Happy New Year

From our family to yours, happy holidays and a safe and successful New Year.

We'll be back in 2018 with more of our insights and explanations of the estate planning process.

First Thoughts on the "Tax Cuts and Jobs Act"

As we write this post (on December 20, 2017), the United States Senate has passed the Republican "Tax Cuts and Jobs Act" and the House of Representatives is set to re-vote on that legislation this afternoon (the House must re-vote because the version of the legislation it rushed to vote on December 19 contained provisions which violate Senate procedural rules). Following that vote the legislation will quickly receive the President’s signature and become law. That is when this process really gets interesting.

Republicans pushing this legislation have claimed, it is the “largest tax cut ever” (it is not) and a boon to the middle class (we will reserve judgement for now) and all manner of other grandiose claims. Whether some, all, or any of the promises made while promoting this legislation will ever come to pass remains to be seen, however there are certain things that will result from the legislation becoming law.

With respect to estate planning, those individuals with the largest estates will see a huge windfall, with the Estate Tax Exemption doubling from $5.5 million to $11 million per person. Under prior law only .02% of estates were subject to estate taxation. The new legislation further assures that large estates receive a significant benefit because the number of estates which will incur liability under these new provisions will amount to less than .01% of taxpayers. Despite this significant increase, in the exemption there has been no change in the laws with respect to basis, so heirs and beneficiaries will continue to receive a stepped-up basis for property transferred at death.

From an income tax perspective, the legislation maintains the number of tax brackets (there are seven) but changes the tax rate and income range for each of the brackets. These changes reduce the top tax rate and increase the threshold before a taxpayer will pay that rate and have varying effects on the other brackets to the benefit of some and detriment of others. The average middle-class taxpayer (making 19,050-$77,400) will now fall into a 12% bracket, down from 15%. However a number of individual deductions have been reduced, including the mortgage interest deduction and the deduction for state and local income/sales taxes, which may result in those same taxpayers owing more than in years past. On a positive note for many, the final legislation does not contain provisions in the original House bill which eliminated deductions related to tuition waivers for graduate students, student loan payments, and medical expenses.

Corporate tax rates will see a dramatic reduction with the tax rate dropping to 21% from 35% with few existing deductions seeing any substantial change. Although the legislation itself has not been dissected by experts because it was kept under wraps during the legislative process, it is believed that “Pass-Through” companies such as LLC's, partnerships, sole proprietorships and S-corporations may also see a significant benefit. Owners of Pass-Through companies will be able to deduct 20% of the income from those entities, subject to certain caps, effectively lowering the top tax rate they will pay. While some effort was made to limit individuals with "service industry" income (such as lawyers) from taking advantage of these provisions, a significant number of tax experts have recently detailed ways they believe these provisions can be manipulated to the taxpayers advantage.

Unanticipated loopholes in the provisions regarding Pass-Through entities are unlikely to be the only errors which Congress will need to correct in the legislation. Multiple lawmakers are already acknowledging that they will need to pass additional legislation to correct certain provisions of the tax bill to correct unintended consequences which are mostly a result of the speed with which the legislation was passed. Additionally much of the legislation leaves rule-making up to the Internal Revenue Service (IRS), which will now be busy attempting to prepare for significant changes which take effect in under two weeks (note the IRS has 18 months to write Rules which will be retroactive to January 1, 2018).

In addition to its implications for the tax code, the current legislation also contains language that will significantly impact other areas of public policy. It contains provisions which open sections of the Arctic National Wildlife Refuge to drilling and eliminates the individual mandate to purchase health insurance contained in the Affordable Care Act. Further, estimates of the fiscal impact of the legislation from groups across the political spectrum indicate that it is likely to balloon the deficit by many billions of dollars, with the Joint Committee on Taxation indicating that the bill will increase the deficit by $1.45 trillion over the next 10 years.

Overall this legislation is a benefit to corporations, pass-through entities, the wealthy heirs, and anyone with income in the six figures. It appears less beneficial to individuals with smaller incomes because the reduced tax rates are offset by limitations on deductions these taxpayers previously benefited from and decreases to the individual rates expire in 2025. Individuals in states and municipalities with higher local taxes will also see increased federal taxes because they will no longer be able to deduct their complete local tax bill. The repeal of the Affordable Care Act’s individual mandate to purchase health insurance is also likely to result in an increase in health insurance premiums for those people who continue to purchase health insurance.

It is important to regularly review the state of the tax code and to make changes to policy to reflect the changing times and while promoting this legislation Republicans suggested that was their goal. Tax experts will be busy trying to make sense of and take advantage of the new provisions, and the IRS will be busy writing regulations designed to close unintended loopholes. With the changes, tax law will be in flux for quite some time. As the 500+ pages of the new tax law become public we and others will be providing explanations of how the law impacts you. Be careful to consult your tax expert before changing any of your tax planning.

Matt and Al

Patient Advocate Designations 2.0

The Patient Advocate Designation, when paired with the General Durable Power of Attorney, comprise the primary documents in the “here” portion of estate planning. Like the Power of Attorney, the Patient Advocate Designation grants another person (the Designee) the authority to make medical decisions on behalf of the Principal in the event that the Principal is unable to make their own medical decisions because of illness or accident. While on the surface the Power of Attorney and Patient Advocate Designations appear to be similar, there are some important distinctions between the two documents that are worth addressing.

Just as with the Power of Attorney, the Patient Advocate Designation can grant a variety of authority, but for the purposes of estate planning the document will include the authority to make any medical decision, including end of life care decisions, in the event that the Principal is unable to make their own healthcare decision. While it is occasionally useful to provide a Designee with less authority, for practical purposes most Patient Advocate Designations grant broad authority because they are only used in the event that the Principal is unable to articulate their own wishes.

The Patient Advocate Designation normally provides that two physicians must state in writing that the patient does not have the ability to understand and make their own medical decisions. Only after these physicians have confirmed that the Principal does not have the capacity to make his/her own decisions, can the Designee make medical decisions, including end-of-life care decisions for the patient. It is noteworthy that the ability to make decisions regarding healthcare is different from being physically incapacitated. Even if a person is unable to manage their own affairs due to physical incapacity, they may still have the ability to participate in their own healthcare decisions, if they are able to understand their doctors and articulate their wishes.

In order to make informed decisions for an incapacitated patient under any circumstance, it is generally considered good practice to include a release in the Patient Advocate Designation to allow the Designees to receive medical information from medical practitioners and medical facilities that is normally protected by privacy laws. Frequently this release will extend beyond those times when a Patient Advocate is called upon to make decisions so that the Designee can receive regular updates on the Principal’s health, even when they do not need to make decisions.

With a common focus being on a situation where a Designee needs to make end of life decisions, people sometimes lose sight of the fact that a Patient Advocate may also be called on to make decisions regarding long-term healthcare treatment. Such decisions include whether the Principal is able to reside in their own home due to medical risks, what scope of care is necessary to make the Principal comfortable, and where the Principal will live if they do need inpatient care. These decisions can prove to be especially difficult for Designees because they are not things that people generally like to discuss. It is important to make sure the Principal discusses these types of issues with the designee ahead of time if possible.

It is important to fully understand what authority is given in a Patient Advocate Designation before signing the document. An attorney experienced in estate planning should be willing to take the time to review the scope of that document before expecting you to sign anything. This is just one reason why we always remind our reader of the importance of working with an attorney to navigate the estate planning process.

Matt and Al

Powers of Attorney 2.0

A few posts ago we addressed how the “here” portion of estate planning allows people to appoint others to make decisions on their behalf if they become incapacitated due to illness or accident. The Power of Attorney is the legal document allowing a person to designate who will make legal and financial decisions for them in the event of incapacity.  While many are aware of a Power of Attorney in the event of incapacity, it is also worth noting that not all Powers of Attorney serve the same purpose and if not properly drafted a Power of Attorney may prove useless in the case of emergency.

