The Importance of Regular Document Review

Many of my clients, after signing their estate planning documents, express with relief, “I'm glad we’re done with that task". Whenever I hear that statement, I remind my clients that, while executing documents is an excellent first step in the estate planning process, as their life changes, their documents may someday need changes, updates, or revisions. I suggest three primary events that should cause them to review and possibly update their estate planning documents:

 Substantial Change in the Value of Assets

An important goal of estate planning is to minimize or avoid gifting and estate taxes. As asset values increase, especially the point where a portion of the estate may be subject to estate taxes, it is critical to review documents to determine if the current strategies implemented are sufficient to achieve planning goals and to determine if different or additional strategies are advisable to protect against possible tax liability.

As assets increase, it may be advisable, or desirable, to take advantage of advanced gifting strategies for loved ones. This not only benefits family in the near-term, but also reduces the value of the future estate, thereby reducing estate tax liability. Certain gifting strategies also have an effect on income tax liability. By transferring income-producing assets to children or grandchildren, the income created by those is taxed at a lower rate due to the new owner’s lower total income.

In addition to reviewing an estate plan in regards to eventual distributions, as assets increase it is important to make sure additional assets are appropriately included in the trust property. Proper funding is important to achieve the second goal of estate planning, probate avoidance.

An increase in assets is not the only reason to review estate plan documents. If the value of assets decreases, it may be possible to simplify an existing estate plan by eliminating revocable trusts that are no longer necessary. Additionally, existing gifting plans may require review to ensure the existence of sufficient assets to provide for continued personal well-being.

Change in Family Situation

The family situation and dynamics are rarely stable, with many possible events creating a desire to modify an existing estate plan. Those events include,

1. The birth of additional children
2. The birth of grandchildren and a desire to provide for their future in addition to, or in lieu of, providing for children
3.  A special need arises with a child or grandchild
4.  A child demonstrates greater maturity earlier than anticipated, or perhaps demonstrates significant immaturity, raising questions about their ability to handle funds
5.  A parent or another elderly relative indicates a potential financial need
6. The need to remove an ex-spouse as a beneficiary following divorce
7.  In contemplating remarriage the need to ensure protection for both a new spouse and children from a prior marriage
8.  A significant change in personal health
9.  For any number of reasons, those people chosen to act as guardians for minor children, trustees, or persons designated to make legal or medical decisions in the event of incapacity are no longer appropriate choices.

These and many other naturally occurring family events require periodic review to make sure that estate plan documents reflect the changing situation and present desires.

Changes in the Law

Since 1976, almost every year has brought a modification to federal estate tax statutes. Case law is constantly evolving as the Internal Revenue Service litigates positions in opposition to strategies used by taxpayers to minimize or eliminate estate taxes. In addition, state law as it relates to probate, trusts, and powers of attorney and patient advocate designations has changed a number of times. Regular review of documents and the status of the law help ensure maximum estate tax and probate savings.

These three factors may have different relevance for clients with different situations. For an older client whose assets remain constant there may be little need to revise estate planning strategies for tax law changes, but it may be more important in the family dynamics change concern arises for beneficiaries with previously unforeseen issues. For younger clients with growing families and growing balance sheet, document review becomes important as assets approach taxable levels, or the birth of children creates an increased need for protection in the event the unexpected occurs.

Whatever the reason, it is important to be mindful that in order to provide maximum protection for loved ones and minimize potential tax liability estate planning must be an ongoing process. For younger families with rapidly changing lives, a review every three to four years, or perhaps even more frequently, is advisable. For families in more mature or secure situations, less frequent review is necessary. A good estate-planning attorney should provide guidance when there is a change in the law that affects existing documents, but since a client’s personal life rarely makes front-page news it is important to keep attorneys apprised of major life changes. This allows them to provide guidance and support that creates peace of mind from knowing that an estate plan continues to provide protection for loved ones.

Protecting Four-Legged Loved Ones

The subject of today's blog started as a joke over the holidays as I discussed with a number of friends my desire to expose more people to the information in our blog. Those friends informed me that the most successful blogs they know of deal primarily with pictures of cute animals and/or celebrity gossip. In honor of that discussion, I start today's blog with this adorable photo.

