Thursday, December 27, 2012

I've Been Named as a Trustee, What do I Need to Do?

     At some point, a friend or loved one may ask you to serve as successor trustee for their trust. Usually people are flattered when this happens, but rarely have they considered what is required of a successor trustee. The successor trustee is responsible for the administration of the trust once the trust maker, or grantor, dies. On occasion the successor trustee will also take over administration of the trust if the grantor becomes incapacitated. Sometimes administration is relatively simple, such as when the beneficiaries are all adults and the trust has no provisions to distribute assets over an extended time. Other times, the successor trustee may administer the trust for a significant amount of time if the beneficiaries are minors or the grantor feels that the beneficiaries are unable to handle their own assets until sometime in the future, if ever.
     Whether trust administration is short-term or long-term, there are rules in the common law and Michigan statutes that a successor trustee must follow. When you agree to act as a trustee, you place yourself in a fiduciary situation, and must act with a high degree of care with respect to the trust and its beneficiaries. The Trustee:
  1. Must follow the instructions of the trust agreement as specified by the trust maker
  2. Must in good faith, act in the best interests of the beneficiaries of the trust. Good faith means not taking advantage of another, even through technicalities of law
  3. Must use ordinary care and diligence in the administration of their duties, even if not receiving any compensation for services
  4. Must invest the funds of the trust properly to preserve the principal and earn a reasonable rate of return
  5. Must provide accountings to beneficiaries 
  6. Must make distributions to beneficiaries as stated in the trust. 
  7. May not deal with the trust property for Trustee’s own benefit or for any purpose not connected with the trust’s purpose.
  8. Must not commingle trust property and non-trust property 
     These are the default provisions under the law, Michigan law allows the grantor to supplement or waive many of the above requirements. For example, the trust provisions may allow the trustee to ignore the normal prudence and diversification requirements for investment of the trust assets, when the grantor wishes to maximize income for the current beneficiary rather than balancing the interests of all the beneficiaries. Additionally, the grantor may also allow the trustee to provide accountings only for current beneficiaries and not contingent beneficiaries unless the court so provides.
     Just as the rules for administering the trust can vary, the terms of the trust related to the distribution of the trust assets can take many forms. The trust may provide for great flexibility in distributing assets to beneficiaries by allowing the trustee to make distributions within their total and complete discretion. Alternately, the trust may provide a broad standard, such as health, education, and maintenance of accustomed standard of living. Such a standard would include making distributions to a beneficiary to assist them in starting a business or purchasing a home, but does not allow the trustee to distribute all of the funds outright. Finally, the distribution standard may be very narrow or subject to many restrictions. In these cases, the trustee must carefully monitor the actions of the beneficiaries to ensure that the beneficiary meets all the requirements before making any distributions.
     Trust law and the terms of a trust are frequently complex and the trust normally provides that the successor trustee can retain qualified professional help in administering the trust. This means that the trustee can retain accountants, attorneys, or financial professionals to assist in trust administration. The trustee must still take care to monitor the actions of the hired professionals because these professionals do not relieve the trustee of their fiduciary duty, and the beneficiaries can sue the trustee personally and personal assets to the trustee can be reached to compensate beneficiaries for any breach of fiduciary duties.
     Unfortunately, trust administration may create the potential for litigation. While the trust maker can include a "no contest provision" in the trust that provides the beneficiary who challenges the document be disinherited, the effectiveness of this type of provision is somewhat mitigated by Michigan law. Beneficiaries may disagree with the terms for distributions the grantor has set; blended families, where there are a number of different beneficiaries with different interest, may also create issues for the trustee; and occasionally a beneficiary may argue that the trust maker had been subject to undue influence or a lack of capacity when the trust provisions were initially prepared or later modified. All of these scenarios make the trustee’s position more difficult because even as they attempt to deal with litigation they must also continue to administer the trust for the benefit of any of the other beneficiaries.
     When accepting a trusteeship of a trust is important to remember that it comes with significant responsibilities and may create a larger headache than you ever imagined. While you may feel a personal obligation, should always be aware that a person named as the successor trustee has the option to decline to serve or to resign after initially accepting the position. If you are in the position of being required to make a decision whether or not to accept a trusteeship, it may be appropriate to discuss the situation with qualified counsel to determine if this is the best course of action for you and/or the trust beneficiaries.

Tuesday, December 25, 2012

Happy Holidays

From our family to yours, best wishes for the holiday season
and may the coming year bring joy and prosperity for everyone. 

