Michigan Law Update

The last few months have brought us some significant changes in Michigan law that deals with estate planning. Our next two blogs will address those changes and the impact that they are likely to have on existing and future estate plans.

DESIGNATED FUNERAL REPRESENTATIVE

     Clients who have specific wishes for funeral arrangements, but worry that family members may disagree with them and go against their wishes, whether for religious or personal reasons, now have a specific statute that gives them the right to designate a "Funeral Representative" to make decisions about postmortem funeral arrangements and the handling, cremation, disposition or disinterment of the person's body. 

     The new law allows the client to appoint a "designated federal representative", who then has priority over spouses, family members and others with respect to making arrangements for the client's remains. The funeral representative designation can be included in another estate planning document, including a will or patient advocate designation, but it must be executed before two witnesses and/or be notarized. The representative accepts the appointment by signing an acceptance or by acting as the funeral representative. 

     One important caveat is that the funeral representative is personally liable for the costs of final arrangements, so it is important that the person who has made the declaration insures payment for the costs of the disposition through a trust, insurance, a prepaid funeral contract or some other means.

ELIMINATION OF DOWER RIGHTS IN MICHIGAN

     Recently signed legislation eliminates a wife's "Dower" right. Prior to the legislation, Michigan law assigned a married woman a one third ownership right in any property owned by her husband during the marriage. The effect of this law was that the husband could not attempt to sell property purchased during marriage without obtaining his wife's signature on any legal documents.  The Dower rights were claimed after the husband died, and the widow was entitled to a portion of the property even if it had been transferred to another party without her consent, for the rest of her life. She could not, however, pass those Dower rights on to anyone else and the right was extinguished when the wife died.

     The new legislation abolishes Michigan Dower, and transfers of real estate in Michigan will no longer be subject to a potential Dower claim. The husband will no longer be required to obtain his wife's signature in order to extinguish her Dower rights when transferring property to another.

In addition to these two changes the state of Michigan has also now provided statutory authority for the creation of a Domestic Asset protection Trust (DAPT). A DAPT allows an individual to create and fund an irrevocable trust, which, subject to certain legal requirements, allows the rantor to shield their assets from the claims of a creditor. Our next blog will discuss this new development in greater details.

Alan and Matt

Statutory Distributions Under a Will, Part 2

     On Tuesday, we addressed the provisions of the Estates and Protected Individuals Code (EPIC) that establish allowances for surviving spouses and dependents that take precedence over other creditors’ claims against the probate estate. We also addressed a surviving spouse’s right under Michigan law to elect a statutorily mandated portion of the probate estate in lieu of the distribution scheme articulated in the decedent’s Will. Both of these statutorily created exceptions to the distribution provisions of a Will come as a result of legislature’s desire to ensure that surviving spouses are not left destitute upon the death of their spouse because the spouse "disinherited" them. Today's blog takes a further look at EPIC’s statutory provisions, this time regarding the distribution of the probate estate when a decedent dies "intestate" (without executing a Will) and when the decedent marries or has children following the execution of the Will. Clients are frequently surprised that the statute provides very different distribution provisions for family members than they would actually want. 
     The State statute determines intestate distribution of an estate, and the distributions vary depending on who survives the decedent. Different provisions of the law apply to surviving spouses, surviving dependents, and other surviving relatives. In determining intestate distribution, EPIC first addresses the decedent’s surviving spouse. Presuming that there is a surviving spouse, the share distributed to that individual is dependent on the decedent’s other surviving relatives. If the decedent is survived by a spouse but no parents or descendants, the spouse receives the entire estate. The share for the surviving spouse decreases when the decedent is survived by either parents or descendants (typically children or grandchildren). Tuesday's post details the variety of circumstances and values for the surviving spouse's distribution in the circumstances. 

