Protecting Beneficiaries Against Themselves

The next two blogs take a break from our example series to address a side of Estate Planning that can occasionally get lost in the efforts to get the best legal advantages for our clients. It is important to remember that regardless of the legal and financial benefit a client may receive from having a plan, the emotional benefits cannot be forgotten. 

As estate planning attorneys, we spend a considerable amount of time with clients discussing the “legal” topics of estate planning, such as taxation, probate avoidance, and beneficiary selection. We worry about the value and type of assets in the estate as well as ensuring that clients transfer assets properly so that documents work as intended. We work with the clients to determine who they want to receive assets, in what proportions, and the manner in which they are to receive these assets. In short, we worry about how clients’ "tangible assets" will be distributed following their death.

Sometimes, clients are open about the shortcomings or flaws of their beneficiaries and their ability to handle assets they might receive. More often, clients will initially keep their concerns to themselves, reticent about telling family secrets. In order to properly draft an estate plan that meets their needs it is important that we as professionals are able to get clients to open up about such concerns. 

Are the beneficiaries mature enough to handle large sums of money? 

Do they have problems with a rocky marriage, creditor issues, or even a drug or alcohol dependency? 

Is there a reason to exclude a particular beneficiary?
It is our job to help the client consider all of these factors in determining the distribution of their assets. 

Legally, we can assist the client with options for protecting beneficiaries against themselves and their own tendencies. Clients can establish Trusts that allow the trustee to determine how much money a beneficiary needs, or should have, at any one time. Limitations on immediate distributions can protect the beneficiary’s inheritance against creditors or being included in a divorce settlement. It is possible to include provisions to protect the beneficiary against drug or alcohol dependencies by requiring that the beneficiary demonstrate, through regular testing, that they are not engaging in their vices before the trustee makes distributions. The only limitation on what a client can do is their imagination. I once had a client who indicated that one of his son could not receive any inheritance unless the son was “not married to that woman”.  The client had his reasons for doing this, and the provision created the potential to cause significant family issues upon the client’s death, but for a time it was part of the terms of the client’s trust.

Properly drafted Wills and Trusts can ease a client’s mind that they have legally protected their beneficiaries. However, what about a client’s concern that their beneficiaries have not developed values and beliefs similar to the client that makes the client comfortable with passing on tangible valuables. If this is a concern, a client may want to discuss and consider preparing an “Ethical Will” to help point there beneficiaries in an appropriate direction. The next blog will expand upon the purposes of Ethical Wills in greater detail.

Al and Matt

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

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

Having a Trust is Half the Battle

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

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

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

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

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

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

Matt and Al

Irrevocable vs Revocable Trusts, What's the Difference

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

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

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

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

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

Matt and Al

Exactly What is a Living Trust?

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

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

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

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

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

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

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

Matt and Al

Making Choices 2.0

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

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

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

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

Matt and Al

Why You Need an Estate Plan 2.0

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

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

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

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

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

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

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

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

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

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

Matt and Alan

Estate Planning and Dementia

We hope that everyone enjoyed the long holiday weekend and is ready to return to work refreshed and prepared for a successful week. Today's blog addresses the difficult subject of preparing for a time when we are unable to make our own decisions due to the onset of disease. We know how difficult these times are for families and encourage our clients to consider these possibilities in their planning in order to limit the problems that will arise if they are unable to make decisions for themselves.

I read an article recently about Dementia Awareness Week in the United Kingdom which got me thinking about how people can prepare for the impact of dementia long before any signs of the condition are apparent. A diagnosis of dementia can be devastating to a person and their loved ones. The symptoms of dementia are progressive and its time frame is unknown, but can include memory loss, communication problems, and mood changes.

While dementia can be a horrible diagnosis, with proactive estate planning you can ensure that someone with dementia is protected and properly cared for making that challenging time a little easier. As a person becomes less able to handle their affairs, it becomes more important to put documents in place that will allow designated people to make legal and medical decisions on behalf of that person as they become medically incapable of handling their own affairs.