Thursday, December 20, 2012

Selecting People to Administer your Estate Plan

An important part of developing an estate plan is selecting people to help administer the plan at your death or incapacity. This includes Personal Representatives to administer the Will under Michigan probate, Guardians to see to the physical well-being of your minor children, and Successor Trustees to administer the assets of the Living Trust for the benefit of your beneficiaries. Sometimes selecting people to serve in these capacities is not an easy task because there may not be family members or friends you trust enough to select for those positions. Alternately, there may also be a concern that you will offend some people by not naming them to certain positions. This should not deter you from making decisions that you think are the best ones, because, after all, you will not be around to listen to their complaints.
Guardians are obviously important because you want to select people whose child-rearing philosophies are similar to your own. That may actually be a sibling and his or her spouse, but it may actually be another relative or a close friend. Another common concern when selecting guardians is geographic location. While a family member who lives in another state may be more than capable of caring for your children is important to consider whether such a drastic move is good for your children. The thing to focus on is "what is the best for my children?"
Nearly as important as the Guardian, the Successor Trustee administers trusts, pursuant to their terms, when the initial trustee (who is usually the trust maker) becomes incapacitated or dies. Naming a successor trustee is not a decision made lightly. It is possible to name a family member, a friend or colleague, a corporate trustee, or a combination of them as trustee or co-trustees. Each of these alternatives has positive and negative aspects.
Family Member
Pro: They have family experience with the beneficiaries, are empathetic, and are personally involved.
Con: They are probably unskilled in business, there is no record of accomplishment in maintaining or growing assets, or they can become too emotionally involved.
Friends or Colleagues
Pro: They likely have a personal knowledge about the beneficiary's, and are trained professionals or have good business sense
Con: They may not have enough time to do a good job, may themselves pass away, or may have a conflict of interest when it comes to a business asset of the trust.
Professional or Corporate Trustee
Pro: Corporate trustees have the benefit of being professional, experienced, and objective, regulated and will not die.
Con: Corporate trustees are dispassionate, possibly ignorant of family dynamics, may be too conservative, and may have a high turnover of corporate trust officers.
Some clients use a team approach, considering that "two heads may be better than one,” or that they want a combination of professional and personal co-trustees. Unfortunately this tactic may only give the illusion of safety because it creates a trust that may be clumsy to administer.
What ultimately is important is selecting the person or persons you feel will be able to make good decisions. It is not necessary that they have significant expertise or experience with administration and investments, as long as they are capable of retaining qualified people to assist them. You want someone who has a similar philosophy and values as yourself, because they will be administering the trust for your loved ones.
I often use the story of how I selected my own trustee when my children were small. I have two brothers who I was considering as successor trustee. I asked myself what my brothers would say if one of my children came to the successor trustee and asked for a Porsche to drive down to Wayne State University for college classes. One of my brothers would have said "sure.” The other brother would have said, "You do need a car, but your dad would have bought you an Escort.” I of course chose the brother who took into consideration what I would have done in that situation.
Once you have selected successor trustees, the decision regarding whom to name as a personal representative under the will becomes much easier. Since the successor trustee and the personal representative will work closely with one another during the initial probate process many clients opt to name the same individual in both positions so there is no conflict.
Finally we do not want to forget that during the planning process you will also name individuals to make decisions on your behalf should you become incapacitated. You want to consider carefully whom you are naming under your Patient Advocate Designation to make medical decisions in the event you are incapacitated and whom you are naming under your Durable Power of Attorney to make legal decisions in the event you are incapacitated.  Again, it is important that those people you name have an understanding of your philosophy and values when it comes to making medical decisions, especially those "pull the plug decisions". You want to make sure that the person or persons you name will be able to make those decisions when the time comes, yet will not make them too quickly.
As you can see, naming people to administer your documents for your benefit and the benefit of your beneficiaries is as important as determining where you want your assets to go. If in the estate planning process, you find yourself unable to decide whom to name to these important positions your estate planning professional should be able to assist you in making these important decisions.

Tuesday, December 18, 2012

Estate Planning and the Single Client

     Much of the writing we have done at Plainly Legal focuses on planning for the married couple with children. While this particular demographic has many reasons to ensure their estate planning is complete and up-to-date, they are certainly not the only ones who should feel that need. Estate planning is just as important for the unmarried individual as it is for their married counterparts. 
    As we have previously written, a primary purpose of estate planning is to distribute assets to the individuals and charities of your choice. For a married couple lacking an estate plan, the intestacy statutes deliver the vast majority of assets to a surviving spouse. Coupled with a natural tendency for married couples to own property and bank accounts jointly, the statutes insure the surviving spouse retains control of their deceased loved one’s assets. For an unmarried individual there is no surviving spouse, nor is property normally held with survivorship rights. Most, if not all of the assets of an unmarried individual are owned solely by that individual. The Michigan intestacy statute, which controls if there is no Will or Trust, distributes assets through the family tree starting with parents, then to siblings, then nieces and nephews, then aunts and uncles, and so forth. Depending on family size and closeness of living relatives, assets may be distributed to relatives who have not been seen in years or spread among a large number of people. 
     Even when an individual wants assets to go to their extended family, they frequently would prefer to know that those assets will be used for certain purposes. For example, parents may have sufficient assets of their own and a person may want their assets split among their siblings to ensure that their nieces and nephews can pay for college. Intestate succession can deliver those assets to the siblings outright (presuming that parents are deceased), but offers no guarantee that the siblings will use the assets to pay for their children's education. However, by establishing a trust, the individual has the ability to make those assets available to their nieces and nephews to help pay for their education without worrying that the money will be spent before those nieces and nephews reach college age. 
    Alternately, a person may wish to look out for their parent’s needs in the future. An outright distribution to the parent can potentially affect the parent's ability to qualify for other government benefits. By establishing a trust that makes discretionary distributions to the parent, it is possible to provide a parent with a higher standard of living without having those assets used before government benefits are available. An additional benefit of this method is the ability of the person to decide what other beneficiaries, or charity may inherit any assets that remain at the parent's death. 
     Speaking of charities, taking the time to prepare an estate plan ensures that the single individual’s assets passing to charities, friends, and other loved ones that he or she sees fit to provide for at their death. Those who rely on the intestacy statutes to distribute their assets do not have this option, as the statutes never provide for distribution outside of the bloodline. 
    An unmarried person should not forget to make appropriate beneficiary designations for any retirement benefits, including IRAs, or life insurance they may own individually, or through benefits provided by their employer. If a beneficiary designation is not made, the benefit must go through probate and is controlled by the intestacy statute. With appropriate beneficiary designations, a person can designate specifically who should receive the benefits. 
      In discussing distributions at death, it is also important to consider is the disposition of personal property. Personal property may have significant value, such as collectibles or artwork or may just have sentimental value because they have been passed down through the family for generations. In the absence of any estate planning this property passes along with all other assets through the Probate Court. Under the statute, family members, who may not be aware of their loved one’s personal life or inclinations, control the destiny of their personal items. Through estate planning, items of value, both sentimental and monetary, go to those people the person knows will appreciate them most. 
       As with everyone else who creates an estate plan, the documents that function during lifetime are as important to a single individual as they are to the married couple. Documents such as HIPAA Authorizations and Patient Advocate Designations ensure that doctors and hospitals know who the person desires to make medical decisions on their behalf should they become incapacitated. Furthermore, a Durable Power Of Attorney ensures that someone is authorized to make legal decisions on the person's behalf. In the vast majority of married couples the husband and wife name each other in these roles, but for a single individual the decision is less obvious but equally important. 
     Many of the single individuals I speak with are reluctant to put together a plan, frequently because they either are worried about offending a family member either through their gifting or by who they named to make decisions and act as trustees. Others find such decisions difficult because they are not close to family, and contemplating what happens after they die makes them uncomfortable. When speaking to people with such concerns I find it helpful to remind them that while through events or circumstance they may not be close to their genetic family, they have surrounded themselves with friends and loved ones who fulfill those roles in their lives. By failing to plan for the inevitable, they ultimately affect those people who they love the most, even if they are not genetic family. Close friends are no less affected by the death in the family member and it is important not to add to their burden. 
     Obviously, there are reasons for everyone to engage in estate planning. For an unmarried individual, control over distributions and choosing people to make decisions on your behalf that you are close to, as opposed to family, are high on the list. It is also important to remember that by having an estate plan including a trust, it is possible to avoid the time and expense of the probate process. Finally by engaging in the estate planning process individuals begin the process of a lifetime of planning, something that single individuals frequently delay because there is less imperative to plan when the only concern is their own well-being.

