- Practice Areas
Trusts & Estates
Estate planning and probate administration are much broader in scope than most people realize. This practice requires not only knowledge of the laws and practical aspects of estate planning, probate, and trust administration, but also knowledge of the laws governing business organizations, real estate, personal property, and taxes. Our trusts and estates attorneys have experience in all of these areas, enabling them to provide practical planning advice from a comprehensive, multifaceted perspective.
Helping Clients Understand Estate Planning
Estate planning is an area of law that is confusing to most people, in large part because of terminology that is rather foreign. lt is also confusing because of the impressions generated by advertisements that use fear as a motivation to purchase will or trust forms (which almost always cause more problems than they solve) and because of the horror stories that people hear about long, drawn-out probate proceedings, huge legal fees, and tax liabilities. While these problems do occur in some estates, they are usually a result of the decedent's lack of appropriate estate planning, arguments among beneficiaries, or disputes with the Internal Revenue Service regarding the value of assets in large estates.
Things to keep in mind:
- A person should not rely on what other individuals do for their estate planning and assume the same will work for his or her own situation.
- A good estate plan is based on a particular financial, personal and family situation of that individual. People tend to listen to friends or neighbors who advise them to sign a "simple" will alone or use a joint ownership arrangement as their sole means of estate planning. This may be the right solution for some, but not most.
- It coordinates a number of documents and techniques to make certain that all of the person's objectives are accomplished. This may involve avoiding probate, minimizing federal estate and incomes taxes, titling assets to minimize liability exposure, preserving a family business and that certain assets are distributed in a matter a person desires.
The explanations below are intended to give a person a general overview of the basic documents and techniques used in estate planning.
- Dec 5 2019
- Dec 3 2019
- Nov 27 2019
- Nov 27 2019
Key Estate and Trust Terminology and Information
A will is a document that directs the distribution of your individually-owned assets at your death. The will usually directs that debts and taxes are to be paid, indicates who will receive your tangible personal property (furniture, jewelry, vehicles, etc.), and who will receive the remainder or "residue" of your estate. The will nominates a personal representative (formerly known as an "executor" or "executrix") who is responsible for paying your debts and taxes and then distributing your assets as directed in the will. The will also nominates persons to serve as guardians if you have children who are under age 18 or are otherwise unable to care for themselves.
Many people believe that the will governs the distribution of all assets that they own at the time of their death. Actually, the only assets that are governed by the terms of the will are those that you own in your name alone at death or that are payable to your estate. These are the assets that must pass through the probate process. Assets that you own jointly with rights of survivorship with other persons who survive you will pass automatically to the surviving joint owners upon your death, regardless of the provisions of your will. Likewise, assets such as Iife insurance and other death benefits will be paid directly to whomever you have designated as the beneficiary of those benefits.
Many people also believe that if they have a will, their assets will avoid probate. However, since the will only governs the distribution of those assets that are subject to probate, it does not avoid the necessity of probate proceedings. If you die with assets in your own name alone or with life insurance or other death benefits payable to your estate (rather than to named beneficiaries who survive you), then probate will be necessary whether or not you leave a will. lf you do leave a will, those probate assets will be distributed according to the terms of your will. lf you fail to leave a will, those probate assets will be distributed to your relatives based upon a scheme of distribution devised by the Michigan legislature referred to as the Intestate Succession (discussed below). Therefore, although the will does not avoid probate, it does allow you to choose who will receive probate assets if probate is required.
Without a will, you lose the opportunity to decide who will receive your probate assets. For example, if a woman dies with $300,000 in stock titled in her own name alone, the stock will be subject to probate proceedings. lf she did not leave a will, the stock will be distributed according to the laws of intestate succession.