In its most basic form, a Power of Attorney is a declaration that someone (the Designee) can act on behalf of another person (the Principal). This power can be very specific, such as, “Bob appoints Frank on a particular dated, to sign Closing documents on the purchase of a specific house”. In this example, Bob cannot attend the Closing so he authorizes Frank to sign the documents in his place. Bob is not incapacitated but Frank is still allowed to act in his stead. This is a Limited Power of Attorney.

As with many legal documents, it is possible to achieve a wide range of results with a Power of Attorney. Expanding on the first example, if Bob were out of the country and needed Frank to handle additional aspects of his home purchase, Bob could sign a more expansive Power of Attorney that gives Frank the authority to act on Bob’s behalf with respect to “any action related to the purchase and furnishing of a residence.” This broader authority, likely backed up with more specific language authorizing particular actions, would allow Frank to retain a Realtor, sign Purchase Agreements, purchase furniture, and even deal with movers, all on Bob’s behalf.  The flexibility of a Power of Attorney makes it a powerful tool in planning.

In the previous two examples the Principal is not incapacitated, Bob just needs Frank to act in a situation where he is unavailable. In the context of estate planning, we expand upon this concept to create the General Power of Attorney. This document provides the Designee with broad authority to act on behalf of the Principal. The document, containing many specific authorizations to affirm to those following the Designee’s instructions that the Designee is authorized to act, allows the Designee to act on the Principal’s behalf with respect to many of the common and uncommon decisions that a person must make every day. This “General” power is not without limits, the most important of which is the Designee’s “Fiduciary Duty” to act only in the Principal’s best interest. It is also important to recognize that the law places limitations on the actions a Designee may take on the Principal’s behalf, though some of those limitations can be superseded by specific language in the document.

Drafting is important when it comes to Powers of Attorney because under Michigan law a Power of Attorney must specifically indicate when it functions. This means that in order for a Power of Attorney to be useful in protecting a person during incapacity the document must indicate that it is a “Durable” Power of Attorney. The term Durable simply indicates that even if the Principal is incapacitated (but still alive), the Power of Attorney is intended to continue to function.

One final note on the varieties of Powers of Attorney, from the examples above you can see that Power of Attorney can function even when a Principal is not incapacitated. A Power of Attorney that allows action upon execution is commonly termed an Immediate Power of Attorney. An Immediate Power of Attorney is useful in estate planning as certain actions become more cumbersome to a Principal. It will allow a Designee, such as a trusted child to act on a parent’s behalf even when the parent could handle a task on their own. More commonly used is a “Springing” Power of Attorney that automatically takes effect upon a particular condition, such as incapacity, affecting the Principal.

We hope that this explanation helps you appreciate the benefits and complexity of the Power of Attorney. From a Limited Power of Attorney that functions only for a number of hours to a General Durable Power of Attorney that springs into effect upon incapacity, the Power of Attorney is a complex but important part of an estate plan. With proper drafting, it can allow trusted Designees to easily manage the Principal’s affairs during an unexpected emergency, making sure that such times need not be more difficult than necessary. Due to the complexity and expansive power that a Power of Attorney can give to another person we recommend that you always consult with a trusted attorney, experienced in estate planning, before signing anything that gives someone else authority to act on your behalf.

Matt and Al

Beginning to Understand Medicaid

Recently we began to address Medicaid eligibility and whether Medicaid is appropriate for a client’s circumstances. We choose to start our discussion of Medicaid from that perspective because the rules that govern Medicaid do not lend themselves to a simple explanation blog and frequently clients realize that coverage under Medicaid is inappropriate to their circumstance and therefore we do not explore the details of qualifying for benefits. For those for whom Medicaid coverage may be important this blog expands on Medicaid and discusses some of the rules that govern eligibility.

When discussing the complexity of qualifying for Medicaid benefits it is helpful to start with a clear definition. Medicaid is a government program implemented to ensure that essential healthcare services are available to those whose income and resources are insufficient to address the costs of the services. Medicaid is funded with a combination of Federal and State funds and subject to Federal Law and Regulation, but administered by the States according to Rules that vary from State to State. The collected rules governing Medicaid have generously been referred to as “convoluted and often incomprehensible” by institutions including a Federal Appellate Court. This complexity includes thousands of pages across multiple documents including legislation, regulations, rules, and policies. Much, but not all of, this complexity can be boiled down into three primary requirements:

1. A Medical/Functional Eligibility Test,
2. An Asset Test, and
3. An Income Test.

The first criterion for qualifying for benefits under Medicaid requires the applicant to demonstrate a medical/functional eligibility. Medicaid determines medical/functional eligibility through a seven factor test and an applicant requiring assistance with any of the seven factors meets the eligibility criteria. Most Medicaid applicants satisfy this test because they require substantial assistance with daily functions including eating, toileting, bathing, dressing, and/or ambulating. While these are the most common factors, an applicant may also qualify for Medicaid because they require assistance due to memory issues, have conditions requiring substantial physician interaction, have complex daily medical treatments, or have mental health conditions.

After an applicant meets the medical/functional eligibility for Medicaid they are then subject to an Asset Test. The Asset Test is the aspect of Medicaid most individuals believe they understand and also the aspect subject to the most misconceptions. A simple summary of the Asset Test is that an unmarried applicant may have no more than $2,000 in countable assets in order to qualify for Medicaid. Since Medicaid is not simple it is important to understand the term "countable assets" exists because Medicaid exempts certain property when determining an applicant’s assets. These exemptions include the applicant's home, one vehicle, assorted household goods and personal items, certain life insurance policies, some funeral plans and expenses, and a small number of other assorted assets. An important note, while the value of these assets is not counted when determining whether an applicant meets the Asset Test, any of these assets which pass through the Probate process following the applicant's death may be claimed at by the state as part of the "estate recovery" process, which is designed to help the states for cover part of the costs of Medicaid care provided.

The application process is further complicated for a married couple, when only one spouse requires Medicaid coverage. The rules regarding asset ownership vary from state to state and therefore it is important to understand the rules in your state. In Michigan, during an initial application, the assets of both spouses are deemed to be assets of the applicant. This means that the non-applicant spouse, or Community Spouse, will likely need to “spend down” a portion of their assets in order for the applicant to qualify for Medicaid. The rules for this spend down are as complex as any other portion of Medicaid, but in short the Community Spouse is allowed to protect one half of the countable assets, but not more than $120,900 (in 2017), unless a different amount is determined pursuant to a court order.

After successfully passing these first two tests, the Income Test is likely much less daunting as it only requires that an applicant's monthly income be no greater than their monthly medical expenses. Unlike with the Asset Test, the Income Test only includes the applicant’s income when considering eligibility. Income of a Community Spouse is not counted, nor is the Community Spouse required to contribute his or her own separate income towards the cost of the applicants nursing home care. Additionally in certain circumstances the Community Spouse is granted a portion of the applicant’s income in order to assist the community spouse in maintaining assets such as the home. While this test may appear inconsequential it is important for potential Medicaid applicants to be aware of, so they do not take steps to meet the Asset Test only to learn they are ineligible because they have too much income.

