The Importance of Reviewing Life Insurance Policies

A potentially important part of a client’s estate planning is life insurance. Life insurance provides liquidity for any estate taxes or other expenses at death, can provide for income replacement on the death of a primary household earner, and provides protection against liabilities that might come due or be difficult to pay at the death of a client. However, clients should not buy a policy and presume that the policy will meet all their needs forever. Like other aspects of the estate planning process, clients should review their insurance policies regularly to ensure that those policies still help to achieve the client’s goals.

Often clients, especially those in their early earning years will purchase term insurance because it meets their needs and is more affordable than permanent life insurance. Clients and their advisors should remember that term insurance is just that—purchased for a specific and definite time. Clients should review their policies annually or set reminders so coverage will not lapse without securing new coverage. It is also a good idea to periodically review the policies and compare them with new offerings that may be less expensive. It also is a good idea, as long as the client is still healthy and insurable, to consider purchasing a replacement policy before the current term is up in order to extend coverage for additional years. For example, a client has a ten-year term policy and five years have elapsed, if the client purchases a new ten year term policy the client has secured additional coverage at a lower rate than they would likely receive at the end of their original ten year policy.

Clients also need to remain aware of where their insurance comes from. Sometimes a client will rely on group insurance provided by their employer to meet the needs mentioned above. If so, care should be taken to insure that replacement insurance is available before the client changes jobs or retires.

Even permanent insurance requires the client’s regular review. Depending on a clients circumstances and changes in the insurance market it may be possible to purchase policies with improved benefits or decreased premiums. Clients also need to keep in mind their reasons for purchasing insurance. If those circumstances change so that insurance is no longer necessary it is often more cost effective to allow a policy to lapse than to pay premiums for an eventual payout.

Finally, clients should review their beneficiary designations to be sure the beneficiaries named are those that should receive life insurance proceeds. It is not unusual for us to review client policies and discover their parents or siblings are named, despite having a spouse and family of their own. We also will discover clients still have their ex-spouses named, even if they have remarried. Sometimes Michigan law will protect against these flawed designations in the case of divorces, but federal law overrides state law and insurance proceeds can go to those who should not receive anything.

Insurance products are constantly evolving, and the client should have their policies reviewed by a professional expert in the industry. We are happy to help our clients in facilitating policy reviews

Alan Ferrara

Potential Problems with Joint Ownership

     Occasionally we speak with someone who believes they have taken care of the bulk of their potential estate planning issues by including their children as co-owners on their bank accounts or other investment assets. Since assets only pass through the probate process if owned solely by the deceased, these clients have indeed taken steps to minimize their estate's exposure to the Probate process. However, these clients have not considered the potential downside of co-owner arrangements.

     Adding children as co-owners of real property or bank accounts avoids the need for those assets to pass through Probate, but it also gives those children the opportunity to make use of those assets in whatever way they see fit. While parents may make their children co-owners of accounts with the best of intentions, unexpected events arise that can result in the child making use of funds that their parent relies on for day-to-day expenses. Even without the child accessing the funds for their own needs, the account may be subject to the claims of the child’s creditors, thus creating the potential for even greater loss to the parent. Even if there are no problems during the parent's lifetime, co-ownership situations can create problems following the death.

     Presume a parent intends to split their estate between three children, but names only a single child as the co-owner of the bank account that holds the bulk of their estate. Following the parent’s death, that single child is the sole owner of the bank account and has no legal obligation to share the assets contained in the account with siblings. Even presuming that the child desires to follow their parent’s wishes to share the assets in the bank account, distribution of those assets now has tax implications for the child, as opposed to the parent's estate. Some clients understand these negatives, but believe that naming their children as co-owners of an account is unavoidable for other reasons.

     As parents age, circumstances often require a child to assist their parents in the budgeting and bill paying process. If this assistance reaches a point where the child is handling most of the check writing, parents commonly add the child as a co-owner on the account for everyone's convenience. This change, while seemingly innocuous and beneficial to the parent, creates the potential for  the problems discussed above. Thankfully, simple estate planning techniques can easily avoid all of these problems and allow children to assist their parents with the minimum of effort.