If the woman was married and had children by her surviving husband, then the surviving husband would receive the first $224,000 plus one-half of the balance (or a total of $252,000). The children of the couple would receive the remaining $38,000 divided equally among them. This may or may not be appropriate given this particular family situation. For example, if the children are minors (under age 18), it is likely that the surviving husband will have to petition the Probate Court to be appointed the conservator to manage his own children's assets until the children reach age 18. lt is likely that the decedent would have wanted all of her assets to be distributed directly to her husband so that he would have the ability to deal with those assets however he wished. This is merely one example of what might happen if a person leaves assets in his or her own name alone and fails to leave a will. lf you want to be able to choose who will receive assets that may end up in your name alone at your death, you must have a will. Also, if you have children under age 18, then your will is the document in which you may name the guardian who will take care of your children when you are gone. If you leave no will, then you lose your ability to choose who will take care of your children.
Although the expense and delays involved with the probate process are often over exaggerated, it usually is desirable to avoid probate through a revocable Iiving trust, beneficiary designation, or sometimes through joint ownership of assets, as will be discussed further below.
One method of avoiding probate is to own your assets jointly with "rights of survivorship" with one or more persons. Upon one joint owner's death, the interest of the deceased owner passes automatically, without probate proceedings, to the surviving joint owner(s).
Because a married couple generally will want their property to pass to the surviving spouse outside of probate upon the first spouse's death, joint ownership is usually appropriate between a husband and wife. However, joint ownership between a husband and wife may not be advisable in certain circumstances. For example, when a couple's total net estate (assets, including life insurance and retirement benefits, minus liabilities) exceeds the amount that can pass free of estate tax, there is a potential federal estate tax liability that can be reduced or avoided by executing certain trusts and titling assets separately between their trusts. Also, if one spouse has been married previously and has children by the prior marriage, that spouse may wish to have at least some assets titled in his or her own name alone or in a trust to make sure that some of his or her assets will pass to the children by the prior marriage.
Another exception to the general rule of joint ownership between a husband and wife is with respect to an automobile or boat which, for liability reasons, should be titled in the name of the person who drives that particular vehicle most often. Automobiles and boats owned in a deceased person's name alone can be transferred without probate if there are no other assets subject to probate and the total value of the automobiles is under $60,000 and the total value of watercraft is under $100,000. These vehicles should nal be owned jointly because they can create joint liability for both the husband and wife and expose all of their assets to liability. Many of the disadvantages of joint ownership arrangements arise typically between a single person and third parties (often between a parent and children). lf property is placed in joint name with a particular child, then there can be no assurance at the death of the parent that the child who owns the property jointly with the deceased parent will share with the other children on an equal basis. (Remember, the parent's will has no effect on jointly-owned property.) Even where the asset is owned jointly with all of the children, if one of those children predeceases the parent, then that child's children (the parent's grandchildren), may be disinherited upon the parent's subsequent death.
Another disadvantage of joint ownership is that with respect to some types of assets, such as a residence, the signature of all joint owners will be necessary to complete a sale. lf one of the joint owners refuses to sign or becomes mentally incapacitated, then the sale of the home may be delayed or prevented. In other words, placing others on title to your assets can result in your losing control over those assets. You should also be careful of the exact form of ownership. Just because more than one name is on the title to an asset does not necessarily mean it is owned jointly. For example, two unmarried persons can own a parcel of real estate and if the deed does not specify that they own it as "joint tenants," then in Michigan they are deemed to own it as "tenants in common" (a form of ownership that does not avoid probate).
Revocable living trusts have become very popular in recent years because people have become more and more concerned with the cost of probate proceedings. A trust is often a desirable alternative to joint ownership arrangements because it allows a person's assets to pass outside of probate proceedings without many of the disadvantages or risks of joint ownership described above. A revocable living trust is created by signing a trust agreement. As the person who creates the trust, you are referred to as the "settlor." You typically would name yourself as the initial trustee so that you retain complete control over all assets that are placed in the trust. ln the trust agreement, you would also want to appoint successor trustees who will manage the trust in the event of your disability or death.
