Frequently Asked Questions
ESTATE PLANNING
Q: Is my estate too small to plan for?
No, you need to protect what you do have and have it pass to whom you want when you want.
Q: What is estate planning?
Many people believe that estate planning is simply a way to pass assets to heirs after death. While that is part of it, proper estate planning also involves preparing for the possibility of incapacity to ensure that the people you trust are empowered to manage your affairs if you cannot. . A well-designed plan should include directions to carry out your wishes regarding healthcare matters, thereby authorizing someone you know and trust to make decisions on your behalf if you are unable to do so, such as whether you want to be kept on life support or have other extraordinary measures taken to keep you alive.
Q: Why is estate planning important?
If you don’t make proper legal arrangements for the management of your assets and affairs after you pass away, the state of Michigan and the IRS will do so for you. And they are not concerned with making sure your assets go to the people you want, let alone minimizing taxes. This transfer process is known as probate, and in Michigan it can be very frustrating, time-consuming, stressful and unnecessarily expensive. Failing to specify your intentions can also result in family disputes over who will be appointed to manage your affairs. These battles can be very bitter and costly both financially and emotionally.
Q: What is included in an “estate?”
Simply put, an estate is everything you own. This can include your home, investments, business, life insurance, employee benefits such as a 401K plan, and other property.
Q: Should my minor children have a named guardian? If so, who?
Yes. You should also name at least one alternate guardian in case the primary guardian cannot serve. The choice of guardian is obviously an important decision, since it impacts how your children will be cared for. You should consider factors such as whether the prospective guardian shares your values, where they live, their financial situation and of course whether they are willing and able to take on the added responsibility if something happens to you.
PROBATE
Q: What is Probate? Why do so many people say it should be avoided?
Probate is the court-supervised distribution of your assets after your death. The Probate Court appoints a Personal Representative (Executor) to manage the assets in your Estate. The Personal Representative has to account to the Court for how the assets have been managed. The Probate process can be time-consuming and costly. Most Estate administrations take between six and twenty-four months, depending on size, complexity and how well the beneficiaries get along. Also, Probate Court records are generally public. Therefore, if your planning objectives include efficiently administering your Estate, minimizing fees and maintaining privacy, the Probate Court is not the place for you. A Living Trust-Centered Estate Plan can help you to achieve those objectives.
Q: What happens if someone contests a Will?
Generally, disputes arise over who gets what and who is in charge of the Estate. When a disgruntled person seeks to challenge the terms of a Will, that person must file a Petition in the Probate Court. While that litigation is pending, the Estate administration grinds to a halt. Will contests can be very costly to litigate and can destroy family harmony.
Q: What does it cost to probate an Estate, and how long does it take?
Many different factors determine the cost and duration of probate. These include whether or not there is a Will, the size and nature of the estate, how well family members get along, the location of estate assets and many more. In Michigan, it usually takes between 6 and 24 months to settle an Estate… longer, of course, if litigation is involved. Fees, such as those for Personal Representatives, Attorneys, court costs, appraisals and more, generally total between 2 and 7 percent of the estate’s value.
Q: Are all assets subject to probate?
Some assets, called non-probate assets, are not subject to the probate process. These include:
- Retirement accounts and life insurance policies for which there are designated beneficiaries
- Property titled as joint tenancy with right of survivorship
- Bank accounts designated as In Trust For (ITF) or Pay on Death (POD)
- Assets named in a living trust
Q: If I agree to serve as Personal Representative, will I get paid? Are there any risks?
You will receive compensation for expenses and, perhaps, fees for serving as Personal Representative of an Estate. However, the decision to serve as Personal Representative should not be taken lightly. You could be held accountable, and legally liable, for the decisions you make. An experienced estate planning attorney can explain the risks involved and guide you through the process to minimize your personal liability risks.
LIVING TRUSTS
Q: What is a Living Trust?
A Living Trust allows you to hold legal title to your assets and manage them while you are alive and well, as well as designate successor trustees to follow your instructions in the event of incapacity. It usually becomes effective immediately after incapacity or death and, unlike a Will, when properly funded, avoids the publicity, expense, delays and frustration of probate. It can also allow for the management of your affairs without the need of a conservatorship or guardianship proceeding. A Living Trust is revocable, meaning it can be changed whenever you want, and even terminated
Q: How does a Living Trust let me stay in control of my assets?
