Stefanie A. Porter, J.D., CFP®

Partner

Have you ever traveled to a place where you didn’t speak the language?

Estate Planning

es Como un idioma extranjero

(it's like a foreign language)

It may have reminded you of the infamous, bad-connection cell phone commercial, “Can you hear me now?” When things are lost in translation, it makes it difficult to get where you need to go and almost impossible to do it efficiently. For a lot of people, the topic of estate planning is like a foreign language. This makes it difficult to ask the right questions and to know whether the plans you have in place are right for you and your family. We want to remove the communication barrier and give you enough information to feel comfortable with your estate planning decisions and plans.

The beautiful thing about estate planning is its versatility.

Every plan can be crafted to reflect each person and family’s unique needs, though there are some common elements. Basic estate planning documents include a last will and testament, durable power of attorney, patient advocate, and living will. Some clients will also include a trust in their estate planning documents. Each document is an important piece of the overall estate plan.

A Last Will & Testament

A last will and testament, sometimes just referred to as a will, is written instructions to probate court to facilitate the transfer of assets to one’s heirs. It addresses what happens to property that is owned individually. This includes personal property (furniture, household effects, car, etc.) as well as bank or investment accounts. A will does not affect the distribution of assets that are owned as joint tenants with rights of survivorship or assets that have a beneficiary designation like retirement accounts, life insurance proceeds, and investment accounts with a transfer on death designation. One of the most crucial functions of a will is the appointment of a guardian for minor children.

After a death, someone needs to handle the business aspects of a probate estate. In Michigan, the will appoints a personal representative (also known as an executor in other states) to perform this function. The personal representative is responsible for filing the necessary paperwork with the probate court, paying outstanding debts, filing the last tax return, and collecting the assets and distributing them to the proper beneficiaries. Depending on where the assets are located and the terms of the will, this process can take anywhere from 6 to 24 months. Once the personal representative submits the final accounting to the probate court, the estate is officially closed.

There are two significant drawbacks of a will. The first is it must be submitted to the probate court which makes it available as a public record. Clients who prioritize privacy often structure their estate to minimize the amounts of assets that are part of the probate estate. The other drawback is the cost of a probate estate. In addition to the probate court filing fees, many counties impose a fee based on the value of the estate. This fee could range from a few hundred dollars to several thousand.

Durable Power of Attorney

A power of attorney (POA) is when someone (called the principal) appoints someone else (called the agent or attorney-in-fact) to act on his or her behalf in the ways that are outlined in the document.

In estate planning, a power of attorney is used to appoint someone to manage the financial affairs of a principal. The powers granted often include banking and business-related tasks such as making deposits and withdrawals, paying bills, managing investments, signing tax returns, and filing for Social Security.

There are two common types of power of attorneys used in estate planning. A durable power of attorney is effective upon execution and acceptance, and it remains in effect even when the person granting the power is incapacitated. In contrast, a springing power of attorney only goes into effect when a triggering event occurs, such as when a person is incapacitated or unable to manage his or her their financial affairs. If the principal recovers, the right to act as a power of attorney terminates. If the power of attorney is drafted with a springing power (effective during periods of incapacity), it’s incredibly important the document spells out clearly and concisely how to prove incapacity.

Power of attorney forms signed after October 1, 2012 in Michigan must include a signed acknowledgment of his or her responsibilities from the agent. This doesn’t have to be done when other estate planning documents are executed, but it must be done before the agent can act under the POA.

There are certain situations in which a person may want to name more than one person as agent under a power of attorney. A typical example of this is granting more than one child the ability to manage financial transactions. There is nothing that legally prohibits this, but it can lead to some practical challenges. First, the document would have to be very specific about whether one agent can act alone, or if there needs to be unanimous agreement between all agents to conduct all business. Michigan law does not require a third party, such as a bank or investment firm, to accept the power of attorney. If there are doubts or confusion in the document about the identity and powers of the agent, financial institutions may be less likely to honor the POA. Also, having multiple agents increases the possibility of duplicate transactions and confusion.

An agent’s right to act under a POA automatically terminates when the principal dies. Upon death of the principal, the person named in the will as personal representative, even if it is the same person as the agent, would need to get letters of authority from the probate court to conduct business on behalf of the decedent. Also, an agent acting under a POA cannot make decisions about assets that are held in a trust account. Thus, if there is a revocable trust and assets or accounts have been titled to the name of the trust, it’s the trustee who has authority and responsibility over those assets.

Patient advocate designation is like a power of attorney, except it applies to health care decisions rather than financial matters. What is called a patient advocate in Michigan goes by a few other names in other places, including health care proxy or health care power of attorney. Unlike a power of attorney, the authority to make health care decisions is only effective if someone is unable to do so. It is always a springing power.

Living Will

The patient advocate designation goes hand in hand with an advanced directive. An advanced directive is sometimes called a living will, and it’s a document that outlines what health care decisions a person wants.

Often this includes when to accept or refuse medical treatment, care and custody of the patient, and anatomical gifts. It provides instructions for the patient advocate.

Due to the sensitive and timely decisions a patient advocate may be required to make, it’s best to name only one individual to perform this role. Others should be listed in successive order in case the first is unavailable or deceased. In the event family members don’t agree or can’t decide on the best course of action, there is one person who has the legal authority to act.

Living Trust

Another piece of the estate plan for many clients is a trust.

A trust establishes an entity that is created to manage assets beyond a person’s death. Some trusts are created under the provisions of a will (called testamentary trusts), and other trusts are created under a separate trust agreement. The person creating a revocable trust is called the grantor and is often the same person as the initial trustee. The trust names successor trustees who will step in and manage the assets if the initial trustee is unable to do so. The trust assets are used for whatever purpose the grantor/trustee deems appropriate. The grantor/initial trustee has the power to amend and revoke the trust if it no longer meets his or her needs.

When the grantor becomes incapacitated or dies, the revocable trust becomes irrevocable (unable to be modified and revoked), and the successor trustee, or co-trustees, will step in and manage the trust for the benefit of the grantor and/or the trust beneficiaries.

A trust allows the grantor to have a large amount of control and flexibility in the distribution of assets. In addition, a trust is a private agreement between the trustee and the beneficiaries; there is no probate filing or public record. The downsides of creating a trust include the additional complexity to the estate planning and the cost in drafting a trust agreement. The decision on whether a trust is needed depends on a family’s goals. If all of the assets of the trust will be paid out in equal shares to the adult beneficiaries, it may be easier to accomplish the estate planning goals without a trust. If there are minor beneficiaries, blended families, special needs individuals, or other reasons the assets will remain in trust beyond the death of the trust creator (grantor), a trust is a very useful, flexible, and widely used tool.

It would be impossible to cover all aspects of estate planning in a newsletter, but hopefully you have a better understanding of estate planning language and can assess whether you have the proper documents in place. If you have questions or would like to have more in-depth information regarding your estate plan, please don’t hesitate to reach out.

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