Once you create the trust, it becomes a separate legal entity for purposes of holding assets. lt is not unlike a person who operates a business as a sole proprietor and then incorporates the business to create a separate legal entity. The creation of a trust is very similar in that an individual can own assets in his or her own name alone orthe individual can create a separate trust into which he or she may place assets.
The major advantages of establishing a trust and transferring assets to the trust are:
- to the extent you transfer assets to the trust during your lifetime, those assets will avoid probate upon your death
- if you become mentally incompetent at some point, then the trustee (or the successor trustee) can manage the assets in the trust for your benefit without the necessity of a probate court conservatorship proceeding
- after your death, the trust can provide for distributions to children or other beneficiaries when they reach ages you specify in the trust agreement. A trust agreement is very flexible and its provisions can vary tremendously from person to person.
lf one of the primary reasons you create a revocable trust is to avoid probate proceedings, then it is extremely important that you retitle all of your assets in the name of the trust (except for vehicles and for life insurance or retirement assets that pass by beneficiary designation). You may recall from the discussion above regarding probate, that probate proceedings are required only if you have assets titled in your own name alone at the time of your death. lf all of your assets are titled in your name as trustee of your trust or pass by beneficiary designation, then no probate proceedings will be required with respect to those assets. However, if you retitle most of your assets in the name of your trust but through oversight leave a few assets in your name alone, you will have incurred the expense of creating the trust and yet probate proceedings will still be required for those assets in your name alone at the time of your death. lf you serve as the initial trustee of your own revocable trust, there will be no income tax effect from your establishment of the trust and retitling your assets in the name of your trust. ln other words, if you are the initial trustee, then you will file your income tax returns in the same manner as if you owned your assets in your own name alone (you may also file a joint return with your spouse, if you are married). At such time as you no longer serve as trustee (because of your resignation, disability, or death), the successor trustee would begin managing the trust assets and the trust would become a separate taxable entity and the trustee would have to file separate income tax returns for the trust.
The revocable living trust should be distinguished from a trust that is contained in a will. A trust contained in a will is referred to as a "testamentary trust" which does not come into existence until the time of your death. By its very nature, a testamentary trust is part of the probate process and, therefore, you may not use a testamentary trust to avoid probate proceedings. As a result, although testamentary trusts are still sometimes used for purposes of managing assets and delaying distributions to children, the trend today is to use a revocable living trust since it also provides you with the opportunity of avoiding probate by transferring assets to the trust during your lifetime.
If a married couple has a large estate, then there is a potential federal estate tax liability that comes due typically on the death of the last spouse to die. Trusts are frequently used in this situation to divide the assets between the husband and wife and to minimize that estate tax liability. The use of trusts to avoid or minimize federal estate taxes is discussed later in this Summary.
It is important to coordinate your beneficiary designations for life insurance and other death benefits with your will (and trust if applicable) to make certain that all of your assets pass to the right persons or entities in the most efficient manner. For example, if you create a living trust in order to avoid probate and to make certain that upon your death your assets are managed for the benefit of children or others over a period of years, it might be advisable to have life insurance and perhaps retirement proceeds pass to the trust, rather than to the children directly. Presumably, you would want those death benefits to be paid into the trust to be managed along with your other assets for those beneficiaries. lf beneficiary designations indicate that those proceeds are to be paid directly to your children or other beneficiaries, they will receive those proceeds directly and outright free of the trust.
There are also income tax and estate tax consequences with respect to whom you name as beneficiaries of these death benefits. For example, if you are married, you may want your retirement assets to be payable to your surviving spouse upon your death so that he or she, can treat the retirement assets as his or her own IRA and can spread out the income tax liability over a longer period of time. lf your retirement assets are payable to your trust, then income taxes may be due over a shorter period of time and this may increase the overall income tax liability. The best way to handle beneficiary designations on retirement assets should be determined based upon your particular situation.
It is important to plan for the possibility of disability as well as death. Often people assume that if they become incompetent their spouse or other family members will have the ability to act on their behalf simply by virtue of that relationship.