Navigating all of the rules and regulations that govern Medicaid eligibility can be extremely time-consuming and there are many potential pitfalls which can result in a denial of benefits. The most common issue that causes problems with an application is when an applicant engages in a transaction that Medicaid deems to be a Divestment. A Divestment is defined as any transaction that takes place for less than fair market value in order to assist in qualifying for benefits. This includes the obvious example of giving away assets in order to meet the Asset Test, but also less obvious pitfalls including paying loved ones for assistance prior to applying for Medicaid. When an applicant engages in a prohibited transaction, Medicaid assesses a penalty, making the applicant ineligible to receive coverage despite otherwise qualifying for Medicaid. While it may appear obvious what transactions will be deemed divestments it is again critical to know that each state treats the issue of divestment differently and understanding the rules of your state is essential to avoiding the creation of a substantial problem.

As you can see, even when summarized, the rules for Medicaid eligibility are complex. Before taking any action related to Medicaid we strongly encourage our readers to consult with specialists with substantial experience in the field in order to minimize the chances of making an error that causes significant issues.

Matt and Al

The Question of Medicaid Planning

To expand upon our previous post on Gifting, today we are addressing Medicaid. Often questions regarding gifts are tangential to questions about qualifying for Medicaid. Taking time to educate clients on the benefits, and limits, of Medicaid is the first step to deciding if Medicaid is appropriate for a client's circumstances.

With the rising cost of healthcare, especially as it applies to long-term care for elderly individuals, our clients often inquire about Medicaid and its rules and limitations. While Medicaid is the “best insurance money can’t buy,” qualifying for coverage under Medicaid comes with significant asset and income limits. In addition, the facilities which accept Medicaid as a payment over private pay options are many fewer, and may be of lesser quality. Still, a common concern for clients is that significant medical costs incurred in their later years may wipe out assets they worked for their entire lives, leaving them unable to pass on any inheritance to loved ones. Questions initiated by the client, and sometimes by children worried about an inheritance, often center around protecting assets or about giving money away during lifetime.

It is important to clarify that qualifying for Medicaid is not about keeping the government from taking a person’s money, but reaching specific limits of assets before Medicaid coverage is available. In addition it is important for clients to understand that all health care is not the same and there are significant differences between providers. This is the point in most conversations about Medicaid where we discuss the differences between private-pay facilities and facilities funded primarily by Medicaid. We remind our clients that while a private-pay facility generally has a higher cost, the quality of life in those facilities tends to be markedly better. Whether because the facilities have more staff per patient, better amenities, or even simply nicer rooms, a private-pay facility is going to provide generally better care.

This conversation provides us with a gateway to remind people that the funds they will potentially spend on their care are the funds they worked hard to earn during their life. This leads to more in depth discussions about what is motivating inquiries about Medicaid and what is more important to the client, the quality of their care or passing more wealth on to their loved ones. It also provides us with the opportunity to discuss whether the client has reason to believe that they will need the types of long-term healthcare that Medicaid covers. This is because many people believe that Medicaid is an advanced version of Medicare and covers more costs than it actually covers. Often people begin asking questions about Medicaid long before they actually have need for such care and when they may never have healthcare need that Medicaid would cover.

Medicaid planning is a complex area of law with many potential benefits, but it is not something that everyone should be doing. There are a number of things that can be done to prepare a client for a potential Medicaid need, but it is first and foremost important to make sure that clients have the information they need to determine if Medicaid is appropriate to their circumstance. Even if Medicaid is appropriate, the rules that govern eligibility create many potential pitfalls for the unwary, it is important to avoid taking steps that could actually inhibit qualification for coverage in an effort to speed up coverage. As with so many things we discuss, the advice of an experienced attorney is invaluable.

Matt and Al

'Tis the Season for Gifting

Since restarting the blog we have focused primarily on basic estate planning concepts, explaining the various documents and how they work together to create a plan to address the uncertain and unexpected changes that come along during life. Over the next few blogs we are going to move into some more complex planning issues and address how they can be part of an estate plan. In the spirit of the season, we will start with the topic of gifting.

Any time of the year, but especially during the holiday season, clients often consider how they can help their loved ones by gifting cash or other property to them. Obviously the inclination to gift is important, but in the context of estate planning, gifting is generally associated with the tax implications of transferring assets, be it money, real estate, business interests, or any other property. The tax implications of gifting are a pressing issue because the Internal Revenue Code (the “Code”) imposes a Gift Tax on any gifts above a certain level.
The Code treats gifts during lifetime and at death in a similar manner considering them both transfers of wealth that may be taxable if the gifts exceed a certain value. The general rule is the Code imposes a tax on the transfer of wealth, but there are a number of exceptions to the general rule. First, gifts to a spouse are not taxed, unless the donee spouse is not a U.S. citizen. Second, gifts to anyone (relatives or otherwise) to pay for education or medical services are also exempt from gift tax as long as those gifts are paid directly to the school or provider. Third, there is an “Annual Exclusion” amount that allows a person to make as many gifts as they want, to as many people as they want, as long as the total gifts to a single person in a year are under a certain amount known as the Annual Exclusion (currently $14,000.00 and rising to $15,000.00 in 2018).

If a gift to any one person exceeds the value of that Annual Exclusion it counts against the giver’s Unified Credit which can be used during lifetime or at death. The Unified Credit translates into an “Exclusion Amount” which is currently $5,450,000.00 and set to rise to $5,600,000.00 in 2018. The Exclusion Amount can be used to protect transfers at death from Estate Tax or gifts during lifetime from Gift Tax. Each dollar of the Exclusion Amount used by a person during their life reduces their Exclusion Amount at death. If a married person does not use their full Exclusion Amount during lifetime or against Estate Tax at death their surviving spouse can add any unused portion of that Exclusion Amount to their own Exclusion Amount. The result of all of these exclusions is that a married couple can give away in excess of $11,000,000.00 in their lifetime without ever paying any tax on those gifts, which currently make the Gift Tax a very low impact tax, except in the case of high net worth individuals. Congress is currently debating changes in estate and gift taxation. If changes become law, we will discuss this then.

Because for the majority of the population has little worry about making taxable gifts, why is gifting a concern in estate planning? In our experience, issues with gifts revolve more around the personal impact of gifts to the donee rather than the legal impact. People commonly express concerns about gifting different amounts to different children, the impact of making gifts to children who may not make good use of the assets, their own financial security if they choose to make gifts, and the impact of gifting on other aspects of planning, including Medicaid. The stress and anxiety of these questions frequently outweighs a person’s concern about writing a check or turning over control of another asset.

When assisting clients navigating these issues we focus first on the client and ensure that the gifting is both the client’s desire and that the gift will not have a negative impact on the client, either currently or long-term. We remind our clients that they worked hard to accumulate the assets they have and that they should not give away anything that would result in a negative impact to their own lifestyle. Once the client is comfortable their own needs are taken care of, we can then discuss with them their particular situation on how to make gifts to assist loved ones, yet attach strings to protect against the known failings of those loved ones.

It is possible to use Trusts to make gifts to children or grandchildren, but place limits on the use of those gifts and also protect those gifts from creditor problems. One can also structure an intra-family loan that uses gifting to return loan payments to children at the end of the year (or simply provide children with the funds to make the loan payments). It is possible to structure the terms of a Living Trust to take into account gifts made to beneficiaries during lifetime and offset distributions from the Living Trust by the value of the lifetime gifts so that children ultimately receive the same distributions whether during their parent’s life or at death.

Gift planning, as with any other type of tax planning, should never let the “tax tail wag the dog”. By this we mean while it is important to consider the tax ramifications of the gift, it is more important to make sure the gift makes sense after a sound analysis, and then consider strategies enabling the avoidance of taxation. As we always stress, working with an attorney experienced in the legal obstacles and solutions is critical to avoiding mistakes and unanticipated consequences.