A Durable Power of Attorney is a good place to start. This document allows a person to name another person or persons to make legal decisions for them immediately or upon a determination of. This ensures that whether because a person no longer wants the burden of making decisions or because they are unable to make decisions for themselves, that those decisions will be made by a person of their choosing.

A Patient Advocate Designation is similar to a Durable Power of Attorney, in that it is used to name another person to make decisions when a person is unable to make them for themselves, but names people to make medical instead of legal decisions. This is especially important in cases of dementia because ensuring that your desires surrounding healthcare are followed even when you cannot articulate them for yourself is important.

Without these two documents, loved ones will not be able to readily make decisions for a person who becomes incapacitated, requiring the family members to turn to the Probate Court to have a Conservator and Guardian appointed to make medical and legal decisions. The process is costly, can take valuable time, and is a public process. By executing a Durable Power of Attorney and a Patient Advocate Designation, a person can avoid the probate process and provide for immediate decision-making and protection of the person with dementia.

Establishing a Living Trust (a revocable trust) can also protect a person with advancing dementia. If ownership of assets have been transferred to the Trust, the person named as successor trustee can use those assets to care for a person with dementia without any cost, delay or public scrutiny by the probate court. 

Additionally. while they are able, a person diagnosed with dementia may also want to consider an Ethical Will, which is a way to share one's values, life lessons, and hopes with family and friends. The Ethical Will does not transfer material wealth, but can be a statement of what truly matters in life and a hope that those who receive eventual inheritances will take to heart the values and hopes laid out in the document.

While all of these documents are especially pertinent for a person diagnosed with dementia, we should all consider implementing them in order to protect ourselves against an untimely incapacity.

Alan and Matt

Planning to Protect Children with Special Needs

We've previously addressed how estate planning can be used to protect minor children in the event of unexpected events. For those parents whose children have special needs this planning is even more important, as it can impact eligibility for programs that assist their children with their day to day lives. Thankfully it is possible to protect children with special needs and maintain their eligibility for such programs through the use of a Supplemental Needs Trust.

The birth of a special needs child changes the lives of a family dramatically. In addition to the lifelong challenges, parents must also plan for the child’s care and well-being in the event of their deaths or inability to care for their child. It is important for parents address these issues in their estate planning, failure to do so can have serious implications for their child’s future care.

A supplemental needs trust, also known as a special needs trust, can be an important planning tool for parents of children who are likely to need special care and support for their entire lives. A supplemental needs trust protects assets for the benefit of a special needs child without jeopardizing eligibility for means tested benefits such as Medicaid, Medicare, and Supplemental Security Income. If properly drafted, assets in supplemental needs trusts do not count toward eligibility calculations for these and other potential benefits.

As indicated by the name, supplemental needs trust assets can be used to supplement governmental benefits by paying for care and items that are not covered under those programs. Funds can also be used for enrichment purposes, such as costs of visiting family members, specialized education programs, and allowing the child to live in the similar manner as when the parents are alive.

While a supplemental needs trust can be established at any time, parents risk not providing protection to their special needs child in the event of an untimely death prior to completing appropriate estate planning. The supplemental needs trust can be funded immediately with discretionary assets or funded with assets from a parent’s Living or Revocable Trust at death. A supplemental needs trust is not only for wealthy families with significant assets, but also for others who may not currently have significant assets but still have a desire to protect their child. Often a supplemental needs trust is funded with a life insurance policy so that funds are available for use for the child on the death of parents. By working with a qualified financial planner and/or insurance professional, a parent can determine the type of policy and amount that best protects their child.

Once parents establish a supplemental needs trust it is important to inform grandparents and other family members of the existence of the trust so that funds otherwise available or to be given to the child can be directed into the trust for the benefit of the child rather than to the child directly, avoid a potential error that would interfere with government benefit eligibility.

