For Your Own Good Understanding Michigan Estate Planning

Jan 11 2010Transfer Tax Laws Changing

2009 ended without Congress having taken action to change our current transfer tax laws (estate, gift and generation-skipping law).  Under current law, estate and generation-skipping taxes are repealed for 2010.  While this may sound like a good thing to many, the repeal will only last for one year.  Unless Congress takes further action, the tax breaks that led to the one year repeal under the 2001 tax act will end on January 1, 2011 when the estate tax returns with an exemption of only one million dollars.  Last year, the estate tax exemption was 3.5 million dollars. 

Most estate planners thought that Congress would take action in 2009 to set the exemption between 3.5 and 5.0 million dollars.  Most planners did not think that Congress would let the complete repeal occur in 2010 because of the loss of tax revenue at a time when the Country has a very large deficit.  Congress may still pass a law in 2010 to put a higher exemption in place before next January.  Nevertheless, because the estate tax is such a hot political topic, the future is uncertain.

What this may mean to you and your estate plan depends upon your circumstances, how you will be leaving your estate upon your death, and the value of your estate.  If the estate tax exemption is allowed to return to one million dollars next January, it will require many married couples to revise their estate plans.  If your plan includes a trust with a formula that allocates trust assets among your spouse and children (or other beneficiaries), the estate tax repeal or the possible return to only a one million dollar exemption may drastically alter or eliminate the amount to be left to your spouse, for example.  While we hope that Congress takes action to at least restore the estate tax exemption to its 2009 level of 3.5 million dollars, if it does not, then the failure to plan accordingly may have very harsh consequences to many families.

Nov 23 2009Common Estate Planning Mistakes – Part 1

The following is a series of the most common mistakes people make with respect to estate planning:

• Avoid the issue completely. Many individuals find it uncomfortable to deal with their own estate plan because of the underlying issues of death and disability.  Others simply assume that they do not need an estate plan until they reach retirement age.  However, every adult should have some estate plan to cover not only the distribution of assets upon death, but also management of assets during incapacity.  As we all know, death or incapacity can strike at any age.  If you fail to plan for those possibilities, the expense, confusion, and additional stress upon your family or others that you leave behind can be tremendous.

Nov 12 2009How Should You Own Your Vehicles

As a general rule, you should own your vehicle in your name alone. The primary reason for this is to limit your liability exposure. If your car is involved in an accident, most likely you will be the one driving at the time. If someone is injured as a result and they bring a claim for negligence that exceeds your liability insurance coverage, then only your individually-owned assets will be exposed to that claim. If you are married, your spouse’s assets and many of the assets you own jointly with your spouse will be protected because your spouse is not responsible for your negligent acts. However, if you own your vehicle jointly with your spouse, almost all of your assets, your spouse’s assets, and your joint assets will be exposed to the liability (there are exceptions for certain retirement assets). As a joint owner of a vehicle, your spouse is responsible for the acts of those operating the vehicle. Therefore, the way to best limit your liability exposure is to have the vehicle titled solely in the name of the person who operates the vehicle most often.

While assets titled in your name alone at death usually result in probate proceedings through probate court, that is not true if the only assets titled in your name alone are one or more cars with a total value of under $60,000 and one or more boats with a total value under $100,000. So unless you have very expensive vehicles or leave other assets in your own name alone requiring probate, your “next of kin” (spouse or children) can simply transfer title to the vehicles at the Michigan Secretary of State’s office following your death without probate or other legal expenses.

Sep 04 2009Adult Children Need Estate Plans Too

It often does not occur to parents that when their children turn age 18, they are no longer minors under Michigan law. Once a child reaches 18, he or she has legal independence of parents and the ability to enter into contracts and execute other documents including estate planning documents. Although most 18 year olds have not yet accumulated substantial assets, they should execute certain estate planning documents.

Your children should have a general Durable Power of Attorney to authorize one or more individuals to handle financial transactions for them. Although this document can be written so that it is effective when it is signed, it is most needed if a child becomes incapacitated as a result of an accident or illness. Under those circumstances and without a Durable Power of Attorney, financial transactions may have to wait until a conservator has been appointed through a probate court proceeding. These proceedings certainly come at a time when it is difficult on the family and a General Durable Power of Attorney will almost always avoid the necessity of a probate court conservatorship proceeding.