While you are alive and well, a Living Trust gives you complete control of your hard-earned assets. In effect, you are the Trustee of your Trust, and can make any transaction you choose, just like you could before you had the trust created. The Living Trust can be modified at any time or terminated if you so desire. If you become incapacitated, your durable power of attorney takes effect and permits your loved ones to make transactions on your behalf, but only according to the instructions detailed in the Living Trust. When you pass away, the trust becomes what is known as “irrevocable,” and nobody can change the instructions you dictated originally.
It is important to note that in the case of married couples, the surviving spouse retains control over his or her share of assets following its transfer to the survivor’s trust, and only the deceased spouse’s share becomes “irrevocable.”
Q: Should all of my assets go into the Living Trust?
Not necessarily. Certain assets, such as those with specific beneficiary designations like insurance policies or annuities do not need to go into a Living Trust. Many retirement accounts also transfer automatically to named beneficiaries without having to go through probate. Of course, it is important for the distribution of assets such as these to be coordinated with your Trust and overall estate plan, preferably with the assistance of an experienced estate planning attorney.
ESTATE TAXES
Q: How do I know if my estate will be subject to estate taxes?
That is a great question because there has been a great deal of discussion in the media recently about the federal estate tax. For starters, it is important to understand that the federal estate tax is based upon a percentage of your estate, which is comprised of all the assets you own less certain deductions, including charitable donations and what is known as the applicable exclusion amount.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which provided that the applicable exclusion rate increased annually up to $3.5 Million dollars in 2009. EGTRRA expired in 2010, which meant no federal estate tax in 2010. Accordingly, we entered 2010 with much speculation of whether Congress would allow this so-called “sunset provision” of EGTRRA to occur.
It wasn’t until December 17, 2010 that the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “2010 Tax Relief Act”) was signed into law. This ended nearly a year of speculation of what would happen to the federal estate tax. The new law, which amends EGTRRA, provides that the applicable exclusion amount is $5 Million dollars in 2011 and 2012. However, in 2013, neither EGTRRA nor the 2010 Tax Relief Act will apply. Without action by Congress, the applicable exclusion amount will revert back to $1 Million dollars. So, we are again left to speculate about whether Congress will allow this to happen.
We recommend that everyone should have their estate plan regularly reviewed by an experienced estate planning attorney. If your estate plan hasn’t been reviewed recently, you or your family may face unintended consequences due to these changes in the federal estate tax. Additionally, the 2010 Tax Relief Act may offer some additional opportunities for advanced planning related to gift tax and generation skipping transfer taxes.
Q: What portion of my estate is taxable?
Your taxable estate is made up of the total value of your assets minus liabilities and deductions such as funeral expenses, debts, bequests to charities and the value of the assets passed on to your spouse. Taxes imposed on the taxable part of your estate are paid out of the estate itself before distribution to heirs.
Q: Is it true that if I leave my assets to my spouse there won’t be any estate taxes?
This is a tricky question. The federal government lets married individuals give an unlimited amount of assets by gift or bequest to his or her spouse without federal gift or estate taxes being imposed. This is known as the unlimited marital deduction, and in effect it lets married couples delay the payment of estate taxes when one spouse passes away. However, upon the death of the surviving spouse, all assets in the estate in excess of the applicable exclusion amount will be included in the survivor’s taxable estate. Also, unlimited marital deductions apply only to surviving spouses who are U.S. citizens.
Q: If my estate exceeds the applicable exclusion amount, do I automatically have to pay the full amount of estate taxes?
A number of tools exist to minimize estate taxes. Some of the more commonly used are Credit Shelter Trusts, Qualified Personal Residence Trusts (QPRTs) Irrevocable Life Insurance Trusts, and Family Limited Partnerships (FLPs). An experienced, competent estate planning attorney can use these tools and more to help protect against your estate paying too much in death taxes.
PLANNING FOR INCAPACITY
Q: What is a Durable Power of Attorney?
A durable power of attorney allows your wishes with regard to your financial affairs to be carried out should you become disabled or incapacitated. It can avoid the prospect of a conservatorship or guardianship proceeding—and the expense, emotional strain on your family and frustration that goes with conservatorship/guardianship proceedings. In most situations, two types of durable powers of attorney are used. The person you appoint to make financial decisions for you in your durable power of attorney is known as the Attorney in Fact. By appointing a power of attorney, you ensure that your wishes will be carried out by someone you trust, such as a spouse, close friend or advisor.
Q: Are there restrictions on who can create a durable power of attorney? Can I choose anyone I want to be my Attorney in Fact?
In almost all circumstances, any legally competent adult can create a power of attorney, as long as he or she is a resident of the state in which it is created. Likewise, any legally competent adult can serve as Attorney in Fact in most situations. Of course, choosing your Attorney in Fact is an important decision and should not be taken lightly. It is also important to have your durable power of attorney drafted by an attorney experienced in this area of the law.
Q: What is a Durable Power of Attorney for Health Care?
A Durable Power of Attorney for Health Care allows you to designate the person you want to make decisions about your medical care on your behalf should you become incapacitated. It lets you give specific instructions to your agent that he or she must carry out, and gives them the authority to ensure health care providers are following your instructions. This means physicians, hospitals and other medical professionals must carry out your agent’s instructions as if they were your own.
Q: What is a Living Will?
If you become permanently unconscious, terminally ill or unable to communicate your wishes for medical treatment, a Living Will outlines your desires in advance about the level of care taken on your behalf. Most states have laws to protect a patient’s right to refuse medical treatment. A Living Will, together with other estate planning tools and strategies, can protect your loved ones from having to make critical decisions about your medical treatment in an end of life scenario, as well as protect your estate from the high costs associated with carrying out such treatment.
Q: What is a HIPAA Authorization?
A HIPPA Authorization Form allows your medical information to be released to people you choose, such as family members, agents and successor trustees. It is designed to circumvent provisions in the Health Insurance Portability and Accountability Act (HIPPA), which prohibited the release of such information and led to some physicians, hospitals and care providers refusing to provide medical information to patients’ adult children and even spouses.
SPECIAL NEEDS PLANNING
Q: Why should I consider having a Special Needs Trust?
A properly drafted Special Needs Trust or Supplemental Needs Trust allows you to put assets in trust for the benefit of the recipient that can enhance quality of life and preserve eligibility for important government benefits.
Q: Can anyone establish a Special Needs Trust? When should it be established?
It depends on the type of Special Needs Trust. Special Needs Trusts can be established by parents, grandparents, other family members, or the Probate Court. If you have a loved one with special needs, it is important to be proactive and seek experienced legal counsel to establish a proper plan that meets the needs of your loved one.
Q: Is there a minimum amount necessary to establish a Special Needs Trust?
No. However, the decision to establish a Special Needs Trust should only be made after consulting an attorney with knowledge of government benefits programs and experience in drafting and administering Special Needs Trusts.
Q: How do I choose the right trustee?
Selecting a trustee is a critical decision and should not be taken lightly. Nor should agreeing to serve as a trustee. Family members are often considered first, but in many cases they lack the objectivity, necessary information, or time to fulfill the duties of a fiduciary. Professional trustees are available. The services they provide, as well as the costs for those services, should be thoroughly discussed in advance. Regardless of whether the person chosen to act as trustee is a professional or not, it is crucial that the trustee knows and understands all of the rules that govern public assistance programs because protecting eligibility for these programs is central to the trustee’s duty. Pooled Trusts can often be a very effective solution to the problem of selecting a trustee since Federal law requires the non-profit association to manage the Pooled Trust that it establishes.
Q: Should a well-to-do family like mine have a Special Needs Trust?
Absolutely! Why? A properly drafted Special Needs Trust can protect your loved one from predators, creditors and lawsuits. Special Needs Planning can give you the peace of mind that comes from knowing your loved one will be cared for, even when you are gone. Proper planning can also help your loved one maintain government benefits while preserving resources to enhance his or her quality of life.