The vocabulary of estate planning can be confusing, even intimidating. This easy-to-understand guide to common legal terms and concepts will provide you with basic information about the options available to meet your needs.
For more information and assistance, contact an Estate Planning attorney at Mika Meyers.
A Will is a document that directs the distribution of your individually owned assets at your death. Although a Will does not help in avoiding probate, it does allow you to choose who will receive probate assets if probate is required. The Will usually directs how the 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 of your Estate. The Will nominates a personal representative (formally known as an executor or executrix) who is responsible for paying your debts and taxes and distributing your assets as directed by the Will. The Will may also nominate persons to serve as guardians if you have children who are under the age of 18 or are adults but are otherwise unable to care for themselves.
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. Assets 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. Assets such as life insurance and other death benefits will be paid directly to whomever you have designated as the beneficiary of those benefits.
Joint Ownership of Property
Many people use joint ownership to avoid probate. By owning assets jointly with one or more other persons, the asset does not pass through probate. Instead, the ownership of the asset passes automatically to the surviving owners. This is frequently looked upon as a cost-effective way to avoid probate and Joint ownership combined with other estate planning approaches, can be a very helpful and viable tool to meet your needs. There are, however, many disadvantages to joint ownership arrangements.
Joint ownership with a spouse can help protect your assets, however, allowing another individual, such as a child, to have ownership rights in your assets can complicate your ability to manage those assets and may give rise to adverse claims by your child’s creditors or a divorcing spouse. Further, after you pass away there is no assurance that this child will share the asset with his or her siblings on an equal basis. Even if the asset is placed in joint ownership with all of the children, if one child predeceases the parent, that child’s children, may be disinherited upon the parent’s subsequent death. Alternatively, the asset may require the cooperation and participation of all of the children in order to complete a sale or otherwise transfer the asset. If one of the owners refuses, passes away, or becomes incapacitated, then the sale of the asset can become complicated or even prevented. It is a good idea to talk with your estate planning attorney about these issues before deciding to use joint ownership as an estate planning tool.
A Revocable Living Trust
A Trust is a separate legal entity designed to hold assets. Revocable Living Trusts allow a person’s assets to pass outside of probate without many of the disadvantages or risks of joint ownership. The major advantages of establishing a Trust and transferring assets to the Trust are:
- To the extent you transfer assets to a Trust in your lifetime, those assets will avoid probate upon your death;
- If you become mentally incompetent at some point, then the trustee can manage the assets in Trust for your benefit without the necessity of a probate court conservatorship proceeding; and
- After your death, the Trust can provide for distributions to children or other beneficiaries when they reach the ages you specify in the Trust Agreement. A Trust Agreement is very flexible and its provisions can vary tremendously from person to person.
A Testamentary Trust
A Trust contained in a Will is referred to as a “Testamentary Trust”. This Trust does not come into being until you pass away. By its very nature, a Testamentary Trust is part of the probate process, and therefore use of a Testamentary Trust does not avoid probate. Changes in the law have eliminated the benefits of a Testamentary Trust in most cases, but it is still an available tool in appropriate cases.
Durable Powers of Attorney
A Durable Power of Attorney is one of two key documents used to assist you and your family should you become disabled during your lifetime, and should be part of any estate plan. A Durable Power of Attorney is a document in which you name another person to act for you in handling your financial affairs during your life. In 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. The document continues in effect until you or a court revokes it or until your death. A properly prepared Durable Power of Attorney avoids the need for the court to appoint a conservator to manage your assets during your lifetime.
Designations of Patient Advocate
A Designation of Patient Advocate is a second tool to help you plan for any potential disabilities. 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 the result of an accident or illness. This document is essentially a medical Durable Power of Attorney. It 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 physician. It may also include a directive concerning your wishes regarding the use of life-sustaining technology.
In 1996, Congress passed the Health Insurance Portability and Accountability Act (“HIPAA”) to help assure that people’s medical information remains private. As a result of this act, there are stringent requirements for health insurance providers to keep a patient’s health information confidential and disclose it only to persons authorized by the patient. A HIPAA authorization form should be executed if you would like certain individuals to have access to this information so they may deal directly with your physicians, insurers, or other health care providers.