Matt and Al

Having a Trust is Half the Battle

As we discussed when we wrote about Living Trusts, one of the benefits of a Living Trust as part of an estate plan is the ability to change the distribution terms of the trust without needing to make changes to all of the assets. Once assets are funded to a trust they remain part of the trust property until they are specifically removed. This raises the question, what does it mean to fund assets to a trust? The funding of a trust requires making the trust the owner (or beneficiary) of an asset. This may sound simple but it is an aspect of estate planning that is often lacking, even with people have taken the time to prepare all of the documentation. Any assets not funded will be required to go through the probate process before the assets can be transferred to the trust and be administered and distributed pursuant to the terms of the trust, Depending on the assets requiring probate, the process can be relatively simple, but may be complex and require a lot of time and fees before the assets reach the trust.

Some assets are very easy to fund to a trust. For example, tangible personal property (including pots, pans, furniture, jewelry, etc.) is assigned to a trust with a one page document that declares those assets are property of the trust. This Assignment even works prospectively so that as a person acquires more “stuff" it all becomes property of their trust. The Michigan Probate Court has accepted these assignments of personal property as transferring assets of trust and therefore not requiring they be probated. Assignments are also commonly used to transfer ownership of business assets, such as L.L.C. Member Interests and partnership to the trust, though in that case it is necessary to review the terms of the company’s Operating Agreement or Partnership Agreement to ensure that those transfers are allowed under the entity’s controlling documents. Transferring stock of a corporation requires the canceling of an old stock certificate and the issuance of a new stock certificate in the name of the trust.

For bank accounts, investment accounts, stock, bonds, and other intangible financial assets a person must generally contact the company that holds the assets or accounts and inform that company of the person’s desire to transfer ownership of the asset to a trust. Many companies have specific types of accounts to hold assets owned by a trust so that the company follows the proper procedures when there needs to be a change of trustee. In most cases this change is simple, requiring a bit of paperwork and providing the company with proof of the trust’s existence (in the form of a Certification of Trust). Occasionally there will be additional requests for information about the trust because a company has particular record keeping requirements. While these requests are common, no company should need a full copy of a trust in order to allow a transfer of an asset to that trust. If a company does ask for such information it is best to have them communicate with the attorney who drafted the trust to ensure that you privacy is maintained and the company follows the law.

While funding a normal investment account to a trust is simple enough, it is important to remember that retirement accounts (IRA, 401k, 403b, etc.), operates differently and must be funded differently. Since you cannot generally change the ownership of a retirement account without negative tax consequences, you must change the Beneficiary Designation on the account in order to fund it to the trust. For married couples it is usually best to name a spouse as the Primary Beneficiary, because a spouse can “roll over” a retirement account into their own name at the death of the first spouse, and delay taking distributions until they reach age 70½. Naming a trust as a Contingent Beneficiary is often an excellent tactic to minimize the number of people involved in administering assets after death and to potentially create better creditor protection for beneficiaries (we will talk more about this in the future). Ultimately, the decision about whether to fund retirement assets to a trust is one that should be discussed with the attorney who drafted the trust and a trusted financial advisor. These people are best equipped to understand the circumstances and help you make good decisions.

A third major asset that needs to be funded into a trust is real estate. This includes primary residences, vacation property, vacant land, and any other buildings you might own. These transfers are made through the use of deeds that are recorded with the County Register of Deeds. The exact form of deed used may vary by circumstance, but again this is an area of trust funding where an experienced attorney’s assistance can be invaluable. That attorney should not only be able to recommend the proper form of deed, but also prepare the deed so it is ready to sign in conjunction with the estate plan and handle the recording of the document with the county.

There are many different types of property that need to be funded to a trust, so it is impossible to discuss them all here today, but as we have recommended repeatedly in this blog the help of an experienced attorney can be invaluable. If a person only receives a set of documents and brief instructions on the need to fund assets to the trust they are being done a disservice. In those circumstances, people frequently fail to fund to the trust and then probate remains necessary after the person’s death. Trust funding is as important to the estate planning process as the documents. Keep in mind that trust funding is part of the estate planning process. It is ongoing and must be updated as a person acquires new assets to ensure a smooth administration of the trust.

Matt and Al

Irrevocable vs Revocable Trusts, What's the Difference

As we previously discussed, there are different kinds of Trusts that serve different client needs. It is common to have a Living Trust as part of an estate plan because such trusts give the Grantors versatility to adapt their planning as life circumstances change to protect family members and avoid probate. There are other forms of Trusts that provide less flexibility to the Grantor, but they are useful in the right circumstances. Every Living Trust executed as part of an estate plan is revocable (changeable) during lifetime, but at the death of the Grantor becomes an Irrevocable Trust (unchangeable) administered by the Successor Trustee pursuant to the terms set by the Grantor during lifetime. 

This transition from Living to Irrevocable Trust at the death of a Grantor is the most common instance of irrevocable trusts in an estate plan. Generally the terms of the Living Trust provide that at the death of the Grantor no changes may be made to the terms of the trust, and that the successor Trustees have a duty to administer the Trust as a separate legal entity. This duty requires the successor Trustees to apply for a Tax ID number from the IRS, inform the institutions that hold the trust’s assets of the change in status, and provide the Beneficiaries of the trust with sufficient information to allow them to enforce their rights under the trust. The Trustees are charged with following the Grantor’s instructions with respect to administering and distributing assets to trust beneficiaries until the assets of the trust are exhausted or distributed outright to a beneficiary. 

While the “Irrevocable Living Trust” is the most common instance of an irrevocable trust in an estate plan, other forms of irrevocable trusts are available depending upon the need of the client. While clients like the Living Trust because it is changeable, they can control it during lifetime, and they can receive the benefits of the assets in the Living Trust, those benefits can be detrimental in certain tax and printer liability circumstances. Irrevocable trusts are beneficial as part of an estate plan because an irrevocable trust, if properly drafted, is a separate legal entity from the person who created it and therefore is treated differently in a number of respects. If properly drafted, irrevocable trust assets and income are not considered as owned by the Grantor, therefore taxable income is not included in the Grantor’s income nor can creditors up of the Grantor generally reach irrevocable trust assets. The drawbacks of an irrevocable trust generally require that the Grantor cannot be a beneficiary or trustee of an irrevocable trust, prevents the Grantor from changing the terms of the trust and prevents the Grantor from enjoying the benefits of the assets. In addition, income earn by a trust is taxed at a higher rate than that earned by an individual if income is not distributed to beneficiaries.

Even with these downsides, creating an irrevocable trust can address a variety of complex planning circumstances. The Irrevocable Trust can be used to own insurance policies provide cash to pay estate tax on the death of the Grantor, or be used to provide proceeds used to fund a business buyout, while not being includable in the Grantor’s estate. An Irrevocable Trust can also be used to hold funds to care for the needs of children with disabilities and not be subject to the requirement of state agencies that such funds be used in lieu of state funds instead of in addition to any straight funds. A recent change in Michigan law also allows the creation of an irrevocable trust that allows the Grantor to have substantial use of trust assets while shielding those assets from creditors in the event of a lawsuit. These techniques tend to involve individuals with more complex planning situations and significant assets, but can assist in addressing concerns about careers with higher than average liability or to address concerns regarding assets and second marriages. Other sophisticated estate planning strategies also use different types of Irrevocable Trust, but a discussion of these is beyond the scope of this blog.

Care should be taken when considering irrevocable trust strategies because, as with all good planning ideas, some may be taken to a ridiculous and untenable level. While properly executed and administered irrevocable trusts comply with legal provisions, the IRS is always looking for situations where trust are not properly drafted or administered, opening up the client to taxes and penalties Always consult with an attorney experienced in estate planning before signing any documents.

Matt and Al

Exactly What is a Living Trust?