It is important to remember that protecting special needs children is more than simply setting up a trust for their benefit. Another important aspect of this planning is the need to choose the correct trustee to administer the trust. Parents should try to pick a trustee who knows the child and knows and supports their wishes for the child's benefit. Often the trustee is a family member who knows the child well and is able not only to communicate with them but also use the trust assets to provide an appropriate lifestyle. Parents will often spell out their wishes for the child's in a separate letter, giving the trustee a better idea of their wishes for their child.

The rules for government benefits are complex and therefore parents should consult with an attorney knowledgeable with not only those rules and also supplemental needs trusts in order to ensure that any planning provides the maximum protection for their children.

Alan and Matt

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.

Adding Additional Protections for Inherited IRAs

     Last year the Supreme Court of the United States unanimously held that Inherited IRAs do not qualify for protection during a bankruptcy. Stating that the term "retirement funds" refers to money set aside for time when a person is no longer working, the Court stated that three characteristics disqualify the funds held in an Inherited IRA from the status of "retirement funds.” 

1. The owner of an inherited IRA cannot add additional funds to the account. 
2. Holders of Inherited IRAs must take distributions from those accounts without regard to the number of years until the account owner reaches retirement. 
3. The owner of an Inherited IRA may make penalty-free withdrawals from the account, up to the entire balance of the account, at any time without triggering the 10% withdrawal penalty found in the Internal Revenue Code.

     This important for any client who expects their retirement accounts to make up a large part of their estate, because this decision means that those inherited retirement assets do not enjoy the usual protection from creditors and will be at risk if one of their beneficiaries files for bankruptcy after receiving their inheritance. Presumably, those assets will also be at risk if a beneficiary divorces a spouse.  Thankfully, we already have a tool that addresses this concern and provides protection for beneficiaries. A standalone IRA Trust named as the beneficiary of a client's IRA can make distributions to the beneficiaries of the IRA Trust without exposing the inherited IRA to creditors. I

     Normally only an individual can be a "designated beneficiary" under an IRA, but if a Living Trust meets certain requirements it is considered a "see-through" trust and the Internal Revenue Code and Regulations treat the beneficiaries of the trust as the "designated beneficiaries" of the IRA. This allows those beneficiaries to stretch their distributions to receive the minimum required distributions over the life expectancy of the oldest beneficiary. In the event that it would be more advantageous for each beneficiary to take distributions over their own life span, it is possible to create specific sub trusts for each beneficiary under the IRA Trust to stretch distributions over the individual beneficiaries' lifespans. 

     For years, we have been using standalone IRA Trusts to assist clients who wished to place different restrictions on the distribution of their retirement and nonretirement assets or to protect beneficiaries from misusing the benefits of an inherited IRA by taking large lump sum distributions, or as protection against possible creditors or loss of assets in a divorce action. With this recent decision from the Supreme Court, a standalone IRA trust provides clients with the peace of mind that in the event one of their loved ones becomes one of the nearly 1,000,000 people who file for bankruptcy in the United States each year, their inherited IRA assets will remain protected.

     The law and regulations governing "inherited IRAs" and the use of IRA Trusts is expansive and complex. Before a client begins designating a trust as the beneficiary of a retirement account they should consult with a legal expert in that area. Additionally at the death of the account owner, it is important to seek additional advice as to the best way to retitle accounts or distribute the assets. If you or your clients have specific questions regarding this or any other planning matter please do not hesitate to contact us and we will be happy to provide you with an understanding of the consequences of any actions.

Avoiding Personal Property Fights

While we value our client's privacy and would hate to have any of their affairs end up as a news story, there are lessons that are better learned by observing others than by experiencing them ourselves. With that in mind today's blog addresses an all to common problem that arises even when an estate does not contain an Oscar statuette. 