     When a spouse does not survive the decedent, EPIC provides that the descendants (children, grandchildren, etc.) split the estate by "right of representation". Under Michigan law, "right of representation" means that the estate is divided per capita at each generation. This means that if the decedent had three children who are all alive at his death then the estate is split into three equal shares and distributed to those children. If, however, only one of the decedent’s three children remains alive at his death, the living child still receives a one-third share of the estate while the shares for the two deceased children are recombined and then divided equally between all the children of the deceased children. For example, if children A, B and C are all alive, and the estate is $900,000, they each receive $300,000 of the estate. If B and C have predeceased the decedent, and B has two children and C has five children, each of those children of a predeceased child will receive 1/7 of 600,000, or approximately $85,000. B's children receive a total of $170,000 (rather than splitting $300,000) and C's children received a total of $430,000 (rather than splitting $300,000). If used, EPIC can dramatically skew estate distributions among family members. 

    If the decedent has neither spouse nor any living descendants, EPIC then distributes the estate to the survivor or survivors of the decedent's parents. If there are no surviving parents, the estate then passes to the decedent’s living siblings, followed by living grandparents, then to living descendants of grandparents. If none of these potential beneficiaries are alive, the probate estate escheats (is distributed) to the State of Michigan. 

     A different rule applies if the decedent has executed a Will at some point in their life, but never updates the document after being married or having children. Michigan law provides in that case, that a surviving spouse is entitled to the share they would receive had the decedent died intestate, unless from the Will or other evidence it is clear that the Will was made in contemplation of the marriage and the spouse was purposefully omitted, in which case the surviving spouse receives nothing. 

     Children omitted from a Will are treated similarly to an omitted spouse, but the omitted child's share is dependent on whether or not other children of the decedent were provided for in the Will. If the decedent had no living children when the Will was executed and did not provide for children, an afterborn child is entitled to a share equal to that they would receive had the decedent died intestate. If however the decedent had one or more living children when the Will was executed, the omitted afterborn child is entitled to a share that is equal to the share for the non-omitted children. As with an omitted spouse, if the decedent’s Will provides clear evidence that the omission was intentional, the omitted afterborn child receives nothing 

     As this week's discussion of the probate statutes demonstrates, EPIC may provide for estate distributions significantly different from what the decedent might have provided for if the decedent had planned. Thankfully, proper planning protects loved ones and insures against accidentally disinheritance. Appropriately drafted documents can ensure that the spouse and descendants receive the share of an estate that the deceased spouse or parent actually wanted rather than what a state statute provides for. A client can avoid the probate process entirely by executing and properly funding a living trust guaranteeing that their assets are distributed to those people and institutions that are named in the trust document.

Statutory Distributions under a Will

We spend a great deal of time in the estate planning process discussing gifts and distributions with our clients. It is worth noting that when a person dies with a Will, Michigan law provides for certain automatic distributions over and above the terms of the Will. These statutorily authorized distributions exist to protect surviving spouses and children by providing them immediate access to funds needed for normal expenses. These provisions also guarantee their right to retain a substantial portion of personal property over the claims of any potential creditor. Before we continue, this is an opportune time to review legal terms commonly used in estate planning, as these terms appear often in legislation.

• Decedent: The individual who died, also known as the Deceased Individual.
• Surviving Spouse: The person married to the decedent at the time of the decedent's death.
• Descendants: The children, grandchildren, great-grandchildren, etc. of the decedent.
• Estate: The individually owned property of the decedent that must pass through the probate process at the decedent's death.
• Intestate: The state of dying without a Will

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.

The property and assets received from these allowances are in addition to any amount that the surviving spouse or child would inherit either by intestate succession or under the decedent’s Will.

In addition to these allowances, a surviving spouse has the ability to elect a statutorily mandated share of their deceased spouse's estate in lieu of what the spouse would receive under the terms of the Will. That election entitles the surviving spouse to one half (1/2) of the sum or share that would have passed to the spouse had the testator died intestate, reduced by one half of the value of all property received by the spouse from the decedent by any means (for example, joint tenancy of assets) other than testator or intestate succession upon the decedent's death.

The intestate share of a surviving spouse varies depending on the other parties that survived the decedent. The spouse is entitled to:

• The entire intestate estate if no descendant 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.

As with the Homestead allowance, the values listed above are adjusted on a yearly basis for inflation. However, keep in mind that when a surviving spouse elects to take this statutorily mandated share, the spouse receives only one-half of the amounts listed above.

