A Tale of Two Documents

As we discussed in previous posts, estate planning addresses more than just post-death planning. Powers of Attorney and Patient Advocate Designations allow a person to choose who has the authority to act on their behalf in the event of incapacity. It is important that all of your estate planning documents are up to date and specifically grant authority to the designee because companies seeking to protect themselves from litigation are reluctant to allow designees to act absent confirmation they are doing so in the Principal’s interest.

Nick and Paul have almost nothing in common except that both were in situations where their loved ones needed to make use of Durable Powers of Attorney in order to manage their affairs. While both families were able to act on behalf of their loved one, their experiences while making use of a Durable Power of Attorney were very different.

While Nick and Paul both had Durable Powers of Attorney, naming people to act on their behalf in the event that they became incapacitated, there were significant differences between these documents. Both men had originally done estate plans in the early 2000's, but only Paul had taken the time to regularly update his documents so that when both were incapacitated in 2015 Paul's Durable Power of Attorney was two years old while the Nick’s had not been updated in nearly 15 years.

Paul's son, who was designated as his father's Attorney-in-Fact had little trouble managing Paul's finances, including ensuring that Paul's home and bank accounts were properly funded to Paul's Living Trust. Paul's updated Durable Power of Attorney contained specific enumerated powers as well as the provisions that exculpated third parties who acted in reliance upon good faith that Paul's son had the authority to act on his father's behalf. Between these specific provisions regarding the powers the Attorney-in-Fact could exercise and the provisions for protection from liability, it was relatively easy to manage Paul's affairs during his incapacity.

Unlike Paul, Nick had not taken steps to ensure that his estate plan was up to date. Since the time Paul executed is Durable Power of Attorney, the person Paul named as his primary Attorney-in-Fact had died and Nick’s son needed to acquire additional documentation in order to prove his authority under his father’s Power of Attorney. In addition, Nick's Power of Attorney lacked significant detail with respect to the powers the Attorney-in-Fact could exercise. Instead of enumerating specific powers, Nick’s Power of Attorney only stated that his Attorney-in-Fact had broad authority to act in Nick's best interests, including a much smaller number of activities than Paul's more up-to-date documents contained.

Contrary to the relative ease with which Paul's son was able to manage his father's affairs, Nick’s son repeatedly needed assistance in establishing that the primary named attorney-in-fact could no longer act, that he had authority to act in his father's behalf with respect to particular activities, and that despite the amount of time which had elapsed since the execution of Nick’s power of attorney, no contradicting document existed. Fortunately we were able to provide sufficient assistance to keep these inconveniences from rising to the level of significantly interfering with Nick's care.

Keeping all estate plan documents up to date so that they reflect the client’s current wishes is important and not just because those wishes may change over time. Ensuring that documents provide sufficient guidance to designees and institutions allows the documents to be used efficiently and effectively when needed. While it is possible to guide designees through these matters, and we are happy to do so, it is much preferable, as with most estate planning, to know that the documents will work as intended and not encounter additional problems while attempting to cope and deal with obviously difficult circumstances.

Matt and Al

Mixer Feelings

While a great deal of an attorney’s responsibility attaches to understanding the law, in the area of estate planning an experienced attorney will also serve as a guide, counselor and mediator, assisting client's designees as they navigate complex family dynamics. It is important to communicate to beneficiaries left behind after a client has died the wishes of the client as laid out in the estate planning documents. While a beneficiary may disagree or be unhappy with the terms of the documents and what has been left for them, it is important that all beneficiaries understand the intent of the client and that arguing against it can cost all parties significant time delays and expense. Despite this process, a may still act against their own best interest and the best interest of the other beneficiaries.

Ramona was a lovely woman who had strong, but different, relationships with her two daughters, Samantha and Tammy. Ramona's relationships with her daughters reflected different hobbies that each enjoyed, and because of differences in Samantha and Tammy’s personalities, Ramona's relationships with her daughters rarely overlapped. Unfortunately, while Samantha and Tammy's different personalities allowed Ramona to enjoy time with each of her daughters, those personality differences also created deep-seated tension between the sisters.

Following Ramona's death, Tammy and Samantha were named as co-trustees to administer their mother's Trust, but unfortunately almost immediately problems began to arise. Shortly after Ramona's death Tammy went to Ramona's home and removed a number of items of personal property. In response, Samantha took steps to secure Ramona's estate planning documents, which led to rapidly escalating retaliatory actions between the women until both realized that they would be unable to continue the administration of their mother's Trust without some sort of mediator. We had represented Ramona in preparing her estate plan and, thankfully, her daughters trusted us to act as impartial arbitrators and guide them through the administration process.

Tammy and Samantha divided the administrative efforts so that their contact would be minimal and for the most part occur using us as intermediaries, which worked well until it came time to address the division of the remaining personal property. This portion of the administration grew increasingly acrimonious as Samantha and Tammy continued to argue. The argument came to a head in our offices where we met with the two women in separate conference rooms and attempted to sort out the cause of their fighting. After much discussion, it became clear that Samantha was particularly incensed by Tammy's initial removal of items from Ramona's house, including a KitchenAid stand mixer. That mixer was a particular sticking point because Samantha knew that Tammy already owned a stand mixer and therefore likely had no need for Ramona's mixer.

When we broached the subject of the mixer with Tammy, she shared with us a number of wonderful memories of her time speaking with her mother and recollected how impressed Ramona always was that the mixer she received as a wedding present held up so well over many decades of use. Tammy indicated that she hoped her mother's mixer would continue to serve her just as well and help her to remember her mother every time she baked. As Tammy shared the story, it became clear that her initial action had not been malicious, but that she never considered how Samantha might feel about the situation. The idea of a compromise began to form and we returned to speak with Samantha.

After confirming that Samantha did not share Tammy's sentimental feelings about the mixer we brought the two women together and asked Tammy to share the memories of baking with Ramona with her sister. After Tammy recounted all the years that she baked with her mother, we were able to work out an arrangement where Samantha received Tammy's mixer, Tammy kept Ramona's mixer, and the two sisters began the process of healing their relationship. While I cannot say that we created lasting peace in our time, we did at least enable the family to effectively administer their loved one's affairs.

While not all conflicts are as simple to resolve as swapping small appliances is important to recognize that often what seemed like insurmountable conflicts have their roots in relatively small transgressions and with proper assistance, it is possible to begin the healing process. An experienced estate planning attorney will do more for the family than prepare documents or go to the Probate Court. They can also help strengthen family bonds in the face of emotional difficulties.

Matt and Al

What are Will Substitutes?

A good estate plan makes the transition of assets desired by the decedent an easy process. Even in the absence of good planning, the Probate Court will attempt to follow the wishes of the deceased if it is possible to establish by clear evidence what the decease wanted to happen. Establishing that by clear evidence, when potential beneficiaries disagree about intent can be very time consuming. 