     By executing an Immediate Durable Power Of Attorney, a parent can give their child the ability to manage the parent’s finances without becoming co-owners of an account. This allows the child to assist their parent with bill paying while protecting the account from the child's creditors. The same result is achievable by changing the ownership of the bank accounts to the name of the Living Trust and naming the child as a current co-trustee. The additional benefit of using a Living Trust is that assets held in the name of the Living Trust do not pass through Probate after the owner’s death.

     Any time an individual gives another person the authority to act on their behalf, there is the potential for abuse of that authority. This is one of many reasons it is important to consult an experienced estate planning attorney before executing documents that grant someone else the authority to act on your behalf. If you have specific questions regarding the use of Powers of Attorney or Living Trusts for you or one of your clients please feel free to contact us directly and we will be happy to answer your questions. 

Matt Ferrara

Limitations of Medicaid

     Recently, a number of clients have expressed interest regarding the possibility of planning to protect their retirement assets in the event they require expensive long-term medical care. Frequently these discussions include the topic of Medicaid and whether the client should give their assets in the short term to avoid Medicaid's five-year penalty period. These clients want to make sure they receive sufficient care without consuming so much of their nest egg that their spouse or other loved ones have little to nothing after they pass away. Before engaging a client in the discussion of the legal techniques used to preserve assets for a spouse or loved ones while qualifying for Medicaid, it is important to me that the client understands the potential downsides to Medicaid.

     One of the first things I ask client who inquires about qualifying for Medicaid is whether they are comfortable with the idea of leaving their home and moving into a long-term care facility. Many clients are surprised to discover that, with some minor exceptions, Medicaid only covers expenses related to long-term care in a Medicaid approved facility. This means that the client must move from their home into such a facility. This causes some clients to rethink their desire to pass on assets at their death and instead focus on using their resources for their own comfort and well-being. Even when clients are not concerned about leaving their home, many will rethink divestment plans when faced with the limitations of facilities that accept Medicaid.

     While Medicaid is sometimes referred to as the best insurance money cannot buy, there are limitations to what that insurance provides. While many quality facilities that are primarily private pay also maintain a limited number of Medicaid qualified beds, the majority of Medicaid beneficiaries live in care facilities that lack the resources to provide the level of care clients may expect. For clients with significant resources, the revelation that maintaining their assets provides additional options is another factor that reduces the desire to divest assets in order to qualify for Medicaid. When faced with moving from their home and the limitations of Medicaid care, most clients change their mind about giving away their assets and instead prefer to take steps that make further Medicaid planning possible in the event that a change in circumstances makes such planning necessary.

     This brings us back the client’s original concern that healthcare costs will consume their assets leaving nothing for surviving spouses or other loved ones. Thankfully, even when Medicaid is not immediately necessary it is possible to take steps to prepare the clients to take advantage of Medicaid if the need arises. This planning includes drafting broader Durable Powers of Attorney to provide the Attorney in Fact with the specific authority to make transfers and gifts to assist the client in qualifying for Medicaid and discussing other steps the client can take to decrease their countable assets while improving their quality of life.

     Medicaid is a complex area of law and any actions taken to assist in qualifying for Medicaid should be taken only after a consultation with an attorney familiar with the law and the clients’ particular circumstances.

Matt Ferrara

Intra-Family Loans

     Clients often ask how they can assist family members and pass wealth to them without giving up their money. One strategy that accomplishes all of these goals is to engage in intra-family lending. An intra-family loan allows parents to loan money to a child for a specific amount of time at a specific interest rate. For example, recently a client of mine decided to lend $100,000 to her son and daughter-in-law to purchase a new, larger residence to accommodate their growing family. They set up an intra-family loan and documented it in writing with specific repayment terms. The son and daughter-in-law purchased an asset they could not otherwise afford and the client will get an annual interest payment as well as a return of her principal.