Thursday, December 13, 2012

The Effects of Divorce on Estate Planning

     Divorce is frequently a difficult and painful experience for the parties involved. By the time the proceedings are complete, most people want to go their separate ways and interact with their former spouse as little as possible. Unfortunately, as with other major life events, divorce is also a time where it is important to review and update an existing estate plan.
Under Michigan law, divorce has a substantial effect on existing estate plan documents, including:
  • automatic revocation of any potential disposition of property made by a divorced individual to his or her former spouse as a beneficiary under a Will or Trust;
  • automatic revocation of provisions conferring powers of appointment on the divorced individual’s former spouse so that the former spouse can no longer appoint beneficiaries under a Will or Trust; and
  • revocation of any nominations of the divorced individual’s former spouse to serve in a fiduciary or representative capacity rendering the former spouse unable to act as Personal Representative or Trustee even though named in the document.

     Additionally, divorce severs interests of a former spouse in property held at the time of divorce as joint tenants with rights of survivorship, and it is important to retitle real estate following a divorce. While all of these changes result in a change in the distribution of assets via estate plan documents, they do not negate the documents themselves, therefore the documents continue to function and successor beneficiaries, including minors, may become the primary beneficiaries because of the divorce. If there are no successor beneficiaries, then the Intestacy Statute dictates distribution of those assets.
       Presuming that successor beneficiaries are named, the change in beneficiary is important because in many documents there is a presumption that should something happen to the Grantor their now former spouse will receive such distributions and the terms of the trust did not adequately provide for direct distribution to minor children. Further, even when there is adequate provisions for maintain assets in trust for minors, it is important to ensure that the trustee named to administer that trust is a person the Grantor believes will look out for the best interests of any children and ensure funds are available for their long-term care. It is worth mentioning that a decree of divorce may contain provisions requiring the inclusion of certain provisions in an estate plan, including the purchase of life insurance to cover alimony or child support payments should something happen to the Grantor. Failure to comply with such requirements can have adverse consequences.
     While a review of the terms of the Trust, the beneficiaries, and the successor trustees is important, it is just as it is important to ensure those individuals who are designated to make decisions upon incapacity are also the people the Grantor now wants to make decisions on their behalf. Many people execute Patient Advocate Designations and Durable Powers of Attorney naming their spouses as the sole designee to make decisions on their behalf. Following a divorce those documents are revoked and the grantor is left without a designate to make medical decisions. Even if those documents name other successor designee, it is important to ensure that those individuals are still the best people to be making decisions should the Grantor become incapacitated. Frequently successor designee's are close friends of the couple, who may not continue to be actively involved in their separate lives following a divorce.
      As a side note, it is important to remember that in addition to revoking all the above interests held by former spouses, divorce also revokes interests held by former spouse’s relatives. Thus if after a divorce an individual wishes to continue to leave assets to a relative of the former spouse or name their former spouse’s relatives as a designee, it is necessary to execute new documents reaffirming that desire. While this may seem like an unlikely scenario, is important to remember how many people meet their spouse through a friendship with siblings, grow close to extended family during the course of a marriage, or feel that a former spouse’s sibling or parent is still a good trustee for minor children.
      Also related to updating estate plan documents, is the importance of updating beneficiary designations of assets that transfer outside of the probate process. This includes such assets as insurance policy proceeds and retirement benefits. Updating beneficiary designations are important because these beneficiary designations are a contractual agreement between parties, and divorce does not negate such designations. It is possible for a former spouse to receive large amounts of assets that the deceased certainly would rather have distributed to the beneficiaries of their newly updated estate plan.
      With all of the changes following the dissolution of the marriage, the updating of an estate plan can easily get lost in the shuffle. However due to the substantial impact that a divorce has upon an estate plan, it is important to take the time to review documents for necessary changes. When contemplating making changes be sure to consult an attorney to ensure that changes are made properly.

Tuesday, December 11, 2012

Using your "Imagination" in Designing a Living Trust

My clients will often ask if they can provide for certain events in their Living Trust documents. The usual answer is that "the only limit on what you can put in your estate planning documents is your imagination." However, I do temper that with the statement that you should not let your imagination run wild.