Jan had two sons, Ken and Luke. Ken has three children, while Luke never married and has no children. While Jan lived comfortably and was generally well organized but never saw the need to work with an attorney to prepare an estate plan. Instead, she made lists of items in her home that she wanted distributed to her sons, daughters-in-law, and grandchildren, and prior to her death wrote a letter to Ken and two of her grandchildren telling them what she wanted to happen to her home and money after she passed away.

While Jan had good relationships with all of her family members, she was particularly close to two of her grandchildren who lived close to her in her later years. These two grandchildren provided helped Jan a great deal so in her letter Jan indicated that, with the exception of the items she listed for each of the other family members to receive from her home, she wanted these two grandchildren to inherit her remaining assets. Following Jan's death, Ken and his family engaged our firm to assist them with the probate of Jan's estate and the enforcement of her wishes.

Since Jan never created a will it was necessary to petition the Probate Court to appoint a Personal Representative (the “PR”) for her estate and to grant that person the authority to follow Jan's wishes. Normally when a decedent lacks a formal Will the intestacy statutes control the appointment of the PR and the distribution of an estate. Michigan law also allows the submission of other writings to the probate court, including letters, as evidence of the decedent’s testamentary intent (their wishes regarding the distribution of assets after their death) for the Court to rule that those writings are to be treated as a "Will Substitute." In our Petition to the Probate Court we included copies of the letters written to Ken and both grandchildren, requesting that the Probate Court appoint Ken as the PR and authorize him to distribute Jan's assets pursuant to the wishes articulated in her letter.

While under the best of circumstances it is possible to establish a document as a Will Substitute with only a single Hearing, in this case the process was complicated by Luke's desire to have his mother's assets distributed pursuant to intestacy statutes. Under the intestacy statutes Ken and Luke, as Jan's surviving children, were entitled to divide Jan's property equally between them. Since the proposed Will Substitute would result in Luke inheriting only a small number of family photos and other personal items he had substantial incentive to question and challenge the use of that document.

As a result, in order achieve the Probate Court’s permission to make distributions pursuant to Jan's letters, we undertook a lengthy process of litigation. This process required a number of hearings and delays in the administration caused by Luke's need to represent himself after the attorney he initially hired to pursue the matter requested the court's permission to stop representing Luke. While self-representation is not uncommon in probate matters, it has the potential to increase significantly the amount of time needed to resolve the matter because the self represented party may not fully understand the actions they need to take but also because in any family conflict the emotions involved may result in parties pursuing a matter well after it is clear that they lack a chance of prevailing.

Fortunately for Jan's grandchildren, Michigan law encourages judges to consider any form of a person's expressed wishes to serve as a Will Substitute. Despite our success in achieving Jan's stated goals, it is important to note that much of the complication here could have been avoided with a small amount of proper planning. While there are few barriers to a disgruntled heir, like Luke, attempting to challenge the validity of a Will or Will Substitute, it is much easier to achieve the desired results with the proper documentation. In those circumstances, being able to present Luke with a Will articulating his mother's wishes likely would have ended his efforts to overturn Jan's wishes with significantly less effort.

Matt and Al

Long Delayed Probate

One of the common complaints about the Probate process is that it takes a long time. This can be true and, even more frustrating for clients, sometimes those delays are not caused by action but rather inaction. Today’s example shows how the process can drag on despite a Personal Representative’s best efforts.

When Donna’s mother, Edith, passed away, Donna hoped that everything related to Edith’s estate would be simple. Edith owned a home and had both a checking and savings account. Edith had also taken the time to write out a simple form Will, leaving everything she owned to Donna, and have this Will witnessed and notarized as required by Michigan law. By any estimation this was to be a simple Probate and we were happy to assist Donna in completing it. Unfortunately, Donna and Edith had one problem-- they had not anticipated, Edith’s son Frank. 

Frank had not been active in his mother’s life and therefore Edith had chosen to make Donna the sole beneficiary and Personal Representative under her Will, leaving nothing to Frank. However because of the rules of Probate administration, Donna was required to give Frank notice of the proceeding, which is where problems began. Under Michigan law, while an informal Probate is favored, any interested party (which includes heirs of the decedent who were excluded under Will) may Petition the Probate court to seek a formal probate. In this matter, Frank filed such a Petition challenging the validity of Edith’s Will. 

When a Probate proceeding becomes formal it means that there must be Hearings before the Probate Judge, and when the Probate court schedules Hearings it does so based on the assigned Judge’s calendar. Unless there are extenuating circumstances, such as a time-sensitive emergency, these hearings are scheduled for a date weeks in the future so that the Parties involved have time to file written information with the Court and give the other Parties involved the required Notice. When Frank caused the informal Probate of Edith’s estate to become a formal proceeding the simple process of administering a relatively small estate transformed into a saga that Donna would not soon forget. 

The first Hearing on the matter was scheduled for six weeks from the date that Frank had filled his Petition challenging the validity of the Will. During the intervening time, we prepared a Response to Frank’s Petition evidencing the proper execution of Edith's Will and provided Frank and the Court with that Response. Three days before the scheduled Hearing we received Notice that Frank had hired an attorney to represent him and this attorney had promptly filed a Motion to Adjourn the scheduled Hearing in order to have time to properly prepare. While inconvenient, this type of request is common in Probate litigation and the Court willingly allowed the delay, moving the Hearing forward four weeks. 

In the next four weeks we attempted to communicate with Frank’s new attorney, but after an initial conversation received no replies. Nothing further was filed with the Court and the day of the scheduled Hearing the attorney did not appear in Court. As a result of the missing attorney, but the presence of Frank in the Court, the Judge further adjourned the Hearing for two weeks and we provided Notice to the Attorney who finally responded to communication indicating that he had never been paid a Retainer Fee by Frank, therefore had stopped working on the matter, and had never filed an Appearance with the court. Frank unfortunately neglected to tell the Court that his attorney had “fired him”. Nearly two weeks later we received another Motion requesting an Adjournment, this time due to Frank’s illness. The matter had not yet grown to the point where the Judge felt that delay was unwarranted and the matter was delayed five more weeks. This five week delay become nine weeks when Donna needed to travel for work and then the Judge was on vacation. 

Thankfully in the interim we were able to convince the Judge to grant Donna limited authority over Edith’s Estate in order to at least maintain the status quo of the property. We had been able to provide Notice to Creditors and prepare an Inventory of the Estate’s assets. All of this was beneficial when 26 weeks later we again appeared at the Probate Court for a Hearing to discover that Frank had a new attorney, retained the prior day, requesting a further delay. Thankfully, by this the Judge was able to see the chain of events, review our Response to Frank’s initial threadbare Petition as well as the additional work done by Donna in her limited capacity, and see through all of Frank’s excuses.. 

