July 13, 2021
Should We Create an LLC for a Rental Property or How Should It Be Titled? |Weekly Wednesday Wisdom Webinars
Certified Elder Law Attorney and Financial Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm.
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Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.
On this week’s webinar, attorney and advisor Chris Berry of www.castlewealthlegal.com answers the below questions.
- My stepfather passed away and we’re concerned about scammers taking advantage of my mother from fraud, what can we do?
- For a ladybird deed to be valid, does it have to be witnessed, notarized? Does the person who will be the beneficiary have to be involved? Where do I store the Ladybird Deed?
- Can you do something with the credit bureau so that no one has access to the credit?
- My mother who has dementia wants to appoint someone else as a Trustee, how do we go about doing that, and can she?
- Does Ladybird Deed only get recorded when you die?
- Regarding Roth Conversions, how much would be lost, say 5% on the computing interest if you paid the tax now to do the conversion?
- Should we create an LLC for a rental property or how should it be titled?
- Do we take an RMD from a Roth?
- What is the difference between a Castle Trust vs. Veterans Asset Protection Trust?
- If a person who does not have long-term care insurance is in a facility draining their life savings, can you take a large chunk to update the house before it is gone? and how does someone apply or move from medicare to Medicaid?
- What are some estate planning techniques for estates greater than $4Million to minimize estate taxes?
- Is the current $11.7 million estate tax, gift tax reduced by any gifting
All right we’ll go ahead and get started here let me tip that up a little bit. All right so my name’s Chris Berry of course and we do these workshops every week at one o’clock. Always geared towards just answering your questions. So I have people submit questions ahead of time via email or if you do have questions or something’s unclear as I’m going through everything today feel free to go ahead and interrupt me or better yet don’t interrupt me put it into the chat section or the Question and Answer section and I’ll go ahead and address it. This is general information so if you want to see how this applies to your situation make sure to book some time and we always start with a positive focus.
So something positive that happened last week or over the week either personally or professionally. It’s a good way to start out on a positive foot and I’ll just share, I had a lot of great conversations with clients and families looking to become clients and a lot of conversations around taxes. Where taxes are going and what can we do to protect our wealth from taxes going up which seems to be a big concern these days. So just very appreciative of everyone all the families that we work with and the good that we can do to help them. So a bunch of questions submitted already if you do have a question feel free to put it into the Question and Answer but otherwise I’ll just go ahead and get started answering some of these questions. So the first question my stepfather passed away and we’re concerned about scammers taking advantage of my mother from fraud what can we do?
So this is a common concern especially as we have loved ones who are aging. There’s a lot of scammers out there. There are different things you can do. You can sign up for some of these identity thefts protections like Lifelock. I don’t have any specific stories. I actually had one of those for a period of time but I let it lapse. There are things and we have a checklist or I can link you to a checklist I think from the FTC if you’re concerned with identity theft.
These are the steps that you need to take but I did have a situation number of years back where I had a family where the husband had dementia. He was the one that kind of managed the money but he had given away a good chunk of change to scammers and thought it was still a good idea. A good investment and it was hard the way that his dementia was affecting him to kind of reason with him. You’d have a conversation with him and it would have seemed like a normal conversation but just his decision-making was slightly off as it related to the investments. He was a very smart guy engineer did well managing his investments for the family his whole life but he started giving away money to like buying a bunch of gift cards and shipping them overseas thinking that was some type of investment.
So what we did in that situation is and he was a very kind of proud man and it’s his money. So he can certainly do what he wants but what we did is we took a chunk of change and we actually put it into a trust where he was not the trustee anymore. We actually had one of the daughters serving as a trustee and there were over a million dollars that we protected in the trust. And it not only protected from long-term care costs in the future that nursing home Medicaid spend down but also what it did is that now we basically protected him and his wife who really hadn’t balanced a checkbook or managed finances protected from a lot of these scammers. So that now we had one of the daughters was kind of the trustee that managed the money.
