THE TOOLS OF ESTATE PLANNING; THE REVOCABLE LIVING TRUST

In prior months we have discussed a number of the “Tools” which comprise a well rounded Estate Plan. While I have opined that the Durable Power of Attorney is perhaps the all-important “hub” of a good plan, the Revocable Living Trust is–perhaps–equally important.

Often referred to as a “Will-substitute,” the Revocable Trust functions, like a Will, to distribute assets to heirs (known as “beneficiaries”) after death. However, it is the additional things that can be done with a Trust that make it “shine” in the Estate Planning arena. A Trust allows the maker (known as a “grantor”) to provide for ongoing management of assets and controlled distributions for beneficiaries who may be minors, incapacitated, or simply not ready for unfettered receipt of assets in the mind of the grantor. And, during the continued lifetime of the grantor, the Trust can be an important asset management tool in the event of the grantor’s own incapacity.

In most states, a Trust is not subject to the same “formalities of execution” that a Will must have. Trusts are generally governed by contract law (with some modification by modern state Trust Codes), which can allow for more flexibility in drafting for the wishes of the grantor.

The “magic” of the a Trust is that it is recognized as a “legal person” and therefore, “lives on” after the death of the Grantor. This means that there is essentially uninterrupted management and control of assets within the Trust and (usually) no need for court-supervised administration of the estate.

Like many legal concepts, there are some common misconceptions about Trusts:

Trusts do not save or avoid taxes. Trusts, themselves are simply tools. Avoidance or reduction of taxes requires active planning, and often involves the use of Trusts. Many times over my 25 years of practice, I have seen persons relying on the existence of a Trust as a tax savings, only to be rudely surprised after it was too late.

You don’t have to hire a third party Trustee. There often seems to be this vague notion that you must put all your assets in a box, take it down to the bank or brokerage, and entrust it to some third party who then tells you how and when you can use them. This is followed by a similar vague thought about the expense involved.

In reality, you may–and usually should (and the substantial majority of my clients do) be your own Trustee. Indeed, most of these Trusts are known as “Grantor-Revocable Trusts” (which has a technical tax meaning). Michigan’s Trust Code actually provides that the grantor of such a Trust remains and is treated as the owner of the Trust assets in all respects. There is no independent tax reporting or filing under a grantor-revocable Trust. Nor is there any duty to “account” (it just wouldn’t make sense to require you to account to yourself).

On the death or incapacity of the grantor, a successor trustee can be a family member or close personal friend or advisor. With married couples, we usually appoint spouses as co-trustees, with the surviving spouse continuing in that role. This doesn’t mean there is never a time when a third party Trustee might be advised. There are professional trustees who are well versed in trust and asset management and set up to fulfill the formal requirements of trust administration. Most often this arises after the grantor’s death.

You don’t have to have be a millionaire for a Trust to be advised. I would like to have $10 for every time in my career that I have heard a client (and sometimes a colleague) say the estate wasn’t large enough for the estate tax and therefore a trust wasn’t necessary. This misconception goes hand-in-hand with the notion that Trusts somehow eliminate or reduce taxes. The primary function of a Trust is orderly, managed, asset distribution without the need of Probate. Any client who owns a home, has life insurance and some other assets is at least a candidate for a Revocable Living Trust.

There are certain crucial steps in setting up an Effective Trust:

Trusts must be Funded! One critical error we see regarding Trusts is that they often fail to be funded. I like to describe a Trust as a box. The document itself is the box.

We can make a pretty nice box, with lots of proverbial bells and whistles. But by itself, it is still just a box–an empty box.

The trust will only cover assets that are titled in the trust, or are designated to automatically pay into the trust at some point (often on death). Other assets will still be subject to probate (or may, whether intended or not, pass directly to a beneficiary or joint owner).

Careful attention must be paid to each type of asset in this process. There are even some assets which in most circumstances, should probably not be put into a Trust (most notably, many retirement plan assets).