A current news story about the actor and comedian Robin Williams's estate is a clear example of why complete estate planning is necessary. The comedian's wife, Susan, and children  Zachary, Zelda and Cody are fighting over his estate, specifically personal property. Susan, married to Williams for three years, is claiming personal items that the children argue were to be given to them.

The dispute centers around two houses owned by Robin Williams at the time of his death. Williams' Trust grants Susan one residence and its contents upon his death, but there is another clause that says that his children get all of his "clothing, jewelry, personal photos taken prior to his marriage to his current wife,... memorabilia and awards in the entertainment industry and the tangible personal property located in Napa."  The wife is asking the court to define "memorabilia" to exclude Williams' collections , including Japanese anime figurines, antique weapons, carved boxes, theater masked, rare books, lapel pins, fossils, graphic novels and skulls, which the children are claiming. 

While Robin Williams carefully thought out his estate planning to protect all of his loved ones, he, like many others, failed to specify in detail personal property bequests. This can lead at a minimum to hurt feelings and can escalate into significant family disharmony and tear families apart.

Rather than leaving personal property bequests to the interpretation of various beneficiaries or the courts, it makes more sense to specify personal property bequests in a "Personal Property Memorandum", coordinated with the client's Living Trust, detailing specific beneficiaries for various personal items including, artwork, collections, specific pieces of jewelry, and any other personal property. 

We all have the ability to prevent family squabbles over personal property, whether of great value or sentimental value. Why leave it to others, including the courts, to guess or argue about how we really wanted our personal property to be distributed.

How Helping Mom with the Bills can Derail an Entire Estate Plan

When clients make decisions regarding access to their financial accounts, they often do so for their own ease or convenience. It is important to review the ownership of bank and investment accounts to ensure that a decision made in the name of simplicity does not result in unintended consequences.

     Often older clients have their children assist  them with regular financial activities, like shopping, paying bills, or banking and investment activities. For simplicity, the client adds that child as a co-owner of the client’s bank and/or investment accounts. While in some cases this is not a major issue, co-owning an account with a child can unintentionally skew the client’s distribution to family members under their intended estate plan. 

     When a person dies, assets that they own individually must pass through probate to name the beneficiaries, and assets owned by a client's Living Trust pass pursuant to the terms of the Trust. However, when a client co-owns an account with a child and the child survives the parent, the child becomes the sole owner of the account. Assets that the client intended to pass to a number of different beneficiaries are the property of a single person and not subject to the terms of the Probate Court, Will, or Trust. If a client with three children intends to divide assets equally between those children, but co-owns a checking account and an investment account with one of those children then the other two children stand to inherit substantially less than their parent intended (or possibly be disinherited entirely). 

     Co-ownership during the client’s lifetime may also become a  problem because even though  the client and their child know the child is only an owner to help their parent, creditors do not want to see that distinction. An expensive legal battle may occur to protect the assets from creditors of the children. Additionally, when the client names a child as the co-owner, that child has total access to the bank or investment account. We hope that the child can be trusted, but we have seen a number of situations where the child has used the parent's funds for their own purposes, whether because they have alcohol or drug dependencies or simply are unable to control their own spending impulses. In these situations, not only do the eventual beneficiaries suffer, but also the parent can suffer financial ruin when they otherwise would have been financially comfortable.

     Thankfully, it is easy to avoid at least some of these problems. If the child is trustworthy, the  easiest way is to make the child a signatory on an account without making them a co-owner. The downside to this option is that many institutions do not allow this option. Instead, the parent can execute an immediate power of attorney, allowing the child to act on their behalf with respect to financial decisions. If the client has a Trust, the client can name the child an immediate co-Trustee of the parent’s Living Trust, giving powers to assist the client. These options allow the child legally to  act on their parent’s behalf without unintentionally changing the distribution plan at death or worrying about a child's creditors.

