When to Update an Estate Plan

We advise that estate planning is an ongoing process and that our clients should not simply put documents in the drawer and forget about them. Part of that ongoing process is a need to review and, if necessary, update documents on a regular basis. Our clients often ask us, "How often should I update my documents?"

When it comes to keeping an estate plan up to date, there is no one-size-fits-all answer, because a client’s need to update documents is related to when things change in the client's life. For some clients there is a need for annual review and updating the documents to reflect changes in asset ownership, gifting to loved ones, charitable inclinations, or desires to change their beneficiaries. For other clients, for example those with young children, fewer changes may be necessary though it is important to ensure that the designees named to serve as Guardians and Trustees remain current with the people that a client wants to raise and provide for their children.
There are a number of life events that may give rise to the need for amendments or other changes to estate planning documents, including births, deaths, changes in employer/retirement, and in geographic relocation. Depending on how documents are structured and whether various life events were taken into account in the drafting of documents, any of these events can create the need for significant updates.
While most estate plans automatically take into account the birth of additional children, unless the client has designated successors, the death of a successor trustee, attorney in fact, or patient advocate means that it is time for an update. The same is true if the client simply no longer wants their original designee involved. Failure to update designees may delay or derail the administration of an estate or Trust.
As we touched on previously, in general estate planning documents do not “expire”. A Will drafted in 2018 is as good as one drafted in 1968, but documents can get “stale.” A stale document is one that has not been updated in many years and especially in the case of Powers of Attorney and Patient Advocate Designations, a stale document can make administration more difficult. Financial institutions, doctors, and others may be reluctant to follow the instructions of a designee relying on a ten year old document, worrying that the Principal may have executed a contradictory document in the interim or, because of time, may not want that person designated to exercise power. Refreshing documents regularly keeps them current with laws and helps avoid conflicts with anyone accepting the documents as proof of authority
We recommend reviewing documents at least once a year to confirm whether or not changes are necessary. When in doubt if a change is needed, an experienced estate planning attorney can provide you with the guidance you need to avoid putting yourself or your loved ones into a difficult position.

Matt and Al

Estate Planning as a Process 2.0

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

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

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

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

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

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

Matt and Al

The Importance of Reviewing Life Insurance Policies

A potentially important part of a client’s estate planning is life insurance. Life insurance provides liquidity for any estate taxes or other expenses at death, can provide for income replacement on the death of a primary household earner, and provides protection against liabilities that might come due or be difficult to pay at the death of a client. However, clients should not buy a policy and presume that the policy will meet all their needs forever. Like other aspects of the estate planning process, clients should review their insurance policies regularly to ensure that those policies still help to achieve the client’s goals.

Often clients, especially those in their early earning years will purchase term insurance because it meets their needs and is more affordable than permanent life insurance. Clients and their advisors should remember that term insurance is just that—purchased for a specific and definite time. Clients should review their policies annually or set reminders so coverage will not lapse without securing new coverage. It is also a good idea to periodically review the policies and compare them with new offerings that may be less expensive. It also is a good idea, as long as the client is still healthy and insurable, to consider purchasing a replacement policy before the current term is up in order to extend coverage for additional years. For example, a client has a ten-year term policy and five years have elapsed, if the client purchases a new ten year term policy the client has secured additional coverage at a lower rate than they would likely receive at the end of their original ten year policy.

Clients also need to remain aware of where their insurance comes from. Sometimes a client will rely on group insurance provided by their employer to meet the needs mentioned above. If so, care should be taken to insure that replacement insurance is available before the client changes jobs or retires.

Even permanent insurance requires the client’s regular review. Depending on a clients circumstances and changes in the insurance market it may be possible to purchase policies with improved benefits or decreased premiums. Clients also need to keep in mind their reasons for purchasing insurance. If those circumstances change so that insurance is no longer necessary it is often more cost effective to allow a policy to lapse than to pay premiums for an eventual payout.

Finally, clients should review their beneficiary designations to be sure the beneficiaries named are those that should receive life insurance proceeds. It is not unusual for us to review client policies and discover their parents or siblings are named, despite having a spouse and family of their own. We also will discover clients still have their ex-spouses named, even if they have remarried. Sometimes Michigan law will protect against these flawed designations in the case of divorces, but federal law overrides state law and insurance proceeds can go to those who should not receive anything.