When presented with this information, clients often express surprise and wonder why they are not allowed to dispose of their assets in any way they choose. The simple answer is the Michigan legislature has found a compelling interest in ensuring that surviving spouses are not left destitute upon the demise of their spouse because the spouse "disinherited" them. This is not to say that a married couple cannot execute a prenuptial or postnuptial agreement providing that the surviving spouse waives the right to the elective share. Such agreements however require that both parties disclose all of their assets and that separate counsel represent both parties prior to consenting to such an agreement.

It is clear that while there is substantial freedom in designating those individuals who will inherit property upon a decedent's death there are limitations. A further limitation addressed by Michigan statute is the circumstance of a marriage, or birth of a child, following the execution of a Will. On Thursday, we will discuss this limitation in more detail.

An important caveat to all of the foregoing information is that any amounts received by surviving spouses or children under allowances or an elective share of an estate apply only to those assets that are part of the decedent’s probate estate, thus any asset owned by a trust is exempt from attachment under these exceptions. This ability to bypass the statutory limits on disinheritance is another benefit of a properly executed and implemented trust. In the event that an individual seeks to disinherit their immediate family it is important to discuss this decision with an experienced attorney to ensure that all the necessary steps are taken to enforce such a decision.

The State of Estate Planning Post Fiscal Cliff

2013 is now three days old and we at Plainly Legal are pleased to report we have survived the "fiscal cliff" that loomed so ominously at year-end. While it took a few extra hours, some arm-twisting, and likely more than a few hurt feelings, Congress has managed a compromise and begun to address the expiration of tax cuts and mandatory spending reductions that make up the “fiscal cliff.” While the legislation passed by Congress is broad and addresses many different aspects of taxation, and Congress still needs to address a number of other areas in the next few months, I wanted to take just a few moments of your time to address impact of that legislation on the estate planning process.

The final legislation’s impact on the estate planning process is rather limited as compared to earlier proposed bills, but for the most part there is good news. The most important aspects of the bill are:

• The new law makes permanent the existing $5,000,000 exemption for each taxpayer for the Federal Estate Tax, and the law indexes this exemption to the rate of inflation so the exemption will grow slowly over time. This means that estates smaller than $5,000,000 ($10,000,000 for a married couple) are not subject to Federal Estate Taxation.
• The Lifetime Gift Tax Exemption for making gifts prior to death also remains at $5,000,000. The Lifetime Gift Tax Exemption and the Estate Tax Exemption remain linked, so every dollar of the Lifetime Gift Tax Exemption used counts against the Estate Tax Exemption.
• The legislation makes permanent the exemption portability, which is the ability of a widow or widower to make use of the unused exemption amount of a deceased spouse.
• The only substantive change in the legislation from the rules that governed for the past twelve months is an increase in the highest rate of estate taxation from 35% to 40%.

For better or worse, the legislation makes only limited changes to the law affecting estate planning. Plainly Legal will leave to others the political discourse and countless opinions expressed by elected officials, pundits, and others about the scope of the changes. Instead, we take solace in the fact that this legislation creates a level of certainty in the estate tax law that has not existed for the last few years. The certainty and permanency of exemptions and provisions that no longer have a sunset date (at least until Congress decides to actively make changes again) creates an opportunity to review a client's estate planning and determine whether it is appropriate to make any changes. With higher exemption limits, it may no longer be necessary for both a husband and wife to have a Living Trust, allowing planning simplification. In addition, concerns or issues which have been weighing on clients about family situations until the federal law was clearer can be addressed. It is also a good time to review your assets and confirm they are properly titled to avoid probate.

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

     At some point, a friend or loved one may ask you to serve as successor trustee for their trust. Usually people are flattered when this happens, but rarely have they considered what is required of a successor trustee. The successor trustee is responsible for the administration of the trust once the trust maker, or grantor, dies. On occasion the successor trustee will also take over administration of the trust if the grantor becomes incapacitated. Sometimes administration is relatively simple, such as when the beneficiaries are all adults and the trust has no provisions to distribute assets over an extended time. Other times, the successor trustee may administer the trust for a significant amount of time if the beneficiaries are minors or the grantor feels that the beneficiaries are unable to handle their own assets until sometime in the future, if ever.