     A benefit of these loans as opposed to a bank loan is the ability of parents to charge a lower than market rate of interest. The Internal Revenue Service regulations require that the interest rate of the loan, known as the Applicable Federal Rate (AFR), equal a minimum rate set by the IRS each month. The current AFR annual rate just 0.18% for loans of three years or less, 0.95% for loans of more than three but less than nine years, and 2.47% for loans of a longer duration.As long as the child can find an investment that pays more than the principal and required interest, the child benefits from the loan, and the parent has effectively transferred wealth to the child that he or she would not otherwise have had. As an added benefit, in the current economy a parent can benefit from this relationship as well if the parent charges an interest rate greater than what could be gotten at currently low bank savings rates.

     To avoid any future conflict, it is important that client’s document the loan's amount, term, interest rate and repayment schedule in a formal written contract. This is important not only to ensure a return of the parent's money, but also for protecting the client against an IRS claim that the transaction was a gift, not a bona fide loan. 

     While there is an initial presumption that money or property transferred by a parent to a child is a gift, not a loan. It is possible to overcome this presumption by presenting by proof that the parties intended to repay the loan and intended to enforce the collection of the debt. Courts have held that the existence of a written document evidencing the debt, the charging of a specific interest rate, the existence of a set repayment day, and proof of actual repayment of the loan are all criteria that favor the position of a transfer was a bona fide loan.

     As with all tax related strategies, clients should seek the advice of a qualified professional before engaging in an intra-family loan. Proper planning can provide benefits to both the borrower and the lender.

Alan Ferrara

Avoiding Conflict when Distributing Personal Property

      One of the primary reasons that a client prepare an estate plan is to ensure that there is a minimum of disagreement and turmoil for their loved ones following their passing. Client frequently spend significant time contemplating the distribution provisions for the bulk of their assets, but often give little thought to the distributions of their tangible personal property. In our experience, dividing jewelry, artwork, furniture, and other items of personal property can often cause discord among beneficiaries. A client should consider how personal property, whether of significant value or simply sentimental value is distributed

      While our primary concern is focusing on the monetary aspects of estate, we encourage our clients to consider who should receive items of personal property. Children or grandchildren may have an emotional connection to Aunt Jane's ring, Grandma's mantle clock, or even dad's golf clubs. We suggest our clients spend time with their loved ones, discussing if there are items of property they would each like to receive. Often clients come back to us surprised by the emotional value that their children attached to items of relatively insignificant monetary value. It may be a collection of cookie cutters that hold memory of holiday baking or hand tools that will always remind the loved one of their parent’s self-reliance. The small physical objects are often the most important items that a loved one inherits. By spending time learning about their loved ones strongest memories, it is possible for our clients to prepare a memorandum distributing specific items of tangible personal property to the beneficiary who will most appreciate the significance of those items.

      A client may also learn which items may cause the most conflict among their beneficiaries when the time comes to divide personal property. If two children express substantial interest in the same piece of furniture, jewelry, collectible, or any other object, clients can use the same memorandum they created to make special gifts to their loved ones to preemptively sidestep disagreements. These conversations allow the client to make decisions about distributions of personal property understanding why particular beneficiaries feel an attachment to particular property. For example, if two children express interest in the same wooden chest, clearly both cannot inherit the item. However, if through discussions the client learns that one child is actually attached to the smell of the quilts contained in the chest, while the other has strong memories of sitting on the chest, a client can distribute the chest and quilts separately and provide both their children with items they will cherish without creating any rift in the sibling relationships.

      Repeatedly in this post, we have referred to a memorandum for distributing tangible personal property. The use of the memorandum is a common technique that allows the client to provide a list of items they wish to be distributed to particular beneficiaries following the execution of a Will or Trust. Michigan statutes authorize the use of a personal property memorandum that is read in conjunction with the Will or Trust document. The client can make changes to distributions of these items over the years without needing to amend their Trust or draft a Codicil for their Will. The personal property memorandum is a tool we provide each of our clients to allow them to make gifts to their loved ones and limit family discord. As part of the estate planning process, it is important for clients to take advantage of this tool to gain its full value.

