Estate Planning Tools
DURABLE POWER OF ATTORNEY /
PATIENT ADVOCATES OR "LIVING WILLS"
PRE-NUPTIAL AGREEMENTS /
Your Will tells a Probate Court judge what to do with any land located in this state, or any personal property that you own after your death. A Will also names a Personal Representative who will gather and identify the assets to be sold, or distributed to the people that you name. He or she can be given powers beyond the "statutory" powers that a Personal Representative has when there is no will. These extra powers given in a Will help to avoid family disputes, expensive insurance bonds, delays and extra court hearings.
A Will can also nominate a guardian for minor children but the other natural parents will normally be ordered to receive custody and given rights to any money left to the child until the child is an adult (their 18th birthday). Instead a Will can place all the money into a Will trust that another family member can protect until the child is able to handle the money. This can mean age 25 or beyond if the "trustee" in your Will feels that a young beneficiary might waste the money.
A Will cannot distribute insurance proceeds, joint property, pension funds, or checking and savings accounts where there is another name on the contract or card. These items are not owned by you after your death. These items can be left to a living trust or Will only if that is on the beneficiary card.
One purpose of a Will is to avoid disagreements between surviving family members over what your "real" wishes were. The Will normally not used when the first spouse passes away as most assets are held jointly. Michigan does not have an inheritance tax until an estate exceeds $1,500,000 or more. Most Wills do not have to deal with enough money to worry about taxes, but property not held jointly might have to be sold and split between a surviving spouse and the children if there is no Will. Half of the home and most of the property that a surviving spouse needs for income will go to the children. There are exemptions for a surviving spouse, which would protect their home.
You cannot leave property at your death to a charity or persons other than your spouse and children, unless you have a Will or living trust. You must make irrevocable lifetime gifts unless you have a Will or living trust. A "charitable trust" can allow you to give property to a charity after you and your spouse, and then your children, have enjoyed its use, but receive income tax credit for the property's fair market value, to spend during your lifetime, this special type of trust is irrevocable.
Everyone should have a will even if they have everything held jointly, where they have given away their home to their children, and where they feel "too young" to worry about dying. The Will takes care of things that were missed or that were received by the estate after your death (tax returns, lawsuits, pensions and other income). Anyone over 18 can have a Will in nearly all states.
Your Will can make specific gifts to individual children. This includes heirlooms, jewelry, and collections such as guns, coins or art items. A collection would probably be split up or sold without a Will directing its distribution. The Will has no effect without a Petition to a Probate Court and acceptance by the judge. A later Will revokes an earlier one. A sale of an item listed in a Will does not revoke the Will; it merely revokes the gift. A Will should be replaced if you have any changes in your life such as: a death, divorce, remarriage, a disabled child, or you move to another state.
You are not required to leave any gift to a child who is over age 18. You cannot leave your spouse out of your Will. Unless there was a "pre-nuptial" agreement, the surviving spouse can bypass your will and demand at least $150,000 and one-half of all of the rest of your assets. However, this half includes property they received by joint ownership and in joint bank accounts. Any agreements must be "fair" in all aspects. The survivor may also claim certain cash exemptions and temporary support over and above the one half interest.
Your Will must be probated in two states if you own real estate in another state. A Will does not pass property; only the Court Order does that. A Michigan court cannot affect title to land another state. This type of situation is a good reason to have a living trust to avoid such high expenses as a trust is effective to pass title in more than one state.
Many Wills have a trust clause written into them where there are minor children or grandchildren. This is most important where there is an ex-spouse who would receive the money for minor children or where a child might not be able to spend funds wisely. A separate living trust can also help reduce or prevent your gift from merely replacing other benefits where there is a disabled party receiving assistance. This area of the law changes very rapidly and another tool besides a Will should be considered for funding extra gifts to the disabled child or heir.
An attorney who prepares a Will should know about any special questions, such as concerns about a spendthrift, a disabled child, or about a family cottage that you may wish to discourage children from selling. You need to provide the attorney with copies of deeds, insurance beneficiary cards, and savings and stockbroker account cards for review. This allows a clearer discussion about what is or is not to be in your Will, and about any tax concerns that might be reduced.