Since Parties are entitled to due process in the Court, the Judge could not simply reject Frank’s attorney’s request out of hand, but another Hearing was scheduled for two weeks later with the caveat that no further delays would be granted in the matter. As the Hearing day drew near, we received a phone call from the newest attorney indicating that he intended to withdraw from the representation because Frank had failed to communicate further information to him that would support Frank’s claim that Edith’s Will was invalid. When the day of the Hearing arrived, Frank failed to appear in Court. 

The Judge, after a seven month delay, quickly allowed Frank’s attorney to withdraw from the matter and named Donna as Personal Representative of the Estate. Normally this would be the point where Donna was able to proceed with the remainder of the Administration without further ado, but Frank was unwilling to let the matter drop. Over the course of the following year Frank filed a number of spurious motions with the Court forcing Donna to spend substantial additional time and effort in the administration of her mother’s estate. 

The moral of this story is that in the end the right party triumphed, but that there are more efficient ways of reaching the same result. Had Edith taken the time to speak with an experienced attorney she could have learned about deeds that would transfer her home to Donna automatically at her death and been instructed to name Donna as the beneficiary of her bank accounts. These two actions, which collectively cost almost nothing, would have saved thousands of dollars in fees and hours of time because the assets would then have passed to Donna without having to go through the probate process. This is just one example of how a small amount of planning now can result in huge future savings. 

Matt and Al

Understanding Informal Probate

Our recent blogs have focused on the benefits of estate planning. As we have indicated in the past, even if an individual does not do any of their own planning, there is a default plan under Michigan law that addresses the distribution of assets in the absence of other instruction. While this is only one aspect of the Probate process, it is a good place to start a series of the examples focused how an estate plan, or lack of one, affects post-death administration. 

Alice was the wife of Bill, the mother of Carole and Don, and the grandmother of six loving grandchildren. She stayed active in her later years volunteering with a number of organizations and was well respected in the community. After her husband, Bill, passed away, she became the sole owner of all of their joint assets and never felt the need to do any additional estate planning to address the distribution of her home, bank accounts, and the IRA she rolled-over to her own IRA after Bill’s death. She never saw the need to worry about what would happen after she died. Despite Alice's lack of concern, her estate was valued at more than $500,000.00 and required a fair amount of work.

Since Alice owned all of her assets individually and did not have a Will, it was necessary to open a probate estate in order for Carole and Don to gain the authority to gain access to and manage Alice's assets. Michigan law allows for three forms of probate administration, the small estate affidavit (for states with a total value of under $20,000), the informal probate proceeding (a simplified form of probate requiring more limited involvement of the probate court), and the formal/supervised probate proceeding (used to handle any litigation involving an estate). To administer his mother’s estate, Don retained our firm to assist him with the informal probate process. 

When opening an informal probate proceeding without a Will it is necessary to provide the court with a variety of information, including the identity of all of the decedent’s heirs, the identity of the proposed Personal Representative (as well as any other individuals with equal priority to serve in that role under the law), and a statement that the person applying for the informal probate is unaware of the existence of any Will belonging to the decedent. Don’s application for informal probate requested that the court appoint him as the Personal Representative though he had equal priority under Michigan law with his sister Carole. Upon receiving the Probate Court's appointment and his Letters of Authority Don then had 28 days to inform Carole of his actions. It is at this point in the estate administration process that it is first possible for an “informal” probate to become a “formal” probate. Had Carole chosen to challenge Don's appointment as Personal Representative the Probate Court would hold a Hearing on the matter and the administrative process would, at least temporarily, transition to a formal probate.

Fortunately, Carole and Don have a strong relationship and Carole lived outside of the state, so it made sense to everyone for Don to serve as the Personal Representative negating the need for a more formal probate proceeding. As Personal Representative, Don was then obligated to fulfill certain duties, including informing any known creditors of Alice of her death, publishing a notice to unknown creditors, assembling an inventory of the estate assets and keeping the Court and Carole informed of the status of each of these actions. As he proceeded with his duties, Don also became responsible for paying Alice’s outstanding bills, closing her accounts, and eventually selling her home. After he completed these duties, Don divided the remaining assets equally between himself and Carole as required by the Michigan Intestacy Statutes. Because of the various notice requirements, the minimum time for completion is 6 months and maybe longer depending upon the types of assets in the estate

It is worth noting that not all of Alice’s assets passed through the Probate process. While inventorying Alice’s assets Don learned that Alice had designated beneficiaries of her IRA many years earlier, naming her grandchildren to receive equal shares of that account. This beneficiary designation superseded the intestacy statute because the IRA custodian was contractually obligated to pass the IRA to the grandchildren, and the court had no jurisdiction in that asset. Thankfully, all of Alice’s grandchildren were over the age of 18 so this distribution was able to happen without any additional complication. If any of the grandchildren have been under the age of 18, the Probate Court would have required that a guardianship and conservatorship proceedings be instituted to protect the interests of the minors. This proceeding would have continued until all of the grandchildren reach the age of 18, necessitating annual accountings and hearings with the Probate Court. Consider how the children would have felt if Alice had spent most of her other assets maintaining her lifestyle and the only significant asset was the IRA. Was it really Alice’s intent to essentially “disinherit” her children in favor of her grandchildren?

The probate of Alice’s estate was a relatively simple process without any conflict between heirs, without the discovery of unknown creditors, and without difficulty in distributing assets to heirs. Even with that simplicity it took nearly a year to complete the process. With a little bit of planning on Alice’s part much of the work done by Don could have been significantly simplified and it certainly would have decreased the cost in both attorney’s fees and Don’s time. We recommend that everyone put some form of planning in place, because the value of that planning is worth many times its cost. Keep in mind that estate planning is not a one size fits all process, you should take the time to work with an attorney who will assist you in preparing the plan that is appropriate for your circumstances.

Matt and Al

Other Planned Gifting

While gifting strategies can involve millions of dollars and extensive family businesses, they can also take a much smaller form, allowing parents to make gifts to children to assist in the purchase of a home or other investment opportunities. Coupled with intra-family lending strategies it is even possible to greatly exceed the annual gifting limits.

Eric and Fran have two children, Georgia and Haley, with whom they are very close. Circumstances had led to the daughters, along with their husbands, living a significant distance from Eric and Fran. A significant factor in this situation was the high cost of property near Eric and Fran’s home, keeping the daughters in their young marriages from affording to live closer to their parents. Eric and Fran had done fairly well for themselves and have the flexibility to assist their children, but want to do so in a way that does not completely provide the daughters and their husbands with a handout. 