     While it is true there is almost no legal limit on what you do in your Living Trust, it may lead to bigger issues later. While we are all concerned that our beneficiaries may not have the maturity or good sense we have developed after a lifetime of experiences, we should be careful not to be so restrictive that it makes it difficult to administer the trust.
     For example, I had a client who wanted to place restrictions on distributions for young children in the event he predeceased them. He wanted to require that they received no inheritance unless they earn a degree from a specific college. While it was a worthy desire, it did not take into consideration that the children might have no interest in attending that college, for any number of reasons unrelated to their desire for a college education. An alternative college might better suit the child's interest and skills. Alternatively, the child might be better suited to entering into a trade rather than going to college for which there is no interest.
     Another client had three daughters and at any given time was at odds with one of them, although not always the same one. Over the course of ten years, one of the three was always excluded from the Trust. I cautioned the client that trying to use her estate to control her children might not be the best way to establish a good relationship, but every twelve to eighteen months, she revised her trust to remove one daughter and provided only for the other two. I did not look forward to the day I had to explain to the three daughters that only two of them were beneficiaries of her trust. Eventually, my client concluded that it was counterproductive to try to control her children with her money and asked that I revise her trust to provide for all three daughters equally. She died unexpectedly a few months later, but the daughters shared equally because of the last trust amendment.
     A third client had three sons, all in their 30s. One son was the "good son" and was to receive a share of the trust immediately upon the death of his parents. The client did not speak with his second son because of a business arrangement gone awry. That son borrowed money from his father to go into business, then grew bored with the business, and left it to his father to clean up the mess. This lead my client to provided that this second son was not to receive any of his inheritance until he reached age 65. The third son was also not to receive his inheritance until age 65, unless "he was not married to that woman." Including provisions such as these (and some even more imaginative) in the trust is the client’s prerogative but, as you can imagine, may cause serious problems and possibly create sibling disharmony when the parents die.
     Many clients desire to promote their own value system to their beneficiaries and discourage unproductive behavior. Trust provisions for this purpose include:
  1. Allowing a Trustee to make distributions to assist in the purchase of an automobile at certain ages and upon achieving a specific grade point average.
  2. Providing for a distribution to a beneficiary upon enrolling in college.
  3. Distributing an annual award for academic performance.
  4. Distributing an award upon receiving a Bachelor's degree, especially within a designated period of time
  5. Providing an award for receiving an advanced degree.
  6. Making a distribution to match the beneficiary's earned income, up to a certain maximum amount.
  7. Allowing distributions to assist in the purchase of a residence.
  8. Allowing distributions to assist in starting a business.
  9. Requiring financial training to assist beneficiaries in managing distributions
  10. Providing for distributions for the cost of traveling to visit family members in an attempt to encourage and maintain relationships among children and grandchildren.
  11. Preventing distributions to those not engage in productive activities or who are substance abusers
     These and many other incentive provisions are possible, but should not be added to a document without serious thought of the consequences as well as possible drawbacks or traps created because circumstances may change in the future.
One of the great freedoms of a Living Trust is the ability to dictate the exact distribution of your assets after you are gone. It is important to temper that freedom with common sense and to engage an experienced attorney to seek out potential problems with your distribution instructions. The trust is a tool that can assist in protecting your loved ones from potential problems in life, but just as it is nearly impossible to use a hammer on a screw, tools have limits. Attempting to work outside of those limits can have unexpected and sometimes disastrous consequences.

Thursday, December 6, 2012

The Importance of Regular Document Review

Many of my clients, after signing their estate planning documents, express with relief, “I'm glad we’re done with that task". Whenever I hear that statement, I remind my clients that, while executing documents is an excellent first step in the estate planning process, as their life changes, their documents may someday need changes, updates, or revisions. I suggest three primary events that should cause them to review and possibly update their estate planning documents:
 Substantial Change in the Value of Assets
An important goal of estate planning is to minimize or avoid gifting and estate taxes. As asset values increase, especially the point where a portion of the estate may be subject to estate taxes, it is critical to review documents to determine if the current strategies implemented are sufficient to achieve planning goals and to determine if different or additional strategies are advisable to protect against possible tax liability.
As assets increase, it may be advisable, or desirable, to take advantage of advanced gifting strategies for loved ones. This not only benefits family in the near-term, but also reduces the value of the future estate, thereby reducing estate tax liability. Certain gifting strategies also have an effect on income tax liability. By transferring income-producing assets to children or grandchildren, the income created by those is taxed at a lower rate due to the new owner’s lower total income.
In addition to reviewing an estate plan in regards to eventual distributions, as assets increase it is important to make sure additional assets are appropriately included in the trust property. Proper funding is important to achieve the second goal of estate planning, probate avoidance.
An increase in assets is not the only reason to review estate plan documents. If the value of assets decreases, it may be possible to simplify an existing estate plan by eliminating revocable trusts that are no longer necessary. Additionally, existing gifting plans may require review to ensure the existence of sufficient assets to provide for continued personal well-being.
Change in Family Situation
The family situation and dynamics are rarely stable, with many possible events creating a desire to modify an existing estate plan. Those events include,

  1. The birth of additional children
  2. The birth of grandchildren and a desire to provide for their future in addition to, or in lieu of, providing for children
  3.  A special need arises with a child or grandchild
  4.  A child demonstrates greater maturity earlier than anticipated, or perhaps demonstrates significant immaturity, raising questions about their ability to handle funds
  5.  A parent or another elderly relative indicates a potential financial need
  6. The need to remove an ex-spouse as a beneficiary following divorce
  7.  In contemplating remarriage the need to ensure protection for both a new spouse and children from a prior marriage
  8.  A significant change in personal health
  9.  For any number of reasons, those people chosen to act as guardians for minor children, trustees, or persons designated to make legal or medical decisions in the event of incapacity are no longer appropriate choices.
These and many other naturally occurring family events require periodic review to make sure that estate plan documents reflect the changing situation and present desires.
Changes in the Law
Since 1976, almost every year has brought a modification to federal estate tax statutes. Case law is constantly evolving as the Internal Revenue Service litigates positions in opposition to strategies used by taxpayers to minimize or eliminate estate taxes. In addition, state law as it relates to probate, trusts, and powers of attorney and patient advocate designations has changed a number of times. Regular review of documents and the status of the law help ensure maximum estate tax and probate savings.
These three factors may have different relevance for clients with different situations. For an older client whose assets remain constant there may be little need to revise estate planning strategies for tax law changes, but it may be more important in the family dynamics change concern arises for beneficiaries with previously unforeseen issues. For younger clients with growing families and growing balance sheet, document review becomes important as assets approach taxable levels, or the birth of children creates an increased need for protection in the event the unexpected occurs.
Whatever the reason, it is important to be mindful that in order to provide maximum protection for loved ones and minimize potential tax liability estate planning must be an ongoing process. For younger families with rapidly changing lives, a review every three to four years, or perhaps even more frequently, is advisable. For families in more mature or secure situations, less frequent review is necessary. A good estate-planning attorney should provide guidance when there is a change in the law that affects existing documents, but since a client’s personal life rarely makes front-page news it is important to keep attorneys apprised of major life changes. This allows them to provide guidance and support that creates peace of mind from knowing that an estate plan continues to provide protection for loved ones.

Tuesday, December 4, 2012

Protecting Four-Legged Loved Ones

The subject of today's blog started as a joke over the holidays as I discussed with a number of friends my desire to expose more people to the information in our blog. Those friends informed me that the most successful blogs they know of deal primarily with pictures of cute animals and/or celebrity gossip. In honor of that discussion, I start today's blog with this adorable photo.

While we do not intend to make a habit of luring readership to our site with adorable puppy pictures, we are not opposed to an occasional cute picture in order to educate people about the estate planning process.