While we do not intend to make a habit of luring readership to our site with adorable puppy pictures, we are not opposed to an occasional cute picture in order to educate people about the estate planning process.

-Matt

For most people, the process of estate planning revolves around ensuring that their assets go to the people they care for and that sufficient protections are in place so that those assets are put to the greatest possible use. For some people this means establishing 529 Education Savings Plans to ensure that funds are available for children or grandchildren to attend college. For others it means limitations on the distribution of trust principal to ensure that beneficiaries with spending issues or other personal issues have a source of income over their lifetimes. Often forgotten in the estate planning process is the fact that a person's loved ones sometimes include nonhuman companions that will also require care after their owner has died. While it is certainly possible to nominate an individual to care for a loved pet and leave that person funds for that purpose, the use of a pet trust ensures that those funds are used only for the benefit of the pet and the new owner does not skimp on the pet’s care to supplement their own income.

Currently forty-eight states, including Michigan, allow for the creation of a trust for the benefit of animals. These trusts, commonly known as Pet Trusts, allow people to ensure that assets are available to provide for their furry friends after they are gone. In Michigan, Pet Trusts are governed by MCL 700.2722. This statute formalizes the principle that the care of a pet is a lawful, noncharitable purpose, for which the trust can be created. Furthermore, the statute creates a presumption against construing a bequest for the benefit of the pet as merely precatory or honorary, thus discouraging courts from refusing to enforce such bequests.

The Michigan statute does however place certain limitations on the use of Pet Trusts. First, the statute limits the term of a Pet Trust to the lifetime of the animal or animals named as beneficiaries. However, the statute recognizes that certain animals have extremely long lifespans and therefore exempts trusts created under the statute from the uniform statutory rule against perpetuities, which would otherwise cause such trusts to fail and be unenforceable. It is possible for a pet trust to provide for multiple generations of animals or for multiple animals of varying ages. Second, the statute specifically allows the probate court to reduce the amount of property transferred to the trust if the court determines that the amount designated substantially exceeds the amount required to care for the animal. When a court makes this determination, the amount of reduction passes pursuant to the terms of trust as if those assets were not expended caring for the animal. This means that as in the case of Leona Helmsley, who attempted to leave her dog, "Trouble", $12,000,000 in the trust fund, the probate court is free to determine the amount of assets needed to care for a pet over its remaining expected lifespan. In the case of Trouble, it is worth noting that the probate court determined that a reasonable sum to provide care for the rest of his lifetime was only $2,000,000.

For those people who are not real estate moguls with the desire to keep their Maltese in handmade dog food and fur coats for the rest of their lives, a pet trust still provides an excellent resource for ensuring care of their animal companions and encouraging a two legged loved one to take the pet into their home. When creating a pet trust it is important to remember three things. First, as discussed, it is important to determine how much to leave in trust for the pet’s care. You should also determine what happens to any amount left in trust at the death of the pet. As with any other residuary distribution from a trust, the grantor can determine how such funds are distributed. In the simplest case, any remaining funds are distributed to the other beneficiaries. Alternately, if the grantor is charitably inclined, remaining funds could be used to benefit charitable organizations including the ASPCA, Humane Society, or World Wildlife Fund. In addition, it is important to name individuals who you wish to care for your pets. A pet trust does very little good if there is not a human alive to expend the trust assets for the pet’s benefit. From a common sense perspective, it is preferable to name someone other than the Trustee of the trust as the guardian for the pet, thus ensuring that there is supervision over the use of the assets. Lastly, it is important to remember that pet trusts are not limited to dogs and cats. The statute allows the creation of the trust for any animal, thus it is possible to ensure that funds are available to care for large animals such as horses or long-lived animals such as turtles long after the original owner has passed away.

As with any other form of trust is important to work with a knowledgeable and licensed attorney to ensure the observation of the legal formalities of creating a trust and that the trust is enforceable. Planning for the long-term care of an animal is as complex as planning for the long-term care of any other loved one, but with the proper assistance it is possible to ensure that all of our friends and family, on two legs or four, receive the best possible care even after we are gone.