Michigan Estate Planning Blog

How Does a Revocable Trust Work?

 

A revocable or living trust is a document created by you while you are living, creating a separate legal entity to hold title to property or receive property by being the designated beneficiary of financial assets. Real estate is moved into the trust by recording a deed for the real estate into your trust, according to the article “What are the pros and cons to putting my home in our trust” from Coastal Point.

There are many benefits to having property in a revocable trust, including probate avoidance, especially when you use one trust to hold property in more than one state, thereby avoiding having the estate go through probate in more than one state. Trusts are also used to make the administration of an estate easier and maintain property in further trust for beneficiaries within the initial trust. Trusts are also used to maintain privacy, since a revocable trust is never a public record in most states, unlike a last will and testament.

The revocable trust can be more expensive and time-consuming to set up initially. Nevertheless, they save the beneficiaries time and money after the death of the grantor (the person creating the trust). They can be a little more difficult for people to understand than the traditional last will and testament. However, the overall pros usually outweigh the negatives.

Probate is the process by which the court approves the validity of the will and the plan to distribute assets to beneficiaries. When someone dies, and their real estate and assets are not in a trust, the estate is probated, meaning an estate is opened at the Register of Wills in each state where the person owned real estate. The assets of the decedent are tied up for at least eight months, so any creditors of the decedent can submit claims against the estate. After the period of time required by each state, check with your estate planning attorney to find out about your state’s process. The estate can be closed, and assets can be distributed.

The main benefit of placing real estate in trust is to avoid probate. This not only saves time and expense but allows the property to pass immediately to the beneficiaries, be sold to a third party, or otherwise be disposed of following the instructions in the trust. Holding assets in trust also provides privacy and lets you be very specific about what you want to happen to those estates.

If the trust is revocable (as opposed to irrevocable), you also have a lot of flexibility. Changes can be made to the terms, contents and distributions as wished by the grantor. The trust can even be revoked entirely, if wished. A revocable trust remains private and is not part of the public record.

Be sure to fund the trust once it is created, either by retitling deeds or other asset ownerships. Knowing exactly how to title the property deed or make proper changes to account names is something your estate planning attorney can help with.

Reference: Coastal Point (Feb. 15, 2024) “What are the pros and cons to putting my home in our trust”

How to Protect Your Spouse when Diagnosis Is Dementia

 

Few illnesses are as terrifying as dementia, for which there is no cure. If estate planning is in place, it may need to be adjusted to address new, more imminent issues. Reviewing the family situation from a legal and financial aspect is critical, and there is no time for delay, explains a recent article from Morningstar, “’I don’t want my wife to lose everything’: I’ve been diagnosed with dementia –I suddenly could not spell or write legibly.”

There are a number of steps to be taken to smooth the path ahead. First is to update your will and create a financial power of attorney. Don’t try to do this without the help of an experienced estate planning attorney.

This may also be the time to reassess your investment portfolio based on your new financial plan and risk tolerance.

An Advanced Healthcare Directive will inform doctors what actions you want them to take when you cannot make those decisions for yourself. You may want to list your wife as your healthcare proxy to carry out these decisions, but be mindful of the pressures put on a marriage when serious healthcare issues occur. Your spouse will need emotional support as well, and you’ll want to have a successor to your spouse for both the healthcare and POA documents.

Share your situation with trusted family and friends to create a team–a community of people who can provide support, part of which will be updating beneficiaries. Now would also be the time to record instructions for access to devices, documents, and even daily habits.

Long-term care insurance will help with expenses and should serve as an example for anyone reading this article. Policies should be purchased early in life when they are relatively affordable to help alleviate the financial burden of nursing home costs.

An estate planning attorney and financial advisor will help you take an accounting for assets, expenses, and projected long-term care costs. You’ll want a team approach to provide as much guidance as possible.

When to put your long-term care policies into payout status is a difficult decision. You’ll need to time this with a Medicaid plan, which your elder law estate planning attorney will be able to help with.

Now may also be the time to create a trust and divest assets to make it through the five-year Medicaid look-back, using your long-term care policy in the next five years.

There are exceptions to the five-year look-back rule for Medicaid eligibility. They include paying off debts, buying medical devices, or making home improvements to improve accessibility. However, eligibility depends upon income and other assets.

Some states, including Florida and New York, have rules exempting homes from assets calculated by Medicaid under certain circumstances. California eliminated an asset limit this year, making a person’s home automatically safe from Medicaid while they are living, but this does not mean it’s exempt from the Medicaid Estate Recovery Program.

Working with a team of professionals, including an estate planning attorney, and having the support of family and trusted friends will be important as time goes by and the disease progresses.