So that’s and husband the dad so he had about I think we left about 60 000 kinds of in his name that was his spending money. That he could do whatever he wanted and then we had the wife kind of taken care of over here so that we could protect the big bulk of the funds from kind of the fraud or scammers coming after them. So there are different things to do that was us creating a restrictive trust to protect the family wealth. Some other things would be making sure you have powers of attorney in place. So having that financial power of attorney so you can make decisions for someone but really to take away someone’s independence to really take away their ability to make their own decisions. That would be going through a guardianship proceeding where now if they sign a contract or something they don’t have the legal authority to do. That I try not to do this because it’s basically taking your loved one to court.
We call it more of a nuclear option but it is something on the table. Other things we’ve done is with the power of attorney we’ve kind of moved some of the money just to maybe a different bank but it is a tough situation. There are no easy answers in situations like that so so hopefully that was helpful. This next question is with regards to ladybird deeds. So ladybird deed is the type of deed that basically says the home is in your name while you’re alive and well you’re the owner of it you can refinance it you can do whatever you want with the home. The real estate and then if you pass away that home goes to whoever you’ve listed on the deed. A lot of times when we’re doing a revocable trust we’ll name the trust as the beneficiary of the account or of the ladybird deed. So that upon death the true or the real estate flows into the trust and then the trust directs where the assets go.
It’s like a beneficiary designation but now it’s for real estate. For ladybird to be valid does it have to be witnessed and notarized? Does not have to be witnessed does have to be notarized just like any other type of deed. Does the person who will be the beneficiary have to be involved the answer to this is no? It’s just like a beneficiary designation at the bank. You don’t have to call up your child to say hey I’m adding you as a beneficiary. Where do you store the Ladybird deed well it gets recorded and we send it to the register of deeds at the county and then we also notify the city tax assessor that a transfer has been made. And we do what’s called a property transfer affidavit.
We do a lot of ladybird deeds and typically we’re either doing a Ladybird deed or we’re doing a d directly to an asset protection trust but it’s a big thing to think about is don’t forget about the real estate out there. Make sure that if you own real estate or lots of lands that they’re tied into the overall estate plan. The comment comes in can you do something with the credit bureau so that no one has access to the credit yeah. You could put a freeze on any type of credit you could reach out to the credit bureaus to pull information. Those are all also good ideas as well that was getting back to the first question. Number three my mother who has dementia wants to appoint someone else as a trustee how do we about how do we go about doing that and can she even do that. So understand that like dementia and aging we don’t go from healthy to completely incapacitated. We don’t go from healthy to unable to make decisions there’s kind of this gray area and that’s where a lot of difficult conversations and decisions are made are in the gray area. It’s pretty straightforward if someone’s in a coma they don’t have the capacity to act but when someone’s just going through the aging process. It’s difficult to understand how much you should get involved in or what protections should be made.
So in this situation, we have a mom who has dementia but apparently still lucid enough to kind of express her wishes and understand what she’s doing but there’s a dementia diagnosis and that’s something that’s important to understand is that if you have dementia diagnosis that doesn’t automatically take away your authority to make decisions. It’s just a physician’s opinion really the only way that we can take away someone’s decision-making is through guardianship which again like I mentioned before that’s kind of a nuclear option. We don’t want to try to go through we don’t want to go through guardianship unless we have to because now the courts are getting involved. So if we do want to name someone else as a trustee it’s pretty straightforward. All we do is we do an amendment to the trust and it has to be notarized and go through all those steps but all we do is amend the trust and then we would have mom sign it now the question is can she go about doing that even if she has a dementia diagnosis most likely yes.
As long as she’s having what we call lucid moments and typically what I say to families is does mom recognize you. Does she understand what she’s doing like appointing I want my son Jim to manage things for me and if mom says yeah that’s what I want then we could probably execute the documents even if mom were to forget that later in the future? So to be able to execute legal documents as a general rule you just need what’s called lucid moments and so typically we’ll find a good time or a time of day when things are a little sharper. So that we can get those documents. Updated so my mother has dementia wants to point someone else as a trustee. Yep, we can probably do that all we’d have to do is an amendment and have mom sign and these days. We don’t even have to sign in person due to the pandemic we can do virtual signings over zoom or a facetime or web conference. Someone writes in Ladybird deed and then a semicolon. So I don’t think the question necessarily came through. If you do have more questions on the Ladybird deed. Number four Roth conversions how much would we lost say five percent on the compounding interest if you pay the tax now to do the conversion. Oh, here we go this was regarding Ladybird deeds. Does it only get recorded when you die? No, you like I said you record it right away at the county. So as soon as you sign the deed you get it recorded at the county.