Through a series of discussions with us, each other, and a realtor, Eric and Fran located a large parcel of land for sale in an area that was centrally located for all three families. They then proposed that if the daughters and their husbands were willing to build a home on the property, Eric and Fran would purchase the land and divide it into three parcels so that the family could all be close together. This land division would take the form of a gift where Eric and Fran would each give each of their daughters and each husband a gift of interest in the land on December 31st and January 1st of the following year. This complex gift allowed Eric and Fran to each give $14,000 of value to each of their daughters ($28,000 from both parents together) plus the same amount to each son-in-law. They then repeated the gift the next day so that within the span of twenty-four hours Eric and Fran had effectively gifted $112,000 in land to each of their children. 

While this initial gift allowed Eric and Fran to bring their family back together, it was only half of the plan they eventually put into place. Once Georgia, Haley, and their husbands owned the land, there was still the matter of building houses. After working with builders and architects to create designs for all three homes, construction was set to commence.  Instead of funding the construction with a standard building loan, Eric and Fran had the means to loan each of their daughters the cost of construction. They did this much like a normal loan, documenting the whole process and including with the loan a mortgage on the property and residence, which insured that Eric and Fran would be repaid, and gave them a priority lien on the property in the event their daughters ever found themselves in financial dire straits. 

A significant benefit of this intra-family loan was the ability for Eric and Fran to use the IRS’s Applicable Federal Rate (AFR) as the interest rate for the loans, instead of using a standard bank rate. While bank rates at the time were relatively low, the AFR for a short-term (under three years) intra-family loan was under 1% annually. This allowed Eric and Fran to establish loans to their daughters that would save the daughters thousands of dollars in interest payments over the lifetime of the loan. The monthly loan payments were amortized over a normal 30-year period with a balloon payment at the end of three years, the intention being that the loans be “refinanced” at the three-year mark to pay the balloon payment and every three years thereafter to continue to take advantage of the very low short-term AFR. 

While all of these steps provided a great benefit to Georgia and Haley, Eric and Fran wanted to build in one more benefit to their daughters (and their sons-in-law). Each year after the creation of the loans, if each couple made all of their required payments on time and in full, Eric and Fran would make additional “gifts” to reduce the principal of the loan. These gifts are always less than the annual exclusion and therefore will never impact the couple’s lifetime exemption. Eric and Fran also like the idea that the future gifts are discretionary (and not guaranteed or required) and that they are not simply handing their daughters money that they will not fully appreciate. If Georgia, Haley, and their husbands follow through with their obligations in full (and Eric and Fran continue to make annual gifts), they will enjoy fully paid off homes in a burgeoning Michigan community in less than ten years, a significant advantage and one that will not incur any gift tax liability for anyone involved. 

We cannot state enough that this and every other strategy we discuss in this blog involve complex planning and should not be attempting without consulting experienced attorneys and other advisors to ensure that expensive errors to not occur. 

Matt and Al

Planning to Address Highly Appreciating Assets

While not applicable to all clients, it is important to recognize that clients in unique financial situations create unique planning opportunities. One more common situation is a client who wishes to limit their possible Gift/Estate Tax liability while retaining control and income from assets that are likely to continue appreciating over the years. Commonly this includes real estate and family owned companies. 

Carl and Debbie opened a dry cleaner in a strip mall many years ago. Since then, they bought the strip mall containing their store, then the gas station on the corner, and then many other pieces of commercial property. They continue to own that original dry cleaners, and many of their children and now grandchildren have worked there to ensure they understood the value of hard work. In addition to growing the assets of the family owned businesses, Carl and Debbie ensured that their family members got good educations and where possible went into careers that bolster the growth of the family business. While still active in some aspects of the family business, Carl and Debbie now are ready to begin stepping back and giving more responsibility to others, but they are not quite ready to relinquish control of the company. Nor are they prepared to reduce the income to which they have become accustomed.

Carl and Debbie have been cautious clients for many years, making sure to limit their liability through judicious use of LLCs for each of their businesses, creating a tree of holding companies that protect them in the event that a tenant or customer should decide to create legal problems at a particular property. A company known as C&D Holdings, LLC (C&D), ultimately owns all of these different entities and Carl and Debbie each own 50% of the Membership Interests (like stock for an LLC) in C&D. Further breaking down the Membership Interest of C&D, the LLC has Voting and Non-Voting Membership Interests, meaning that the owner of the Voting Interests has control of the decision making for the company and the owners of Non-Voting Membership Interests do not get a say in the operations but do have value. C&D has 4% Voting and 96% Non-Voting Membership Interests, with Carl and Debbie owning an equal share of each.

Carl and Debbie are aware that the value of C&D is likely to continue to increase over the coming years, even as they become less active in its operation. Additionally, they want all of their family (five children, twelve grandchildren, and three great-grandchildren) to benefit from their success, even those family members are not directly involved in the operation of C&D. Carl and Debbie also know that they are not ready to retire from the operation of the business, nor have they fully prepared the family members who are active in the operation of C&D for that situation. The generally increasing value of the company, coupled with the desire to continue to receive income from the business creates a situation where it is beneficial to Carl and Debbie to begin gifting part of their Non-Voting Membership Interests in C&D while retaining the Voting Membership Interests.  This allows the value of the company to appreciate in the hands of Carl and Debbie’s heirs and limits the future Estate Tax liability created at their deaths. While these gifts will have an impact on Carl and Debbie’s Gift Tax liability, it is possible to limit that impact through further planning. 

The rules regarding Gift Tax liability are somewhat complex and we addressed them in an earlier blog, so we will let you refresh yourself on those as you choose. For Carl and Debbie’s purposes it is important to know that their goal is to pass as much value to their children using as little of the lifetime exemption as possible. Discounts in the value of C&D’s Membership Interest stem from limitations what the recipients of a gift may do with that property. A major limitation on the gifts is the recipients’ inability to sell their newly received Membership Interest in C&D. The terms of C&D’s Operating Agreement limit the sale of Membership interest to only Carl, Debbie, or their descendants and require the approval of the owners of the Voting Membership Interests to approve any sale. Additionally, the value of the Non-Voting Membership interests is further limited because those Membership Interests do not give the new owners any say in the management of C&D.

These limitations, combined with a valuation of C&D by a qualified appraiser, create a situation where the value of the Membership Interests that Carl and Debbie gift to their family members can be discounted for gift tax purposes reducing the value of the gifts required to be reported. This discount allows them to transfer more of C&D to their family (where it will continue to grow in value) without using up all of the Gift Tax Exclusion. In addition to this discount, Carl and Debbie are also able to take advantage of their ability to each make gifts up to the annual exclusion ($15,000.00 for 2018) without using any of their lifetime exclusion. This has allowed them to each make annual gifts of their Non-voting Membership Interests to their children, grandchildren, and now great-grandchildren over the course of many years. It is important to note that as family members receive the Non-voting Membership Interests, they will share in any income distributions from C&D.

