Planning Ahead for an Unexpected Event

     A short time ago a client of mine passed away unexpectedly. A few days after the memorial service I got a panicked call from his widow who said, "I am sitting in the middle of a circle of papers and documents, I have no idea what to do, or how I am supposed to pay the bills!" 

     While this couple saved, invested well, and kept their estate planning documents up to date, he handled the financial issues and never communicated to his wife where anything was or how to handle the day-to-day financial obligations. I calmed her, assured her that because of their good savings and spending habits she would have no financial issues, and then set an appointment to meet with her and her financial planner to explain to her the extent of her assets and her ability to access them.

     This got me to thinking about preparing for the unexpected and how some clients do a good job of this and some do not. A little preparation can save family members much time and stress at a time when they are already grieving. It is a good idea for both spouses to be familiar with monthly bills and how they handled, and where investment accounts are and how they can be accessed.

     Over the years, to help our clients with this preparation, we have built a list of information we have found useful or important to know when a loved one passes away. This list, or at least its location, should be shared with spouses and children, and updated regularly. 

     We included our list at the end of this post, please feel free to use it and add to it were necessary. Also, feel free to let us know if there is other important information that you feel we should include on the list.   

     It is also a perfect opportunity to remind everybody to "live life to its fullest, but plan for the unexpected.” The planning is obviously more important for those left behind.

Inventory and Location of Legal Documents:

Will:______________________________________________________________

Trust:_____________________________________________________________

Power of Attorney:__________________________________________________

Living Will:_________________________________________________________

Patient Advocate Designation:_________________________________________

Important Contact Numbers:

Attorney:__________________________________________________________

Accountant:________________________________________________________

Broker:____________________________________________________________

Financial Planner:___________________________________________________

Life Insurance Agent:________________________________________________

Property Insurance Agent:____________________________________________

Doctors:___________________________________________________________

Spiritual Leader:____________________________________________________

Funeral/Burial Arrangements Desired

__________________________________________________________________

__________________________________________________________________

Close Family and Friends to Notify

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

Location of Assets

Deeds to property:___________________________________________________

Bank Accounts and PIN #s:___________________________________________

__________________________________________________________________

__________________________________________________________________

Brokerage Accounts #s and Passwords or PINs:___________________________

Certificates of Deposit:_______________________________________________

Mortgages:________________________________________________________

Safety Deposit Box Location:__________________________________________

Retirement Plans and IRAS:___________________________________________

Annuities:__________________________________________________________

Life Insurance Policies and Beneficiary Designations:

__________________________________________________________________

__________________________________________________________________

Vehicle Titles:______________________________________________________

Collectibles:________________________________________________________

Stock Certificates:___________________________________________________

Service Providers

Gas:______________________________________________________________

Electric:___________________________________________________________

Cable:____________________________________________________________

Internet:___________________________________________________________

Landscaping:_______________________________________________________

Telephone:_________________________________________________________

Newspapers/Magazines:______________________________________________

Plumber:__________________________________________________________

Heating and Cooling:_________________________________________________

Electrician:_________________________________________________________

Handyman:________________________________________________________

Important Passwords

Computer:_________________________________________________________

Email:____________________________________________________________

Router:____________________________________________________________

Creditors

Mortgages on Real Estate:____________________________________________

Other Borrowing:____________________________________________________

Credit Cards to Pay and Cancel:_______________________________________

__________________________________________________________________

__________________________________________________________________ 

The Unexpected Results of Probate Distributions

Last week’s blog discussed the process of probating an estate. This week we will continue that theme and discuss the distribution of an estate when the decedent has and has not left a Will. Later this week we will continue discussing estate administration with a look at the benefits of establishing a buy sell agreement for clients with interests in small (and not so small) businesses.

     As we previously discussed, the probate process can be both lengthy and expensive, but eventually the appointed personal representative is able to make distributions from the estate to the designated beneficiaries. If the decedent left a Will, those beneficiaries are the people named in the Will. If the decedent died without a Will, then state law dictates the distribution of the estate.

     After giving effect to the statutory allowances that we discussed in last week's blog, the personal representative first makes distributions to the decedent's surviving spouse. The size of the share distributed to the surviving spouse depends on the decedent’s other surviving relatives. The spouse is entitled to:

• The entire intestate estate if no descendant (child or grandchild) or parent of the decedent survives the decedent.
• The first $150,000.00, plus 1/2 of any balance of the intestate estate, if all of the decedent's surviving descendants are also descendants of the surviving spouse and there is no other descendant of the surviving spouse who survives the decedent.
• The first $150,000.00, plus 3/4 of any balance of the intestate estate, if no descendant of the decedent survives the decedent, but a parent of the decedent survives the decedent.
• The first $150,000.00, plus 1/2 of any balance of the intestate estate, if all of the decedent's surviving descendants are also descendants of the surviving spouse and the surviving spouse has 1 or more surviving descendants who are not descendants of the decedent.
• The first $150,000.00, plus 1/2 of any balance of the intestate estate, if 1 or more, but not all, of the decedent's surviving descendants are not descendants of the surviving spouse.
• The first $100,000.00, plus 1/2 of any balance of the intestate estate, if none of the decedent's surviving descendants are descendants of the surviving spouse.

For individuals with estates under $150,000.00, the law provides the surviving spouse is entitled to all of the assets. However, for larger estates, the intestate distribution statutes may result in distributions, to parents or children, which the decedent would not have intended.

     Speaking of unintended distributions to children, it is important to note that if an asset in the probate process passes to a minor child, that asset must be held in trust until the minor child reaches age 18, at which point the child, whether mature enough or not, receives the remainder of that asset outright and free of trust. In addition to the potential problem of providing a lump sum of money to an 18-year-old, the probate court requires that the personal representative provide an annual accounting of those assets to the court until the child turns 18. As with every other aspect of the probate process filing these accountings takes more of the personal representative’s time and has a financial cost.

     Clearly, there are potential problems that arise when a decedent does not have a Will. Some of these, such as unintended distributions to parents or children as opposed to the surviving spouse, and large distributions to children upon reaching age 18, may be avoided by executing a. However, other problems such as the financial costs and reporting burdens exist as long as the Probate Court remains involved in the administration of an estate.

     As we have advocated in our writings on this blog and in our practice, clients can avoid almost all of these issues through proper planning and the use of a Living Trust. The Living Trust ensures that the decedent’s decisions govern the distribution of their assets and does not rely on a one size fits all approach that can result in unanticipated consequences. Additionally, because a Living Trust is a private agreement there is no involvement of the probate court, which can expose the decedent's assets and distribution decisions to public scrutiny. Furthermore, the Trust's private nature allows for greater ease in making distributions following death and avoids the costs associated with long-term administration of an estate through the Probate Court if the client desires to hold assets in trust until such time as their beneficiaries can handle those assets responsibly.

     Keep in mind that each individual's needs are different and estate planning should not become a one size fits all commodity. It is important for clients to meet with experienced experts in planning fields and discuss their desires regarding assets after their death so that the client can receive advice best suited to their particular situation.

Introduction to Probating an Estate

As we discussed last week, the death of a loved one can be very trying. In addition to the emotional weight of the loss, survivors must also contend with the burdens of administering the decedent’s estate. 

     The first step in administering the estate is determining whether there are any assets that must pass through the Probate process. Under Michigan Law, any assets owned by the decedent alone, as well as IRAs and life insurance policies without valid beneficiary designations, must go through the probate process before passing to their new owners. The probate process can be lengthy and is very public. The probate is opened in the county in which the decedent resided at the time of death and a personal representative is named to administer the estate. Unless the decedent executed a Will naming a person to act as personal representative, the Probate Court will appoint someone to that role. Upon appointment, the personal representative receives "letters of authority" which gives them the power to act on behalf of the estate. 

     The personal representative is charged with gathering all of the assets of the estate and protecting them, which includes covering assets with insurance where appropriate, maintaining assets such as real estate, and protecting any other valuables. The personal representative must value the assets in order to file an inventory and regular accountings with the probate court, showing what is being done.

     The personal representative also has a duty to notify all actual creditors and potential creditors of the estate. Once notice is given, the creditors have four months to file a claim against the estate. The personal representative must then determine which claims are valid and then pay those claims, as well as any expenses or obligations of the administration of the estate. 

     The personal representative must also determine the beneficiaries of the estate, either by looking at the terms of the Will or, if there is no will, the state intestacy statute. The beneficiaries must be given information regarding the assets of the estate and their entitlement.