For most people, the process of estate planning revolves around ensuring that their assets go to the people they care for and that sufficient protections are in place so that those assets are put to the greatest possible use. For some people this means establishing 529 Education Savings Plans to ensure that funds are available for children or grandchildren to attend college. For others it means limitations on the distribution of trust principal to ensure that beneficiaries with spending issues or other personal issues have a source of income over their lifetimes. Often forgotten in the estate planning process is the fact that a person's loved ones sometimes include nonhuman companions that will also require care after their owner has died. While it is certainly possible to nominate an individual to care for a loved pet and leave that person funds for that purpose, the use of a pet trust ensures that those funds are used only for the benefit of the pet and the new owner does not skimp on the pet’s care to supplement their own income.
Currently forty-eight states, including Michigan, allow for the creation of a trust for the benefit of animals. These trusts, commonly known as Pet Trusts, allow people to ensure that assets are available to provide for their furry friends after they are gone. In Michigan, Pet Trusts are governed by MCL 700.2722. This statute formalizes the principle that the care of a pet is a lawful, noncharitable purpose, for which the trust can be created. Furthermore, the statute creates a presumption against construing a bequest for the benefit of the pet as merely precatory or honorary, thus discouraging courts from refusing to enforce such bequests.
The Michigan statute does however place certain limitations on the use of Pet Trusts. First, the statute limits the term of a Pet Trust to the lifetime of the animal or animals named as beneficiaries. However, the statute recognizes that certain animals have extremely long lifespans and therefore exempts trusts created under the statute from the uniform statutory rule against perpetuities, which would otherwise cause such trusts to fail and be unenforceable. It is possible for a pet trust to provide for multiple generations of animals or for multiple animals of varying ages. Second, the statute specifically allows the probate court to reduce the amount of property transferred to the trust if the court determines that the amount designated substantially exceeds the amount required to care for the animal. When a court makes this determination, the amount of reduction passes pursuant to the terms of trust as if those assets were not expended caring for the animal. This means that as in the case of Leona Helmsley, who attempted to leave her dog, "Trouble", $12,000,000 in the trust fund, the probate court is free to determine the amount of assets needed to care for a pet over its remaining expected lifespan. In the case of Trouble, it is worth noting that the probate court determined that a reasonable sum to provide care for the rest of his lifetime was only $2,000,000.
For those people who are not real estate moguls with the desire to keep their Maltese in handmade dog food and fur coats for the rest of their lives, a pet trust still provides an excellent resource for ensuring care of their animal companions and encouraging a two legged loved one to take the pet into their home. When creating a pet trust it is important to remember three things. First, as discussed, it is important to determine how much to leave in trust for the pet’s care. You should also determine what happens to any amount left in trust at the death of the pet. As with any other residuary distribution from a trust, the grantor can determine how such funds are distributed. In the simplest case, any remaining funds are distributed to the other beneficiaries. Alternately, if the grantor is charitably inclined, remaining funds could be used to benefit charitable organizations including the ASPCA, Humane Society, or World Wildlife Fund. In addition, it is important to name individuals who you wish to care for your pets. A pet trust does very little good if there is not a human alive to expend the trust assets for the pet’s benefit. From a common sense perspective, it is preferable to name someone other than the Trustee of the trust as the guardian for the pet, thus ensuring that there is supervision over the use of the assets. Lastly, it is important to remember that pet trusts are not limited to dogs and cats. The statute allows the creation of the trust for any animal, thus it is possible to ensure that funds are available to care for large animals such as horses or long-lived animals such as turtles long after the original owner has passed away.
As with any other form of trust is important to work with a knowledgeable and licensed attorney to ensure the observation of the legal formalities of creating a trust and that the trust is enforceable. Planning for the long-term care of an animal is as complex as planning for the long-term care of any other loved one, but with the proper assistance it is possible to ensure that all of our friends and family, on two legs or four, receive the best possible care even after we are gone.

Thursday, November 29, 2012

Dying with Debt

Up to this point, Plainly Legal has focused on topics dealing with the transfer of wealth, either through lifetime gifts or at death. Today's blog takes a detour to discuss the question of what happens with a person's debt when they die. Recently, a friend contacted me with a question about information she received from someone at her bank when she attempted to designate beneficiaries for her bank accounts. This bank employee (I did not ask which bank or the job title of the employee) told her that she should not designate a beneficiary because, if she were to die with debt that debt would then pass to her loved ones. Before continuing with today’s blog, it is important to emphasize:
The good news is that personal debt is non-inheritable. If a person incurs debt during their lifetime, the beneficiaries of the person’s estate, no matter if they are beneficiaries through a Will, Trust, or the Intestacy Statutes, are not personally liable for any debt left behind. This does not however mean that debt disappears at death.
When a person with personal debt dies, that person's debt becomes the liability of the person's estate. Creditors are then free to try to collect on that debt from the estate. It is the responsibility of the Personal Representative (and Trustee) to pay the enforceable debts of the deceased prior to making distributions to the beneficiaries. To ensure that creditors receive payment prior to making distributions beneficiaries, the Michigan Probate Code mandates that the personal representative of the estate is required to publish a death notice (to inform unknown creditors) and provide notice to known creditors. Those creditors then have four months to present their claims to the Personal Representative. After the four-month window, with some exceptions, the probate statute bars creditors’ claims against the estate.
When a creditor makes a claim against an estate it is the responsibility of the personal representative to determine if the claim is valid and, if so, to provide payment to the creditor. While the personal representative is responsible for making these decisions, they do so in a fiduciary capacity and upon determining that a claim is valid, pay the claim with the estate's assets. Absent extraordinary circumstances, the personal representative is never personally liable to pay the debts of the estate they represent. The practical result of this situation is that a personal representative may determine that a creditor’s claim is valid, but the estate lacks the assets to pay the debt. In that situation, neither the personal representative nor any beneficiaries of the estate become personally liable for the unpaid debt.
At this point, it is important to address a number of minor exceptions to these rules, the largest of which being that the four-month claim window becomes a three-year window if the Personal Representative fails to properly publish notice of the death or fails to inform a known creditor of the death (a "known creditor" is a creditor that's existence is known or reasonably discoverable by the personal representative). A second common exception is that the four-month claim window does not apply to any form of secured debt, such as a lien or mortgage. In almost every circumstance, the holder of a secured debt has the right to enforce their security agreement and take possession of the property in which they have a security interest. For example, a bank may repossess a house that is subject to a mortgage owned by the bank if the estate is unable to make payments on the bank’s loan.
Since probate law requires that creditors receive payment prior to distributions to almost all beneficiaries (there are exceptions for a limited number of distributions to a surviving spouse and minor children), it is possible that the estate assets can be exhausted before a beneficiary receives anything from the estate. In the event that the debts of an estate exceed the estate assets the beneficiaries receive nothing, however those beneficiaries do not incur liability for unpaid debt because of their status as beneficiaries.
While it is the responsibility of the estate to pay the deceased's debts prior to making distributions there are certain assets that are never accessible to the creditors of the estate, including retirement benefits and life insurance proceeds. While creditors cannot attach the assets of a person’s IRA in order to recover debt, once a person receives a distribution from the IRA, creditors can attempt to recover those funds if the person deposits them in a bank or other financial institution. When the owner of an IRA dies with debt the distributions to the beneficiaries of an inherited IRA are protected from the original owner’s creditors. This is true even if the IRA beneficiary is a Trust or the estate.
 We now reach the situation my friend encountered on her trip to the bank. Unlike IRA accounts, beneficiary designations on bank or investment accounts do not enjoy the same protection from the original owner’s creditors. While a beneficiary designation causes those accounts to pass directly to the individual named in the designation, such designations do not limit the rights of creditors of the previous owner. This does not mean that someone named as the beneficiary of a bank account becomes liable for the original owner’s debts. In practical terms this means that a creditor can recover assets in a bank or investment account transferred via beneficiary designation, but that creditor still may not recover in excess of the assets transferred from the deceased individual.
Substantial debt is an understandable concern for many people these days. It is important to remember that when you or your loved ones die, personal debt generally becomes the responsibility of the deceased person’s estate, for the Personal Representative to pay before making distributions to other beneficiaries. Payment of these debts can consume the assets of an estate, but in that circumstance the beneficiaries are not liable for debt in excess of the estate’s assets.
 It is just as important to consult reputable source when dealing with debt as it is when making decisions regarding other planning. While employees of financial institutions may seem like knowledgeable sources of information, you should be aware that not every employee receives the same training. If you have doubts as to the accuracy of information you receive, ask to speak with a manager, contact your attorney for a second opinion, or send us a message and we will attempt to address your issue, directly or in an upcoming blog. 

