Michigan Estate Planning Blog

Major Blunders in Estate Planning

Kiplinger’s recent article entitled “5 Common Estate Planning Mistakes to Avoid” warns that if you overlook an important step or make a misstep in your estate planning, everything could be undone. You could instead burden your family with a challenging and headache-inducing estate.

There are many ways to get things wrong. Let’s look at a few:

1. Not preparing for incapacity. The main reason to create a will is because we know that some day we’ll pass away. A will lets your family know how to distribute your property and other assets. A well-thought-out estate plan should identify the people authorized to make important decisions on your behalf regarding finances, health care and other critical matters. This is accomplished with powers of attorney. Once you are unconscious or afflicted with dementia, it will be too late. Make a list of decision-makers now, inform them of your wishes and create the necessary powers of attorney
2. Failing to include funeral and burial wishes. If you can purchase a burial plot and make funeral plans, put this in your estate planning documents. If you don’t, it may mean a lot of work for your family after your death. Name someone to be in charge of the funeral and burial arrangements and make sure that person understands your wishes. If you don’t detail your wishes prior to your death, it may become an issue for your loved ones.
3. Ignoring the tax implications of transferring property. As generous as it may seem to give property to your family during your lifetime, it is usually much smarter – and far more generous – to delay the transfer until you’re deceased. If you convey the deed to property to your next of kin before you die, they may see a hefty tax bill whenever they sell the same property. That’s because the basis for that property will be tagged to the date on which you made your purchase, not the date you made your gift. As a result, it could leave your heirs scrambling to pay an enormous sum that would have been averted, had they been granted the deed after your death.
4. Failing to designate backups for decision-makers. The best of plans can go south without a secondary beneficiary. This will address any unforeseen events. Name backups for your executor and other decision-makers. If they can’t fulfill their obligations, a court will name substitutes unless you’ve already planned for these contingencies.
5.  Not tracking beneficiary designations. In addition to stating the beneficiaries and their respective shares in your will, you must also communicate a directive to your bank that sets forth the interests in your account after your death. If you fail to do this, the bank’s rules will override anything you’re written in your will as to that account. That means your percentages will be different from those expressed in your will.
6. Take steps now to make certain there are no hidden issues that will haunt your family after you’ve passed.
7. Reference: Kiplinger (Oct. 17, 2022) “5 Common Estate Planning Mistakes to Avoid”

What is a Life Estate?

 

A life estate is a type of property ownership that divides the control and ownership of a property. The person who creates the life estate for their home and assets is known as the “life tenant.” While a tenant retains control of the property, he or she shares ownership during their lifetime with the remainderman (the estate's heir).

Quicken Loans’ recent article entitled “What Is A Life Estate And What Property Rights Does It Confer?” explains that while the life tenant lives, they’re in control of the property in all respects, except they can’t sell or encumber the property without the consent of the remaindermen. After the life tenant passes away, the remainderman inherits the property and avoids probate. This is a popular estate planning tool that automatically transfers ownership at the life tenant's death to their heirs.

The life estate deed shows the terms of the life estate. Upon the death of the life tenant, the heir must only provide the death certificate to the county clerk to assume total ownership of the property.
Medicaid can play an essential role in many older adults’ lives, giving them the financial support needed for nursing facilities, home health care and more. However, the government considers your assets when calculating Medicaid eligibility. As a result, owning a home – or selling it and keeping the proceeds – could impact those benefits. When determining your eligibility for Medicaid, most states will use a five-year look-back period. This means they will total up all the assets you’ve held, sold, or transferred over the last five years. If the value of these assets passes above a certain threshold, you’ll likely be ineligible for Medicaid assistance.

However, a life estate can help elderly property owners avoid selling their home to pay for nursing home expenses. If your life estate deed was established more than five years before you first apply for benefits, the homeownership transfer would not count against you for Medicaid eligibility purposes.

To ensure you’re correctly navigating qualifying for Medicaid, it’s smart to discuss your situation with an attorney specializing in Medicaid issues.

Reference: Quicken Loans (Aug. 9, 2022) “What Is A Life Estate And What Property Rights Does It Confer?”

Important Documents in Your Estate Plan

 

The Durable Power of Attorney (DPOA) and a Health Surrogacy or Advanced Health Directive are used for situations where you can’t make decisions for yourself, explains Parent Your Parents recent article entitled “What You Should Know about Durable Powers of Attorney and Health Surrogacies.”

A Durable Power of Attorney (DPOA). This is written authorization to represent or act on another’s behalf in private affairs, business, or legal matters. The person authorizing the other to act is the “principal” or “grantor.” The person given the power is called the “agent” or “attorney-in-fact.” There are two types of power of attorney: (1) a Springing Durable Power of Attorney, which “springs” into action when you become incapacitated; and (2) a General Durable Power of Attorney, which becomes effective as soon as it is signed and continues until you die.

If you live in a “Springing POA” state and move to a “Durable POA” state, the document is treated as a Durable Power of Attorney, and your agent can act without your consent. You should consider who you trust to be your agent.

It is typically a family member, a friend, or a professional agent. You should also have an alternate designated who can step in if something happens to your first choice and he or she is unable to serve.

Health Surrogacy or Advanced Directive. This document is called a variety of things: a Power of Attorney for Health, Designation of Health Surrogate, or a Living Will. No matter what it’s called, you’re appointing an adult to make healthcare decisions for you when you are unable to make them for yourself.

When you’re in an accident, unconscious, or injured and need a specific medical procedure, the designated agent steps in and makes important decisions in your stead.

If you’re in your 60s but still don’t have a legal document describing what you want to happen when you’re incapacitated, speak with an experienced estate planning attorney.

Your family, close friends, and healthcare professionals should know how you feel about end-of-life treatments and have your detailed directions as to various circumstances and how you would like them handled.

Reference: Parent Your Parents (Sep. 15, 2022) “What You Should Know about Durable Powers of Attorney and Health Surrogacies”

The Difference between Revocable and Irrevocable Trust

 

A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” And not everyone needs a trust. For some, a will may be enough. However, if you have substantial assets you plan to pass on to family members or to charity, a trust can make this much easier.

There are many different types of trusts you can establish, and a revocable trust is a trust that can be changed or terminated at any time during the lifetime of the grantor (i.e., the person making the trust). This means you could:

Add or remove beneficiaries at any time

Transfer new assets into the trust or remove ones that are in it

Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and

Terminate or end the trust completely.

When you die, a revocable trust automatically becomes irrevocable and no further changes can be made to its terms. An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust must stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.

The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes, and an irrevocable trust doesn’t. Revocable trusts can also allow your heirs to avoid probate when you die. However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die.

In addition to protecting assets from creditors, irrevocable trusts can also help in managing estate tax obligations. The assets are owned by the trust (not you), so estate taxes are avoided. Holding assets in an irrevocable trust can also be useful if you’re trying to qualify for Medicaid to help pay for long-term care and want to avoid having to spend down assets.

But again, you can’t change this type of trust and you can’t act as your own trustee. Once the trust is set up and the assets are transferred, you no longer have control over them.

Speak with an experienced estate planning or probate attorney to see if a revocable or an irrevocable trust is best or whether you even need a trust at all.

Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”

 

Why Does Everyone Need an Estate Plan?

Twenty and thirty-year olds are busy building their lives, starting or growing careers, exploring personal goals, repaying student loans and maybe starting a family. They’re young and healthy and think nothing can happen to them—but that’s not true. A recent article from Kiplinger titled “You’re Not Too Young for an Estate Plan: 7 Essentials for Your 20s and 30s” explains why even a twenty-year old with student loans needs an estate plan.

Student loans. Federal student loans discharge upon death, so no further payments are needed, including any federal Parent PLUS loans parents may have taken out. However, for private student loans, the decision is up to the lender. If the private loan was taken out by the student, the institution may forgive the loan. However, if a parent or another adult co-signed the loan, they might be responsible for paying the entire loan. The exception: if the loan was made after November 20, 2018, the co-signer may be protected by the Economic Growth, Regulatory Relief and Consumer Protection Act. If you took out loans after getting married, the surviving spouse is likely to be required to pay the loan if they co-signed the loan or if you live in a community property state.

 

Health Care Directive and Health Care Power of Attorney. The Health Care Directive is used to tell your family what you would want if you were near death, whether by injury or illness. Healthcare providers are obligated to follow your directions if they are stated in this document. Without it, you could be kept on life support for many years, regardless of what your family wants.

 

A Health Care Power of Attorney is used to name someone you trust to act as your “agent,” if you become incapacitated. This document is focused on your care and medical treatments. It also lets your agent speak with your health insurance company, obtain access to medical records and discuss your care with healthcare providers.

 

Last Will and Testament. This document isn’t just for people with homes, families, and retirement accounts. Young people have property too—your car, your personal possessions, and whatever financial resources you may have accumulated. If you have a will, you can direct who you want to receive what you own. Without one, the court will decide who gets your possessions and your family won’t have any say about it. With a will, you can determine who receives your property, including your digital assets. You’ll also name an executor in the will—the person who is in charge of distributing your property. An estate planning attorney will create a document to comply with your state’s laws. It doesn’t have to be a complicated document, but it is a good way to ensure your loved ones know your wishes.

 

Retirement Accounts and Beneficiaries. These accounts may not be as robust as they will be later in your life. However, they are still yours. Make sure that you have named beneficiaries who you want to receive them if you die. Singles may name a sibling, parents, partner, or another family member to receive these assets.

 

Digital Assets. A digital life means you need a digital estate plan. Creating an inventory list of all of your digital accounts, usernames and passwords. If an account has two-factor authentication, indicate how another person might gain access to the account. Don’t include any of this information in your will, as it becomes a public document after being submitted to the court for probate. Tell a trusted family member where the inventory is located. If you own cryptocurrency, research how crypto assets are passed if the original owner dies.

 

Guardianship. Your will is used to name a guardian for minor children. Without it, the court will appoint a guardian, and it may not be the family member you wish it would be.

 

Don’t Forget Your Furry Friends. You can add a pet guardianship clause to a will to ensure that your pet stays with a trusted friend or family member who has agreed to care for your pet. You can also set up a pet trust to set aside funds for your pet’s care, including food, veterinary visits, toys, training and treats.

 

Reference: Kiplinger (Aug. 22, 2022) “You’re Not Too Young for an Estate Plan: 7 Essentials for Your 20s and 30s”

Estate Planning for Blended Families

Today, a blended family is more common than ever, with stepfamily members, half-siblings, former spouses, new spouses and every combination of parents, children and partners imaginable.

Traditional estate planning, including wills and non-probate tools like transfer on death (TOD) documents, as valuable as they are, may not be enough for the blended family, advises a recent article titled “Legal-Ease: Hers, his and ours—blended family estate planning” from limaohio.com.

Not too long ago, when most people didn’t take advantage of the power of trusts, couples often went for estate plans with “mirror” wills, even those with children from prior marriages. Their wills basically said each spouse would leave the other spouse everything. This will would be accompanied by a contract stating neither would change their will for the rest of their lives. If there was a subsequent marriage after one spouse passed, this led to problems for the new couple, since the surviving spouse was legally bound not to change their will.

As an illustration, Bob has three children from his first marriage and Sue has two kids from her first marriage. They marry and have two children of their own. Their wills stipulate they’ll leave each other everything when the first one dies. There may have been some specific language about what would happen to the children from the first marriages, but just as likely this would not have been addressed.

It sounds practical enough, but in this situation, the children from the first spouse to die were at risk of being disinherited, unless plans were made for them to inherit from their biological parent.

Todays’ blended family benefits from the use of trusts, which are designed to protect each spouse, their children and any child or children they have together. There are a number of different kinds of trusts for use by spouses only to protect children and surviving spouses.

Trust law requires the trustee—the person who is in charge of administering the trust—to give a copy of the trust to each beneficiary. The trustee is also required to provide updates to beneficiaries about the assets in the trust.

A surviving spouse will most likely serve as the trustee when the first spouse passes and will have a legal responsibility to honor the shared wishes of the first spouse to pass.

Your estate planning attorney will be able to explain the many different types of spousal trusts, and which is best for your situation.

Reference: limaohio.com (Aug. 20, 2022) “Legal-Ease: Hers, his and ours—blended family estate planning”

Who Is the Best Choice for Executor?

 

Parents do so much to make sure they are treating their children equally. This is all good when it comes to buying bicycles or sharing candy. However, when it comes to naming your executor, equal is not always best, says a recent article titled “3 Mistakes to Avoid When Choosing Your Personal Representative of Your Estate” from The Street.

The most common mistake parents make is naming all of their children, with the hope they’ll set aside any differences and rise to the occasion. Another is to make an age-based decision and name the oldest child as the executor. Maybe worse: tossing names into a hat and picking one.

The wrong decision can lead to more than fighting among siblings. Fighting often escalates to litigation and wounds that never heal.

The decision of who to name as a personal representative, agent or executor needs to have a business approach. Remove emotions from the equation and examine your children’s strengths and weaknesses.

Your executor, the agent named to carry out instructions in your will, has many responsibilities, including:

Obtain the last will and testament and file it with the court.

Obtain multiple original copies of a death certificate.

Inform heirs and relatives of your death and of the open contest period when they may challenge the validity of the will.

Use estate funds to settle outstanding debts.

Maintain any real property, until the estate is settled.

Notify banks, government agencies, insurance companies and creditors of your death.

File final personal income tax.

Create a complete inventory of the estate and, when the will is deemed valid by the court and creditors have been paid, distribute assets.

Make court appearances on behalf of the estate during probate.

File estate taxes.

The executor must be able to manage these and other matters, while keeping the peace in the family and standing up to any challenges. Not everyone is up to the task.

Naming more than one personal representative so no feelings get hurt.

If your children have a history of working well together and are all equally versed in personal finance, this might work. However, more often than not, it’s a recipe for disaster. By asking so much of them during a highly emotional time, even the best sibling relationships will be tested.

Picking the wrong child for the job.

Not only does the person need to be responsible, reliable, organized and trustworthy, but they need to live close enough or be able to travel if you live far away. If none of your children are good candidates, speak with an estate planning attorney to explore other options.

Not preparing the person ahead of time.

Someone who has never served as an executor before is not likely to fully understand what their role will be, what tasks need to be accomplished and how much time it will take out of their schedule. Talk with the person you chose as your executor and provide them with all the details. Tell them where personal property is located and where you are storing your last will and testament. Share the names of your estate planning attorney, financial advisor and CPA.

Good estate planning and clear communication is the best bet to avoid acrimony between siblings after parents die. Make sure that they understand your desire for the family to stay together and give them the tools to do so.

Reference: The Street (July 28, 2022) “3 Mistakes to Avoid When Choosing Your Personal Representative of Your Estate”

Some Key Documents Should Be Considered Before Sending Your Child Off to College

In the United States, as soon as a minor turns 18, they’re typically considered a legal adult.

As a result, parents no longer have any authority to make decisions for their child, including financial and health care decisions.

Yahoo’s recent article entitled “Don’t Let Your Child Leave for College Without Signing Three Critical Documents” asks what if your adult child becomes sick or is in an accident and ends up hospitalized?

Because of privacy laws, known as Health Insurance Portability and Accountability Act (HIPAA), you wouldn’t have any rights to get any information from the hospital regarding your child's condition.

Yes, we know you’re her mother. However, that’s the law!

You also wouldn’t have the ability to access his or her medical records or intercede on your child's behalf regarding medical treatment and care.

If your child’s unable to communicate with doctors, you’d also have to ask a judge to appoint you as your child’s guardian before being able to be told of his or her condition and to make any healthcare decisions for them.

While this is hard when your child is still living at home, it’s a huge headache if your child is attending college away from home.

However, there’s a relatively easy fix to address this issue:

Ask an experienced estate planning attorney about drafting three legal documents for your child to sign:

A Durable Power of Attorney (DPOA) for Health Care. This document designates the parent as your child's patient advocate.

A HIPAA Authorization gives you access to your child’s medical records and lets you to discuss his or her health condition with doctors.

A DPOA for Financial Matters, designates the parent as your child's agent, so that you can manage your child's financial affairs, including things like banking and bill paying, in case your child becomes sick or injured, or is unable to act for any reason.