     Whether trust administration is short-term or long-term, there are rules in the common law and Michigan statutes that a successor trustee must follow. When you agree to act as a trustee, you place yourself in a fiduciary situation, and must act with a high degree of care with respect to the trust and its beneficiaries. The Trustee:

1. Must follow the instructions of the trust agreement as specified by the trust maker
2. Must in good faith, act in the best interests of the beneficiaries of the trust. Good faith means not taking advantage of another, even through technicalities of law
3. Must use ordinary care and diligence in the administration of their duties, even if not receiving any compensation for services
4. Must invest the funds of the trust properly to preserve the principal and earn a reasonable rate of return
5. Must provide accountings to beneficiaries 
6. Must make distributions to beneficiaries as stated in the trust. 
7. May not deal with the trust property for Trustee’s own benefit or for any purpose not connected with the trust’s purpose.
8. Must not commingle trust property and non-trust property 

     These are the default provisions under the law, Michigan law allows the grantor to supplement or waive many of the above requirements. For example, the trust provisions may allow the trustee to ignore the normal prudence and diversification requirements for investment of the trust assets, when the grantor wishes to maximize income for the current beneficiary rather than balancing the interests of all the beneficiaries. Additionally, the grantor may also allow the trustee to provide accountings only for current beneficiaries and not contingent beneficiaries unless the court so provides.

     Just as the rules for administering the trust can vary, the terms of the trust related to the distribution of the trust assets can take many forms. The trust may provide for great flexibility in distributing assets to beneficiaries by allowing the trustee to make distributions within their total and complete discretion. Alternately, the trust may provide a broad standard, such as health, education, and maintenance of accustomed standard of living. Such a standard would include making distributions to a beneficiary to assist them in starting a business or purchasing a home, but does not allow the trustee to distribute all of the funds outright. Finally, the distribution standard may be very narrow or subject to many restrictions. In these cases, the trustee must carefully monitor the actions of the beneficiaries to ensure that the beneficiary meets all the requirements before making any distributions.

     Trust law and the terms of a trust are frequently complex and the trust normally provides that the successor trustee can retain qualified professional help in administering the trust. This means that the trustee can retain accountants, attorneys, or financial professionals to assist in trust administration. The trustee must still take care to monitor the actions of the hired professionals because these professionals do not relieve the trustee of their fiduciary duty, and the beneficiaries can sue the trustee personally and personal assets to the trustee can be reached to compensate beneficiaries for any breach of fiduciary duties.

     Unfortunately, trust administration may create the potential for litigation. While the trust maker can include a "no contest provision" in the trust that provides the beneficiary who challenges the document be disinherited, the effectiveness of this type of provision is somewhat mitigated by Michigan law. Beneficiaries may disagree with the terms for distributions the grantor has set; blended families, where there are a number of different beneficiaries with different interest, may also create issues for the trustee; and occasionally a beneficiary may argue that the trust maker had been subject to undue influence or a lack of capacity when the trust provisions were initially prepared or later modified. All of these scenarios make the trustee’s position more difficult because even as they attempt to deal with litigation they must also continue to administer the trust for the benefit of any of the other beneficiaries.

     When accepting a trusteeship of a trust is important to remember that it comes with significant responsibilities and may create a larger headache than you ever imagined. While you may feel a personal obligation, should always be aware that a person named as the successor trustee has the option to decline to serve or to resign after initially accepting the position. If you are in the position of being required to make a decision whether or not to accept a trusteeship, it may be appropriate to discuss the situation with qualified counsel to determine if this is the best course of action for you and/or the trust beneficiaries.

The Effects of Divorce on Estate Planning

     Divorce is frequently a difficult and painful experience for the parties involved. By the time the proceedings are complete, most people want to go their separate ways and interact with their former spouse as little as possible. Unfortunately, as with other major life events, divorce is also a time where it is important to review and update an existing estate plan.

Under Michigan law, divorce has a substantial effect on existing estate plan documents, including:

• automatic revocation of any potential disposition of property made by a divorced individual to his or her former spouse as a beneficiary under a Will or Trust;
• automatic revocation of provisions conferring powers of appointment on the divorced individual’s former spouse so that the former spouse can no longer appoint beneficiaries under a Will or Trust; and
• revocation of any nominations of the divorced individual’s former spouse to serve in a fiduciary or representative capacity rendering the former spouse unable to act as Personal Representative or Trustee even though named in the document.