Tuesday, November 27, 2012

It is Better to Give than Receive

At this time of the year, our thoughts turn to the holidays and sometimes we get caught up in the hustle and bustle of shopping, parties, family gatherings, and religious services. Our minds race with countless questions; what should I get for everyone; what am I getting; where are we going; what time is that party; and will I survive the stress?
In addition, we also take time to reflect on the blessings of our family, friends, and business acquaintances. We remember that not all people are so fortunate and we reach out a hand to our fellow man through acts of charity. We all feel warmer inside after giving, whether to the Salvation Army Red Kettle at the mall, to our own church or temple, to the local food kitchen, or to countless other groups that seek to assist those in need or find cures for medical conditions. Not only does charitable giving feel good, but also it is good for you.
  •      Charitable contributions are income tax deductible: Gifts made directly to charities are income tax deductible and reduce your taxable income in the year of the contribution, if the charity receives the gift by December 31.
  •     Charitable contributions are not counted when determining estate tax liability: The value of gifts made at death reduce your taxable estate, saving 35%-50% depending upon the current estate tax rate
  •     If structured properly, charitable contributions may avoid capital gains on highly appreciated property: By executing a charitable trust, it is possible to provide funds to charities while also gaining additional tax advantages.

Some people want to retain control over assets they intend to give away, allowing them to take advantage of a current or future income stream while also guaranteeing a benefit to their favorite charities at some point in time. Achieving these goals is possible with a charitable trust. Charitable trusts take advantage of the differences between present interests (or as I like to refer to them “here” interests) and future interests (“hereafter” interests) to provide benefits to trust beneficiaries.
Charitable Remainder Trust (CRT) allows you to receive the current income stream from assets transferred to the trust and distributes the remainder portion to the charity after a specified time, or at your death. You get to enjoy the “here” and the charity enjoys the “hereafter.” Through the use of a properly structured CRT, you, your heirs and your chosen charities all benefit, and the IRS receives nothing
The CRT is especially useful where the transferred asset is highly appreciated. If the CRT trustee sells appreciated property, following the property’s transfer to the CRT, there is no capital gains tax liability (unlike if you sold the property yourself). This results in the availability of more assets to provide greater income in the “here.”
While any distributed trust income is taxed to you as ordinary income or capital gains, depending upon its character, you may consider leveraging the CRT by using such income you receive to fund gifts to an Irrevocable Life Insurance Trust so your heirs can receive more value at your death without it being subject to income or estate taxes. Alternatively, some people name their children or grandchildren as the current beneficiaries of the CRT to provide those beneficiaries with income taxed at a lower rate than if the grantor of the CRT took distributions directly.
A final thought on the use of CRTs, the amount of the income tax deduction for contributions to the CRT is determined using IRS tables. The longer the period before the charity gets complete control of the trust property, the smaller the deduction you are able to take.
A Charitable Lead Trust (CLT) functions similar to a CRT but provides for the charity in the “here” by giving the charity the current income stream from assets transferred to the trust and for other beneficiaries in the “hereafter” by distributing the remainder portion to family members after a specified time or your death. Again, the amount of the income tax deduction for contributions to the CLT is determined using IRS tables. The longer the period the charity gets the income from the trust property, the smaller the gift to the remainder beneficiaries, and the larger the deduction you are able to take. However, tax rules require you pay tax on the income as the charitable beneficiary receives in order to take the immediate charitable income tax deduction. By making use of a CLT, you can fulfill your charitable inclinations, shift income and assets to eventual beneficiaries with little gift tax cost, and remove assets form your estate. 
The CRT and the CLT both serve as excellent methods of charitable giving as part of a larger estate plan. If however your charitable inclinations include a long-term, active charitable commitment, it may be appropriate to consider organizing your own Charitable Foundation. While creating and maintaining a Foundation requires substantial administrative effort, the use of a Foundation allows you to receive charitable tax deductions, manage the long-term distribution of assets, choose and change which charities benefit from your philanthropy, and potentially provide a vehicle for a multigenerational commitment to doing good works.
No matter how you decide to satisfy your charitable wishes, with proper planning you can benefit your favorite causes, shift income and assets from your estate to other family members and teach your children and grandchildren the lesson of doing good works. If you have specific questions regarding charitable trusts and foundations, feel free to email us or leave them in the comments section.

