(This is the first of our blog articles on estate planning, business and succession planning, probate and trust administration, and real estate law. Our focus is on the laws of Michigan and Florida, where we have offices in Oak Park and Grand Rapids, Michigan, and Fort Myers and Naples, Florida.)
Understandably, most people are not eager to plan for the end of life. But there are many good reasons to overcome that reluctance and take action. In this article we will discuss five ways that an estate plan can benefit you and your family, including:
- Avoiding Probate
- Providing for Children and Other Dependents
- Asset Protection
- Planning for Possible Disability
- Minimizing Taxes
This article is intended as an introduction and overview. In future articles, we will explore these and many other issues in greater detail.
1. AVOIDING PROBATE
The probate process is not as horrible as some people say. But it can result in some expense, delay, and public disclosure of private details which can be reduced or avoided with proper planning. The good news is that for many people with typical property and simple situations, it is relatively easy to plan to avoid probate.
If you are married and own property jointly with your spouse, your surviving spouse will take title to that property at your death without the need for probate. Unmarried persons can also avoid probate through joint ownership. But for several reasons, using joint ownership as an easy way to avoid probate for unmarried persons without careful thought can be shortsighted and risky. Adding a joint owner to a bank account or to the title to property can expose those assets to the new joint owner’s creditors. And using joint ownership without considering how it fits into your overall estate plan can result in accidentally giving an heir a disproportionate share of your estate.
In addition to joint ownership, many of the most valuable assets that people transfer at death will avoid probate because those assets are transferred to a designated beneficiary outside of probate. Examples include retirement plans, life insurance, and certain brokerage and bank accounts. The key is to make sure your designated beneficiaries are clearly identified and coordinated with your overall estate plan. It is also important to regularly update your beneficiary designations to account for changes in your life such as divorce, death of a family member, or the birth or adoption of a child.
If you have substantial assets beyond those described above, a revocable trust (sometimes called a “living trust”) can be created and funded now. Any property held in that trust at your death will be managed or distributed according to the trust, and will not require probate. Establishing a living trust can be a particularly good strategy for a widow or widower not only to avoid probate, but to provide for the management of property in the event of incapacity or disability in the future.
2. PROVIDING FOR CHILDREN AND OTHER DEPENDENTS
If you fail to implement an estate plan, state law provides one for you, at least for those assets that are not jointly owned or distributed to designated beneficiaries. But it is unlikely that the state law will distribute your assets exactly as you wish, or in a way that takes into account the particular needs or circumstances of your family. A will or trust can address your specific situation.
If a spouse, children, parents, or others depend on you for continuing financial support, hopefully you are able to obtain adequate life insurance coverage. Combined with other assets, life insurance proceeds can create substantial assets even in an otherwise modest estate.
A thoughtful estate plan can include trusts for the benefit of your dependents to manage and distribute assets. A trust can arise from the terms of your will when you die, or can be created during your life to avoid probate as described above. Some people mistakenly believe that trusts for dependents are only for the very wealthy, or that they complicate matters for the surviving family. But that is not the case. Trusts for surviving dependents can provide many potential benefits for lots of people, including:
- allowing for the appointment of a qualified trustee who knows how to manage funds for a minor or inexperienced investor.
- providing a way to keep a child’s entire inheritance from being distributed at age 18.
- providing an opportunity to create one “pot” of funds for multiple children so that the trustee can distribute to children according to their needs.
- protecting inherited funds from present or future creditors of the beneficiary.
- preserving assets intended solely for children from the potential remarriage of a surviving spouse.
- limiting access to an inheritance to preserve potential eligibility for public benefits, such as Medicaid and Supplemental Security Income.
3. ASSET PROTECTION
Besides preparing documents to direct the transfer of your property at death, an important part of estate planning is to build and preserve wealth during life so that there will be some property to transfer. Even persons with low risk careers and lifestyles can be sued. Adequate liability insurance, including auto insurance and possibly an “umbrella” insurance policy, is the first line of defense to protect assets against lawsuits.
The form of ownership and proper titling of your property can help to protect assets from creditors. As stated above in the section on avoiding probate, adding an unmarried joint owner to an account or title can potentially expose those assets to the new joint owner’s creditors. Even a husband and wife should be careful with how they own property. While owning property jointly can protect those assets from creditors of only one spouse, owning certain property jointly, such as an automobile, can be risky since a lawsuit arising out of a car accident might result in liability against both owners of the car. In that case, all jointly owned assets of a husband and wife could be at risk.
For people with higher risk careers or lifestyles who are more likely to be sued, Michigan adopted a Domestic Asset Protection Trust law in 2016 that provides an opportunity to plan now and avoid future claims. Florida does not have such a statute as of yet.
But most importantly, estate planning provides an opportunity for you to set up trusts at your death that will preserve your intended use of your property and protect family members from creditors, divorce, remarriage, or just from being spent carelessly. In many cases, family members will appreciate this planning. Inheriting a large sum of money can be a burden, and in the hands of an inexperienced recipient, can result in regret later when the funds are gone and were not used efficiently or wisely.
4. PREPARING FOR POSSIBLE DISABILITY
The main purpose of planning for possible disability is to avoid going to probate court to have a guardian appointed. A significant percentage of people will become incapacitated or disabled during their lifetimes and need someone else to handle their financial affairs, and to assist in making important decisions. In the absence of planning, a family member or interested person would need to petition the court for guardianship for the disabled person. Besides the expense and effort, a judge must determine whether the person is disabled and must oversee and approve the guardian’s actions. In addition, there may be some dispute between family members over who is best suited to act as a guardian.
Fortunately, planning for disability is a well-established practice that can be addressed using a durable power of attorney document, health care advance directives, and maybe a revocable trust. Importantly, you can chose who will make decisions and act on your behalf, and that might be different people for different things. You can avoid court by allowing your disability to be determined by one or more doctors, or by some other method you chose. And most importantly, thinking and planning for disability gives you the opportunity to communicate with your family and agent(s) who will act on your behalf to let them know your wishes so they can act for you as you direct.
5. MINIMIZING TAXES
Most people do not need to worry about estate tax. But for those who need to include tax planning in their estate plans, and to assure those who do not, including the issue of taxes on this list is important.
In 2017, federal estate tax is due when a deceased person’s total estate, plus certain gifts given during their life, exceeds $5,490,000. If married, planning can allow the couple to combine their estate tax exemptions and avoid tax on up to $10,980,000. The tax rate on estates and gifts in excess of the exemption amount is essentially 40%. Both Florida and Michigan currently have no state inheritance or death tax.
Common strategies to address estate taxes include giving gifts during life to reduce the estate, or using life insurance to fund the payment of taxes. Needless to say, if you have total assets approaching or in excess of the current exemption amounts, estate planning to minimize taxes is reason enough to implement an estate plan.