     Additionally, divorce severs interests of a former spouse in property held at the time of divorce as joint tenants with rights of survivorship, and it is important to retitle real estate following a divorce. While all of these changes result in a change in the distribution of assets via estate plan documents, they do not negate the documents themselves, therefore the documents continue to function and successor beneficiaries, including minors, may become the primary beneficiaries because of the divorce. If there are no successor beneficiaries, then the Intestacy Statute dictates distribution of those assets.

       Presuming that successor beneficiaries are named, the change in beneficiary is important because in many documents there is a presumption that should something happen to the Grantor their now former spouse will receive such distributions and the terms of the trust did not adequately provide for direct distribution to minor children. Further, even when there is adequate provisions for maintain assets in trust for minors, it is important to ensure that the trustee named to administer that trust is a person the Grantor believes will look out for the best interests of any children and ensure funds are available for their long-term care. It is worth mentioning that a decree of divorce may contain provisions requiring the inclusion of certain provisions in an estate plan, including the purchase of life insurance to cover alimony or child support payments should something happen to the Grantor. Failure to comply with such requirements can have adverse consequences.

     While a review of the terms of the Trust, the beneficiaries, and the successor trustees is important, it is just as it is important to ensure those individuals who are designated to make decisions upon incapacity are also the people the Grantor now wants to make decisions on their behalf. Many people execute Patient Advocate Designations and Durable Powers of Attorney naming their spouses as the sole designee to make decisions on their behalf. Following a divorce those documents are revoked and the grantor is left without a designate to make medical decisions. Even if those documents name other successor designee, it is important to ensure that those individuals are still the best people to be making decisions should the Grantor become incapacitated. Frequently successor designee's are close friends of the couple, who may not continue to be actively involved in their separate lives following a divorce.

      As a side note, it is important to remember that in addition to revoking all the above interests held by former spouses, divorce also revokes interests held by former spouse’s relatives. Thus if after a divorce an individual wishes to continue to leave assets to a relative of the former spouse or name their former spouse’s relatives as a designee, it is necessary to execute new documents reaffirming that desire. While this may seem like an unlikely scenario, is important to remember how many people meet their spouse through a friendship with siblings, grow close to extended family during the course of a marriage, or feel that a former spouse’s sibling or parent is still a good trustee for minor children.

      Also related to updating estate plan documents, is the importance of updating beneficiary designations of assets that transfer outside of the probate process. This includes such assets as insurance policy proceeds and retirement benefits. Updating beneficiary designations are important because these beneficiary designations are a contractual agreement between parties, and divorce does not negate such designations. It is possible for a former spouse to receive large amounts of assets that the deceased certainly would rather have distributed to the beneficiaries of their newly updated estate plan.

      With all of the changes following the dissolution of the marriage, the updating of an estate plan can easily get lost in the shuffle. However due to the substantial impact that a divorce has upon an estate plan, it is important to take the time to review documents for necessary changes. When contemplating making changes be sure to consult an attorney to ensure that changes are made properly.

Taking Advantage of the Present Gift and Estate Tax Lifetime Exemption

           Many years ago, I stopped trying to use a "crystal ball" to determine what Congress would do with estate tax law. I can only counsel my clients about what the current law is and what opportunities are available today.

           

           As many commentators have discussed, one planning opportunity available through the end of 2012 is the ability to make large lifetime gifts to remove significant assets from an estate before death. The Gift and Estate Tax Lifetime Exemptions are currently $5,120,000.00. This means that in 2012, an estate having a net value of $5,120,000 or less is completely exempt from Estate Tax. In addition, this exemption allows individuals to make large gifts during 2012 that are not subject to the Gift Tax. In 2013, the exemption drops to $1,000,000.00 unless Congress decides to extend or modify the current law in some way.

           By taking advantage of the higher Lifetime Exemption in 2012, clients can make gifts to children and other beneficiaries without any out-of-pocket cost for Gift Tax. In addition, gifts in 2012 can save future estate taxes by removing future appreciation on the gifted assets. Gifts made to multiple generations (e.g. children, grandchildren, etc.) this year, also can avoid any Generation-Skipping Transfer Tax. 