Insurance products are constantly evolving, and the client should have their policies reviewed by a professional expert in the industry. We are happy to help our clients in facilitating policy reviews

Alan Ferrara

More Potential Pitfalls of the New Estate Tax Law

     As we discussed in our last post, the increase in the applicable exclusion to $5,250,000, which dramatically reduced the number of estates with estate tax liability, also has the potential to create large problems for surviving beneficiaries if older estate plans are not updated. This is especially true in plans where the existing non-marital share primarily benefits other than the surviving spouse. This situation arises most commonly where clients want their children to receive something immediately upon the death of the first spouse or where the client wanted to provide for the children of a first marriage after remarrying. This strategy may have made sense at the time, because in prior years the applicable exclusion was smaller resulting in a smaller non-marital share and thus leaving sufficient assets to provide for the surviving spouse in the marital share. 

     With the new larger applicable exclusion, existing trusts will allocate significantly more assets to the non-marital share, potentially resulting in an inadvertent disinheritance of the surviving spouse. Some alternatives for protecting the surviving spouse in a situation such as this, while still achieving the goals of older trusts include the following modifications to the trust provisions: 

• Revise the non-marital share to provide the spouse is the sole beneficiary of distributions of income during the spouse's lifetime with the remainder going to children. 
• Revise the non-marital share to include the spouse as a beneficiary or co-beneficiary of income and/or principal together with the children, within the discretion of the trustee. 
• Revise the non-marital portion of the trust to limit the size of the non-marital trust for children and descendants (such as the figure that the client originally intended as the highest estate tax exemption) while providing the remainder of the non-marital portion be used for the exclusive or primary benefit of the surviving spouse. The amount of this cap will depend on the goals of the client and the needs of the surviving spouse. 

     Keep in mind that merely placing an arbitrary cap on the non-marital share, with the remainder going to the marital share will increase the surviving spouse's taxable estate by increasing the marital share. This increase could cause the surviving spouse's estate to be subject to estate taxes where the combination of the surviving spouse's separate assets and the enlarged marital share exceed the surviving spouse's applicable exclusion amount. The permanent adoption of portability has the potential to alleviate this problem in many situations. Portability is a complex topic that we will address in a separate post in the near future. 

     What is important to know is that with careful planning it is possible to provide a surviving spouse with extensive rights in and powers over the trust funds without causing the entire trust fund to be included in the surviving spouse's gross estate. Such rights and powers would include: 

• The right to all income, distributed currently. 
• The right to withdraw or require distributions of principal in such amounts and at such times as are necessary for the surviving spouse's health, education, support, or maintenance. 
• The right to receive distributions of principal in such amounts and at such times as the trustee (other than the surviving spouse) deems appropriate for any or at least a broader purpose. 
• The noncumulative annual right to withdraw the greater of 5% of the value of the trust fund or $5,000 dollars. 
• A testamentary power to appoint the trust fund to a class of beneficiaries that does not include the surviving spouse, his or her creditors, his or her estate, or its creditors. 
• The right to serve as the sole trustee or as a co-trustee or to remove and replace other persons serving as trustees. 

     As you can see, failing to review estate plan documents after tax law changes can lead to significant problems. Those problems can be remedied easily making changes to documents so that they again will reflect the intentions of the clients.

Alan Ferrara

Estate Administration

     Sometimes, despite our best attempts to completely fund a Living Trust, a person dies and has assets in their own name. When this happens Michigan law requires that those assets pass through probate. In prior posts we discussed the process of probate in general, but if you have a client whose estate will be subject to probate, it is important to deal with the specifics of probate on a timely basis.     The biggest challenge often is getting the client to understand the probate process and the need to collect information quickly. The client is often a grieving family member and occasionally not in the best position to give their full attention to completing the work of probating the estate. While it is possible to delay some aspects of the process some matters must be handled quickly. For example, there may be a need to manage and preserve some of the assets. Securing real estate or protecting and storing other valuables demands immediate attention. In order to deal with these matters, there must be a Personal Representative for the estate and that is where the Probate court normally first gets involved.
     The probate process usually begins by petitioning the Probate Court for the appointment of a Personal Representative. The Personal Representative is the person designated to administer the Estate and has the legal authority to do anything necessary with respect to estate administration. Parties interested in the probate (such as the spouse, children and grandchildren) must be listed on the petition, which also needs to include an inventory of estate assets. If the interested parties all waive the right to a formal hearing, the court can appoint a Personal Representative immediately upon filing of the petition. In order for the process to proceed quickly, the person desiring to be the Personal Representative should collect specific information prior to the first meeting with the attorney in order to avoid delays in starting the probate process. That information includes:

1. Original of the Last Will and Testament, if there is one
2. Names and addresses of all "interested parties" which include spouse, children, grandchildren, and any other potential beneficiaries named in the Will or by the state intestacy statute 
3. A list of all "probate assets". 