Regular Monitoring is Critical. Another factor contributing to the failure of Trusts in Estate Planning is the failure to periodically and consistently review the plan. This relates not just to the document itself, but to the process of funding. The one true constant in our lives is change. I am consistently impressed with how often clients change their asset mix. CD’s become due. Accounts are changed to “better” investments. Products are exchanged and rolled over. And banks seem to change names so often these days that often the paint isn’t even dry on the new signs between name changes. All these factors contribute to the crucial need to undertake periodic review. While I am hesitant to set a “rule of thumb,” if it has been more than two years between reviews, that is too long! The reality of the situation is that your own particular circumstances will dictate the frequency.

We recommend Revocable Living Trusts for the majority or our Estate Planning clients, not because it is a “favored product,” but because it truly fits the needs and goals of most clients in our experience. In upcoming posts, I will address some variations of Trust Agreements that may be recommended for clients with particular circumstances.

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The Tools Of Estate Planning - The Last Will and Testament

It is very common these days for third party advisors of every description (insurance advisors, accountants, church groups, foundation officers, brokers, etc.) to recommend a Will. Questions like “do you have a Will”; “have you updated your Will?” are frequently asked.

While I agree that a Will is an important fundamental “tool” in the Estate Planning tool bag, I take a more contrary view. Misconceptions about Wills are the most common of all misunderstandings in this arena. I continue to be impressed, in this “information age” at how much misinformation or just misunderstanding exists about Wills.

Lets consider some fundamental points about Wills:

● Wills do not avoid Probate! Indeed, a Will is simply as set of written instructions to the Probate Court (or more correctly, to the “executor”), on how the Probate Process should be handled.

Clients are often dumbfounded when they learn that even with the Will they spent so much time (and often money) to have done the estate still must be probated.

● Wills do not always do what you think they will do. A Will only governs assets which are subject to probate. Too often, over the years, I have had to explain to a client that, even though mom or dad’s Will clearly divides their asset equally among all the children, the division legally will not happen that way. While there are certainly circumstance in which this is intentionally done, it is often a matter of misunderstanding by the client making the Will about how the law works. Insurance policies pay to the designated beneficiary, usually without regard to the terms of the Will. Assets that are owned jointly with one or more other persons often go to the joint owner, outside of probate and again, without regard to the terms of the Will (this is often the case in a joint bank account, or an account which designates a “pay on death” or “transfer on death” beneficiary).

● You already have “a Will.” The Michigan Legislature (as has most states) has considered how the “typical” person would want their assets distributed. The Michigan Estates and Protected Individuals Code (EPIC) directs the distribution of assets of a person who died without a Will (a term or condition known as “intestacy”). My problem with that is that I have not met that “typical” person in my 25 years of helping clients with their Estate Planning. The statue simply makes some assumptions which are often not reflective of clients’ desires. Ironically, in other cases, clients go through a significant amount of angst and effort to create a Will that does not differ substantially from this statutory scheme (in other words, they spend time and money on a Will which really doesn’t accomplish much for them).

I am not saying a Will is a “bad” thing, or that you should not have one. We always recommend a Will as part of the overall Estate Plan. There are some very important functions of a Will:

● A Will gives you the opportunity to direct the Probate Process the way you want it to be done -- if there is a need for Probate for some reason.

● With a Will, you choose the executor (in Michigan, called a Personal Representative).

● A Will remains an effective way to nominate guardians for minor children.

● In situations where there is a taxable estate or income tax issues, the IRS (and state treasury) will look to the language in the Will for the handling and apportioning of taxes.

● There are special situations (e.g., in certain Medicaid circumstances) where using a Will and creating a “Testamentary Trust” may be preferred.

● A Will can be used as a “catch all” and a curative document to “repair” situations that do not occur as planned (for example, we recommend a “pour-over” Will whenever a client creates a revocable living trust).

In summary, while there are instances in which a Will is appropriate as the tool of disposition in an Estate Plan, there are commonly better methods and the Will becomes an important supporting and backup tool as part of the overall Plan.

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The Tools of Estate Planning - The Health Care Durable Power of Attorney

The Michigan Statute authorizing these specialized powers of attorney denominate them as “Healthcare Designations of Patient Advocate.” The previous blog addressed Durable Powers of Attorney, the rationale behind them and the common law and statutory law authorizing them. The Designation of Patient Advocate is a special form of a Durable Power of Attorney which restricts itself to medical and health care issues. For purposes of this blog, I will refer to them as Medical or Health Care Powers of Attorney.