     The Michigan the Estates and Protected Individuals Code ("EPIC") provides for three allowances for either a surviving spouse or surviving children. These allowances take priority over other claims against the estate, except for administration costs and expenses and reasonable funeral and burial expenses:

• Homestead Allowance: The surviving spouse or surviving children are entitled to a Homestead allowance of $15,000, adjusted for inflation. This allowance ensures that surviving family has sufficient funds to pay housing and utility costs. This allowance has priority over all successive allowances.
• Family Allowance: During the period of probate administration, the surviving spouse and any minor children whom the decedent supported are also eligible for a reasonable family allowance to cover the cost of normal living expenses. While this allowance lacks a definitive value, the allowance is limited to a single year when it is clear that an estate is inadequate to discharge all other allowable claims.
• Exempt Property: The surviving spouse is also entitled to household furniture, automobiles, furnishings, appliances, and personal effects from the estate up to a value not to exceed $10,000.

     After completing all of these steps the personal representative can then begin to distribute the remainder of the estate to the heirs. On Thursday we will discuss the factors that impact the portion of an estate each heir receives. 

Working Together to Assist Clients

Today’s blog begins a series focused how attorneys and financial planners can work together to assist clients following the death of a loved one. Over the coming month we will address a variety of areas where clients benefit when their advisors work together as a team to make a very difficult time in their lives a little easier. We invite and encourage our readers to send us their thoughts on these issues so that we can take them into account as we tackle this complex subject.

     The loss of a loved one is one of the most emotionally difficult experiences a person will ever face. Sadly, during our careers as planners and advisors, we face the loss of a client, with unfortunate regularity. When those clients leave behind a surviving spouse or children, it is important to be prepared to assist those survivors while being mindful of their grief over their own loss. This is a perfect opportunity for the attorney and the financial planner to work together for the maximum benefit of their client.

     There are a wide variety of issues that arise after a death, including the administration of the decedent’s estate and trust, updating estate planning documents for surviving spouses, and making financial decisions that take into account their changed circumstances. Some of these decisions must take priority over others and it falls to attorney and planners, who handle these matters with more regularity, to keep clients from becoming overwhelmed by the decisions that must be made, even as the client still grieves for their loved one. 

     Immediately following a death it is important to quickly determine if there are any documents showing the deceased client wished to make anatomical gifts, had a prepaid funeral, or left specific instructions for funeral or memorial services, as well as a specific burial request. This is important first because such instructions elevate the need for survivors to make certain decision, but also because discovering these instructions after the survivors take other contrary actions can be devastating. 

     After addressing matters related to the disposition of the decedent’s remains, the personal feelings of the client are paramount and their mourning should take precedence over meetings with planners and advisors, but when they are able, it is important to begin the process of administering the estate and trust. A first step in the process is to determine a list of assets and values held in the estate of, or a living trust of, the deceased spouse. The client's planner often as this information and is the best person to assist in developing a list of assets. Documents should be reviewed to determine ownership of assets and beneficiaries of any insurance policies or IRAs. A review of estate planning documents will indicate whom beneficiaries are, what are the terms of distribution, and who are the persons chosen to help administer the estate, the personal representative and the successor Trustee.

     In this stage of the process, the attorney can assist the client in determining whether any probate of assets is necessary and whether it is necessary to file a federal estate tax return. If a business was part of the deceased's estate, it is important that the surviving spouse and successor Trustee continue to handle the management of that business appropriately. It is also important to determine if any Buy-Sell Agreements exist to govern the transfer of the business to surviving partners. Finally, if there are any assets outside of the state of Michigan these will also have to be administered. 

     With their more complete knowledge of the assets, the planner is invaluable at this point in the process for determining what assets remain available for the spouse, revising  the surviving spouse’s investment plan and providing a strategy for cash flow for both the short-term and long-term to assist the client in maintaining his or her lifestyle.

     This only begins to scratch the surface of the choices that face clients at this difficult time in their lives. Over the coming weeks we will address a variety of issues in greater detail, paying special attention to how attorneys and financial planners can work together to assist clients in managing these issues. As we continue to explore this topic we must remind ourselves that as important as this planning is to our clients, we must always balance the need to make decisions with the client’s need to mourn their loved ones.