Reference: Yahoo (Aug. 2, 2022) “Don’t Let Your Child Leave for College Without Signing Three Critical Documents”

Does the Way I Title My Assets Have an Impact on My Estate?

FedWeek’s recent article entitled “How Assets Are Titled Can Make a Big Difference” discusses the different ways property may be titled, and the significance of each one.

The way in which you take title to assets can affect your estate, taxes and perhaps the disposition of the asset if a couple divorces. Many couples want assets to be titled simply in the event something happens to one, so the other spouse can take possession immediately without taxes or complications. Joint ownership may be the simplest way to meet most of these objectives. However, this can get complicated if any number of things happen, such as divorce, second marriage, children from multiple marriages, adoption and blended families of all types.

It’s critical to be educated on the different types of ownership, so you know when a change may be needed. Here are the main options:

Holding Assets in Your Own Name is simple and inexpensive. However, if you become incompetent, those assets might be mismanaged. At your death, individually owned assets may have to go through probate.

Joint Tenants with Right of Survivorship is when one co-owner dies, all assets held this way automatically pass to the survivor. One joint owner can take over if the other is incapacitated, and jointly held assets don’t go through probate.

Tenants in Common means there’s a divided interest, although none of the owners may claim to own a specific part of the property. At the death of one of the joint owners, the share owned by the deceased must pass through their will to determine ownership. The surviving joint owner doesn’t automatically own the entirety of assets.

Tenancy by the Entirety is a type of joint ownership similar to rights of survivorship for married couples. It lets spouses own property together as a single legal entity. Ownership can’t be separated, which means creditors of an individual spouse may not attach and sell the property. Only creditors of the couple may make claims against the property.

With Entity Ownership, you might create a trust, a partnership (such as a family limited partnership), or a limited liability company (LLC) to hold assets. These entities may provide protection from creditors and tax benefits.

Community Property may only be used by married couples in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). Each person owns an undivided interest in the entire property. When a spouse dies, the survivor automatically receives the entire interest, so there’s no need for probate. Community property can’t be controlled by a person’s will or trust.

Ask an experienced estate planning attorney to review your estate plan and how assets are titled.
Reference: FedWeek (July 27, 2022) “How Assets Are Titled Can Make a Big Difference”

What are Big Mistakes to Avoid in Estate Planning?

Whether it’s a change in domicile, the death of a family member, new grandchildren, or a significant change in assets, it is important to make sure you adjust your estate plan accordingly, says Kiplinger’s recent article entitled “Updating Your Estate Plan? Don’t Make These Top Mistakes.”

1. Updating a will or trust but forgetting to update ancillary documents. When updating an estate plan, people tend to home in on updating their wills and trusts without also having their powers of attorney, health care directives, or guardians reviewed. This prevents them from completing a full update to their estate planning. While these ancillary documents are good forever, that doesn’t mean they shouldn’t be reviewed and updated.
2. Using flawed reasoning when selecting agents to act on your behalf. Some people choose their executors, trustees and other agents by trying to appoint all their children together or appointing agents by age or profession, instead of who is best suited to serve. The best person should live nearby and have the time to address issues you may need.
3. Forgetting to update an estate plan when moving to another state. Estate planning documents drafted out-of-state, provided they were drafted with the legal requirements of that state, will be effective in all states. However, practically speaking, having out-of-state documents can complicate trust or estate administration, or the ability to exercise powers of attorney or health care directives. You should always update your plan when they move to another state to make certain that the plan functions correctly.
4. Forgetting to create an asset cheat sheet or failing to keep that list updated. Most of us accumulate different assets and investments as we get older. It’s not uncommon for a person to have stocks, life insurance, annuities, securities, or other investments at many different institutions. When you update your estate plan, create a list of your accounts and assets and update that list as things change. Be sure to include the name and location of the account and the last four digits of the account number.

When making changes, if you avoid the above mistakes, it will ensure that your plan is properly updated and will not cause any unnecessary future complications.

Reference: Kiplinger (June 30, 2022) “Updating Your Estate Plan? Don’t Make These Top Mistakes”