However, without a Durable Power of Attorney and a Designation of Patient Advocate, as described below, it is likely that a conservator or guardian will need to be appointed by the Probate Court to act on your behalf should you become incompetent. This requires court supervision and can result in delays, expense, and a public proceeding to determine competence or incompetence. These proceedings are often uncomfortable for those involved and may cause dissention among family members. Certainly the proceedings come at a time when most family members are experiencing difficulty dealing with the fact that a loved one has lost some of his or her faculties. For these reasons, the Durable Power of Attorney and the Designation of Patient Advocate are important documents. Neither of these documents is expensive to prepare because they both deal with decisions that may need to be made in the future and therefore are drafted extremely broadly. ln other words, usually these documents are drafted so broadly that they fit most clients and do not require a great deal of customizing by the attorney. Nevertheless, as mentioned above, they can be an extremely valuable and important tool in an estate plan.
A Durable Power of Attorney is a document in which you (the "principal") name another person (referred to as the "agent" or "attorney-in-fact") to act for you in handling your financial affairs during your life.
ln this document, you can delegate a broad range of powers to the agent so that the agent can manage your affairs if you become mentally incapacitated or physically disabled. Although the agent has a legal obligation to act only in your best interest, because of the broad powers that are given to the agent, you should choose an agent who you trust completely. Usually a husband and wife will name each other as their agent. However, because your spouse or other agent may predecease you or become mentally incompetent, you also should consider appointing an alternate agent. The Durable Power of Attorney can be drafted to be effective immediately (at the time the document is signed), or only in the event you become incompetent. The document continues in effect until you or a court revokes it or until your death. You must be mentally competent in order to validly execute or revoke a Durable Power of Attorney.
Michigan law allows you to appoint a "patient advocate" to make decisions concerning your care, custody, and medical treatment in the event you become unable to make those decisions yourself as a result of an accident or illness. The document that you sign in order to appoint a patient advocate is referred to as a "Designation of Patient Advocate," which is essentially a medical durable power of attorney.
lt specifies the responsibilities and authority of the patient advocate under circumstances where you are unable to make medical care and treatment decisions for yourself, as determined by your attending physicians. You may also include in that Designation a direction that you would not want to be kept alive by life support systems if you become comatose or terminally ill. This type of direction is commonly referred to as a "living will." By executing a Designation of Patient Advocate, you can provide guidance to the person you select as the patient advocate, minimize the potential for family conflict, and reduce the emotional burden on family members and others involved if these decisions have to be made for you. As with the Durable Power of Attorney for financial matters, it is advisable to appoint an alternate person to serve in case the person you first name as a patient advocate is unable to serve for any reason. lf you do not have a Designation of Patient Advocate, should you become incompetent and need medical treatment, the hospital or other provider of medical services may require that a guardian be appointed for you through the Probate Court.
At the end of 2012, Congress increased the estate and gift tax exemption to $5,000,000 adjusted annually for inflation. The top marginal estate and gift tax rate was increased from 35% to 40%. Then at the end of 2017, Congress increased the exemption to $11,180,000, with annual inflation adjustments. In 2019, the current exemption is $11,400,000.
A "portability" feature that was added in the 2011 was continued under the new law. Portability gives the surviving spouse the ability to use later the unused portion of his or her deceased spouse's estate tax exemption. In order to take advantage of this feature, the surviving spouse must file an estate tax return for the deceased spouse to make the election, even if the deceased spouse's estate was below the $11,400,000 estate tax filing threshold. lf the return and election is not filed by the surviving spouse, then the unused portion of the deceased spouse's exemption is lost.