Matt Ferrara

Protecting Wills and Trusts from Beneficiary Contests

One of the primary goals in executing an estate plan is the ability to control the distribution of assets. While many clients decide to divide assets equally among their beneficiaries, others choose to provide for different beneficiaries in different amounts or with different limitations. In some cases, the client has a child who has received large gifts during their lifetime and therefore the client chooses to reduce that child’s share or exclude that child from distributions at their death. In other situations, the client seeks to spread out distributions over the beneficiary’s lifetime due to worries about spendthrift behavior. Sometimes the child has exhibited such bad behavior the client decides to disinherit that child completely.  Occasionally, these clients worry that their family members will argue about assets or trust provisions after their death and want to prevent this type of action. Fortunately, a Settlor can add provisions to a Trust to discourage beneficiary from arguing or starting litigation after the client's death.

Michigan law allows the use of "in terrorem" or "no-contest" clauses to discourage contests of Trusts. No-contest clauses work by providing that any beneficiary who contests the provisions of the trust forfeit any distribution from the trust to which they were otherwise entitled. The goal of a no-contest clause is to deter beneficiaries from engaging in costly litigation against the Trustee or one another by severely penalizing the beneficiary who take such actions. The hope is to minimize litigation, cost and delays in the administration of documents, prevent family discord and damage to long-term relationships, and keep personal family matters private.

While Michigan courts have traditionally enforced contestability clauses, irrespective of good or bad faith shown in the contest, in 2010, Michigan's legislature codified the use of contestability clauses, but limited them in certain situations with the statutory language:

“A provision in a trust that purports to penalize an interested person for contesting the trust or instituting another proceeding relating to the trust shall not be given effect if probable cause exists for instituting a proceeding contesting the trust or another proceeding relating to the trust.”

            This statutory language limits the enforceability of no-contest clauses to times when no probable cause exists for instituting a challenge to the Will or Trust. "Probable cause" exists if there is evidence that would lead a reasonable person, to conclude that there was a substantial likelihood that the challenge would be successful.

Courts now must decide if enforcing a Settlor's intent and desire to reduce frivolous claims by beneficiaries should be superseded by the need to protect beneficiaries from mistakes or wrongdoings by trustees. Due to this standard, probable cause is usually determined on a case-by-case basis, requiring the courts to find substantial basis for a contest. This requirement may still cause a beneficiary challenging a document a high level of discomfort if a court determines that there is no probable cause.

It is possible to draft no-contest to cover a broad spectrum of situations or to apply to specific individuals, such as a difficult child. When including no contest clauses in documents designed to address concerns regarding particular beneficiaries, it may be appropriate to explain the Settlor’s concern about that beneficiary. Such explanations may assist the court in determining that there is no probable cause for any contest. As with other complex estate planning issues, drafting documents to include no-contest clauses only should be done after consultation with and with assistance from experienced professionals.

Alan Ferrara

Addressing Client's Concerns Regarding their Children's Marital Issues

We typically post about general issues involving estate planning, but as we all know, clients have specific problems with which require individualized solutions. One good example of this are concerns regarding adult children potential issues related to their marriage.

A common client concern, because of trends in divorce, is the worry that an adult child who receives an immediate distribution from a trust will lose some or all of those assets to an ex-spouse following a divorce. Obviously the clients would much rather have all of the assets owned by their child and eventually used for the benefit of their grandchildren. To alleviate this concern we are now modifying Trusts to change distribution provisions so that there is no longer an immediate distribution of assets to some or all of the children. Instead, the Trust distributes income and principal over time, protecting the bulk of the distribution from loss in the event of a divorce.

Clients have a wide variety of options for the limitations they place on these distributions, ranging from automatic distribution of income annually to distributions of income only within the total discretion of the Trustee. In addition to limiting distributions of income, the Trust normally provides that distributions of principal also be within the discretion of the Trustee. By using this type of language, the Trust assets being held for the child are not considered "marital assets" subject to a division upon divorce. The Trust can even provide for distributions of assets held for the benefit of children to grandchildren to help defray the costs of education or other expenses of maintaining their accustomed standard of living.