The Medical Power of Attorney is often confused with another similar planning tool, the “Living Will Declaration.” The Living Will Declaration is a self-activating instruction to the Medical Community to take certain, often life-ending, actions. Unlike the Living Will Declaration, which is a direct instruction to the medical community, a Medical Power of Attorney appoints a person as your agent (just like a General Durable Power of Attorney), to act on your behalf in the process of making medical and health care decisions. These powers can range from daily care decisions to the ultimate end of life decision.

A well-drafted Medical Power of Attorney will not only specifically itemize the powers granted, but it will designate the person who has that authority. There is a specific itemized list of powers which may be granted by statute and it is wise drafting to include those statutory powers in the document.

The Medical Power of Attorney statute was passed by the Michigan Legislature in late 1990. Prior to that time, the status of the Power of Attorney in making healthcare decisions was questionable. Michigan had some very unclear statutory treatment of the meaning of “death” and how and when life could be terminated.

The medical and legal community alike embraced the advent of the Medical Power of Attorney Statute.

Unlike a general durable power of attorney, the Michigan Medical Power of Attorney statute requires the written determination by two medical professionals that the patient is unable to meaningfully participate in their own health care decision making process, before the agent is authorized to act.

In April of 2004, certain provisions in the Health Care Portability and Accountability Act (HIPAA) which critically effect these Medical Powers of Attorney became active. HIPAA, among (many) other things, provides that a Medical Provider cannot reveal “Protected Health Information” (PHI) to anyone without the prior, written authorization of the patient.

Obviously, when the patient is not competent, this is not possible. The HIPAA regulations provide for a delegation, in writing, by the patient (obviously prior to their becoming incompetent). It is critical that a Medical Power of Attorney contain HIPAA - compliant provisions.

Hospitals and Legislators offer a “fill-in-the-blank” form of Health Care Designation. In my view, while better than nothing, they leave much to be desired and do not cover with sufficient detail, the important provisions which should be in these documents.

The Medical Power of Attorney is one of the fundamental, important tools of estate planning.

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The Tools of Estate Planning - The Durable Power of Attorney

This is the first in a series of Blogs on Estate Planning Tools.  Estate Planning is a process.  The documents we lawyers prepare for clients are the “tools” used to ensure that the process works.  Some are basic tools that every client needs as part of their plan.  Some are more sophisticated and reflect the clients’ needs, desires, and special circumstances.

Everyone Should have a General Durable Power of Attorney

The General Durable Power of Attorney is one of the basic tools that should be in every estate plan.  This document, correctly drafted, will give the client the flexibility needed to respond to almost any variation in circumstances, whether specifically addressed in the estate plan or not.  The Power of Attorney will allow surrogate decision makers to act in your best interest and in furtherance of your estate plan, even when you cannot.

Stuff You Probably Didn’t Want to Know.  There are some fundamental components that must be included in a good Durable Power of Attorney document.  To well understand these components, it is useful to have a basic familiarity with the law which is the foundation of the Durable Power of Attorney.  As you read on, hopefully you will remember the adage, “do not shoot the messenger.”

My father the engineer was fond of saying that the best, most trouble-free, and lasting designs were based on simplicity.  Unfortunately, what could perhaps be the simplest of all estate planning concepts is necessarily complicated by the law which governs it.

Common Law vs. Statutory Law.  Since before the United States was settled, our ancestors have relied on something known as “Common Law.”  Common law developed based on a series of court decisions over many years, starting with English courts, and carrying over into most of the United States.

When the legislature (congress at the federal level) of a state thinks common law is insufficient to cover certain issues, or needs to be changed, it enacts written laws, known as “statutes.”  One of the quirks of statutory law is that when it changes or goes against traditional common law, our courts interpret it very narrowly.  Why am I telling you this?  What does this have to do with Estate Planning and Durable Powers of Attorney?

Agency Law.  The common law of Agency governs Durable Powers of Attorney.  They are very similar to an employment document (employment law is also originally based on Agency law).When you grant someone a Power of Attorney, they become your Agent (and you are known as the Principal).  Under the common law rules, Agency was automatically terminated when the Principal become incapacitated.