Reference: Morningstar (Feb. 25, 2024) “’I don’t want my wife to lose everything’: I’ve been diagnosed with dementia –I suddenly could not spell or write legibly”

Will My Family Need to Pay an Estate Tax?

 

Known as the “death tax,” an estate tax is applied to assets inherited by others when you die. In addition to the federal tax, twelve states and the District of Columbia have their own estate taxes, says a recent article from CNBC, “What is estate tax and who pays it?”

Inheritance taxes and estate taxes are often confused. A beneficiary pays inheritance taxes, while estate taxes are paid from the decedent’s estate before any remaining property or assets are distributed to heirs.

One of the executor’s duties is to file an estate tax return. The value of the assets is usually determined by their fair market value.

The unlimited marital deduction means the surviving spouse is exempt from federal estate taxes. However, the second spouse to die’s estate will need to pay estate taxes.

The current federal estate tax exemption ranges from 18% to 40%, depending on how much the estate is over $13.61 million. This historically high number will revert to $5 million (indexed for inflation) on January 1, 2026.

Twelve states and the District of Columbia impose their own estate taxes. These include Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Connecticut and Vermont have flat estate taxes. However, most estate tax rates increase with the total value of the assets.

An experienced estate planning attorney will help identify strategies to minimize or avoid paying estate taxes altogether. For instance, if you leave assets to a qualifying charity, that amount is deducted from the gross estate before taxes.

Gifting is a frequently used means of minimizing estate taxes. In 2024, you can gift up to $18,000 per individual without paying the federal gift tax and without the gift counting towards your lifetime gift exemption of $13.61 million. A married couple may give up to $36,000 tax-free combined.

Irrevocable trusts transfer control of an asset from the grantor to the beneficiary, protecting it from creditors and reducing the estate's value. While rules vary from state to state, irrevocable trusts typically may not be amended, modified, or terminated without the beneficiary's consent.

Contributions can also be made to 529 educational plans, which offer tax-free earnings and withdrawals for educational expenses. They are excluded from the taxable estate. However, the contribution can’t be more than $18,000 per year, or it will be subject to the gift tax. Each state sets its own contribution limits per beneficiary.

Most Americans don’t have to pay federal estate taxes. Still, many state taxes have lower exemption levels, so speak with your estate planning attorney to learn your estate’s tax liability and consider how to minimize it for your heirs.

Reference: CNBC (Feb. 17, 2024) “What is estate tax and who pays it?”

Succession Planning Addresses Company Operations and Estate Planning

 

Business owners typically have a high percentage of their net worth tied up in the business and sometimes the real estate where it operates. What’s surprising is how little attention is often given to the succession plan, says an article from Accounting Today, “The two sides to succession plans for private businesses.”

Starting with the operational side, who will take over the business owner's work when they die, become incapacitated, or retire? If a business founder is in the weeds of the business, this is a big issue. The owner must have extensive conversations with key employees to discuss the details.

Multigenerational family ownership isn’t always the cure for a succession plan. Second- or third-generational roles must be planned, so capable people fill them. Bloodline succession doesn’t always work for running a business.

These conversations regarding roles, compensation and equity incentives must be very detailed. Not all employee leaders are willing to pour their lives into a privately owned business for the benefit of heirs without an incentive plan.

On the financial side of succession, who will become the owners of the deceased’s shares, and what financial arrangements will be made for that transfer? Businesses with the least amount of animosity and grief are those who have done the hard work: they have the business evaluated by an outside professional and having clear plans for how the successor owners will own and operate the business.

How will the transfer of the business take place in the future? An estate planning attorney should work with the business’ accountants, financial advisors, insurance brokers and other professionals to develop a clear plan for the business and the family.

If the owner is contemplating retirement, will they count on the income from the business operations to fund their retirement, or will they sell their shares to family members or outsiders? Who will oversee this transfer if the business owner becomes incapacitated?

Succession planning for a privately held business is a lengthy process requiring input from skilled professionals, and ideally, it should begin the moment the business is well-established. There’s always time to tweak an existing plan, but never time to plan in an emergency.

Reference: Accounting Today (Feb. 13, 2024) “The two sides to succession plans for private businesses”

How Does an Estate Plan Address Young Beneficiaries?

 

Certain beneficiaries require more intentional estate planning than others. While the law sets the age of adulthood at 18, specific testamentary instruments can redefine at what age a beneficiary is considered an adult. A recent article from The News-Enterprise, “When planning for young beneficiaries, consider all options,” explains how this works.

Young beneficiaries, especially 18-year-olds still in high school, are still immature, and their brains are still developing. Add a strong dose of grief to a teenager’s life, and even a bright, stable adolescent may not make good decisions.