A Will or living trust should be used pass property to your children where it has significantly increased in value and otherwise might be too expensive to sell because of the taxes on the gain. There is normally no income tax on the gain on the sale of property in an estate or living trust. There is usually no inheritance tax in Michigan except for federal taxes. A Quit Claim deed will avoid Probate Court, but leaves children liable for the income taxes on any gain in value over your original cost. It also prevents your sale of the home without their agreement and signature.
There are special problems and tax rules for a Family Farm or for a Family Business. They can exceed the federal inheritance tax exemption if you prepare carefully. There can be tax problems when you give a home to children and reserve the right to live there for the rest of your life; or where a debt on the child's home is to be forgiven on your death. All of these things should be carefully discussed.
There should be a Will or living trust whenever a business, a farm or assets approaching $350,000 are involved. Assets can be placed outside of the Will and in a living trust in order to double the exemptions to $3,000,000 after the surviving spouse's death in most cases. Otherwise, the inheritance tax rises from 37% to 55%, and often assets must be liquidated just to pay the taxes. A 2001 amendment to the tax laws raised this credit to $1,500,000 in the year 2004 and has raised the limit to $250,000 in tax-free gain on the sales of your residence ($500,000 for a married couple, and no longer limited to one time).
A Will is just one of the tools used to pass property on to your children and grandchildren. Its drawback includes complicated procedures that your spouse or children need to deal with t its very worst time for tem. It is also a public process that normally includes months of delay, court intervention, and may require expensive hearings and annual reports to the Probate Court.
The greatest problem with a Will is that it cannot plan for changes in family concerns after it is written or after your death. These changes may require a forced sale pf assets immediately after death when the price is at its lowest or when family needs to accept less in order to get cash right away. The other planning tools such as a LIVING TRUST can be used along with a Will to reduce these problems. No tool is perfect as tax laws change and family needs change.
Having a Will drafted is not complicated and normally takes little time. The expense and time is well invested reducing taxes and probate costs, and in avoiding family disputes or emergency sales that lower the value of the assets that you worked hard to accumulate.
Each person should discuss a Will and other estate planning tools with their lawyer. You might want to discuss whether you should declare your residence in another state; the best timing of a gift to allow the largest tax deduction; concerns over two families or adult children from second marriages. There may be special family problems such as a disabled family member. Legal advice needs to be personally considered for each family's individual needs.
DURABLE POWER OF ATTORNEY
A Durable Power of Attorney is a document that you sign to allow another person to sign their name in place of yours in order to take care of your business or personal affairs. This can be for a specific purpose such as the sale of property or for a general purpose such as paying regular bills. It remains in effect unless you later revoke it. The power of attorney must state the powers that are allowed such as to make gifts, deal with the federal Social Security programs or to deal with hospitals or nursing homes. It may or may not be accepted by a bank or credit union in place of their forms.
There are two types of Durable Power of Attorney; the standard power takes effect as soon as it is signed. The "springing" power only takes effect after you are disabled or incapacitated. A letter from your treating doctor must be attached to the springing powers stating that you are unable to take care of your affairs due to an injury or illness before the other person could take care of your business.
The Durable Power of Attorney avoids the need for a Probate Court Judge's appointment of a Guardian and Conservator in case a person becomes ill. It can also be a convenience in the case of a person who travels to another state for the winters or who cannot easily travel to sign items.
PATIENT ADVOCATES OR "LIVING WILLS"
Your personal care and medical treatment may be directed through a "Patient Advocate" form which names a spouse, friend, or other relative as the person designated to advise your doctor regarding treatment if you are unconscious or incapacitated. These are also referred to as "Living Wills."
The Patient Advocate form allows you to point out treatment that you do not want and allows you to decline life-preserving measures where it may only delay death or prolong life in a vegetative state of a coma. This form also allows you to let your doctor know that you want all available treatment, if that is your desire. The form prevents unnecessary treatment and prevents family grief over who should decide on certain care and whether or not to use life-preserving treatment. The patient advocate form should be part of your estate plan.
If you are considering a marriage where each of you have adult children, you can agree in a written document called a "Pre-Nuptial Agreement" that each of you will keep your property separate after your marriage and that it will all pass to the surviving spouse. This allows you to leave most of your property to your children while providing for your spouse's support. It is also important in that it avoids suspicion and money concerns by your children. You would also keep your own property if there were a divorce. Most money disputes are avoided. Otherwise, Michigan law allows a spouse (and their children) to claim one-half of your property and significant exemptions upon your death. There are some exceptions, especially for a brief marriage, but the Pre-Nuptial agreement is an excellent tool. There is discussion to amend this law. There is also special concern if you have property purchased while you lived in a "community property" state.