If the beneficiary is a partner not married with a product where will there be property taxes no typically it’s an exempt transfer. So there’s it doesn’t affect your property taxes really there’s no reason not to do a Ladybird deed unless you’re doing an ass protection trust. Another question comes in do you help with asset protection for a family cottage owned by a parent and also help them with that. All right I’ll try to get to that one in a bit. So number four so regarding Roth conversions how much would be lost say five percent on the compounding interest if you pay the tax now to do the conversion. So this is a common misconception a lot of people feel that if they do a Roth conversion or move money from a tax-deferred bucket where you see this bigger number to say something tax-free like IUL or a Roth or even a taxable account. But somehow you’re losing because now you go from this bigger number pre-tax to a smaller number post-tax or tax-free and there’s this misconception that you’re missing out on compounding interest.
And I’ve done this explanation before but let’s say we have an IRA it’s valid at a hundred thousand dollars just to keep the math simple. Let’s say we have a Roth and let’s say the taxes are eighty thousand or eighty thousand. The tax is twenty percent so we would agree that a hundred thousand dollars pre-tax is the same as eighty thousand dollars post-tax whether this is in Roth or index universal life. Which a little more complicated but add some additional benefits that are that over and above what a Roth can offer. So the concern here is well if we get better growth and rather than five percent I’m not good at math in my head. Let’s say it’s 10 so even better like we’re giving more interest compounding interest. Let’s see what effect that has on this so if both of these are invested in the same thing and both of them go up to ten percent now your IRA is at a hundred and ten thousand dollars and your Roth is at eighty-eight thousand dollars.
Okay because they both go up to ten percent right and the idea is that well we want the growth on that bigger number but here’s the thing anything inside of an IRA is an always taxed bucket. Meaning it’s just a matter of time when it will be taxed either during your lifetime or 10 years after you pass away. It’s going to be taxed and we all know taxes are going up but for right now let’s just assume taxes remain exactly the same in the future which we know is not true. So okay is 110 000 the same as 88 000. Well, we still have to pay our tax right because in your IRA you’re going to have to pay a tax at some point whether it’s now or in the future and we know taxes are going up in the future. So now we need to subtract out that 20 tax and again in reality this 20 tax in the future could easily be 30 but we pay the tax. So that’s 22 000 that we have to subtract out what does that leave us that leaves us 88 000 okay. So again you’re not missing out by doing a Roth conversion or moving money to IUL. Okay if taxes are remaining the same all you’re doing, in reality, is you’re paying a bigger tax bill and it’s it is a big misconception a lot of people have because anything in those pre-tax accounts you don’t have that.
You have a tax liability that has to be paid it’s just a matter of when is that tax liability going to be paid is it going to be paid. Now when we’re in a lower tax bracket because of the tax cuts and jobs act that’s supposed to expire or if some of these tax changes happen. We could and with all the spending we’re doing the government and the articles about and the concerns about inflation in the future a lot of people are paying attacks now. And I think it makes a lot of sense and I’d be hard-pressed to find a reason not to do that and I’m not saying just go out and liquidate your IRAs entirely without having an intelligent conversation about it but what we do is we weigh the pros and cons and I’ll tell you I’ve sat down with families who their CPA is telling them to minimize taxes in like this specific year.
Just looking at taxes through a microlens of what can I do to minimize taxes this year versus looking at taxes through a macro lens. Of okay if I have IRA money I’m going to have to pay tax on that at some point doesn’t it make sense to have a tax plan and that’s something that we’ve been doing a lot of work with clients not only in terms of income taxes but now also estate taxes with the state taxes coming down. So again to answer the question regarding how much would be lost I can’t stress this enough zero. Okay, all you’re doing is you’re paying more tax you could pay 20 000 now or you could let that account grow. You’re still going to have the same after cash spending money but now you’re paying 22 000. So by paying the taxes sooner rather than later you’re keeping more money especially if taxes go up in the future because imagine if this 20 is 30 in the future and you’re paying less tax overall.