The result of this extensive, complicated, and intricate planning is a process by which Carl and Debbie are transferring ownership but not control of their family business to the next generations. As Carl and Debbie step back from operations, they will be able to transfer the Voting Membership Interests to their children (or grandchildren) who will succeed them at the helm of the business, leaving those individuals with the fiduciary duty to act in the family’s best interest while running the business. 

As always, the strategies discussed in this blog are complex and require a significant invest to implement properly. Improper use of these strategies can be very expensive both due to the tax implications but also with the ability to properly operate a business. Do not attempt these strategies without working with experience professionals. 

Matt and Al

Planning for Charitable Gifts

Many clients wish to provide for their favorite charities in addition to their loved ones. While sometimes charitable giving is as simple as writing checks, with proper planning it is possible to make gifts to loved ones and charities in a manner that insures that each gains the greatest advantage from what they receive. 

As we discussed in our last blog, Arthur and Beth married after re-meeting each other after decades apart while volunteering with a favored charity. Their involvement with this organization continues to be a major part of their lives together and both of them wish to provide for the organization financially after their death. Thankfully, their lives apart resulted in a situation where both Arthur and Beth have the means to continue to save money during their retirement, despite rising costs in their lives, and therefore they should be able to fulfill their charitable inclinations without creating hardship for their surviving spouse. 

Both Arthur and Beth receive pensions from their former employers and this allowed them to delay receiving Social Security benefits and thus increasing the amount they receive from that benefit. Further, each benefited from wise investing after the death of their first spouse, giving them a sizable if not overly large nest egg. On top of these advantages, both Arthur and Beth have IRA accounts that they funded during their working years, and they now draw upon these accounts in the case of emergencies but otherwise only take the Required Minimum Distributions. While not everyone enjoys these advantages, Arthur and Beth were fortunate to have circumstances that allowed them to do so and now can take advantage of other strategies to help achieve their planning goals. 

Despite their financial stability, Arthur and Beth are unlikely to ever have an Estate Tax liability. This is especially true in light of the recent legislation that raises the exemption threshold for each of them to nearly $11 million. There are, however, other taxes that may impact their loved ones as they receive inherited assets; the most prominent of these is Income Tax. While most inherited assets will not have any related income taxation (or at least receive a stepped-up basis to limit potential taxation), when Arthur or Beth’s children receive distributions from an IRA inherited from their parent, those children will incur Income Tax liability at their individual rate on the funds distributed each year. This is a primary reason it is normally advisable to “stretch” inherited IRA distributions over the lifetime of a beneficiary. Arthur and Beth want to take another tactic with their planning, eliminating the potential tax liability and fulfilling a different goal.

Arthur and Beth have decided to name each other as the primary beneficiary of each of their IRAs, so that the survivor of them can roll over the account into their own IRA and continue to have access to those funds if needed after their spouse’s death. Each has then indicated that after the death of their spouse they will name their favored charity as the beneficiary of the remaining IRA assets, allowing those funds to pass to the charity. The benefit here is a substantial gift to a worthy charitable institution and the ability of the charity to take distributions from the IRA without incurring the Income Tax liability that an individual beneficiary would incur. It is worth noting that there are risks to this strategy as Arthur and Beth have structured their plan. 

By naming each other as the primary beneficiary of their IRAs, both Arthur and Beth risk their surviving spouse changing the contingent beneficiary designation from the charity of their choosing to another charity or even to other individuals. Arthur and Beth could avoid this risk by naming the charity as the primary beneficiary but they trust each other and feel it is important that the survivor of them have access to the IRA funds if necessary to address emergencies. It is important to note that this planning works with traditional IRA accounts, but is not generally advisable when dealing with Roth IRAs due to the differing tax consequences. 

As we continue to remind our readers, all of these planning opportunities arise due to working with experienced professionals, attorney, financial planners, and accountants who can guide you to success. None of the examples used in this blog are appropriate for every person and you should not attempt anything you read about here without consulting experts to avoid unanticipated (and costly) results.

Matt and Al

Estate Planning for a Second Marriage

Estate planning is an excellent tool for balancing interests and taking steps to avoid future pitfalls. Nowhere is that more evident than when we assist couple contemplating second marriages with blended families plan for the future.

Arthur and Beth have an interesting story; they met when they were kids and got married as they reached retirement age. Both of them had previous marriages and children, but after years apart, they reunited through the charity work they did in their 60’s after retiring from their original careers. While it took them a while to engage in the estate planning process, they both saw the benefit of an estate plan when it came to achieving their goals.

When Arthur and Beth combined their lives, they did so carefully, not wanting to worry their respective families about sudden changes. This meant that they clearly delineated who paid for what in their marriage, but also helped them to assess their financial situation and evaluate what the other would need in order to continue to live comfortably after one of them passed away. Neither wanted to find themselves unprepared because they had given up some aspect of their independence. This strict organization allowed us to create a plan that allowed each of them to know that the other would be cared and provided for if they were to pass away first and also know that their own children would be the ultimate recipients of their assets.

Mindful of the concerns their children might have of losing their potential inheritance, and aware that Michigan law provides a surviving spouse with specific benefits related to the deceased spouse’s estate, Arthur and Beth negotiated and executed a Prenuptial Agreement that provided that each gave up any rights to the others assets that might be available under Michigan law either in a divorce or at death. They did specifically agree that their respective Living Trusts would contain provisions that benefited a surviving spouse.

Both Arthur and Beth have their own Living Trusts, which are now the owners of the assets they previously owned individually. This means that when either of them passes away, their respective successor Trustee will only control those assets, and the surviving spouse (and his or her family) has no fear that he or she will lose control of their own assets. The two trusts are similar in that they each provide the surviving spouse with the right to receive distributions of the trust’s income and principal sufficient to cover the costs that the deceased spouse had paid during their lifetime. This ensures both Arthur and Beth that the death of their partner will not be more difficult due to a sudden financial change. However, bank accounts and bills are not the only part of Arthur and Beth’s assets that their estate plan addresses.

When they married, Arthur sold his home and moved into to Beth’s condominium. To ensure that if Arthur survives Beth he does not need to immediately look for a new home, we included a provision in Beth’s Living Trust that allows Arthur to continue living in the residence as long as he is alive and pays for a designated portion of the expenses. This benefits Arthur and protects Beth’s children by giving each guaranteed rights regarding the property. Under some circumstances we include a provision that gives the surviving spouse the right to require the Trustee to sell a residence and use a portion of the sale proceeds to purchase a new residence (in the name of the Trust) if the surviving spouse wishes to move. Arthur and Beth did not opt for this level of complexity in their planning, knowing that if Arthur choose to move he had sufficient assets from the sale of his home when they married.