Since restarting the blog we have mentioned Trusts as part of estate planning but have not explained what a Trust is, how it works, and the different types of Trusts. Trusts are a useful tool in assembling an estate plan, and one we frequently recommend for a variety of reasons. Most of the time when discussing Trusts we are referring to Living (also known as Revocable) Trusts. In the context of Trusts, the terms “Living” and “Revocable” both mean that the Grantor (Signer) of the Trust may change the terms of the Trust after it is initially executed. We use Living Trusts in estate planning, because a Grantor can amend or restate their Living Trust as needed when the Grantor’s circumstances change. Under most circumstances, a Grantor can change a Living Trust at any time up to their death, at which time it becomes an Irrevocable Trust and the terms cannot be changed (Irrevocable Trusts are different from Living Trusts in many ways but we will discuss those at a later date when we write a blog on Irrevocable Trusts).

A Living Trust is a written document that establishes a legal entity, similar to a Corporation or L.L.C., which owns property on behalf of a person, which is the Grantor while alive and the Trust Beneficiary after the Grantor has died. The person responsible for managing the property the Trust owns is the Trustee. A simple way to look at a Living Trust is to imagine a large empty bucket that Mr. and Mrs. Jones (the Grantors of the Trust) create by signing the Trust document. The document provides that Mr. and Mrs. Jones are the Grantors of the Trust and name themselves as initial Trustees who get to control what goes into the bucket. As Grantors and Trustees they get to transfer assets into and out of the bucket at any time, and as the beneficiaries of the Trust during their lives they get to use the assets in the bucket however they wish. This collection of circumstances means that there is almost no difference between the Joneses owning the property and the Jones Living Trust owning the property. In both cases, the Joneses can do anything they want with the property.

During their lives the Joneses put all of their property in the bucket, including, homes, bank accounts, investments, and other personal property. They can also provide that assets with beneficiary designations, such as insurance policies and retirement accounts, can designate the Trust as the beneficiary. When the Joneses die, the Trust Document provides detailed instructions of how the assets in the bucket are to be administered. The first instruction is a list of people who can pick up the bucket (the Successor Trustees). The Successor Trustees then pick up the bucket and follow the rest of the Joneses instructions regarding how the property in the bucket is to be distributed.

A major advantage of a Living Trust in the context of estate planning is the ease with which a Successor Trustee can take over the management of the Trust. If you recall from our early posts, when a person owns property at their death, that property must pass through the Probate Court before anyone can do anything with the property. This is not true for a Living Trust, because a Living Trust is not a person and the Probate process only affects individuals. Instead, the named Successor Trustee (or Trustees if more than one person is named to act) sign an affidavit know as a Certification of Trust and present proof that the previous Trustees are unable to act (usually in the form of a Death Certificate). With those two documents, the successor Trustees can take over the administration of the Living Trust.

Now the successor Trustees still have a fiduciary duty to act in the best interests of the Beneficiaries, meaning that the Successor Trustee must administer the Trust in the best interest of the Beneficiaries and never for their own advantage. The successor Trustees need to take control of the Trust's assets, prepare an inventory of those assets, provide notice to creditors, pay outstanding bills, and handle tax related matters, all before making distributions to the Beneficiaries. However, unlike with a Will, a successor Trustee does all of these things without the supervision of the Probate Court.

While this improved ease of administration is great in general, it is even better when dealing with minor Beneficiaries or Beneficiaries suffering from a legal incapacity or financial immaturity. In cases such as this, a Trust allows the Trustee and the Guardians named to care for those Beneficiaries to work together to ensure there are sufficient assets available to care for the Beneficiaries without the need to report to the Probate Court on a regular basis. This eliminates much of the cost of administration and retains more assets for the care of the Beneficiaries. The Trust can also be used to distribute assets over time to those Beneficiaries who do not have the financial maturity or discipline to manage the assets themselves.

We hope that this simple explanation of Living Trusts helps you to understand how a Living Trust can fit into an estate plan. There is a great deal of information that we just cannot fit into a blog that is less than 1,000 words so please check back for further explanation on the subject. Also remember, a Trust is a complex legal document and must be drafted correctly to function as intended. It is always best to consult with an attorney experienced in estate planning before attempting to make use of a Trust, because as with most subjects, you can find as much bad information as good information about the supposed benefits and drawbacks of Trusts.

Matt and Al

Pour-Over Wills 2.0

We’ve discussed how both Wills and Living Trusts can serve as important parts of an estate plan and how a Living Trust acts as a substitute for a Will, eliminating he Probate Court interference. With that knowledge, many clients wonder why they should bother to have a Will at all. In most cases, the inclusion of a Will in an estate plan is a form of insurance to protect against the unexpected.

It is important to remember that a Living Trust allows the avoidance of the Probate court because the Trust owns property instead of the individual, but the Trust does not automatically become the owner of property. Clients need to fund (“transfer”) their assets to the Trust (a process that we will discuss in detail in the coming weeks) in order for the Trustee of the Trust to control the assets. While we work with our clients and their advisors to assist with the funding, occasionally there will be an asset the client fails to fund to their Trust. The Will fills the gap in administering such an asset.

When a person has a Living Trust and still owns assets in their own name at death, the terms of their Will, commonly termed a Pour-Over Will, provides instructions to the Probate Court regarding the distribution of the person’s assets. In this case, the Will instructs the court to distribute all of the person’s assets to the successor Trustee of the person’s Living Trust, ensuring that the Trust remains the vehicle for controlling the final distribution of assets. Having a Will in place to give the Probate court these instructions simplifies the Probate process and assures that a person’s wishes for asset distribution are used instead of the intestate statute under Michigan law.

While Probate is never a desirable option for administering an estate, a Probate using a Pour-Over Will is much better than a Probate without any Will. In the absence of a Will, assets not funded to a Living Trust would be subject to the Michigan intestacy statutes, requiring a formal Probate proceeding and appointment of a Personal Representative who is required to distribute assets directly to the deceased’s heirs at law under the intestacy statute rather than what might be they specific desires of the deceased. In addition to distributing significant amounts of assets to heirs the deceased would not want to benefit, such distributions may be inefficient or undesirable if the heir is a minor or under some form of incapacity and unable to responsibly manage their own affairs. This type of situation could contradict the terms of the deceased’s Living Trust and require the ongoing supervision of a court appointed Conservator for many years.

Even when a client is meticulous with their funding, a Pour-Over Will can protect against the unexpected. The Pour-Over Will ensure that all of a person’s assets, even those they do not know exist, become part of the Trust assets. It also allows assets that only arise after a person’s death, such as the proceeds from a Wrongful Death Lawsuit, to become part of the Trust assets. 

A Pour-Over Will, coupled with a Living Trust, serves as a safety net to an estate plan. It makes sure that the Living Trust remains in control of asset distribution even when circumstances do not go as expected. In this way, it is just one of many forms of protection that make up a properly drafted estate plan designed to ease the difficulty of an already trying time for family and friends. There are other more complex methods of using a Will in conjunction with Trusts but we will discuss such things in future blogs.

Matt and Al

Thankful

We are thankful for the opportunity to make our living with a practice that focuses on helping others achieve their goals and protect their loved ones.
We also thankful for all the people who work with us to make that happen from the staff in our office to the planners, advisors, and other professionals with whom we work.
We hope you have a happy and safe holiday season. We'll be back on Monday with more information on Estate Planning.

Matt and Al

Why You Should Pay Attention to Net Neutrality

Today we are taking a break from estate planning to address another area of law that has been in the news a lot in the past year, Net Neutrality. The goals of the blog have not changed; we are still taking a complex topic and explaining it so that more people understand what Net Neutrality means and why it is important to your lives.