A Ladybird Deed is a deed named after Ladybird Johnson, President Lyndon Johnson’s wife, and can be used to pass title to another person or persons at your passing. The person who signs the deed essentially reserves a life estate in the property and retains the right to sell the property during his or her lifetime and the right to retain the proceeds from that sale. The deed specifies that if the property is still owned by you at the time of your death, the property will pass to individuals or entities that you name in the deed. Essentially, the deed provides a method for avoiding probate if you still own the property at your death but reserves all the freedom to deal with the property during your lifetime. Ladybird Deeds are becoming more popular, primarily due to Medicaid qualification rules. A house that is under a Ladybird Deed still qualifies as an exempt “homestead” under the Medicaid rules.
Tools for Minimizing Estate and Gift Taxes
While Michigan does not currently assess an estate or gift tax (sometimes referred to as a “death tax”), Federal Government does assess an estate tax on assets held by a person at the time of their death. While exemptions are currently very generous ($5 million per individual, $10 million per married couple), for people with Estates in excess of that amount there are many tools for managing their property to eliminate or minimize the estate tax their family will have to pay after they pass away.
Estate Tax Planning Trusts
For married couples with Estates in excess of the estate gift tax exemption, it is often beneficial for each spouse to have a separate Revocable Living Trust with special language that allocates the Trust assets into separate sub-trusts after death. These are sometimes referred to as “A-B Trusts” or “Credit Shelter and Marital Trusts”. The basic reason for having separate Trusts for each spouse is to make sure that the couple can take advantage of both of their estate tax exemptions to minimize estate tax on the last spouse’s death. Without this planning, a couple who has one simple Living Trust or owns all of their assets jointly may waste one exemption or lose out on protecting the growth on these assets from estate tax. Separate Trusts are not usually needed unless the couple’s combined assets are likely to exceed the two times the federal estate tax exemption then in effect at the time of their death.
Annual Lifetime Gifting
You can eliminate or minimize your estate tax exposure by gifting away assets during your lifetime. Any individual can give up to the annual exclusion amount to another individual in a calendar year without having to pay any gift tax and without even having to report the gift to the Internal Revenue Service. The annual exclusion amount is currently $14,000 per person per calendar year. This allows an individual with four children to give away up to a total of $56,000, annually, and not be required to report those gifts to the Internal Revenue Service. If a person gives away more than $14,000 per individual, only the amount above $14,000 is a reportable gift. While a gift tax return must be filed in the year in which a gift in excess of the exempt amount is given, no tax needs to be paid. The taxable gift is applied against the donor’s lifetime gift tax exemption (currently $5,450,000) and an assessment of the tax impact of the gift is made at the time of death.
An Irrevocable Trust is a Trust that cannot be revoked or amended by the grantor during the grantor’s lifetime or at the grantor’s death. It is distinguishable from a Revocable Trust, which can be revoked or changed during the grantor’s lifetime. By creating an Irrevocable Trust and transferring assets to the Trust, the person removes those assets from his or her Estate. Typically, such Trusts provide a mechanism to avoid creating a taxable gift, while assuring that the asset is no longer considered property of the decedent at the time of his death.
There many different types of Irrevocable Trusts and other mechanisms that can be used to manage assets where the potential Estate is greater than the federal estate tax exemption. Each has characteristics that may appeal to a particular individual under certain circumstances. These vehicles include:
- Irrevocable Life Insurance Trusts (“ILIT”)
- Intentionally Defective Grantor Trusts (“IDGT”)
- Qualified Domestic Trusts (“QDOT”)
- Grantor Retained Annuity Trusts (“GRAT”)
- Family Limited Partnerships (“FLP”)
- Qualified Personal Residence Trusts (“QPRT”)
- Charitable Remainder Annuity Trusts (“CRAT”)
- Charitable Remainder Uni Trusts (“CRUT”)
- Charitable Lead Annuity Trusts (“CLAT”)
- Charitable Lead Uni Trusts (“CLUT”)
- Pooled Income Funds
- Gift of a Remainder Interest
- Charitable Gift Annuities
- Life Insurance Gifts
If you have questions about any of these trusts or other vehicles, please contact an estate planning attorney at Mika Meyers, Beckett and Jones.