When dealing with blended families it is also worth noting that the selection of Trustees and other designees may become more difficult, with children feeling slighted if parents omit them in favor of second spouses or the other spouse’s children. This situation often gives rise to distrust and insecurity, which can threaten the implementation of even the best planning. To address these concerns with Arthur and Beth we took an approach that provided everyone with a bit of responsibility and accountability.

During their lifetimes Arthur and Beth named each other as Co-Trustees of their respective trusts, making it clear to their children that they had the utmost trust in their new partners. After the death of either of them, the surviving spouse will serve as a Co-Trustee with one of the deceased spouse’s children, but in the event that there is a disagreement between the surviving spouse and their Co-Trustee, the spouse retains the authority to act without the Co-Trustee’s consent. This allows the deceased spouse’s children to have a hand in the management of their parent’s trust and have insight into the use of the funds that will eventually pass to them, but does not overly burden the surviving spouse by requiring them to “beg” their late spouse’s children for funds.

Arthur and Beth provide good insight into a blended family that works well together and in the end is likely to implement their planning with little trouble. They also are an example of how with proper planning it is possible to provide for loved ones and charities in a more advantageous manner. Our next blog will address this aspect of their planning in detail but as you can see, the insight of experienced professionals can be the difference between peace and quiet and war and peace when it comes time to administer an estate plan.

Matt and Al

Planning for the Here

While much of the focus of an estate plan is on the hereafter, it is important to remember that a Living Trust, Durable Power of Attorney, and Patient Advocate Designation make up parts of the “here” planning as well. When a client begins to reach a point where they cannot manage all of their own affairs, those documents become the workhorses, helping loved ones assist in their care.

Ursula was a strong independent woman who had lived nearly thirty years after the death of her husband without ever considering remarriage. She had two grown children, Vivian and Walter, and three grandchildren, lived alone in the house she and her late husband had built nearly fifty years earlier, and was generally healthy. However, as happens to everyone, time eventually began to catch up with Ursula and it became more difficult to handle her own affairs.

First, she stopped driving at night, then limited her driving distance, but eventually Ursula admitted that it was no longer safe for her to drive at all. With this admission began the discussion of whether living alone was still a good choice but Ursula was not interested in selling her home, so Vivian and Walter did not press the issue. Vivian lived relatively nearby and did not work fulltime, so she was able to assist her mother when needed. The grandchildren also served as drivers when necessary.

As these changes began happening on a daily activity level, we became involved to update Ursula’s planning. We discussed the various parts of the estate plan and reminded Ursula of why she had the documents in the first place and, following those discussions, we helped her make some changes to her plan.

First, Ursula decided that it made sense to make Vivian an immediate Co-Trustee with herself to ensure that, if necessary, Vivian could manage any of the Living Trust’s assets in the event that Ursula was unable to act or simply did not want to deal with investment decisions and banking transactions. We also updated Ursula’s Power of Attorney to make it immediately active and named Vivian to act under that document for the same reasons. While Vivian (and Walter as the successor designee under both documents) had no desire to run their mother’s life, all the parties involve recognized that a time could come when it was easier on Ursula for someone else to act in her stead, and at her direction. Everyone involved recognized that Ursula was still in control and that any action taken by Vivian must be in Ursula’s best interest. This is not to say that Vivian could not take an action that benefited herself if Ursula so directed, but we did stress the importance of Vivian’s fiduciary duty to Ursula.

As time went on, circumstances did eventually arise where Vivian needed to act on her mother’s behalf, initially simply because Ursula did not want to be bothered, but later in order to manage affairs as Ursula developed additional health issues that limited her mobility. The documents prepared allowed Vivian to organize and simplify all of Ursula’s finances, consolidating her multiple bank accounts into a single account. As Ursula consented to moving to a senior living community, Vivian was able to sign documents for Ursula’s new apartment and handling the closing on the sale of Ursula’s home (she was delighted that one of her grandchildren purchased it). All of these transactions took place at arm’s length to ensure that there was no question that Vivian was acting in her mother’s best interest, and had the family dynamic been different additional documentation could have been provided to assure Walter that his sister was acting in their mother’s best interest.

In the end, due to the years of serving as Co-Trustee with her mother, when the time came for Vivian to administer the Living Trust after her mother’s death the process was simple, requiring little more than the writing of a few checks and the closing of a bank account. Nevertheless, this simplicity was borne from good planning; planning that gave Ursula piece of mind and made her later years less stressful. This is the result of good, ongoing communication with experienced professionals. Had nothing been done with Ursula’s planning as her life began to change, her later years would have been more difficult for Vivian and Walter. Always be aware that your estate plan is more than just a set of documents to be used after your death. Your estate plan is part of a process that needs regular updating to ensure that it still meets your current needs.

Matt and Al

Planning for Business Owners

In our previous blog we touched on how planning for clients with a variety of assets can be more challenging, or at least provide the opportunity to make use of more interesting planning strategies. One situation where this is especially common is when the client owns a family business. When that is the case, the relationship between the business and the beneficiaries is a lynchpin in the planning.

Michael and Nancy own a series of businesses, originally inherited from Nancy’s parents and then expanded, that over the years have allowed them to provide very well for their three children Oliver, Pam, and Quinn. All three children are now adults with children of their own, and Michael and Nancy have assisted them with funding their grandchildren’s college costs. Pam is very active in the family businesses, ready to step in and take over control whenever her father is ready to retire. While Oliver and Quinn are not involved in the businesses, Oliver has become a successful CPA and is doing well on his own. Quinn on the other hand has struggled to find her way in the world. A recent divorce has left her in a precarious financial and personal situation.

Adding to the complexity of planning for Michael and Nancy is that a section of their business is very reliant on the work on a particular key employee without whom that portion of the business is likely to suffer. The employee also has expressed interest in owning part of the business. While the complexity of this situation cannot be explained in the confines of our normal word limits we will summarize how proper estate planning can be used to ensure that Michael and Nancy can provide for Oliver, Pam, and Quinn equally, address concerns about differing financial states, and avoid creating a competitor.

First, it is important to note that much of the planning for Michael and Nancy’s situation revolves around the use of a document called a Buy-Sell Agreement (Buy Sell). This document creates an obligation for the owners of a business to sell and a particular party to buy the business under certain predetermined circumstances. The Buy Sell will establish the triggering events (often Death, Incapacity, and/or Retirement of the seller), the sale price (or at least how that price will be determined), and the terms for paying the sale price. Depending on the relationship between the buyers and sellers, there may be a life insurance component to the Buy Sell that guarantees there will be funds for some, if not all, of the purchase price.

