection Agency has long regulated its use, detection and disclosure. The EPA recently expanded its regulation in the area by requiring contractors who renovate, repair or paint pre-1978 homes, child care facilities and schools to be specially trained and certified in the removal and containment of lead-based paint.

Although lead was eliminated as a paint ingredient over 30 years ago, it remains on the walls in countless structures, often buried under several layers of newer paint. Many common activities can cause dust or chips containing lead-based paint to be released into the air: sanding, scraping, or even something as simple as replacing an old window.

These new regulations affect anyone that conducts renovations or repairs for a profit. The certification requirement went into effect April 22, 2010, but the EPA recently announced a grace period for those not yet certified. As long as an individual renovator has enrolled in a training course by September 30, 2010, and has completed the course by the end of the year, no fines will be imposed. Contracting firms that are not yet certified, on the other hand, will be subject to fines beginning October 1, 2010.

The fines for violation of the new rules are enormous, up to $75,000 per incident. These are clearly not regulations that can be ignored! A list of the 15 currently-accredited Michigan trainers and other information about lead-safe practices can be found at www.epa.gov/lead.

Dan A. Penning

From Julie Pfitzenmaier, an attorney with Wright Penning & Beamer:

When they’re selling what we want to buy

As I prepare for my upcoming wedding, I am increasingly bombarded with vendor contracts asking me to pay this and waive that. And I will tell you that I am often tempted to do exactly that, especially when the vendor appears to be selling what I want. But, as an attorney, I am always asking (sometimes excessively) the “what if” questions and making sure the answers to those questions are in the contract. Initially, this was uncomfortable for me, as it may be for some of you. First of all, we tend to hire people with whom we are comfortable, and with whom we enjoy working. Second, we may be in unfamiliar territory when negotiating contracts, or specific types of contracts. And, finally, we may see asking tough questions as being negative or putting up road blocks to what we want. If you are parents of a groom- or bride-to-be you might run into resistance from vendors and children alike when asking these same questions.

Ask questions first
But, these “what if” questions and their answers are essential. Clients often come in with a contract issue saying “I never thought anything like this would happen,” and we are forced to look at the contract for what is sometimes an unpleasant answer. Here are examples of the “what ifs” I asked my photographers:

• What if something happens to your equipment during the wedding?
• What if something happens to your computer after the pictures are downloaded?
• What if your children get sick and you need to leave?
• What if you get sick or there is another emergency?
• What if we are dissatisfied with the replacement photographers you select in the event you are unavailable?
• What if there is a snow storm between Grand Rapids and Detroit on the day of the wedding?

The second step, of course, is making sure that the answers to the “what-ifs” are in the contract. Hand write changes into the contract if you must, but resist the temptation to accept “Just trust me,” or “That has never happened before.”

Minimize the surprises
Of course, things will go wrong. But, you can minimize the surprises and anticipate the solutions if the contracts you sign have the answers. So, take some time, do a little “negative” thinking, and come down with a case of the “what ifs.”

We strive to make “doing business” profitable and advantageous for you. Please call us if you need help crafting the “what-ifs!”

Dan A. Penning

A few years ago, terms like “short sale,” “upside down,” and “under water,” were not even part of our lexicon. Today, they are common place. Following some 15 years of steady appreciation, peaking in 2006, home values in Michigan have since declined 45% on average. In Oakland County, distressed sales now account for approximately 93% of all home sales. If a short sale becomes your only option, here are some basics to keep in mind.

1. A short sale results when the seller owes more money on the mortgage than the home is worth. As a result, the seller is forced to negotiate a discounted payoff of the underlying mortgage debt with the mortgage lender in order for the sale to take place. Sellers want to avoid having to pay money against the mortgage at closing and to obtain a waiver of any deficiency. Buyers want clear title and a quick closing.

2. It is absolutely essential that a short sale contingency be included in the listing agreement for the property and in the purchaser agreement. Such contingencies will provide that the sale is contingent upon the ability of the seller to negotiate a short sale with its mortgage lender upon terms and conditions that are acceptable to seller, in seller’s sole discretion. If the seller is unable to get such an approval, the purchase agreement can be terminated, buyer’s deposit refunded, and seller has no obligation to the realtor under the listing agreement.

3. Mortgage lenders have very specific, detailed and comprehensive procedures that must be followed, exactly, in order for a short sale to be considered. Substantial documentation must be provided, and there must be full and accurate disclosure on the part of the seller. Failure to accurately disclose such things as hardship, income and assets, may result in the short sale being later set aside on the basis of fraud. The process is detailed and time consuming (as long as 6 months or more), ultimately resulting in either the rejection of the request or a statement of the terms upon which the mortgage lender will agree to the short sale.

4. Mortgage lenders are not required to waive the balance owing on the mortgage. They may require that some, or all of it, be paid by the seller at closing, or that the balance owing will remain payable by the seller under the original mortgage note or a new promissory note.

5. A short sale will impact the seller’s credit rating and may adversely impact the ability to obtain certain types of mortgages in the future. And, any part of the loan deficiency that is forgiven must be reported by the mortgage lender to the IRS on Form 1099-C. Whether or not the forgiven debt is taxable depends upon a number of factors, including whether or not the home was the borrower’s principle residence, when the forgiveness took place, and so on.

Based upon historic trends, many believe that it will take another ten years or more for homes to regain the value that has been lost in the past 4 years. Distressed sales (short sales) are therefore a fact of life that will be with us for years to come.

Dan A. Penning