Frequently when clients choose to include such limitations on distributions the Trust will also include a provision that the Trustee, in its complete discretion, can distribute the entire share of the child at any time. This is beneficial because if there is a troubled marriage, the assets can be held, but after a divorce, or if there is comfort that there are no longer marital issues, the Trustee can distribute all Trust assets the child and the child can then control their own destiny.

Regardless of the provisions used, the child in question should not be the sole Trustee of his or her own sub-trust, or a spouse in a divorce may be able to argue successfully that the child has sufficient authority for an automatic distribution and thus the assets should be considered marital property. In these types of situations, there should be an independent Trustee, or at least a sibling who is both understanding of the situation and sympathetic to the child.

In reviewing existing documents for clients with concerns regarding their children's marriages, close attention should be paid to the following concerns:

1. Does the Trust provide for an immediate distribution of assets?
2. If the Trust holds assets for the benefit of a child, using distributions that specified ages or anniversaries of the parents' deaths, will this provision require distribution over a shorter time than would be needed to protect against marital issues?
3. Are protections in place for grandchildren as well as children?
4. Is the child in question a Trustee of his or her sub-trust, which might create an ability of a divorcing spouse to reach assets of the Trust?
5. Is the Trustee of the Trust for the child on good terms with the child so that the child can be comfortable that he or she will be treated favorably, or is the Trustee one who is not on good terms with the child or is not sympathetic to the child's situation? Siblings who are fighting or on bad terms with the child may not be the most appropriate Trustee for the child's sub-trust.

     As our clients relate concerns and problems with other family members, it is important that we review their estate planning documents to make sure that appropriate changes are made to protect their interests and the interests of their children.

Alan Ferrara

Using Motivational Distribution Provisions

     One of the reasons for having a trust is the significant control the trust provides the grantor over distribution of their assets. Some clients use this control to include distribution provisions designed to motivate the beneficiaries to either take or abstain from certain actions. We believe in explaining the consequence of any given action to our clients and then allowing them to decide whether those consequences are worth the benefit of their actions. This philosophy frequently comes into play when clients want to use distribution provisions as a carrot or stick for their beneficiaries.

     One common form of motivational distribution is a payment to the beneficiary upon their graduation from college. Without careful drafting, such provisions can create situations where it is more advantageous for the beneficiary to remain a student supported by the trust or opt for a lengthy education resulting in many degrees and an equal number of distributions. With provisions requiring very particular educational achievements, for example graduation from a Big Ten university, a beneficiary may never receiving gifts intended for their benefit if such a degree is beyond their capabilities.

     Another form of motivational distribution reflects the grantor’s desire to influence their beneficiary’s marital decisions. A danger in this type of distribution, in addition to the chance of creating substantial resentment between the parties, is a poorly worded distribution provision can result in the beneficiary engaging in a spree of weddings and divorces in order to take advantage of overly broad provisions. As with education-based distributions, it is possible for relationship-based distributions to fail entirely because a beneficiary is completely unwilling or unable to engage in the required behavior.

     It is part of our responsibility as counselors to our clients it to create documents that achieve their goals and avoid these types of situations. Frequently we do this by suggesting alternatives that achieve the grantor’s overall goals, while limiting potential future problems in the administration of the trust. This means that clients who want education-based distributions are encouraged to include trade schools and other forms of post-secondary education as benchmarks for the distribution. For clients concerned about their beneficiary's spouses, distributions made over time may offset some concerns that a spouse will end up with assets in divorce or provisions for distributions to grandchildren in the event that a parent fails to receive a distribution will keep assets available to assist loved ones even if beneficiaries fail to conform to the grantors preference.

     Ultimately, the choice of distribution provisions is up to the client. If the desire to achieve certain outcomes despite the potential challenges results in complex distribution provisions it is important to remember that in a living trust such provisions are always amendable during the life of the grantor. Hopefully in time, clients will realize that their beneficiaries have grown into the productive members of society they hoped for and adjust their documents accordingly.