For Michael and Nancy we used two different Buy Sells to achieve their goals, one with their daughter Pam and one with their key employee. For the key employee the Buy Sell granted an initial sense of ownership in the part of the business in which he was involved, and guaranteed him the right to buy out that portion of the business when Michael and Nancy retired or passed away. The Buy Sell even included incentives to encourage the key employee to improve the business while Michael and Nancy remained the owners, increasing profits in the near term without significantly increasing the final purchase price. This Buy Sell was part of the planning to create sufficient liquid assets to allow Michael and Nancy to make Pam the sole owner of the remainder of the family business while still having assets to leave to Quinn and Oliver.

In addition to the funds from their key employee’s Buy Sell, Michael and Nancy created a Buy Sell with Pam which controlled the transfer of the majority of the remaining family business assets. Michael and Nancy funded this Buy Sell with the proceeds of a Second to Die Life Insurance policy on Michael and Nancy’s lives that provides the business with the funds to buy Michael and Nancy’s interest in the company from their Living Trust, leaving the Trust with liquid assets to distribute to Oliver and Quinn. In lieu of those liquid assets, Pam will receive her parent’s voting interest in the company, giving her complete control of that asset.

Since the liquid assets for Oliver and Quinn will pass through Michael and Nancy’s Living Trust, they were able to provide their Trustee with the discretion to hold distributions to Quinn in trust in the event the Trustee deemed that she needed additional assistance with the large influx of money. While this creates a situation fraught with potential problems because Michael and Nancy named Oliver as the first successor Trustee, the family dynamic between Oliver and his “baby sister” is strong and Michael and Nancy are comfortable with the situation.
This example touches on the simplest use of a Buy Sell and does not address many of the other strategies available to business owners for transferring wealth to their beneficiaries but clearly, the complexity of even this simple plan requires the involvement of other experienced professionals. As always, do not attempt to implement the strategies you read about here without consulting an attorney experienced in the estate planning field.

Matt and Al

Planning for the Generations

In the previous blog we mentioned that our client, Edna, contemplated leaving gifts to her grandchildren that they would not receive outright until they reached retirement age. While Edna opted against this gifting option, other clients have seen value in restricting the distribution of gifts until beneficiaries attain physical, if not mental, maturity.

Harold is in his seventies and while he is now retired, he enjoys his time because he has significant investment income in addition to his Social Security. Harold’s investment income is sufficient to allow him the luxury of only taking the minimum distributions required by law from his IRA, allowing that account to continue to grow tax-deferred. Presuming that nothing changes, Harold will have the opportunity to provide for his loved ones after his death in a variety of ways.

Harold outlived two wives but was close with his own children, Isaac and Janice, as well as his stepchildren, Karen and Luke. While he wants to treat all four children equally, he recognizes that Luke has issues managing money, as evidenced by a recent bankruptcy. Additionally, Harold wants to provide for his grandchildren, but sees that each of them is at a different point in their lives and therefore it might not be appropriate to make gifts to them in the same manner. This sort of complex family situation is ideal for a Living Trust, because the Grantor (Harold) can divide assets as he sees fit and the successor Trustee has the responsibility of dispersing assets in the manner Harold chose.

In this case, Harold chose to divide the majority of his assets into four equal shares for the benefit of Isaac, Janice, Karen, and Luke. While the value of each of these shares is to be equal, the terms of distribution are not. Isaac, Janice, and Karen are to receive their shares over the course of five years, with the Trustee having the discretion to make distributions for their health, maintenance, or support if circumstances warrant. Luke’s share, in light of his ongoing bankruptcy, is to be held in trust with the Trustee having the authority to make distributions for Luke’s benefit, but not to distribute funds directly to Luke.

This difference in distribution terms will help to protect any inheritance Luke receives from garnishment by his bankruptcy proceeding, while still allowing Luke to benefit from the funds. Harold has provided that upon reaching age 65, Luke may receive whatever remains of his Trust outright. This additional restriction, lasting long beyond the current bankruptcy, helps ensure that as Luke gets older there will be  funds available for him in retirement. Due to the value of Harold’s trust, it is likely that there will be funds remaining at this time and Harold hopes that by 65 Luke will have the maturity to handle his own affairs.

To address Harold’s desire to provide for his grandchildren we established a separate “IRA Trust” that does not contain any assets during Harold’s lifetime, but the IRA Trust is named, in very specific fashion, as the beneficiary of Harold’s sizable IRA. The IRA specifically names sub-trusts created under the terms of the IRA Trust, each for the benefit of a particular grandchild, as a beneficiary. This designation, along with other terms that allow the IRA trust to comply with the law and regulations, allows the IRA Trust to serve as the beneficiary of the shares of Harold’s IRA while still using the separate ages of Harold’s grandchildren as the measuring ages for making the minimum distributions required under the law. As a result, each of Harold’s grandchildren, ranging in age from 30 to 12, will be treated slightly differently but all of them will benefit more from Harold’s IRA than if the IRA Trust did not exist.

First, the IRA Trust allows the Trustee to manage the assets and comply with laws, leaving the beneficiaries free to enjoy the boon from their grandfather. The IRA Trust also prevents a beneficiary from electing to take a large distribution from their inherited IRA without fully appreciating the consequences of that action. Finally, because the IRA Trust allows each beneficiary’s age to act as the measuring age for their required minimum distributions, the younger beneficiaries do not need to withdraw more funds in a year than necessary. This benefits the younger grandchildren by allowing more funds to grow tax deferred until age 65 when Harold has decided that his grandchildren will gain complete access to the funds.

Clearly, this level of complexity is not necessary for all clients but many clients like the idea of using particular assets to benefit certain beneficiaries and often there is a benefit to doing so in order to gain either tax savings or increased growth potential. The complexity of Harold’s plan is something that people should not attempt without consulting financial planners and attorneys experienced in complex estate planning as even simple errors in implementation may be very costly when it comes time to execute the plan.

Matt and Al

The Right Plan for Senior Clients

While there are some aspects of estate planning that feature more prominently when dealing with an older client, it is important to remember that each client is unique and that their needs must be addressed on a case by case basis. There is no one size fits all package of estate planning documents that is right for every client and while there are many proactive strategies that an older client may employ, much of that planning is designed to address specific circumstances which never come to pass.

Edna and Frank were married for many years but never considered estate planning. Frank passed away in his mid-eighties and Edna discovered that many of her preconceived notions about how she and Frank owned property were mistaken. We assisted Edna through the probate process and ensured the transfer of her home and a large savings account from Frank’s name alone to her control and ownership. After consolidating that savings account with her primary bank accounts, we began assisting Edna with her own planning to ensure that her children, Brian and Gail, did not have to deal with the stress and difficulties of probate when Edna passed.