The loss of the unused exemption would be important if the surviving spouse's estate eventually exceeds his or her remaining exemption at his or her later death.Before this portability feature was added, it was important for married couples with combined estates larger than the exemption to have separate revocable trusts with tax provisions and to divide their assets between their two trusts to make sure that the exemption of the first spouse to die was not wasted. For example, before portability, if a couple owned all their property jointly or left it to each other directly by beneficiary designations, upon the first spouse's death, his or her exemption would be wasted. Then upon the surviving spouse's death, there would only be one exemption available. The estate in excess of the one exemption would be subject to the estate tax. If that same couple had executed and funded separate trusts, they would be able to utilize two exemptions to shield twice the amount of assets from estate tax. Now, the portability election may avoid the necessity of couples having to create two trusts in order to minimize taxes. However, for couples whose combined estate may exceed twice the $11,400,000 exemption ($22,800,000), the two trust plan may still be advisable because the separate trust plan may also avoid estate tax on all of the appreciation on the assets in the first spouse's trust from his or her date of death through the date of the second spouse's death. In addition, the two trust plan can help a wealthy couple utilize the generation skipping exemption for both spouses. The portability feature applies only to the estate tax exemption - not to the generation-skipping tax exemption. The decision of whether or not a married couple should have two trusts is still best made with the advice of an experienced estate planning attorney.
Remember that when we refer to your combined estate, it includes all of the assets that you own and control including real estate, financial accounts, retirement plan accounts and life insurance at death benefit values (rather than cash value).
So, what does this all mean to you? lf you are a single person, then your plan may not need to change at all as a result of the new law. lf you are a married couple with combined assets under twice the current $11,400,000 exemption ($22,800,000) and you already have separate trusts to minimize estate taxes that were drafted when the exemption was much lower, then you may be able to simplify your estate plan. Unless there are other reasons to have separate trusts (second marriages being one example), couples with estates under twice the exemption amount typically would prefer having one trust together or even joint ownership. The two trust plan might add additional accounting and an additional income tax return for a trust that is now unnecessary. Those expenses were worth it when it was necessary to avoid an estate tax of around 50%. lf the estate tax exposure is removed by the new law, going back to a simple plan may be beneficial.
In a family-owned business, typically ownership is transferred from the older generation to the younger generation or the business is sold to a third party. Sale of the business to an outsider is often easier because it provides the parent-owner with the liquidity to treat his or her children equally, which is usually one of the parent's estate planning objectives. Transferring ownership of the business to the younger generation is a more complex proposition because of family dynamics. Some of the children may be involved in the business while others may not. Treating the children equally may be difficult, especially if they do not get along because of long-standing sibling rivalries or because of different management styles, efforts, or abilities. As a result of these issues, the parent's estate plan must be closely coordinated with a thorough business succession plan. The attorney, accountant, and other advisors must structure any transfer to take into account these family and psychological issues along with the legal and tax considerations.
The task may be more difficult than many business owners expect. Studies have shown that only about one-third of family-owned businesses survive into the second generation, and far less survive into the third generation. One of the major hurdles is convincing the parent to begin grooming the next generation to take over the business. This requires an investment of time and effort in teaching and involving the children in business decisions. lf this process is begun too late, the parent may die or become disabled with no one in a position to run the company. The value of the business may then decline rapidly. This is particularly true of service businesses where the customers may only identify the business with the deceased parent. The problems can be even worse if the parent fails to leave sufficient liquid assets to pay the federal estate tax, which is due only nine months after the parent's death. A quick sale of the business may be necessary to raise the cash to pay the tax, and a forced sale seldom brings in the full fair market value of the business. Clearly, succession planning cannot begin too early. Although it involves difficult family, legal, and financial issues, it is the hallmark of a family business that thrives for generations.
Our estate planning, probate, and trust services include the following:
- Durable powers of attorney for financial and medical purposes
- Charitable trusts
- Pet trusts
- Business succession planning
- Family limited partnerships and limited liability companies
- Pre-marital and post-marital agreements
- Medicaid and Elder Care Planning
- Irrevocable life insurance trusts
- Grantor retained annuity trusts
- Educational trusts
- Decedents' estates
- Trust administration
- General probate litigation
Contact us to schedule an appointment with an experienced trust and estate planning attorney.
The following lawyers are experienced in trust, estate, and probate matters:
The following paralegal is experienced in trust, estate, and probate matters: