DO I NEED AN ESTATE PLAN?
Do I really need an estate plan?
© 2012 Lea Ann Sterling
Yes! Everyone needs an estate plan and I’m not just saying that because I’m a lawyer who prepares estate plan documents. The inevitability of death is the reason why and either there are some preparations made for that inevitability or the survivors are left to figure out what to do. There is however a wide range from extremely simple to the highly complex and detailed preparations.
Usually by the time I first meet with a client or a married couple, they have already answered the question of needing an estate plan, and after years of putting it off, have made an
appointment to take care of this unpleasant legal business. They have determined that having a plan already in place when the time of crisis arrives will give guidance and comfort to the grieving survivors when decision-making capacity is lessened. They usually aren’t thinking about an estate plan being a road map, or a device to resolve disputes, but the estate plan does also serve those purposes.
I applaud these new estate planning clients for overcoming the myriad of excuses to not create a plan. They’ve rejected the arguments that they don’t have enough in the way of assets to bother about creating a plan, that they are not old enough, that they don’t have children, that they are not married, or that, if married, the spouse will handle it. An estate plan requires no minimum size, unfortunately death takes young individuals, and not being married and not having children are even stronger reasons to create one.
Situations do exist where there is absolutely no excuse for not having an estate plan. If a disabled person depends on you, you must provide for his or her care if you die first. Similarly, if you have your own business, your employees depend on you. Another situation for which you must take steps to create a plan is if you own property with anyone not your spouse, whether you want the co-owner to become the sole owner or if you want someone else to substitute for you as the co-owner.
Many people mistakenly think that a will gives instructions for a funeral, but more appropriately the Letter of Instruction provides these details. This is not a document enforceable in a court, but instead is guidance to those who must act, often informally prepared by you instead of legal counsel, although attorneys and individuals close to you may assist with the process. A Letter of Instruction can suggest what kind of memorial service you desire, whether you want to be cremated or buried, and provides information for your obituary. The amount of detail is up to you.
Lawyers typically prepare for each estate planning client a will, a financial power of attorney, health care directives, and sometimes a trust. In these documents you are naming who should be responsible when you cannot be and you provide guidance to that designee. The choice may be obvious, such as spouses designating each other, or difficult, especially when choosing alternates and successors or guardians for your children. I have had clients even terminate or delay for years the estate planning process because they could not make these designations! If you don’t designate responsible representatives, the probate court will do it for you and it may not choose as you would!
Your will, signed by you and properly witnessed, takes effect when you die. For your loved ones, it is a special gift. Your will designates someone authority to wrap up your life’s business according to your designated wishes. This designee is called the Personal Representative, replacing the former term executor or executrix. Among the duties of the “PR” are to pay the bills and taxes due and to gather up your assets and distribute them according to your directions. In your will, you may specify which beneficiaries receive what assets. You may also name a guardian for your minor children if both parents are no longer able to care for the children and name a conservator to handle finances for your minor children. The probate court will require the guardian/conservator to make annual reports and will supervise the financial decisions regarding the children.
In Michigan, as part of your will (or as part of a trust), you may create a gift list, also known as a Separate List, to distribute your tangible personal property, such as treasured jewelry, artwork, firearms, tools, or other mementos important to you and specific recipients. A nice part of the Separate List is that you, without the assistance of your attorney, can add to, modify, or make any changes you wish whenever and as often as you like. At the time of your death, your will directs your PR to distribute this listed property as stated on the Separate List as it exists at the time of your death. The Separate List can only be used to distribute tangible personal property, not financial accounts or real estate.
While a will gives instructions after your death, the power of attorney for finances provides for you and your comfort while you are alive! A will is of course a very important part of an estate plan, however, you personally are more likely to benefit from the financial power of attorney than from a Will. While death comes to everyone eventually, you are living through and experiencing moment by moment a disability. We live in times in which it is more likely you will survive disastrous injuries. In a financial power of attorney, you appoint a representative to speak and act for you, on your behalf, and in your best interests when you cannot. A power of attorney can be created to take effect immediately or it can “spring” into effectiveness upon your disability.
If you become disabled and unable to handle your own finances and if you don’t have a financial power of attorney, someone will have to go to probate court to petition to be appointed your guardian so that your financial decisions can be made. The lack of a power of attorney may cause delays that can be very detrimental to you. For example, the detour to probate court to appoint a guardian could delay hiring a lawyer to investigate that auto accident that caused your disability while the evidence is still fresh. Furthermore, the probate process is more time consuming and costly than simply designating an agent in a financial power of attorney.
It is particularly important for young adults to have a power of attorney. The greatest obstacle in designating parents to continue their parental guidance after age 18 in the event of a disability is getting the young adult in front of a notary public to sign the document!
Just as important as a financial power of attorney to your care and comfort while you are still alive is a power of attorney for health care, also known as a health care directive or “living will.” In the health care directive, you designate a patient advocate to speak for you and act in your best interest in medical matters when you are unable to do so for yourself. A health care directive is designed to “spring” upon a future disability, but other documents to assist with health care decisions can be effective immediately. Just keep in mind that a person who is mentally incompetent, however, does not have the capacity to designate a patient advocate. Remember the fight over Terri Schiavo that captivated the nation in 2005 as family members fought over whether to allow this brain damaged woman to die after lying in a hospice bed for 15 years. Her husband said Terri told him she would never want to be kept alive artificially but her parents disputed their daughter would have had such wishes. Terri had not created a document indicating her wishes.