Edna’s financial situation was relatively common for a woman of her age. She owned her home free of any mortgage, she had checking and savings accounts, and she owned a number of CDs. She was receiving Social Security, a pension from her work as a teacher, and a smaller survivor’s pension from Frank’s employer. This income allowed Edna to break even with her yearly expenses, but she and Frank were good savers so when Edna needed additional funds she could dip into the savings account.

At first it made sense, due to her uncomplicated circumstances, to keep Edna’s planning simple. We prepared a basic Will to make certain that in the event any assets needed to pass through Probate the court had clear instructions. We then assisted Edna with naming Brian and Gail as the Transfer on Death Beneficiaries of her bank accounts and prepared a Quit Claim Deed with a Reserved Life Estate (commonly called a Ladybird Deed) that allowed Edna to own her home during her lifetime but automatically pass ownership of the property to Brian and Gail at her death. The goal of the plan was to avoid Probate to the extent possible, but to prepare for unexpected circumstance.

Those unexpected circumstances did arise, though not in the way we anticipated. In the years following our work with Edna, her health took a turn for the worse and she was no longer able to maintain her home or safely live alone. Rather than move into an assisted living community, Edna moved in with Brian and his family. This allowed her the ability to sell her home, which had appreciated nicely, and suddenly Edna found herself to have significantly more assets than she realized.

Not wanting to be a burden on Brian and his family, Edna insisted on paying some amount of room and board. In order to avoid any later question of propriety we prepared a simple Rent Agreement detailing what Edna would pay Brian each month. We also prepared a Care Agreement, supported by a doctor’s recommendation, detailing the care that Gail provided to her mother, in exchange for compensation. This planning is useful in avoiding later arguments and addressing issues related to Medicaid that could arise under similar circumstances.

In addition to these agreements, Edna wanted to use some of the proceeds to the sale of her home to help her grandchildren. While initially Edna considered a more complex plan involving holding assets in trust for each of her five grandchildren until they reached retirement age, through lengthy discussions of the merits of the options Edna eventually invested the funds in §529 plans to assist the grandchildren with college costs.

Edna’s situation is an example of how an estate plan does not need a Living Trust to be successful and gives some insight into how a trust could become part of a simpler plan. Had Edna decided to delay distribution of the gifts for her grandchildren until they retired, it would require the creation of trusts to administer those funds for more than forty years. While this is certainly an option that was available, if Edna wanted to make use of it, the simplicity and more immediate benefit of a §529 plan made more sense under the circumstances.

An estate plan should reflect the client’s circumstances and not take a one-size fits all approach. It should take into account what types of assets the client has, not just net worth, to make a plan that works best for the client and their family. Had Edna owned assets that were more diverse or had other major concerns, different planning would be appropriate, but under the circumstances a Will and proper beneficiary designations served to address her needs. This is the benefit of working with experienced attorneys can provide. They have the knowledge to make recommendations that meet your needs without establishing unnecessary complicated plans.

Matt and Al

Estate Planning that Grows with the Family

Since restarting the blog, we focused on the basics of estate planning with an emphasis on how the documents work. Our next few blogs will focus on the how having an estate plan can be a benefit under a variety of circumstance. All of these examples come from our work, though we have changed the details to protect attorney-client privilege.

As part of an estate plan, a Living Trust provides substantial flexibility to evolve over the lifetime of a client. Take for example Amy and Brian who began working with us shortly after they had their first child Cassie. At that time, both Amy and Brian were young adults with no particular health concerns, so their initial estate plan addressed what would happen to Cassie if Amy and Brian both died. We designed a plan to take into account the next 3-5 years, as in that time it was likely that Amy and Brian’s lives would continue to change.

We drafted Wills for Amy and Brian, primarily to Appoint Guardians that ensured Amy and Brian chose who would raise their child in the event of their deaths. We also established a Living Trust that contained broad general authority for a successor Trustee to provide for Cassie’s financial well-being in the event of Amy and Brian’s death. The Living Trust also contained provisions for distributing any remaining Trust funds  to Cassie when she reached age 25. Finally, we worked with Amy and Brian to “fund” their Living Trust making sure that their home, bank accounts, and mutual fund accounts were all owned by the Living Trust.  We also made sure that their life insurance and retirement accounts named the Living Trust as a beneficiary. This funding ensures that in the event of Amy and Brian’s deaths the Trustee would control all of their assets without any probate.

This “simple” plan ensured that the Probate Court would have no part in administering Amy and Brian’s assets, that Cassie (and her Guardians) would have funds to provide for her care, and that upon reaching age 25 Cassie would receive the remainder of her inheritance outright and free of trust. While this plan did not consider  every possible contingency, it did create a groundwork for protecting Cassie in the event of Amy and Brian’s unexpected deaths and built in Trustee flexibility. The plan also created the groundwork for more expansive planning as Amy and Brian’s lives changed.

Over the next fifteen years, Amy and Brian’s lives changed substantially. Three years after our initial meeting Cassie got a little brother, David, five years after our initial meeting Amy and Brian bought a new home, and ten years later Brian’s mother Edna moved in with Amy and Brian after the death of her husband. As these changes occurred in Amy and Brian’s lives we assisted them in making small changes (to ensure that assets were split between Cassie and David), kept funding up to date (by making the Living Trust the owner of their new home), and made significant changes to their trust to address their role as caregivers for Edna.

Throughout the years, we amended or restated Amy and Brian’s initial Living Trust, making the desired changes without needing to re-fund all of their assets. We additionally were able assist them in adding assets to their Living Trust as they acquired those assets over the years. Had it been necessary, we could also have changed the people named as successor Trustees or Guardians.

It has now been twenty-five years since we began working with Amy and Brian, their children are adults, and as we review their planning they continue to have options. We always hope that our client’s families thrive without problems, but if Cassie or David appeared to have risk factors that a sudden influx of wealth could exacerbate, Amy and Brian could adjust the distribution terms of the Living Trust to allow their successor Trustees more authority over funds. As it is, Cassie and David have done well for themselves and in their most recent documents Amy and Brian decided to name their children as their successor Trustees and distribute all of their inheritance to them immediately.

This example of a “simple” plan that evolves through a client’s lifetime demonstrates the flexibility of estate planning to adapt to changing circumstances. Over the next few blogs, we will lay out how a Living Trust can protect clients and their loved ones over more complex circumstances. We implore you to remember our warning that a Living Trust is a complex legal document and it is important that you work with an experienced attorney and not attempt to DIY a document designed to protect your family’s future.

Matt and Al