"Probate assets" are only those assets that are in the name of the decedent alone and/or in the state of Michigan. Any assets owned jointly with another person, owned by a revocable trust, or that pass by a beneficiary designation are not included in the probate process. It is important to review assets because occasionally assets are titled differently than expected. 
     The Personal Representative’s responsibility is to find all of the estate’s assets. To assist in that process, once the court names a Personal Representative, that person can request information from banks, brokers, life insurance companies, and other financial institutions. Sometimes the however the client it is at a loss to determine the scope of the decedent's estate or where such assets might be located. In addition to reviewing a decedent's financial papers, one good place to start locating assets is by reviewing the prior year's income tax return. The return will list any assets that generated income, including bank accounts and property. In addition, many people now initiate all their financial transactions through the Internet. Determining and gaining access to a decedent's electronic accounts has become very important. Checking property tax records and local register of deeds records is also a way to discover other assets. If the decedent owned assets in another state, the Personal Representative may have to institute an ancillary probate for those out-of-state assets. Finally, the Personal Representative should also change the decedent's mailing address to the Personal Representative's mailing address so that information about accounts and creditors will be readily available.
     Another of the Personal Representative's duties is managing and preserving all of the assets of the Estate. The Personal Representative has a fiduciary duty to prudently manage these assets. The Personal Representative can appoint a qualified professional investment manager to oversee investment decisions. Another part of this duty is insuring assets of the estate against lose. Appraisals of various assets may be necessary in order to ensure fairness and equity in dealing not only with beneficiaries but also with creditors.
     In addition to collecting and preserving assets, the Personal Representative is charged with notifying known and unknown creditors on a timely basis. Known creditors must receive an actual notice and unknown creditors are notified by publication in the local legal news. If there is proper notification, creditors have only 63 days to file a claim against the estate, otherwise their claim is forever barred. 
     While completing all of the previous tasks, the Personal Representative must also determine and notify beneficiaries of their interest in the estate. If there is no Will, the state intestacy statute controls the beneficiary designations. When there is a Will, the provisions of the Will control who is to receive assets of the Estate. In any event, potential beneficiaries should receive initial notification and be advised on a regular basis of the process prior to the eventual distribution of assets. If there is any dispute as to who are beneficiaries, the Personal Representative can ask the Court for ruling on that issue. The Personal Representative should provide an annual accounting of the estate administration to keep the beneficiaries fully advised. 
     Unfortunately, there is no convenient time to institute probate proceedings because it often involves the death of a loved one, but proper communication between the attorney and the Personal Representative, and then between the Personal representative and the interested parties can make the process easier for all involved.

Buy Sell Planning As an Important Part of Estate Planning

When assessing a client's estate planning needs, it is important consider any business interests owned by the client. Business interests are frequently one of the client’s most valuable assets and absent other planning, pass according to the provisions of a client's Will or Living Trust. Unfortunately, often a direct transfer of the business interest to beneficiaries is not optimal for the operation or continuation of that business after the death of the client.

For example, if the surviving spouse or children have not been active in the business, their lack of operational experience can cause reduce the business’ value quickly or even cause the business to collapse completely, rendering it valueless. If the business is a large part of the client's assets and provides a good income stream, this scenario will pose a serious problem for the spouse and minor children if the business is lost. Another potential issue arises when only some, but not all, of the client’s children, are active in the business. If all the children receive equal shares of the business, the non-active children may try to manage the business without knowledge, again causing the value the business to decrease significantly. Alternately, the non-active children may demand the purchase of their interest by the children active in the business, creating substantial cash-flow problems.

However, by engaging in Buy Sell planning it is possible to significantly reduce the likelihood that such problems will arise. Buy Sell planning is also important when the client is not the sole owner of the business. In situations where a portion of the business is owned by a nonfamily member, but the deceased client's interest now goes to beneficiaries a Buy Sell Agreement can protect the nonfamily member and the business from new owners who,

• Have no interest in being a part of the business;
• Want to be part of the business but have no idea how to run it; or
• Are unrealistic about the value of the business.

All of these situations can decrease the value of the business, create cash flow problems if the beneficiaries demand a salary, or simply wish for cash in exchange for their interest.

All of these situations are common, however by executing a Buy Sell Agreement the business owners can proactively limit the chance that a sudden change of circumstance for one owner can bring down an entire business.