     We realize that for many of our clients the distinction between a child signing a check as the co-owner of an account rather than acting under the terms of a Power of Attorney is unclear and seems overly complicated, which is why education is such an important part of our job as attorneys and counselors. We must make sure that both our clients and their children understand that the risks of co-ownership outweigh any convenience they believe exists and that the alternatives, acting under a Power of Attorney or having a Trust with the child as an immediate co-Trustee are safer and no more difficult. 

     It is attention to details such as these that demonstrate to our clients that estate planning is more than simply drafting documents.  We must be aware of the clients’ assets and counsel them as to the appropriate ownership of the assets, given their situation. While coownership of an asset with the child may be appropriate in certain situations, clients should not enter into it until they understand the consequences of that action.

The Value of Assets to Beneficiaries

     In the estate planning process, one of the most difficult decisions for clients is how to distribute assets to their loved ones. Frequently clients run into problems because their desire to treat beneficiaries equally conflicts with their reasons for wanting to provide for those people in the first place. Often we find that when clients begin to consider their own goals in making gifts, and which of their assets can serve those goals best, clients have an easier time making decisions.

     In one instance, our client desired to treat her three children equally. Prior to beginning the estate planning process, the client achieved this goal by dividing her assets and a modest life insurance policy between her children by using beneficiary and transfer on death designations to assign different assets to each of her children. While this initial form of planning worked when the client was younger, the client expressed concern about unbalancing her gifts as she took larger retirement distributions or needed to sell stock in order to pay for medical expenses. The client also wanted to reward her daughter who lived with her and maintained the residence for that effort, and to ensure that another child had an additional source of income.

     As we discussed the client’s income and assets, we learned that she supplemented her modest pension with dividends from stock in companies with substantial long-term stability. We suggested that the client pass these stocks along to the child who would need additional income, holding the stock in trust so that the trustee would distribute income from the dividends to the child and be able to sell the stock in the event that the child needed additional funds. Following that child’s death, the client’s two other children (or their children) would receive the remainder of the stock free of trust. The idea that her son would have a continuous source of income appealed to our client. However she was still concerned about equality between the three children.

     Outside of her stock holdings, the client had approximately $200,000 worth of assets and was uncomfortable with the idea that she had given specific property, the stock and her residence, to two of her children without leaving anything identifiable to the third child. This perceived inequality threatened to derail the entire planning process until we began to discuss the value of various assets. A quick search showed that the client’s stock holdings had a value of approximately $250,000, which was likely to continue to appreciate. The client also knew that the value of her residence decreased substantially following the end of the housing bubble, but that her daughter intended to continue living in the home for the foreseeable future.

     Taking this information into account the client quickly realized that while the residence had value to her daughter as a place to live, the saleable value meant little when dividing her estate. Additionally, knowing that her other two children would inherit her stock holdings after their brother’s death allowed the client to feel more comfortable dividing the remainder of her assets between those two children, despite the knowledge that those assets would be significantly less valuable than the stock at the time of her death.

     To summarize, by helping our client realize that by giving particular assets to each of her children she was better able to achieve her goals than if she just divided assets equally at her death we pushed through a barrier that previously kept the client from establishing an estate plan. As planners, we all need to look at the big picture of the client’s goals because the client’s personal feelings can often create situations where they cannot see the forest for the trees and therefore fail to act. 

Alan Ferrara & Matt Ferrara

Planning for Same-Sex Couples in Michigan

While the Federal and state rules regarding same-sex marriage are changing rapidly because of the recent Supreme Court opinion and legislation in some states, Michigan currently does not recognize same-sex marriage. This failure to recognize same-sex marriage makes estate planning even more important for same-sex couples in Michigan because many protections that exist automatically for opposite-sex couples do not protect same-sex couples.

A few years ago, we met with a same-sex couple who asked how they could insure that their partner not only had the right to make legal and medical decisions in the event incapacity, but how they could guarantee their partner would be entitled to assets. While both partners worked, one contributed more monetarily and had a greater amount of assets, including their home. Knowing their desire to protect each other, we designed their estate planning documents to meet their needs.