           While taking advantage of this strategy has the potential to reduce the taxes imposed upon large estates, the "tax tail should not wag the dog". This means that achieving a client's goals for their estate plan should take priority over the desire to avoid paying taxes. Before the client takes the steps necessary to utilize this strategy, it is important to ask the following questions:

1. Can I afford to make a large gift?
2. Will I need these funds in the future?
3. Am I concerned that my heirs will not be able to manage the assets I give or may have creditor or divorce problems?
4. If I make gifts, do I want them to be outright gifts or do I prefer gifts into irrevocable trusts for control purposes?

           The client should be careful about gifting any assets they may need to maintain their lifestyle later in life. What is given away cannot be returned without incurring gift tax, income tax and estate tax consequences. The client must be comfortable with giving up control and the use of the asset, subject to restrictions that can be placed on a beneficiary's use. 

           If the client can afford to make a large gift and is comfortable doing so, it is probably advantageous, especially if the tax rates increase from the current 35% maximum bracket to the 55% maximum bracket, as is scheduled in 2013, and the lifetime credit drops to $1,000,000.00. Presuming appreciating assets, heirs can receive significantly more in assets and appreciation from a large gift in 2012 rather than after-tax distributions at death. 

           Two words of warning, first under current law, the donee of a gift receives the donor's income tax basis in the gifted property, while the beneficiary of most inherited property will receive a "step up in basis" to the date of death fair market value of the inherited property. While making a gift may avoid Estate Tax, it may also create additional capital gains income tax when the asset is later sold. Consideration of the income tax consequences should be part of the pre-gifting analysis. Second, there is the possibility that there will be a "tax clawback" in future legislation. That is, an added Estate Tax that takes back some of the tax-free benefits of the 2012 gifts. In the current law, it is not clear that gifts made in 2012 using the larger Lifetime Exemption cannot be added back to the estate of a client who made large gifts, resulting in the imposition of a larger Estate Tax burden at death if the exemption is only $1,000,000 at the time of death. 

           If the client is inclined to take advantage of the current legislation, there are a number of strategies for using the current lifetime exemption to make large gifts, including:

1. Outright gifts to beneficiaries of real estate, business interests (corporations, partnerships and LLCs), investment assets and even cash with no restrictions. If the client gives minority interests in entities, the client can maintain control of the entity, and may even be able to take advantage of minority valuation discounts when determining the value of the gifts made.
2. Gifts to irrevocable trusts for the benefit of minors or children with creditor issues, suspect marriages, or spending problems with provisions that protect these beneficiaries and distribute assets over time. The only limit on restrictions is the imagination of the grantor. The trust can be designed to provide maximum flexibility for distributions to beneficiaries yet protection of the principal.
3. Gifts in trust for a spouse, with the remainder going to children and grandchildren after the death of the spouse. The trust, a "spousal limited access trust", can be designed as a "grantor trust" where the person setting up the trust is considered the owner for income tax purposes, yet is not considered the owner for estate tax purposes. The spouse can receive income and/or principal, which allows the grantor to enjoy the benefits of the trust assets. It may be possible for the beneficiary spouse can even have the right to appoint his or her trust rights back to the grantor at their death without it being considered in the estate of the grantor at the grantor's death. This allows the grantor to continue to have use of the assets
4. Gifts to an irrevocable trust can be used purchase life insurance on the grantor. The gift can provide a significant multiple of insurance coverage, thus providing greater benefit to beneficiaries should
5. For those trying to ensure the maintenance of a family vacation home for the future, that client may want to consider gifting a 49% interest in the home to children, either outright or in the form of an LLC interest. Using this method the client can maintain control of the home and there will be no change in the status for property tax purposes.
6. Gifts of property to "grantor trusts" and then the purchase of assets by the grantor for cash or a promissory note. This type of strategy allows the trust beneficiaries to receive interest income during the repayment of the note, as well as the eventual principal repayment. In addition, because the grantor still owns the assets, they will get a step up in basis for income tax purposes at the death of the grantor.

           Before making any large gifts, clients should have a serious discussion with professional advisors to determine if the gifts are appropriate for the client's financial and family situation. Planning for large gifts does take time, which is obviously limited between now and December 31, 2012. If the client is interested, now is the time to start in order to avoid last-minute decisions that are not productive for the client.