Obviously, as an Estate Planning tool, that type of instrument is of very limited usefulness.  Recognizing this limitation, the Michigan Legislature (as have the legislatures of every other state), enacted a statutory provision which allowed a Durable Power of Attorney to provide in its terms that it would continue to be effective, even in the event of the incapacity of the principal.  As noted above, this goes against (or is “in derogation of) traditional common law rules of Agency.  And because of the quirk of narrow interpretation noted above, this means that unless the Durable Power of Attorney specifically and precisely enumerates detailed powers granted to the Agent, the courts (and more importantly, third parties your agent may be dealing with) are likely to consider it useless.

Thus, our legal system requires us to take what could be a very simple document (what is more clear than “my Agent may do anything that I could do”?) and make it a necessarily long and complex document with many, detailed, enumerated powers.

If you have an existing Durable Power of Attorney that is only a page or two, it is likely not going to be as effective as it could or should be.

What Should Your Durable Power of Attorney Say?  A well written Durable Power of Attorney Document will have a number of detailed provisions generally dealing with the “business” of everyday life.  It will generally be necessary for the document to cover at least the following areas:

• Financial Powers, including power to deposit, withdraw from, open and close bank and brokerage accounts, vote stock, and make dividend elections.

• Power to pay and/incur debt, and to contract, negotiate, sue and defend.

• Power to engage in Real Estate transactions (this will require that the Power of Attorney be in recordable form, so it can be recorded in the county register of deeds office if necessary).

• Tax Powers, including the power to file tax returns and make tax elections.

• Powers to deal with Social Security, Medicare, Medicaid and other governmental agencies.

• Power to deal with Qualified Retirement Plans, Pensions, and IRA’s, including power to make elections.

• Powers to deal with Insurance and Annuities (including making elections and beneficiary changes).

• Power to make adjustments to existing Estate Planning Documents.

• Power to make or continue gifts.

• Personal powers like establishing residency, making funeral arrangements, and entering into personal care contracts.

The foregoing is by no means an exhaustive list, but is meant to illustrate the level of detail that is necessary in order for these documents to be useful as intended.

Who Should Your Agent Be?  Considering some of the powers enumerated above might cause you to ask whether you really want to give an Agent such broad and far-reaching powers.

The focus should not be on what the document says, but who we give the power to

.

The “tool” analogy really does work here.  If I want to build a house, I hire a skilled, experienced builder.  In the hands of an unskilled or careless person a sophisticated power tool with very sharp blades can cut off limbs and do serious injury in an instant.  In the hands of a skilled user who exercises common sense, that same tool makes the process better and easier.  And, as a matter of fact, in the hands of an unqualified person, a crude hand tool can still do plenty of damage.

The question you should be focusing on is whether the person being give any power is trustworthy, dependable, and capable of exercising good judgment.  If that is the case, I believe we want to give them the most capable tool to accomplish the assignment they have been given.

I am not saying, necessarily, that the person you appoint must be a lawyer, accountant, or financial person.  Those persons can be hired.  They need to be able to use good judgment and common sense in the process.  Indeed, in most cases, I believe a trusted family member is best solution for this.

When Should The Power Be Effective?  A Durable Power of Attorney may be immediately effective, or may be drafted to become effective only upon a finding of incapacity (sometimes referred to as a “Springing” power).  Clients sometimes express a concern over a power being immediately effective and believe that they would prefer the “springing” power.

While there is no “right or wrong” answer to this question, I have a bias toward the power being immediately effective.  My view is based on the same reasoning used in the “sharp power tool” analogy above.  If the person you have chosen is trustworthy and capable of good judgment, you shouldn’t need to worry about abuse of the power.  If they aren’t, you should be very seriously questioning appointing them under any circumstances.

My bias stems from a practical viewpoint.  If we make the power “springing,” it must be conditioned upon an event -- typically, “incapacity,” How is incapacity defined?  Who makes that determination?  How do we prove that to third parties?

In my view, by making the Durable Power of Attorney conditioned on an event, we set up “road blocks” to its practical usefulness.  We find ourselves having to figuratively “jump through hoops” to validate it.  It seems to me that such “roadblocks” defeat one of its most useful purposes: flexibility and ease of use by the Agent, when that use is most needed.