One of the clients was particularly concerned that in the event of her incapacity some of her family, who disapproved of her relationship, would attempt to exclude her partner from being present and making decisions on her behalf. Knowing that in the absence of other instructions, the Probate Court prefers to name a family member as Guardian or Conservator, we prepared Durable Powers of Attorney, Patient Advocate Designations, and Living Wills, clearly specifying that each of the women wanted the other present and in control of making decisions in the event of their incapacity.

After addressing the clients’ concerns regarding care in the event of emergencies, we turned to what happens after one of them passes away. Under Michigan law, if a person dies without a Will or a Trust, the state intestacy statute determines how assets are distributed. That statute ignores same-sex partners in making distributions and can leave one partner homeless and perhaps even penniless. The first step we took to avoid this situation was to transfer their residence to the two of them as "joint tenants with right of survivorship." While this form of ownership does not provide the same creditor protection to same-sex couples as it does to married opposite-sex couples, it does still guarantee that the survivor of them would own the residence. Additionally, we set up a Living Trust for each of them and provided that upon the death of one, the other partner received all of the tangible personal property, household items, and jewelry to insure that neither would end up owning a home but have to give up other tangible reminders of their loved one.

The Living Trusts also provided that each of their assets would be held in trust for the survivor of them. While in some situations, for tax or personal reasons, it would make more sense to leave assets to a same-sex partner outright, it was important to our clients that in the event any assets remained after the death of the second of them those assets would go to each of their family members who supported them and their choices. However, each named their partner as the successor Trustee so that during her lifetime she would retain almost total control over the assets and never need to request assets from someone else.

Over the years, we have amended these client’s documents to comply with changes in the laws that affect their relationship. But while times and laws are changing, and more states, as well as the Federal government, are treating same and opposite-sex couples equally, until Michigan law does the same it is important for us as professionals to provide guidance to our clients so that they are aware of the ability to control their situation. It is also important to remember that each situation is unique and calls for an analysis of what the partners want, and not presuming that every same-sex couple’s needs will be met with the same plan. 

Planning to Protect a Second Wife and Five Adult Daughters

Over the past year our goal in writing Plainly Legal was to discuss many of the technical legal issues in the area of estate planning that impact the practices of financial planners. Using this information as a basis, going forward we will be addressing specific situations raised by our clients and how we dealt with those situations. As we address these examples, we will do our best to link back to previous posts that address the technical issues. If any of you run across an issue or have a question on how to solve a client problem, feel free to e-mail us and we can address it in future posts.

A client of ours, diagnosed with cancer and given only a short time to live, was concerned about protecting his second wife during her lifetime, yet treating his five adult daughters fairly. The client owned a valuable business and also had significant personal assets, but was concerned that some of his daughters might create problems for his wife after his death. He was also concerned that he had not taught his daughters the value of money and worried they would not handle an inheritance well.

Initially, he wanted to leave everything in trust for his wife for use during her lifetime, with distributions to the daughters after her death. Knowing that the wife was somewhat younger than our client was and in good health, I raised the issue that it might be some time before the daughters received anything. To address this concern I suggested we carve out sufficient assets in a Marital Trust, including the residence and sufficient invested assets to maintain the wife's accustomed standard of living, for her use during her lifetime. Since the residence had significant value, we wanted to provide flexibility for the wife if she ever decided to sell the residence, and therefore we provided the Trustee with the power to sell the residence and use the funds to purchase a new residence for the wife, with any remaining funds added to the Marital Trust for the spouse. This power to purchase a new residence gave the wife the flexibility to downsize her residence or move to a different state for health or personal reasons if necessary. We also named the wife as a Co-Trustee of the Marital Trust set aside for her benefit, so that she had a say in the management of the assets held for her benefit.