Thursday, November 22, 2012

Happy Thanksgiving

From Alan, Matt, and everyone at Finkel Whitefield Selik, have a safe and happy Thanksgiving.

Take the time to enjoy time with friends and loved ones, enjoy a parade, root on the Lions, and give thanks.

Also if you decide to deep fry your turkey, make sure to take special care. Desire for a delicious dinner shouldn't result in a fire ball.

If you have any problems today, hopefully the kind people at 1-800-BUTTERBALL can be of assistance. 

Tuesday, November 20, 2012

The Benefits of an IRA Trust

As we have discussed in previous posts, there are many forms of trusts used in the estate planning process. A special type of trust, known as an “IRA Trust,” is a stand-alone trust, separate from a Living Trust that acts as the beneficiary of IRAs or retirement benefits. The provisions of an IRA Trust satisfy all of the regulations related to the distribution of IRAs and retirement benefits, allowing the beneficiaries to take advantage of their inherited benefits over their lifetime.
While there is nothing barring a Living Trust from being the beneficiary of an IRA, due to the regulations that govern the distribution of retirement benefits it may be difficult if not impossible to take advantage of the most beneficial distribution rules or provide for a lifetime distribution of benefits using only a standard Living Trust. For example, if the Living Trust beneficiaries include charities the Living Trust will not qualify as an "individual beneficiary" and thus the non-charitable beneficiaries will not benefit from the ability to “stretch out” the IRA benefits. In addition, if the Living Trust benefits elderly relatives, the shorter life expectancy of those relatives limits the ability to stretch out distributions and delay or defer income taxation for younger beneficiaries because the regulations base MRD on the life expectancy of the oldest beneficiary. The provisions of an IRA Trust avoid these problems and ensure that the IRA Trust’s beneficiaries enjoy the greatest benefit from their inherited asset.
The beneficiaries of the IRA Trust can be the same as those of the client's Living Trust. However, the distribution terms of an IRA Trust terms are often different from the Living Trust and frequently more restrictive in order to ensure that no matter what happens to the Living Trust assets, the IRA Trust assets will be available to help support children, grandchildren and other beneficiaries. Alternately, an IRA Trust can divide assets between different groups of beneficiaries. For example, the Living Trust may benefit a second spouse while the IRA Trust has children and grandchildren as beneficiaries. Finally, an IRA Trust can help beneficiaries in more difficult or complex situations, such as beneficiaries who are:

  1. Spendthrifts and unable to handle money
  2. Children with addictions
  3. Children with creditor issues
  4. Children with bad marriages
  5. Special care needs children, including those who qualify for government benefits
  6. A surviving spouse who is  unable to say no when children ask for money

In these situations, the IRA Trust Trustee can provide professional management of Trust assets, allowing the IRA assets to grow tax deferred, except for required distributions, and ensure that the beneficiaries do not waste those distributions.
If there are multiple beneficiaries, IRA Trusts are drafted and coordinated with the beneficiary designation of the IRA to allow each of the beneficiaries to use their own life expectancy in determining the minimum required distributions. For example, the beneficiary designation after the death of the client should read as follows: “50% to the sub trust for the benefit of Jane Doe under the John Doe IRA Trust.” With proper drafting, an IRA trust can provide not only for children, but grandchildren and beyond, allowing multiple generations to take advantage of the IRA benefits. In those circumstances, the IRA Trust is often known as a "Dynasty Trust" because it can provide for multiple generations.
Just like a Living Trust, the distribution provisions of an IRA Trust dictate how the beneficiaries receive distributions. One design option for an IRA Trust is the "conduit trust", under which the trustee has no power to accumulate plan distributions in the trust and must allocate any distribution received from the IRA or retirement plan to the beneficiaries. The conduit trust lessens the trustee’s ability to control the income but still allows control over principal distributions as necessary.
Alternatively, when it is desirable or necessary to impose greater control upon the dispersal of the RMD, an "accumulation trust" allows the trustee to hold the RMD in trust for the beneficiary’s benefit. For example, if the beneficiary of the IRA Trust is special needs child, it is important to limit income distributions in order to avoid adversely affecting the beneficiary's right to receive state or federal benefits. It is important to remember however when using an accumulation trust that the federal government taxes income received from the IRA but not distributed to beneficiaries according to the potentially higher trust income tax rates.
Whether a client wants to provide for multiple generations, ensure a lifetime of income for a beneficiary in a difficult personal or financial situation, or simply ensure that different groups of beneficiaries receive the asset that provides them the greatest value, an IRA trust is an extremely useful tool for a wide variety of situations. Due to the complexities surrounding IRA and retirement plan distributions, it is important to work with experienced estate planning attorney familiar with those regulations in order for an IRA Trust to achieve a client's goals.