So again I can’t find a good reason not to consider moving money out of tax-deferred accounts right now. I think this is the biggest risk and the biggest opportunity right now and it is hard because we’ve been kind of knocked into our head to defer deferred paying taxes as long as possible. But now I’m sitting down with families that they did all of their saving in their 401k they rolled it over to IRA. They’re seeing that once they turn 72 they’re going to have to take out the required minimum distributions and pay the tax whether they like it or not. And now they’re like oh my god I have a ticking tax time bomb. What can I do to defuse that ticking tax time and that’s where we’re doing a lot of work these days. Next, should we create an LLC for a rental property?
How should it be titled the answer is probably because any second piece is real estate? We call that a hot asset so now if there’s a slip and fall especially if you have renters in there. You might have renter’s insurance but if that’s like a sandbag versus an LLC if we have this rental property and we’re concerned that there could be a slip and fall or something and now if we don’t put a box around this which is what we call like an LLC that limited liability company limits the liability. So if there is something that happens it’s just self-contained within that box meaning. It can’t pour over into your personal investments. It’s shielding the rest of your assets so typically with second pieces of property. We’ll have that conversation with clients and then especially if it’s a rental and you have other people setting foot on that property. You might want to explore the idea of an LLC limited liability company also we set up asset protection trust in certain scenarios as well but there should be a conversation with regards to limiting the liability on that hot asset just like a business okay.
You want to limit the liability that’s what a business structure is. As it limits the liability to that that either business purpose or that real estate now you wouldn’t put your primary residence into an LLC for tax reasons. I would uncap it for property taxes that’s a whole nother conversation. Instead, we’ll probably look at an asset protection trust all right flying right along with do we take an RMD from a Roth the answer is no. While you’re live so with a Roth IRA there are no required minim distributions. While you’re live however due to the secure act that passed back in 2000 and became effective in 2020. You do have when someone inherits a Roth they do have to take money out of the Roth within 10 years. There wouldn’t be any tax you just don’t get any more tax-free growth and also remember with a Roth it is not a state tax-exempt.
So while it’s income tax exempt it’s not a state tax exam that’s where we might want to look at life insurance and irrevocable life insurance trust. If you’re concerned about estate taxes if a person does not have long-term care insurance. I’m assuming is in a facility draining their life savings can you take a large chunk to update the house before it is gone and how does someone apply or move from medicare to Medicaid. All right let me get to that question in a moment what is the difference between a Castle Trust versus a veteran’s asset protection trust. Really it’s focusing on first what are your goals. So again I’ve talked about this before but our kind of planning processes first figure out what is your goal. Let’s develop the best strategy to help you achieve the goal and then pick the right tool really both of these are concerned about say lawsuits, creditors, the big one is really protection from long-term care costs and with the Castle Trust the big thing we’re protecting from is Medicaid and the devastating cost of nursing home care. Which could easily run 8 to twelve thousand dollars per month with the veteran’s asset protection trust it also builds in that lawsuit protection but again really the big thing is protection from long-term care costs to qualify for this you have to be a veteran and meet certain requirements but now what we could do is we could get you qualified for a VA benefit and that VA benefit could be anywhere from roughly a thousand two thousand dollars a month. If you meet certain requirements there are some technical legal differences between the veteran’s asset protection trust and the Castle Trust the big thing is the Castle Trust it’s a lot more flexible. You can change beneficiaries you can serve as trustees.
You pay taxes the way you normally do it doesn’t uncap your property taxes or anything like that of a veteran’s asset protection trust just because the VA benefit works differently than Medicaid. It’s a lot more restrictive like if if you were to set up a veterans asset protection trust. You could not be the trustee it’s even taxed differently. So we do a lot more of our asset protection trust Castle Trust than we do veterans asset protection trusts. The big thing would be if you are a veteran or surviving spouse it might be something. We may consider depending on the situation to help you get qualified for the VA benefit but yeah there are tax differences. Castle Trust is taxed much more favorably than a veterans asset protection trust and I guess that’d be a good segue.