To protect the daughters from their spending habits and maintain the value of the business, we placed the business and the remaining assets in a Children's Trust for the daughters benefit. The daughters received income automatically from their Trust each year, but principal distributions were totally discretionary until the oldest child reached the age of forty. At that point, the trust began distributing principal at the rate of 20% per year for the next five years. Our client felt comfortable that this would provide an income stream for each of the daughters, allowing them time to learn the value of money and how to manage the business, yet protect the value of the business so that disagreements among his daughters would not result in the sale of the business. To address the client’s concern that his daughters might cause his wife problems, we suggested that the wife be the Trustee of the Children's Trust, with a corporate fiduciary as a Successor Trustee in the event that the wife ever decided to resign as Trustee. Our client liked the idea because it gave the wife control over the children's future assets and distributions, which he felt would lessen the chance that the children would give her problems.

Fourteen years have passed and I am happy to report that the Marital Trust, with good investment advice, has provided sufficient income to maintain the wife's accustomed standard of living. She still lives in and enjoys the residence. Over time, the daughters received all their distributions and now jointly own the still successful family business. They learned the values of hard work and cooperation and the business provides each of them a good income. As an added bonus, some of them even enjoy a good relationship with their stepmother.

This is a good example of how planning can protect families and their assets following a client’s passing. While this particular client was in good health, we completed other planning that facilitated a smooth transition of other business assets and provided funds for payment of Federal Estate taxes when the client passed away. Next week we will address this planning in detail.

Alan Ferrara

Adjusting Estate Plan Documents for Lifetime Gifts or Loans

Clients are often concerned with ensuring that they treat each of their children equally. Clients worry that imbalanced gifting between children, for example providing more funds to one child to attend a private university while their sibling attended a state school, providing one child with the funds to assist with the down payment on a house, or assisting one child with launching a business, will cause tension if not balanced out in the long run. This concern leads to a discussion about which children previously received gifts or loans from the parents and how to adjust the distribution of trust assets to children to be fair to siblings who did not receive such gifts and loans.

One of my favorite phrases with clients is "the only limitation on what you can do is your imagination." I have one client who has chosen to add a provision to his trust that states that all distributions to children whether as a loan or a gift are to be treated as a gift and shares of the children are specifically not to be adjusted for anything received during lifetime. Other clients want options that provide greater equality, but are more complex. While I am happy to provide those options, I will often suggest to a client he or she may want to consider what is "fair" for each child rather than what is "equal.”

There are a number of ways to adjust distributions to account for gifts or loans to children during the client’s lifetime. One example is to have the trustee add all loans and/or gifts made during the client’s lifetime back into the estate at death for calculation purposes. The trustee then provides an equal division for all children, adjusting each child's share for loans and/or gifts they received during lifetime. If clients elect to use this method to adjust bequests, careful records should be kept, to ensure that children are not penalized for loans that were previously repaid.

Another option is to provide a specific dollar amount for each of the children who did not receive loans or gifts during lifetime, which the trustee distributes from the estate before the equal division occurs. Again, good record keeping is important with this method to avoid creating an imbalance in favor of a different child.

There are number of other options, but it is clear that such clauses should be added to a client's documents only after a discussion with the client and careful drafting by a qualified professional.

Alan Ferrara

What Happens When Successor Trustees Take Control?

     In our last blog, we discussed steps a client’s Personal Representative takes as part of the probate process upon the client's death. Today's blog addresses how the client’s Living Trust and their successor Trustee fit into that picture. In most cases, the Successor Trustee plays a significantly larger role in the administration, because a properly funded Living Trust limits the assets that need to pass through the Probate Court.

     Unlike a Personal Representative, the Successor Trustee does not need to wait for the Probate Court to approve their appointment.  The Successor Trustee can sign an Acceptance of Trust indicating acceptance of the trustee position and then take possession of the trust assets on behalf of the trust beneficiaries. The Trustee is responsible for the care and custody of assets and making investment decisions, but may rely on qualified professionals for assistance. It is important to remember that a Trustee is a "fiduciary" and must meet a very high standard of care with respect to all actions.