Thursday, November 15, 2012

2012 Tax Planning - Splitting Inherited IRAs

For individuals who inherited a share of an IRA from an IRA owner who died in 2011, December 31, 2012 is an important deadline. This is because the regulations that govern distributions from inherited IRAs require that beneficiaries make decisions regarding the division of inherited IRAs on or before December 31 of the year following the death of the IRA owner. When there are multiple beneficiaries for an inherited IRA, splitting the IRA account into separate accounts for each of the beneficiaries has the potential to yield important tax and investment benefits.
Death beneficiaries of an IRA must take distributions from the IRA either (1) fully within five years or (2) in annual distributions over their life expectancy. The regulations that govern IRA distributions require that, whether the IRA owner died before or after his required beginning date (generally age 70 1/2), if the IRA owner was older than the beneficiaries, the remaining IRA balance is paid out over the remaining life expectancy of the beneficiary. Generally, when there are multiple beneficiaries of a single IRA, those beneficiaries must use the life expectancy of the oldest amongst them (i.e. the shortest life expectancy) when calculating the Required Minimum Distributions (RMDs). This requirement places younger beneficiaries at a disadvantage because the inherited IRA makes larger annual distributions over a shorter time, triggering potentially greater income tax liability.
For example, John designated his children, Bill and Mary, as equal beneficiaries of his IRA. John dies in 2011 at the age of 75 when Bill is age 55 and Mary is age 40. Under the default scenario, Bill's life expectancy dictates the RMDs for both Bill and Mary. Presuming they each are entitled to $500,000 from the account, in the first year the RMD using Bill's life expectancy is almost $17,000. If Mary could calculate the distribution using her life expectancy, her initial distribution would be only about $11,500. The size of the distributions will only accelerate as Bill gets older.
Fortunately for those younger beneficiaries, if they take advantage of the distribution regulations in a timely manner, they can split the IRA into separate accounts and the RMD rules will apply separately to each account. Following the split, each beneficiary will use their own life expectancy in determining the RMDs. Thus, Mary’s required distributions will be smaller than if she were required to use Bill's life expectancy. In addition, Mary would also have more freedom to invest her portion of the IRA, as her investment philosophy is likely to be more aggressive than Bill’s due to the difference in their ages.
In order to take advantage of this opportunity, recent IRA beneficiaries must direct the IRA trustee to split the inherited IRA into separate and equal IRAs no later than December 31, 2012, making each individual the sole beneficiary of their share of the IRA. Additionally, the trustee must allocate all post-death investment gains and losses for the period before the establishment of the separate accounts to each account on a pro rata basis in a reasonable and consistent manner. After establishing separate IRA accounts, each account owner can provide for separate and distinct investments depending upon the needs of the beneficiary's with gains and losses from the investment of the account allocated only to that account.
Time is running out for the beneficiaries of IRAs inherited in 2011 to make this decision. It is important that beneficiaries and their financial advisors communicate regularly to ensure the ability to take advantage of opportunities such as this. The law governing IRA distributions is both long and complex. This article addresses only the potential to split inherited IRAs into separate accounts for each beneficiary, if you have additional questions or concerns regarding IRA distributions please feel free to leave us a comment, send us an e-mail or call us.

Tuesday, November 13, 2012

An Introduction to Medicaid Planning

Based on a September 2011 poll, conducted by NPR, the Robert Wood Johnson Foundation, and the Harvard School of Public Health, less than 5% of adults considered Medicaid when asked how they would pay for long-term elder care. This stunningly low number sheds light on the fact that while people are living longer and are more aware of the potential need for long-term care as they age, they are unaware of an important method of paying for that care.
Medicaid is a federal program, administered by the states, that pays for nursing home care for individuals who meet the program’s medical, income, and asset requirements. The current average yearly cost of nursing home care in Michigan exceeds $85,000 for a private room. At that rate, even a period of two to three years will deplete the savings of the average person, leaving any surviving spouse with little money to use for their own care. If however, an individual is eligible for Medicaid benefits, the program covers the majority of that cost. The phrase "Medicaid Planning" has become a catchall for the methods used to allow an individual to qualify for Medicaid benefits, while preserving a greater portion of their assets for the well-being of their loved ones.
As a potential applicant contemplates whether to engage in Medicaid planning it is important to consider to consequences and benefits of qualifying for Medicaid. The largest benefit is the applicant’s assets are not consumed by years of expensive medical bills. For a married couple, this insures that the spouse who is not in need of nursing home care has the assets to provide for their own needs. For a single applicant, Medicaid Planning can result in more of the applicant’s assets being passed on to their loved ones.
The consequences of qualifying for Medicaid include the need to leave a home and reside in a nursing home. When faced with that reality, many potential applicants realize that staying in their own home is more important than passing assets to their children. A second often forgotten consequence is that while Medicaid pays for a great deal, if an applicant needs to spend assets in order to qualify for Medicaid, those assets are not available if they are needed for some reason in the future.
Applying for Medicaid benefits is not something to engage in lightly, especially for potential applicants who presently have significant assets, which they could use to pay for care. Proper Medicaid planning is more than spending, giving away, or attempting to protect assets to reach Medicaid’s eligibility requirements. The rules governing Medicaid eligibility consider more than a person’s present financial condition and impose a penalty period of Medicaid ineligibility if the applicant divests wealth to become eligible for Medicaid. The Department of Human Services (DHS) "looks back" 60 months from the date of a person’s application for benefits to determine if that person has given away assets that would impose a penalty on eligibility. There are however ways to spend down assets legally to reach the eligibility threshold.
The first and easiest method requires the client to own a home. DHS considers a single home an exempted asset when determining whether a person meets the asset threshold for Medicaid benefits. The personal property within that home is also exempt. Therefore, a person can pay off mortgages, make necessary repairs, make improvements to the home to increase its value, and purchase new furnishings. All of these techniques are especially useful if one spouse of a married couple needs to take advantage of Medicaid. In addition to the home and personal property, a single car is an exempt asset, this is true even if the applicant never drives the car. Another item that DHS classifies as an exempt asset when determining eligibility for Medicaid, as a pre-paid funeral contract. While many people find it difficult to even think about planning their own funeral, but by taking the time to make those decisions that will eventually become necessary, a Medicaid applicant can both ease the burden on their love ones after their death and remove assets to help qualified for Medicaid.
While spending down assets is a viable method of reaching the Medicaid eligibility threshold when an applicant has few assets, there are times when an applicant desires to qualify for Medicaid, frequently because they are aware that their condition is likely to be prolonged and expensive, leaving them with nothing to pass on to their loved ones, that require more advanced planning.
While it is possible to engage in planning that will assist a potential applicant in becoming Medicaid eligible, the scope of that planning varies greatly based upon the applicant’s present circumstances. Different methods are used when the applicant has a living spouse who is not in need of Medicaid benefits than would be used for a widowed applicant. Furthermore, in a situation where both spouses will potentially require substantial long-term care, still other methods can assist in preserving more assets to pass on to beneficiaries. The complexity of this advanced planning makes it unsuitable to discuss at length in this forum. In addition, potential applicants are cautioned not to attempt such advanced planning without consulting an attorney versed in Medicaid regulations.
 Medicaid planning is a complex area of law, but one with potentially large benefits. Whether a person needs additional care in the near future or simply is aware of the potential need for that care later in life, the proper preparations today, including a complete estate plan, a plan for regular annual gifts, and understanding the pros and cons of the Medicaid program, can insure that any long-term elder care does not leave their loved ones in dire financial straits.