For the question that was submitted what happens if someone does not have any type of long-term care insurance and that person is going into a nursing home and now maybe we’re getting them qualified for Medicaid because Medicare only pays for short-term rehab Medicaid Medicaid pays for long-term care. So everyone gets Medicare typically when they turn 65 that pays for hospital visits and drugs and that type of thing and short-term rehab. You fall you break your hip you go to the hospital you could have rehab in a nursing home for maybe up to 100 days. But then after 100 days or even sooner Medicare is going to run out and now we need to transition over to either private paying utilize long-term care insurance or if we don’t have long-term care insurance then we utilize Medicaid.
Medicaid has an asset test where a single individual can only have two thousand dollars worth of countable assets. So countable assets are really everything other than personal belonging prepaid funeral and a home and so that home is exempt as long as it’s valid at less than roughly five hundred thousand. So one of the things that we could do if we are in a crisis situation where you have a loved one going into a nursing home and maybe they don’t have long-term care insurance. Maybe they didn’t set up a Castle Trust they have excess assets what we could do is utilize some of those excess assets to go into fixing up the home because the home is exempt other things we do is we pay prepay funerals with personal belongings.
So we call those kinds of spend-down techniques things. We can do kind of at the last minute so one of those things is to be able to fix up the home to answer the question that was submitted. And how does someone apply or move from Medicare to Medicaid? They fill out a Medicaid application for our clients if we’re doing Medicaid crisis planning we’re doing the Medicaid application. The actual Medicaid applications are only about six pages but if we are moving things around at the last minute and protecting a chunk of change a lot of times when we submit an application. It could easily be over 100-150 pages because we have to document every step of the way because they’re pretty draconian with that five-year look-back period. Meaning they’re looking back five years to see if you are gifted or moved any money around in a way that’s not allowed and so when we submit a Medicaid application on behalf of a client a lot of times its over 100 pages because we’re documenting every step of the way. So yep so hopefully that was helpful. All right number seven what are some estate planning techniques for states greater than four million dollars to minimize estate taxes.
So there are two taxes that we have to be concerned with when someone passes first is income tax on any tax-deferred accounts 401ks IRAs. Four three b’s and that’s what we’re talking about is moving money out of those accounts to something that’s tax-free or even a state tax-free and then the second thing we need to be concerned about is estate taxes and so right now we have an exemption meaning as long as you die with less than 11 million dollars. You owe zero estate taxes. So if your state is less than 11 million dollars zero estate taxes but what’s going to happen is that estate tax exemption is going to drop down thanks to the tax. So this is thanks to the tax cuts and jobs act which is set to expire in 2025 or if not sooner if President Biden repeals it.
And so it’s scheduled to drop down to five million dollars for an individual and then Biden recently or President Biden recently proposed dropping it even further to three and a half million dollars and this could be as soon as 2022. We don’t really know it’s only a proposal at this point so we don’t know if it’ll even go into effect but we know as scheduled that right now we have 11 million and that’s going to drop to 5 million and if you’re married you can double that it’s called portability. So when one spouse passes you can double that so there’s a lot of different strategies again it depends on first we always start with what are you trying to accomplish what is your goal. Who do we want to leave things to and then we figure out what’s the best strategy and then we pick the right tools to help you achieve that.
Okay so here’s an idea so let’s say we have an estate right now of 9 million okay and we know the estate tax exemption is dropping down well what we could do is we could gift out say 2 million right now to some type of special type of trust. Not a revocable trust but a different type of trust and there are a couple of different ways that we could structure it but we basically remove it from your estate and then what the IRS has said is that when this estate tax exemption drops. You still maintain what’s called the unified credit. So if you gifted while we have this larger unified credit that’s taking a look at lifetime gifts plus your estate. If we gift money out of the estate now then that doesn’t count towards the unified credit in the future. So you would still have your full five million dollar estate tax exemption so we could give or let’s change the numbers we could get 4 million out right now. I can’t do math in my head we could give 6 million out now and when that estate tax exemption drops down to 5 we’ve effectively removed 6 million dollars already and you would still have a five million dollar estate tax exemption. And that’s something that and this is super important this has to be done taking advantage of this changing unified credit.