Net Neutrality is the principle that all content on the internet is equally accessible, which means that Internet Service Providers (ISPs) like Verizon, Comcast, and Time Warner Cable cannot favor a particular website over any other website. This has been the case since the inception of the internet. Customers pay an ISP for access to the internet, content providers (like Netflix, Amazon, and niche legal subject blog writers) pay an ISP to create a connection from their content to the internet, and then customers use the connections provided through the ISPs to go wherever they want online. Presently, every service provider, from ESPN.com to Plainly-Legal.com is equally accessible; and the “path” to every website is open and the same size.

In 2015, the Federal Communications Commission (FCC) put in place strong rules that enforced the principle of Net Neutrality, maintaining decades of precedent, and creating an equal opportunity for two attorneys writing about estate planning equal access to anyone online as any other website. These rules prohibited ISPs from blocking websites or giving priority to certain websites. This means that an ISP cannot block their customers from reaching this blog, nor can an ISP redirect their customer to a different website when they attempt to come here. There is broad support for these rules from content providers, business founders, activists, investors, and the typical internet user who just wants to check their email.

On November 21st the FCC announced that it intends to reverse the existing Open Internet Order which protects the principle of Net Neutrality. This announcement comes despite the fact that millions of Americans have contacted the FCC to comment in support of Net Neutrality. Ajit Pai, Chairman of the FCC, has indicated that the opinions of Internet users are of little importance compared to the opinions of ISPs. It is Chairman Pai’s position that the companies who provide access to the internet should have the loudest voice when discussing what rules they should follow. Companies involved in an industry often have a larger voice than customers or users when it comes to the laws and regulations that govern their business, but in the context of ISPs it is especially troubling because many of these companies enjoy effective monopolies or duopolies over their customers. In a normal business environment if you do not agree with the actions of a company you can stop using that company. However, the United States the vast majority of people have two or fewer choices when it comes to access to high-speed internet, and if you do not like your ISP you might have no options if you want to access the internet

So what does all of this mean? It means that unless Congress acts to preserve access to the internet in its current form, the FCC will vote on December 14th to remove current protections for Net Neutrality. We know that these changes will occur because the opinions of the FCC Commissioners are publicly available. If you want to get involved there many resources available. As we noted there are a lot of people in favor of maintaining the internet in its current form. Here are just a few websites that have more information:

Electronic Frontier Foundation

Free Press

Battleforthenet.com

American Civil Liberties Union

Center for Media Justice

We hope that you will take the time to get involved with this important issue and help ensure that the internet will continue to be an open space where all websites, especially blogs on estate planning issues, continue to be available to anyone who wants access to information. 

Matt and Al

Estate Planning as a Process 2.0

We often refer to estate planning as a process, which confuses some people because they think that an estate plan is just a set of documents. The difference between those two philosophies is important because it gets to the core of how planning should work. When many people think of a plan they think about creating a set of instructions for dealing with a situation, with estate planning that means a set of instructions for addressing incapacity and death. The problem with this mindset, at least with respect to estate planning, is it does not address the changes that begin occurring in a person’s life immediately after signing their plan documents. While for some people those changes may be subtle and have little impact on their estate plan, for others it is important to make changes in the plan to address the changes in their lives. This is why estate planning needs to be an ongoing process.

For younger clients changes in employment, location, and relationship status are frequent motivations to update planning. Making sure clients properly fund new assets to Living Trusts is part of the regular review process. Assets to be funded can include everything from investment accounts to real estate, and consideration of beneficiary designations for IRAs, 401(k) accounts and life insurance policies is important. Events such as marriages and births of children require updates in planning to include these new important people as beneficiaries and designees.

As clients get older, the need for updates continues. A client's original designees for assisting in administrating estate planning documents also age and children become more mature. Many clients choose to update their planning to ensure their children are the primary decision makers. If children fail to mature as expected or encounter other problems, changes to distribution provisions allow the estate plan to evolve to protect those children in the event they need additional guidance.

As clients reach retirement, and beyond, regular review of a plan continues to be important to address the changes life brings. From periodically reviewing funding to ensure that all of the assets accumulated throughout life are titled correctly to ensuring that designees have the authority to address the unique challenges that come with aging, estate plan review can catch issues that become more pressing as a client gets older.

As you can see, no matter what stage of life a client may be in presently there are many changes that should cause them to update their planning. If an estate plan is just a set of documents they sign and put in a filing cabinet, those updates may not occur and cause problems in the event of an emergency. When estate planning is a process, where an experienced attorney works with you to review life events and update your plan accordingly, that plan becomes stronger with each review. Even if a review results in no immediate changes, open communication allows the attorney client relationship to grow and makes it easier on all involved to discuss some of the more challenging aspects of estate planning.

With the holiday season approaching and the end of the year on the horizon, now is a good time to take a few minutes to review current planning and reach out to trusted advisors to discuss the need for updates. For those without a current estate plan, it is also a great time to put a plan in place for the first time. No need to wait for a New Year’s Resolution, start the process now.

Matt and Al

Making Choices 2.0

Since relaunching the blog, much of our focus has been on ability for an individual (the Principal) to choose other people (the Designees) to have the ability to make decisions in the event that the Principal becomes incapacitated. For almost every client this gives rise to the question, "who should I choose?" As with all of the decision-making aspects of estate planning, the answer to that question lies with the person who is creating the plan. As advisors and counselors, we can provide some insight into that decision, but ultimately it is one that must be made by the client.

Many of our clients struggle with choosing a single individual to name as a Designee, sometimes out of concern that the responsibility will create too heavy a burden for one person to handle. The good news in these circumstances is it is possible to appoint multiple Designees to work together to serve in any given role. This means that two or more people may be named to work together, either by unanimous consent, by majority rule, or each acting independently, in order to manage the responsibilities of serving under a Power of Attorney, Will, or Trust. While naming multiple Designees is always an option, it may not be the most efficient way of managing affairs, as naming multiple Designees normally requires those individuals to work together to achieve results. Further, with respect Designees named to make medical decisions under a Patient Advocate Designation, we generally recommend that our clients name a single person to serve as the Patient Advocate at any given time, in order to avoid creating a situation where multiple Designees cannot agree on a course of medical treatment, so doctors require that the Probate Court name a Guardian to remove uncertainty. The goal of implementing a Patient Advocate Designation seeks to avoid the Probate Court, not create a situation that requires it.

We make clients aware that they have the freedom to name anyone they desire to serve as a Designee, but all too often clients delay estate planning decisions due to concerns about their Designees. A common worry is someone who is not named will feel disappointment or even anger because of their omission. In those circumstances we find it helpful to remind our clients it is in their own best interest to choose the people that they believe have the capacity to fulfill the responsibilities of the role, especially as it pertains to them. If that means that a single child is named as the primary Designee in all of the documents because the child is more responsible, so be it, because that child has the ability to manage the responsibility. If the person named as the Designee in the Power of Attorney for making legal and financial decisions is different from the Designee in the Patient Advocate Designation for making medical decisions, that too is acceptable because the goal of naming Designees is to have the people best equipped make decisions making those decisions. Ultimately it is important to consider the consequences of naming someone less capable simply to avoid hurt feelings. Under those circumstances most people are able to trust their instincts, name the individuals who will do the best job and have enough peace of mind to set aside the worry that someone not named will be offended.

The bottom line in all of this is that the Designees named in an estate plan are essential to the success of that plan. While it is possible to name multiple individuals to work together, that is not always the most efficient way to administer a plan. The success of the plan is the result of naming the best people for the job. These decisions are not always easy and every planning situation is unique, which is one reason why it is especially useful to work with an attorney experienced in estate planning. That attorney should take the time to assist and guide you through the process of choosing Designees that meet the standard.