Young adult beneficiaries are categorized in two ways: primary and contingent.

A primary beneficiary is one who the testator or grantor expects to be a young beneficiary at the time of distribution of assets or who is young when the estate planning documents are executed. This is typically the parents of young children or grandparents who intend to leave property to young grandchildren.

Contingent beneficiaries are those who are not anticipated to receive property as young beneficiaries. However, they could inherit if a primary beneficiary dies, such as when a grandchild receives an inheritance following their parent's death.

Even for contingent beneficiaries, some level of planning needs to be done to define the age of majority and provide options for distribution. This is done through an immediate split of assets, with assets going into a general needs trust or a common pot trust.

Assets are most commonly left to young beneficiaries through an immediate split of assets upon estate distribution. Assets are held in a separate trust for each beneficiary, with a trustee appointed for each trust. Assets within the trust are typically available for the child's health, education, maintenance, or support until the child reaches the predetermined age.

Upon reaching the age defined by the trust, the child may receive the assets either outright or incrementally over a period of time.

Another option is to use a common pot trust. This is used for parents with multiple minor children. This type of trust allows the assets to remain in one trust to be used for the needs of all children until a triggering event, such as the youngest child reaching age 18. At that time, the remaining trust assets are split into as many shares as there are beneficiaries, and the shares are distributed according to the remaining instructions. Each separate share is usually left in an ongoing general needs trust until a certain age.

Leaving property in trust for young beneficiaries doesn’t cut off their ability to use the money property. The trustee can continue to use the assets for the beneficiary's care. However, whatever is left is distributed to the beneficiary upon reaching the distribution age.

Your estate planning attorney can help you determine the best way to structure trusts for your children or grandchildren based on your wishes and their ages. By redefining the age of majority and outlining specific directions for distributions, young beneficiaries can receive the most value from their inheritance.

Reference: The News-Enterprise (Feb. 10, 2024) “When planning for young beneficiaries, consider all options”

What is the Most Important Document in an Estate Plan?

 

The priority of every estate plan, regardless of your age, is the medical care documentation. Even while making decisions on other aspects of your estate plan, says this article from Forbes, “Be Sure You Have The Most Important Document In Every Estate Plan,” you should get these documents done to protect your care and comfort for the rest of your life.

Some of the document’s names may vary from state to state. However, your estate planning attorney will know which ones you need.

HIPAA Authorization. The Health Insurance Portability and Accountability Act of 1996 protects patient privacy but also makes it illegal for people you don’t authorize in writing to gain information about your medical status. You’ll need a document authorizing medical providers to discuss your situation with key people in your life. Once the document is executed, distribute copies to medical care providers and the people named in the document.

Living Wills and Advance Directives. Living wills were once simple statements, stating, “If I have a terminal condition and there’s no hope of recovery, don’t prolong my life by artificial means.” These statements are now considered obsolete. Medical science has advanced to a point where it cannot be said with certainty whether someone may improve. There are also disagreements about whether some types of care, like the use of a ventilator, should be considered artificial life support or essential to helping a patient recover from a serious illness.

To address this, some estate planning attorneys create detailed custom living wills, using questionnaires with different scenarios so their clients can decide in any of the situations. Of course, you can’t anticipate every situation, and there can be differences of opinion about diagnosis and prognosis. There are instances where medical providers aren’t given the documents until after treatment has been administered. However, it’s better to express your wishes proactively.

Healthcare Power of Attorney. The limits of living wills and advance directives have led some estate planning attorneys to replace or supplement them with a healthcare power of attorney or healthcare proxy. The HPOA gives one or more people—known as your agents—the authority to make medical decisions if you cannot. The agents talk with your healthcare providers to understand your situation and options. They then make decisions in tandem with the wishes stated in your living will.

Agents need to be available, so you’ll want to name people who are nearby. Appointing more than one agent can provide flexibility in an emergency.

Do Not Resuscitate/Hospitalize. It’s common for older, frail patients to decide they don’t want to be resuscitated or hospitalized. For example, CPR is often declined because while it may bring a person back to life momentarily, their eventual passing may become violent rather than peaceful. The thinking behind DNR orders is this: at some point, hospitalization or treatment for every new ailment only briefly extends life without improving its quality and could reduce the person’s quality of life. Make sure a DNR/DNH is easily accessible to first responders, give medical providers a copy and consider having a bracelet or necklace with these letters.

Once all these documents are executed and circulated, it will be time to focus on distributing property and protecting assets.

Reference: Forbes (Jan. 22, 2024) “Be Sure You Have The Most Important Document In Every Estate Plan”