This has to be done before estate taxes change okay we can only do this while we have a larger unified credit if that unified credit drops to five or three and a half before we do this then we miss that window of opportunity. So that’s something that’s relatively unique right now and the IRS has maybe we leave things in a charitable remainder trust. Where you can retain the said that that is viable some of our other strategies. We have charitable strategies where benefit receives the income and then upon death goes to a charity and then a big one we have is irrevocable life insurance trusts. Where if you identify some chunk of change that you don’t need you don’t need access to. Well we can put it into an irrevocable life insurance trust it has to be an irrevocable life insurance trust and now we can leave it to the next generation of state and income tax-free. So we could fund and I’m just making up numbers two million dollars of the estate could go into an irrevocable life insurance trust and then now based on it being life insurance we could leave maybe three million tax-free both income and estate tax-free to the next generation.
So there are charitable options there are taking advantage of this unique opportunity with the higher unified credit rate. Now we have irrevocable life insurance options. There are some different options if you have businesses et cetera but those are probably the most common examples is the current 11.7 million estate tax gift tax exemption reduced by any gifting the person has done during their lifetime. Yeah, so this 11.11 million or 11.7 million with inflation is a lifetime gift tax exclusion. So if you filled out any gift tax forms previously then that’s going to lower that 11 million dollar exemption if you made gifts that were less than the annual gift tax exclusion which right now is fifteen thousand those don’t count towards the lifetime benefit. Does the islet have its own tax return?
Yes, typically the islet would have its own tax return but really there it would have its own tax id but yeah it would have its own. Typically it would have its own tax id number okay. This was a question that was submitted do you help with asset protection for oops let me clear this was from a previous one. Okay so we have a family cottage do you help with asset protection for a family cottage owned by a parent. Okay, so we’ll say dad owns this and also help them with how to pass it to the children to keep it in the family yeah yeah quite often. So especially in Michigan a lot of people have this family cottage up north that they want in the family and if it’s just in mom or dad’s name. They pass away it might end up going into probate but a lot of times we will set up like a family cottage LLC or a family cottage trust if we’re less concerned with creating rules for how the kids manage it.
Like if we think the kids are gonna fight then we might go this right route and have what we call an operating agreement. So like all right you got to vote on it this type of thing but yeah a lot of times we’re carving out either a separate trust or we’re including kind of language in an existing trust on how to I’m carving out this piece of real estate. Like I had a client where they had a family cottage had I think four children plus some charities he wanted to leave things to. And so his residuary estate said like 10 to each of the kids and then 10 to each of these charities but then what we did is we carved out a provision to say that the family cottage just goes to the four kids. It’s held in trust and the trust continues on even after the person passes away and then we set aside funds to keep the cottage going. So the kids wouldn’t have to throw in money. The big thing is just looking at how do we leave things upon death a lot of trusts that I review say outright at a specific age and the problem with that especially with the family cottage is now if there’s a divorce credit or action bankruptcy. That family cottage might be gone versus a lot of my clients prefer to leave things to their children and trust where they could be the trustee and whatever they keep inside the trust would be protected from like divorces creditors. And then if they pass away the money or that family cottage would stay in the bloodline.
Very different than just relying on beneficiary designations or outright distributions. So that’s typically how we would kind of address the family cottage we can protect it it’s just a matter of how much control if you want to exert more control and telling the kids what to do then we might do a family or a family cottage LLC and create an operating agreement. If it’s more of just you know what I want to make sure they’re protected then we might simplify it and just leave it to them and trust. So that is all the questions that were submitted if you do have any more questions please put them in as I’m kind of wrapping up here any more questions. So if you do have a question please submit it I think I’ve answered everything.
All right so with that, I want to say thank you to everyone who makes it here’s one you are the best I’m an advisor I learn from you every week. Oh, good deal yeah we do back when we could meet in person. We used to do a lot of continued education for financial advisors and attorneys and CPAs both locally as well as nationally. So we really take an educational approach. We really love doing these workshops with good reviews. Thank you all right I’m gonna log off before all these compliments go to my head. Thanks again for doing a great job all right thank you everyone makes it a great week. I look forward to seeing you on the call next week. If you can please make sure to share this information love to see new people on these as well get some great questions and I appreciate all the questions you submit so goodbye.