Similarly, your adult children should have a Designation of Patient Advocate in which they name an individual to make medical decisions if their physicians determine that they can no longer make informed decisions about their own medical care. The Patient Advocate then can make those medical decisions for the child under those circumstances. Without this document, a probate court guardianship proceeding may be necessary. The Designation of Patient Advocate can also include a “living will” statement that indicates what treatment your son or daughter may or may not want under particular circumstances. In light of the recent case involving Terri Schiavo, all adults should consider executing one of these documents to make their wishes clear and help avoid disputes over their medical care.

Finally, your children should consider having a Will or even a Trust, depending upon their financial circumstances, to specify how they would want their assets distributed in the event of death.

Parents who are sending their children off to college or to military service often forget that although their children may be financially dependent upon them, they are legally independent and need to address these issues to avoid a great deal of confusion, expense and emotional turmoil. Estate planning is one of the many tasks that your children should address as they reach adulthood.

Sep 01 2009Recently Divorced? Don’t Forget Your Beneficiary Designations

If you update your Will, Trust, or other estate planning documents, don’t forget about your beneficiary designations for life insurance and retirement plan benefits.  Life insurance and retirement benefits will be paid directly to the beneficiaries you name through the insurance company or retirement plan administrator.  These are contractual arrangements separate and apart from your Will or Trust provisions.  While your Will may sound like it covers everything you own, the Will only governs assets that are subject to probate proceedings.  A Trust Agreement covers the distribution of only those assets that are in the Trust or payable to the Trust.

Updating your beneficiary designations periodically is an important part of a good overall estate plan.  In fact, a critical time to update your beneficiary designations is following a divorce.  While a Divorce Judgment may terminate your ex-spouse’s interest in the insurance policy, unless you update the beneficiary designation, the insurance company may end up paying the life insurance proceeds to your estate (which means probate proceedings), even if you have named your children as the secondary beneficiaries.  The beneficiary designation typically indicates that if the primary beneficiary predeceases you, then the benefits are paid to the secondary beneficiary (your children for example).  However, in the case of a divorce, the primary beneficiary (your ex-spouse) has not predeceased you.  Rather, he or she no longer qualifies as a beneficiary.  As a result, the insurance company is free to pay the insurance proceeds to your probate estate rather than to your children directly.  If you update your beneficiary designations after a divorce, then you can avoid this problem.

The problem is even worse if you fail to update the beneficiary of a 401(k) retirement plan.  Under federal law, if you name your spouse as the primary beneficiary and then you are divorced, unless you update your beneficiary designations for your 401(k), the plan administrator will pay those proceeds to your ex-spouse.  Unlike life insurance, a 401(k) plan is subject to federal law which takes precedence over state law.  Therefore, even though your spouse may have already received half of your retirement plan through the divorce, he or she may, through your lack of attention to detail, receive the other half upon your death.  Again, this can be avoided by updating your beneficiary designations promptly following a divorce.

Aug 31 2009Incentive Trusts

A revocable Trust is a common estate planning vehicle that can provide for children or other beneficiaries after your death.  In some family situations, however, children or other beneficiaries may have shown very little financial ability or even a desire to seek employment.  In those situations, the Trust can be customized to provide certain incentives for those beneficiaries.  An example would be a Trust that upon the parent’s death sets aside a share for the son.  The Trustee is instructed to invest the assets of the share and provide the son with distributions of Trust income and principal but only to the extent that the son produces proof to the Trustee that he has earned income through employment.  The Trust provides an incentive to the son to get a job and earn money.  Upon the son showing proof of earnings to the Trustee, the Trustee would make a matching distribution, for every dollar the son earns he receives a dollar from the Trust.  If the son doesn’t work, then he receives no distributions from the Trust.  The Trust could also provide the Trustee with discretion to make distributions to the son under certain circumstances such as the son actually being unable to work due to disability or because the son is not working because he is the primary caregiver for children of his own.  A Trust can be drafted in many different ways and creatively to provide incentives to beneficiaries to act more responsibly.