A revocable trust is sometimes called a “living trust,” but this term is not to be confused with a “living will.” A trust can be created to be effective immediately or springing at death and is a sort of “private” probate administration. The use of a trust does avoid probate, a characteristic that prompts many people to seek a trust, but not completely. Probate is the court-supervised legal process to get a deceased person’s bills paid and properly distribute the rest of the deceased person’s assets. This basis for the use of a trust may be overstated because probate costs such as inventory fees must be weighed against the cost of establishing a trust. You must also consider the attorney fees that may be spent to navigate probate court. Michigan is somewhat user-friendly and the probate courts operate fairly efficiently while that may not be the case in other states. You can expect that probate court will tie things up while official notices are published according to law, but the protection from the deceased's creditors may be worth the wait.
While the exemption for federal estate taxes was up to $5 million, fewer people were exposed to another one of the primary reasons for setting up a trust—to avoid this tax. That exemption level can be changed by Congress.
As mentioned above, a revocable trust is a form of “private” probate. Using the probate court, your affairs become public information. You establish a trust by creating an agreement with yourself! You create an alter ego—the Me Revocable Trust. The Me Revocable Trust takes its orders from you. The trust document essentially creates an empty basket. You put your stuff into the basket by transferring legal ownership of assets to the trust from you individually. You still own it, but now you own it as a Trustee. You can transfer ownership of your home, your cars, your financial accounts, and any personal property by changing titles, deeding, bill of sale, or assignment. You can designate your trust as the beneficiary of life insurance policies. This process is known as “funding” a trust. For tax-deferment reasons, retirement benefits generally shouldn’t be transferred to the trust.
About the only difference you will notice is that instead of signing just “Me,” you will sign “Me, as Trustee of the Me Revocable Trust.” For income tax purposes, the trust is ignored and considered the same as you individually. There may, however, be implications for Medicaid eligibility and primary residence exemptions.
There are two other situations in which a revocable trust should be seriously considered: where step-children exist or where a surviving spouse may be vulnerable to financial abuse. Suppose wife and husband have children from previous relationships. If they simply leave their estate to the surviving spouse, in the subsequent years the surviving spouse may change his or her will to leave the estate inherited from the deceased spouse to his or her children but not to the children of the deceased spouse, effectively disinheriting the step-children. A trust could reserve the deceased spouse’s estate for not just use by the survivor, but also his or her children.
A spend-thrift trust is also recommended when the lonely surviving spouse would be so lost after the death of his or her partner that he or she might not use the best judgment in associating with future partners or when one beneficiary might exert an undue influence on the vulnerable parent. A capable trustee would provide some oversight.
In the trust document, you name a successor trustee to yourself (and your spouse) to be in charge of the trust’s assets if you become disabled or when you die, and you direct how your finances will be handled and distributed. A successor trustee (after your spouse) could be a trusted and capable friend or relative or a CPA, attorney, or financial institution. A revocable trust can be amended while you are alive and competent so you can change it or terminate it altogether if you wish.
A trust is not a replacement for a will. A trust should be coordinated with a “pour over” will which essentially directs that if there are any assets outside the trust they will be funneled into the trust when discovered. There is always the risk of some stray or unknown asset that the pour over will covers.
While a trust can solve a lot of problems associated with wrapping up your estate when you die, it doesn’t solve every problem. For example, a trust can’t shelter assets for Medicaid eligibility or fend off a contest among your heirs if they want to fight with each other about your estate.
The “Cottage LLC” is an estate planning tool useful for joint ownership of your real estate after your death. When you own a cherished lake cottage or hunting lodge, don’t just leave it to your multiple children as part of your estate. Your children would inherit the property as tenants in common. The late Stuart Hollander, a transactional attorney from Suttons Bay, explained that tenants in common, (T.I.C.) stands for trouble is coming. You will leave your heirs with a mine field of decisions, including forcing heirs to submit to untimely and undiscounted buy outs that may land your cherished family property on the open market instead of in the hands of your descendants. A limited liability company can be formed, effective immediately or springing upon your passing, and you will set the rules for the future co-owners through an Operating Agreement you create.
There are always those trying to find alternatives but beware of cheap tricks such as using joint ownership and unrecorded deeds to create estate plans. You might think that you are going to beat that uncapping or maintain that primary residence exemption into the future generation however laws change as do interpretations of them. Also, it may be tempting to share ownership with the person you intend to inherit an asset but this tactic can backfire if the beneficiary faces a collection action and your co-owned asset is the target! The cheaper plan may not be cheaper in the end than creating an estate plan with a will and powers of attorney.
Plans are made and plans change. Life happens. You and your estate planning attorney don’t have crystal balls to see the future. You acquire stuff, businesses thrive or fail, tax rules change, relatives die, kids get married and divorced, you fall in love or out of love, and grandchildren steal your heart. All of these events can change your plans. With each important life change, re-examine the estate plan, and no less than every five years, make an appointment with an attorney for a wellness check-up on your estate plan. Regular fine-tuning can address changes without a complete re-do of your estate plan.
Finally, when asked whether to probate or not, I advise it is better to probate every death. I had to learn the hard way when new assets came to light ten years after my father-in-law’s death that was not probated because he had, we thought, put everything he owned in his trust. How could we have known that assets lost to his mother in East Germany would be restored when Germany was reunited in 1991? The so-called savings in skipping probate at the time of his death were lost.