How a Trust Works

Over the past few posts, we have done our best to give you an idea of what a Living Trust can do and how such a Trust can be advantageous to a wide variety of people. For many of our clients, having this information is all they need to make the decision to move forward with the Estate Planning process. However for other clients, learning that a Trust can provide these advantages leads them to the inevitable question of how does a Trust make these things happen.

Trusts have been in use for hundreds of years and the law that controls their use is substantial and complex. In Michigan, where we practice, the Michigan Trust Code (part of the Estates and Protected Individuals Code (EPIC)) governs the use of Trusts. Each state has their own law governing Trusts and it is important to consult an attorney who is familiar with that law before engaging in any planning. Today however, we will discuss the broad concepts that allow a Trust to provide benefits to those who include one in their Estate Plan.

Owning Assets

The law allows for the creation of a number of different types of Entities, including Trusts, Corporations, and Companies that have rights and privileges similar to those of Individuals. One of these rights is the ownership of property. Business Entities use this ownership option to spread the cost, liability, and profits of their ventures amongst investors. A properly drafted Living Trust uses this ownership option to create an Entity that owns the property for purposes of control and transfer while subjecting the property to be taxed as if an Individual owned it. This dual natured ownership creates one of the largest advantages of including a Trust in an estate plan, the ability to avoid probate.

Avoiding Probate

Assets owned by a Trust avoid the probate process because the only assets regulated by Probate Courts are those owned by Individuals when they die. Since a Trust is not an Individual and cannot die, it is not subject to the probate process.

The concept that the Trust Grantor may use all of the Trust assets as they see fit during their lifetime yet not be treated as the owner of the assets at death is often one that confuses clients. It is helpful to think of the Living Trust as a bucket containing the Grantor’s assets that the Grantor/Initial Trustee carries around during lifetime. The trust-bucket contains a list of instructions that says that the Grantor/Initial Trustee may use the assets contained in the bucket as he or she sees fit. When the Grantor/Initial Trustee passes away, the Successor Trustee picks up the trust-bucket and uses the assets according to the Grantor’s instructions.

An additional benefit of avoiding the probate process, besides the time and cost involved, is the ability of the Trustee, and not court, to control distributions to Beneficiaries who may be unprepared to handle an influx of assets. While the probate courts can provide a measure of protection for minor children, that protection ends at age 18. For adult beneficiaries in need of additional assistance due to addiction, disability, or other difficult circumstance, the probate courts only have the extreme option of imposing a guardianship or conservatorship if circumstances warrant it.

Enforcing the Grantors Wishes after Death

Legally, the Trust is a contractual arrangement between the Grantor and the Trustee. Upon the death of the Grantor/Initial Trustee, the contract provides the Successor Trustee with the authority to take actions on behalf of the Trust needed to comply with the Grantor’s instructions. This authority is not limitless and the Successor Trustee owes a fiduciary duty to the Beneficiaries (those people who the Trust says will receive the Trust assets).

A fiduciary duty requires the Trustee to act solely for the benefit of the Beneficiaries in taking actions in relation to the Trust and avoid any conflict of interest between the Trustee and the Beneficiaries. A fiduciary duty is the strictest duty of care recognized by the legal system and a Trustee who breaches this duty is subject to removal and a civil lawsuit. A Beneficiary who proves that a Trustee has violated their fiduciary duty may recover profits made by the Trustee, even if the Beneficiary has not suffered any actual harm.

Additionally it is illegal for a Trustee to conceal the existence of a Trust from a Beneficiary of that Trust. While the terms of the Trust may limit the amount of information the Trustee must provide to a Beneficiary, certain information must be provided to a Beneficiary and a court may always order a Trustee to provide information to the Beneficiary or to the court. This requirement ensures that a Beneficiary has the information required to protect their interest in the Trust assets.

The complexity of trust law in the wide variety of trusts in existence make it understandable that an individual would not want to blindly accept that a Trust is able to provide them and their loved ones with all of the promised benefits. As attorneys, we strive to provide our clients with all the information they need to be understand how the documents we draft for them are able to protect them and their loved ones. If you have specific questions regarding how part of a Trust works, please leave us a comment or e-mail us and we will be happy to address that in later posts.