The primary benefit of a buy sell agreement is the protection provided to the health of the businesses. A Buy Sell Agreement typically provides that under certain circumstances, one of the parties has the right or obligation to purchase the interest of the other party for whom a triggering event occurred. The agreement typically provides for specific events, such as death, disability, desire to sell, or retirement that trigger the parties’ obligations to one another. Additionally the Buy Sell Agreement provides provisions for determining the value of the business interest and terms for the payment of the price over a fair time span to all the parties. Further, beneficiaries can receive fair value for their business interest over a reasonable period, without adversely affecting the health of the business. It is important to review and update the buy sell agreement periodically as the situation changes.

In circumstances where the potential for conflict exists between siblings or with non-family owners, the parties will "fund" the agreement with life insurance, to be paid in the event of the death of one of the parties. The life insurance proceeds pay the deceased's estate for the deceased’s share of the business and beneficiaries involved in the business operation or the non-family owner are free to run the business without interference. To the extent that the value of the business exceeds life insurance, the Agreement provides for the payment of the remaining value over a reasonable time, with reasonable terms.

I often meet resistance when I discuss a buy sell agreement with some of my business clients. That resistance usually melts away when faced with one of two questions:

1. "Do you want to be partners with your partner's spouse, if your partner passes away?
2. Will your children’s collective efforts result in the continued success of the business?

While client’s may like a partner’s family members, they are generally not interested in being partners with them and when they truly take the time to consider their children’s interests most clients acknowledge that ownership is better passed to particular children.

A business interest is often a large part of a client’s assets. A properly drafted Buy Sell Agreement is important to insure that beneficiaries benefit from that asset in the best possible manner. Having a Buy Sell Agreement allows a client's family to be treated fairly as part of the purchase agreement and allows the remaining parties to continue running the business with no management interference while purchasing the business interest for a fair price and at reasonable terms. This is why any complete discussion of estate planning issues is not complete without addressing the client’s business interests.

Providing Loved Ones with a Postmortem Checklist

     As we discuss estate planning both here in the blog and in our practice, we take pains to reinforce the idea that estate planning is more than drafting and signing a set of documents that will sit in a drawer, forgotten, until someone passes away. Estate planning is an ongoing process that requires clients to take an active role in order to be most effective. An important example of a client responsibility in the process is the preparation of a Postmortem Guide to assist their loved ones in dealing with the practical results of their death.

     While loved ones know to take care of obvious tasks, such as making funeral arrangements and gathering assets, less obvious concerns including providing notice to Social Security, canceling subscriptions, dealing with credit cards, and shutting off utilities often are forgotten. By taking the time to prepare a Postmortem Guide, it is possible to provide loved ones with a checklist of required actions and all of the information needed to complete those actions.

     Following every estate plan signing we send our clients a letter that includes a list of tasks to complete following a death, including:

•          Making funeral arrangements
•          Meeting with attorneys and accountants
•          Giving notice to Social Security
•          Giving notice to Veterans Administration (if necessary)
•          Giving notice to Pension Providers
•          Giving notice to creditors
•          Securing the contents of any safe deposit boxes
•          Gathering assets and personal effects
•          Maintaining the residence
•          Continuing the operation of existing businesses

Along with that list, we include a form that provides the client with an organized structure for providing their loved ones with the information needed to complete those tasks. This information includes:

•         Space for names and phone numbers of the individuals the client has named in those documents.
•          A section to list existing creditors, such as credit cards, mortgage companies, and other outstanding loans
•          The names and phone numbers for the client’s advisors, including brokers, insurance agents, the doctors, and spiritual leaders
•          An area to provide instructions regarding funeral and burial arrangements
•          An area to provide information regarding the location of assets
•          A section to list the names and phone numbers of utility providers
•          A section for online and other passwords

     We encourage our clients to complete this form and keep it with their estate planning documents and then to inform those people designated in the documents of the location where the documents are located.

     Occasionally a client wishes to provide their loved ones with final words of wisdom or an explanation of the reasoning used in making gifting decisions. In those circumstances, we discourage the inclusion of such information in the estate plan documents, so as to minimize any non-legal language that potentially can lead to confusion in the distribution of an estate. Instead, we suggest the client write a separate letter to their loved ones with this information and include it in the same information package as the to do list and pertinent information form.

     While it may seem obvious that having this information handy will assist loved ones in an emotionally trying time, many of our clients express thanks to us for providing them with a format to articulate the information and for encouraging them to sit down and organize the information as part of the planning process. As we have previously said, estate planning involves more than drafting documents. We see it as the duty of estate planning attorney to continue to guide their client through the lifelong process of planning, including organization, proper funding, and regularly updating documents, thus ensuring that the client’s loved ones do not face any more problems than necessary during an already difficult time in their lives.