Matt and Al

Estate Planning Impact During Life 2.0

In our previous blog, we began unravelling the mystery that is Estate Planning by focusing on what happens when a person dies without a Will. Today’s blog focuses on how an Estate Plan can help avoid problems and complications during lifetime. While planning for an orderly transition at death is a major component of Estate Planning, a person is more likely to become disabled due to injury or illness rather than die, and planning can be critically important for these situations. Today’s blog discusses the “here” component of Estate Planning when someone becomes disabled but does not die.

When we discuss the “here” of Estate Planning we are talking about Powers of Attorney and Patient Advocate Designations that allow a person to designate who will have control of their lives in the event they are unable to control their lives. Each of these documents serves a different role, so it is important to understand what each does, when they work, and who should be named to handle the decision making responsibility. As you continue reading, keep in mind the person who signs and has these documents is known as the Principal and the person named to act on the Principal’s behalf is the Designee.

The Durable Power of Attorney is the document that gives the Designee the authority to make legal and/or financial decisions on behalf of the Principal. While Powers of Attorney can cover a wide variety of circumstances and specific powers, a Durable Power of Attorney for Estate Planning purposes gives much broader authority to make decisions on behalf of the Principal. The word “Durable” in relation to a Power of Attorney means the document is intended to be legally effective even if the Principal becomes incapacitated. Including a Durable Power of Attorney in your Estate Plan provides a tool to loved ones, allowing them a broad spectrum of powers, including, but not limited to, the ability to continue to pay bills, run a business, and even file lawsuits in the event that the Principal become incapacitated.

In the absence of a Durable Power of Attorney, a person wanting to make legal decisions on your behalf must file a Conservatorship Petition in the Probate Court. In addition to dealing with Estate Administration, the Probate Court is responsible for reviewing these petitions, appointing, and supervising those people named to make decisions on behalf of others in the absences of a Power of Attorney. The Probate Court process can be cumbersome and will include multiple hearings, documents, and meetings with attorneys. While it is important that this process exists to assist those who fail to plan, having a Durable Power of Attorney avoids these delays and additional stresses in what is likely already a very stressful time.

The Patient Advocate Designation is similar to a Power of Attorney (and is sometimes called a Medical Power of Attorney or Appointment of Healthcare Surrogate) but this document allows a Designee to make medical decisions on behalf of the Principal in the event the Principal does not have the capacity to make them. A well drafted Patient Advocate Designation grants the authority for the Designee to make a wide variety of decisions, including treatment options in emergency situations and long-term medical decisions such as recovery/rehabilitation alternatives. In the most extreme circumstances, a Patient Advocate Designation also allows the Designee to make decisions regarding end of life care, the so called “pull the plug” decision. These are important and serious powers to grant to another person, which is why we also include a Living Will as part of our Estate Plans. The Living Will (sometimes called an Advanced Medical Directive) articulates a Principal’s desires regarding their care, allowing them to communicate those wishes to their Patient Advocate, even when the Principal is unable to speak.

As the Conservatorship is the Probate Court equivalent of a Power of Attorney, a Guardianship is the Probate Court equivalent of a Patient Advocate Designation. This Probate Court process can determine who has the power to make medical decisions in the event another person cannot make their own decisions, but it is still a much more time consuming and stressful situation, requiring multiple meetings and hearings before decisions can be made. A Patient Advocate Designation ensures that the person you want making decisions about your care can make them promptly without waiting for the Probate Court to weigh in on the matter and select a person the Principal might not otherwise selected.

The Durable Power of Attorney and Patient Advocate Designation are important aspects of the Estate Plan. Choosing a Designee, and a successor Designee if necessary, is an important decision and we strongly recommend that the people chosen to be named in these documents be the people who our clients feel are the most likely to make the decisions that the client would want made. While it is true that many clients worry if children (or parents) will be hurt or offended if they are omitted, but we feel it is better to name those people you feel are able to handle the responsibilities than to include someone who cannot or will not make the decisions that are best for you.

As with much of what we write about, there is a great deal more to this topic. While we strive to provide you with good information, it is important to remember to consult with an attorney experienced in Estate Planning before taking any action in order to avoid potentially expensive mistakes.

Matt and Al

What's the Worst that Can Happen 2.0

"I need to take care of estate planning, but I keep putting it off. 

What's the worst that could happen?"

Estate planning is a mystery for many people, and they do not know where to start to unravel the mystery.  They are not sure what information they need to begin the estate planning process or what questions to ask. People have a vague understanding of what a Will is, and they have heard the terms Living Trust, Patient Advocate Designation or Power of Attorney, but do not understand what those documents do. They get the impression that having an estate plan is a good thing, but never truly understand how that plan can protect them and their loved ones. When those people speak with us, or other attorneys, and begin to learn more about the estate planning process, they are frequently relieved to discover that the process is neither as costly nor as time-consuming as they initially believed. But as they learn the benefits of an estate plan they also become curious about the consequences of not having a plan. Over the next two blogs we will review the consequences of failing to have an estate plan.  We can then move on to discuss the benefits of estate planning and specific strategies for various situations.

First, the good news, it is impossible to die without an estate plan. An estate plan, at its core, is a set of directions regarding the distribution of a person's assets at their death. The Probate Court is the government body responsible for ensuring that a person's directions are carried out. The most common tool for articulating these directions to the Court is a Will. The Will tells the Court who the deceased wants to distribute assets to and who should be responsible for making those distributions (the "Personal Representative" or PR for short). 

When a person dies without a Will, the Probate Court defaults to Michigan's intestacy (legal speak for “dying without a Will”) laws which imposes a distribution plan on that person's assets. This default plan can be sufficient for some people, but in many cases the intestacy laws create unfavorable results because there is no flexibility to distribute other than to “family” members in relatively equal proportions. 

The Probate process, when using the intestacy laws, is lengthy, public and cumbersome because the Probate Court must act as a decision maker and supervisor throughout the whole process. The Probate Court has the responsibility for approving a Personal Representative and then supervising the PR as he or she navigates the process of locating all of the deceased's property, handling claims from creditors, determining who is entitled to distributions, and finally making distributions. Throughout this time there will be multiple hearings, filings, and Orders needed to finally resolve the process and allow the appointed PR to make distributions. 

In a best-case scenario, where all of the heirs are adults, creditors are known, and there are no substantial conflicts among heirs, probate may be completed within 8 to 16 months depending on the efficiency of the PR and the Probate Court. If there are any issues with the estate, the probate process can be ongoing for several years. During that time, each visit to the court will have both a financial and time cost for the estate. In a simple uncontested Probate Court costs are likely to add up to 3 to 5% of the estate's assets. The longer the probate process drags, on the greater the amount of assets consumed by court fees and expenses.

When a person dies with a Will, the Probate Court is still involved in the transfer of asset but unlike an intestacy situation, the Court has clear instructions from the contents of the Will as to whom the deceased wants to serve as the PR and to whom assets are to be distributed. Additionally, through the Will, the deceased can request an informal probate of the estate, which dramatically simplifies the process. The informal probate process limits the number of hearings and filings needed in the event of an uncontested estate. While the Probate Court is still involved in the administration of the estate, the involvement is limited to a more supervisory capacity thus limiting the costs in time and money for the PR and the estate. 

This is only a brief synopsis of the differences between dying with or without a Will, one that does not even begin to address the problems that can arise if everything does not move smoothly. Additionally we have not discussed yet some of the other documents that may make up an estate plan which can simplify the administration and distribution process to eliminate the involvement of the Probate Court completely. Further, today’s post only addresses events after a person dies, estate planning also includes preparing documents, such as Durable Powers of Attorney and Patient Advocate Designations that simplify decision-making in the event that a person becomes incapacitated and cannot make decisions for himself or herself, 

 With all this in mind, it is important to remember that the "worst that could happen" will have very little effect on a person who fails to plan because they will be gone. The cost in time, money, as well as the stress and problems, will all fall on the shoulders of their loved ones, who are already dealing with a loss. The worst that could happen to them is potentially devastating but with some relatively simple planning it is possible to greatly decrease the issues and problems loved ones will need to address. 