     One of the first things a Trustee must do is apply for a federal tax identification number for the Trust. While a Living Trust uses the Grantor’s Social Security number during the Grantor’s lifetime, both the Estate of a deceased individual and that person’s Living Trust must have separate tax identification numbers and file income tax returns for as long as the Estate remains open and the Trust continues to hold any assets. In limited circumstances, the Estate and Trust may file a combined return; however, it is important to seek the advice of a qualified professional before filing such return.

     Next, the Trustee should provide the beneficiaries of the Trust with certain information, including informing beneficiaries of the existence of the Trust, the name and contact information of the successor Trustee, and information regarding the scope and terms of their individual bequest. This statutorily required notice serves as a check on the Trustee's powers by giving the beneficiaries sufficient information to hold the Trustee responsible for their actions. The Trust normally provides that the Trustee must provide an annual accounting to beneficiaries during the time the trust owns any assets. Prior to making any distributions to the beneficiaries, the Trustee should coordinate with the Personal Representative to pay the grantor’s creditors as may be required by law.

     When all Trust Matters are completed, the Trustee distributes the trust assets to beneficiaries pursuant to the Grantor’s instructions. In all circumstances, it is important that a successor Trustee seek the advice of competent counsel in order to comply with all of their responsibilities, and to assist in the smooth administration of the trust to achieve the grantor’s goals. Later this week we will discuss how the successor trustee should handle distributions of particular assets, including personal property and investment accounts.

Matt Ferrara

Extra Privacy Gained from Trusts

     Increased privacy is one of the major benefits of using a living trust in estate planning. The Trust allows you to avoid public disclosure of the assets of the estate and the distribution provisions of the Will in the Probate Court. It also allows the Grantor to provide Beneficiaries with information that applies to their own distribution but not the distributions for other Beneficiaries. 

     The Michigan Trust Code (MTC), which governs the duties and powers of the trustee along with the rights and interests of trust beneficiaries, requires that a trustee of an Irrevocable Trust or a Living Trust which became Irrevocable upon the death of the Grantor inform a trust beneficiary of the following information:

• That a trust exists that names the person as a beneficiary 
• The identity of the Grantor of the trust. 
• The Trustee’s identity, including address and telephone number 
• The court, if any, in which the trust is registered The terms of the trust that describe or affect the beneficiary’s interest and relevant information about the trust property.

     The MTC also mandates that the trustee must provide an annual accounting of the Trust property to everyone who receives, or may receive, a distribution from the Trust. The Grantor of a Trust may override that statutory requirement and dictate whom, if anyone, the Trustee must provide with an accounting. It is important to note that even when the terms of the trust waive the annual accounting, a Probate Judge has the authority to order the Trustee to provide the court, or other parties, with an accounting.

     The benefits of these statutes to a Grantor include the ability to provide bequests of different values for children without revealing the differences in gifting. Alternately, it allows the Grantor to make equal gifts to multiple children, but under different terms, without creating strife because one child receives their bequest outright while other gifts continue in trust with restrictions on distribution. 

     The Michigan Trust Code strikes a balance between the Grantors’ right to privacy and the Beneficiary’s ability to confirm the Trustee meets their fiduciary duty. The information that Trustees must provide to a beneficiary gives that person sufficient information about their rights to the trust assets to determine whether the Trustee is doing their job. If the beneficiary suspects something is amiss, the information gives them a basis for the Probate Court to order a complete accounting. 

     It is important for successor trustees to understand the law and review the terms of the trust in order to determine the scope of their duty under the trust and applicable law. Often the attorney who drafted the trust document is the most useful resource for successor trustees in determining what information the trustee must provide to beneficiaries. A responsible attorney will provide clients with contact information and assurances that they will be available to help the successor trustees administer the trust when the time comes.

Matt Ferrara