Michigan revised its laws on wills and trusts in April of 2000, but the affect is mostly technical and affecting drafting concerns. The federal government completely revised the inheritance tax to raise it to 1.5 million dollars for the personal exemption or 3 million for a couple with a Living Trust, and with a maximum tax rate of 55% for 2004 and 2005. The tax will reduce to zero in 2010, but will return to the pre-April 2000 rates.
A Living Trust, is sometimes referred to as "Inter Vivos" Trust (during a person's lifetime) or Revocable Grantor Trust (the person can revoke the trust) is another tool which has come to be very widely used along with: a Will, Durable Power of Attorney, and a "Living Will" or Patient Advocate forms. These documents are normally drafted at the same time and all are revocable or may be changed if your situation changes, such as marriage or divorce, death of a spouse or child, or moving to another state.
A Living Trust is a form of ownership. You still control your property, but a trust is created, named, and given title to certain assets (the "Corpus" of the Trust). The Trust document spells out how items may be distributed, withdrawn, or sold. It names a "Trustee" (yourself) to act for the trust names the "Beneficiaries" (yourself, and later your children, friends or heirs). This is similar to a small corporation or a partnership owned by a single family.
The primary advantage of a Living Trust is that although a trustee can become incapacitated or die, the Trust ownership is not part of the individual's estate for probate administration. The assets may easily be distributed, without involving further expense, courts or attorneys, to your children after the surviving spouse passes away, or the children may only receive income, and after the surviving children pass away, the assets can then be distributed to the grandchildren.
This means that you keep control over all of your assets as long as you or your spouse are living. Your children receive the assets after you and your spouse's death, but they cannot interfere with your plans or be required to agree to approve your current use, a sale, a mortgage, a charitable gift or a transfer of any of your assets.
You or your spouse can remove, add, or sell trust items by merely removing them as the trustee. The trust directs the delivery of any assets that remain after the "Grantor" or creator of the trust becomes incapacitated or passes away. The Trust document describes how to "deliver" the assets to the spouse or descendants and when to deliver them. It may also set conditions for gifts such as the donee must be in good health, so that it wouldn't endanger any governmental subsidies the donee may be receiving.
Part of the Trust is usually secured when the first grantor dies. A surviving spouse can remove all of the items from the second part. The survivor can also remove some of the assets from the locked side if needed for support or if there are emergencies or medical needs. The amounts and the process are determined when the Trust is drafted. There are two separate trusts from that point so that the assets in the "Bypass" portion of the Trust (the side that is locked) can be given under the first person's federal estate tax exemption without affecting the survivor's estate tax exemption. In 2004, this would allow $3 Million dollars to be passed to heirs without paying estate tax.
Estates, which surpass $1,500,000 in total value, are charged federal estate tax at a rate ranging from 37 to 55%. The trust creates two estates that raise that ceiling to $3,000,000 before any taxes are owed. The trust also bypasses attorney fees, probate court filing fees and inventory fees that are dependent on the value of assets owned. The estate tax or gift tax that your estate pays on $2,000,000 (including life insurance benefits), without the trust is normally about $225,000.
The major factor that affects the decision to use a trust is to allow you to remain in control over the money that you earned. Your family also avoids the need to sell assets immediately after your death in order to probate them or to pay taxes and court expenses. The "estate sale" normally causes a drastic loss in value, as buyers know that there are deadlines to meet, fees to pay and bargains to be found, as the personal representative is normally ill equipped to deal with the detail immediately after the death of a spouse who may have been the only one keeping track of the financial transactions.
The surviving spouse would receive all income and may withdraw principal assets if needed for emergencies or for medical or educational needs. The trust can create limits to only allow up to a 5% withdrawal each year. The decision depends on the tax consequences and whether there are adult children who could be cut out of the estate if the surviving spouse is likely to remarry.
A trust also allows one of the owners to transfer items if the second owner is disabled and cannot take care of matters. The owner's personality is stated in the trust so that a pre-selected successor or co-trustee continues without dramatic changes and matters. This can be a child, an accountant, a bank or professional trustee; it is normally a child as distributions is simple and does not require special skills unless there is a business ownership or a very large estate.
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