Matt and Al

Why You Need an Estate Plan 2.0

Congress is currently engaged in the task of revising tax law, including provisions relating to estate tax. The current proposal calls for raising the estate tax exclusion amount (the threshold over which a person incurs estate tax liability) from the current $5 million per person plus annual cost of living increases to $10 million per person plus annual cost of living increase. Additionally the estate tax would eliminated entirely in 2024. While we am personally skeptical that this is a “middle-class” tax cut, whether the current exclusion is retained, doubled, or entirely eliminated, it will have no effect on the estate planning for 99.98% of taxpayers or our clients. 

Over the last 40 years there has been an overemphasis on trying to avoid estate taxes when talking about estate planning. This has fueled the misconception that estate planning is only for the wealthy who want to control their fortunes from beyond the grave and minimize the amount of taxes their estate might have to pay. The reality is, as the estate tax exclusion has increased over time and eliminated the concern of estate taxes for most people, protecting one’s family and avoiding the state probate process has become much more important. Estate planning creates your blueprint for taking care of your loved ones in those hardest of times after your passing, and taking care of yourself and the ones you love if you are incapacitated because of illness or accident.. 

There are four common documents that make up an estate plan, two of those documents address concerns about the "here" while the other two address what happens in the "hereafter." The "here" refers to a situation where a person becomes incapacitated and unable to make their own decisions while the "hereafter" documents address the administration of assets following a person's death. We will address each briefly in this blog and discuss each and more detailed in future blogs.

The "here" documents include the Durable Power of Attorney and the Patient Advocate Designation, which allow you to appoint others to make decisions for you in the event of sickness or incapacity. This ability is important because it allows a trusted family member or friend to make immediate financial, legal, and medical decisions if you become incapacitated, rather than having to go through a long and costly court process. 

The Durable Power of Attorney names a person who, usually upon your incapacity, has the authority to deal with your financial well-being, including arranging for payment of bills, filing insurance claims and lawsuits, and handling other business matters on your behalf. 

The Patient Advocate Designation appoints a person to make medical decisions on your behalf, up to and including “pull the plug decisions”. Anyone over the age of 18 should have these documents because absent the existence of these documents it becomes necessary to Petition the Probate Court for the authority to make financial, legal, or medical decisions on behalf of another person, this process can be time consuming and cumbersome especially when a loved one needs assistance immediately.

The “hereafter” documents, Wills and Trusts, are documents that serve to enforce your asset distribution wishes after your death. These documents create an organized distribution scheme for your assets that you can modify as your situation and assets change, and if funded properly, can avoid the cost and time delays of probate under state law. The similarities and differences between a Will and a Trust, as well as how they work together, will be discussed in greater detail in future blogs.

At this point, if your answer to any of the following questions is “yes”, you should consider estate planning: 

1. Do you have minor children? A Will and/or a Trust will allow you to name Guardians you are comfortable with to raise you children and ensure that any assets you can pass along to your children are used to their greatest advantage.
2. Do you have assets?  Whether the value of your assets is large or small, a properly drafted estate plan allows you to determine who will receive your assets and under what terms or conditions, rather than having your assets distributed pursuant to a state statute.
3. Do you want to determine who will be able to make legal and medical decisions on your behalf in the event you are incapacitated? Knowing who will make decisions on your behalf is very important because it allows you to guide those people with respect to the decisions you would want them to make. It also eliminates the stressful need to involve the Court when decisions need to be made promptly.

It should be clear that regardless of the size of one’s estate, proper planning is necessary for a number of reasons besides estate tax concerns. An attorney experienced in estate planning can answer your questions and help guide you in preparing a plan that fits your needs, being available to work with you to change your plan as your needs change, and being there to assist and guide your loved ones through those difficult times after your death.

Matt and Alan

Introduction to Plainly Legal 2.0

Estate planning is an area of law that is constantly evolving and adapting to a variety of influencing factors. While the impact of changes in the law are a significant driver of change in estate planning it is important not to underestimate the impact of judicial decisions and development of new technology on the field. Over the course of the last 20 years, we have seen a refinement of the law to address some of the issues that have arisen due to other societal changes during that time, but often it is the responsibility of estate planning professionals and their clients to attempt to resolve situations in the absence of clear statutory guidance. This ongoing evolution is one of the many reasons why we consider estate planning an ongoing process that requires a strong attorney-client relationship built over the course of many years. In the coming days and weeks we will be reviewing and revising many of our previous blog posts in order to update and improve the information contained on our blog and to begin addressing potential changes that could result from Congress's current push to reform the tax code.

We normally encourage our colleagues and clients to review their estate planning as the year comes to a close, this year is no different because, no matter what comes from the legislative efforts in Washington, changes in individual lives generally have a much greater impact on an estate plan than changes in the law. Regular review is essential to confirm that the terms of your estate plan still aligned with your goals for managing your affairs in the event of your incapacity or death. As often as a client contacts us to update a designee or beneficiary in their estate plan, we also hear from clients who need to make significant changes to their estate plan because the goals of their planning have changed over time. We hope that the information we provide to you through the end of the year will prove useful, answering your questions and concerns regarding estate planning and to assisting you in a review of the current state of her planning (or lack thereof).

As you read through our posts, if you find yourself stuck with questions that we have not answered or topics that you would like us to address, please do not hesitate to contact us directly and we will do our best to assist you.

Matt and Alan

Tax Reform "Framework"

     Following in the footsteps of the recently released estimates of the 2018 inflation adjusted exemptions for the Estate and Gift Taxes, yesterday the President unveiled what the White House refers to as a "framework" for tax reform. This framework contains a number of significant proposals, many of which are similar to ideas put forward during the President's campaign including:

• reducing the number of individual income tax brackets from 7 to 3,

• nearly doubling the current standard deduction,

• increasing the child tax credit to an unspecified higher level, 

• significantly reducing the corporate income tax rate, and

• reducing the tax rate on income received from "pass-through" companies (such as LLC's, partnerships, and S-corps).

Also significant in the framework is a renewed effort to reduce individual and corporate tax deductions and repeal the Estate and Gift Tax.

     Economists, pundits, and reporters will have much to say about this effort to reform the tax code, but for our purposes it is important to remember that this framework is essentially a “wish list’ and not a well-defined bill Congress can discuss and pass. The framework omits significant details, including basic, but integral, information such as where the individual bracket thresholds start and stop. While this is clearly a statement of intent regarding how the administration would like to move forward on tax reform, the lack of specifics make it little more than a compilation of common Republican talking points on the subject of tax reform from the last 10 years.

     From our point of view, any discussion of tax reform is an important issue to stay abreast of in order to understand how it will impact our clients planning. The potential repeal of Estate and Gift Taxes reinforces this belief, as any change of that magnitude is likely to create a ripple effect reaching other aspects of the tax code, including whether inheritors receive a step up in basis and the rules regarding the distribution of inherited IRAs. That said, it is our philosophy to keep track of tax proposals but not to spend a significant amount of time gazing into our crystal ball to determine how proposed legislation that may never come to pass will affect our clients.

     Rest assured we will continue to stay abreast of tax proposals and their impact on the planning landscape so that if and when a tax reform proposal becomes law we will be prepared to provide our clients with the expertise necessary to adapt their planning to the changed landscape and ensure that it continues to achieve their goals moving forward.

Alan and Matt