Of course, there will always be exceptional circumstances and none of the conditions are insurmountable.  It is possible to create a definition and designate a decision-maker.  But on balance, I would prefer the ease of use of an immediately effective document.

I believe the Durable Power of Attorney is the single most important Estate Planning Tool for most clients’ Estate Planning Need.  While others are equally advisable (as upcoming Blog entries will illustrate), if I could only choose one Estate Planning component, the Durable Power of Attorney would be the one.

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DIY Law

I have spent a lot of time thinking about how to best approach this subject.  No matter how I do, or what I say, it is likely to sound like a self-protection, “rant” by someone who is looking over his shoulder at the up-and-coming competition.

So let me start by saying that I am not in the least concerned about “competitors.” I have been blessed  with my share of loyal clients and valuable and respected relationships with trusted advisors who refer to me.  I am confident that by doing my best to focus on quality, personal service to my clients, I will continue to have sufficient work load.  My purpose here is to express the real concern that I have for the welfare of all the clients out there--whether mine or not.

In the past several years, I have acquired some new clients who have brought to me Business setups and Estate Planning documents which were acquired on one or more of the “legal.com” sites that seem to be ubiquitous lately.  These sites purport to provide a complete package of the documents clients need to create their own Will, or incorporate their business, at a fraction of the cost of using experienced professional advisors.  They universally disclaim any suggestion that they are lawyers or are giving any legal advice (though they are quick to note that they are set up by lawyers).

There’s the rub.  It is fallacy to think that the primary function of lawyers is to provide legal documents.  That great American President, Abraham Lincoln is famed for saying “a lawyer’s time and advice are his stock and trade.”  Documents are just paper.  Even lawyers use third party sources and form banks.  The real value we give to clients is our experience, analysis of their circumstances and needs -- in short, our advice.

Good lawyers do not charge clients for documents themselves.  What we charge for is our time and our counseling which comes from knowledge of the law, experience, continuing education in our specialties, and counseling and advice.  The problem with documents in and of themselves is that they are dangerous.  Unless they are knowledgeably applied to the particular needs and circumstances of the client, they can either create in the client a false sense of security, or alternatively create disastrous consequences.

I have visited some of these sites.  And I have seen a number of their products.  Some of them are nothing more than scams.  Others provide some pretty adequate packages of documents.

But that is not really the important question.  A much more important question than how to incorporate is whether incorporation is appropriate in the first place!  Most states offer multiple business form choices and the form that works well for one person may not be right for the next (even in identical businesses).  Determining a client’s goals and appropriate business enterprise setup can only be property done by a face-to-face, detailed discussion between counsel and client.

Two years ago, I took in, incidentally (by advising someone who was considering doing business with them), a new client who had a Limited Liability Company set up by a “dot.com” provider.  The documents were so hopelessly intermixed with corporation terminology that they were essentially untenable documents.  It probably cost this client more in fees to clean up the mess than it would have to have me do the job in the first place.

Last year, I had an new estate planning client come in with a D-I-Y Revocable Trust.  The clients had formed many ideas of how the trust concept worked that not only were incorrect, but were hopelessly intermingled with probate concepts.  The irony is that the primary function of the Revocable Trust Agreement is to avoid Probate!  The old saying, “the devil is in the details” is never more well illustrated that in the revocable trust context.  These sites do not explain to the client the importance of funding the trust (getting assets properly titled) as the basis for the trust to work at all.

Last week (prompting this writing), an Estate Planning client gave me information about a business entity she owned.  Curious, I did a quick on-line check at our state offices and discovered not only that the entity she thought she had was inactive, but the “dot.com” she hired to set it up had set up two other entities for her.  I cannot think of a reason why she needed the two other entities.  I do not know all the circumstances under which the two entities were set up, or what communications she had with the “dot.com.”  What I can say with certainty, though, is that she didn’t know and was conducting business under an entity name that probably did not do for her what she assumed it was.

If we are doing our job correctly, we can give clients significant “value-added” to the mere acquisition or preparation of legal documents.  Most lawyers today are willing to give prospective clients a reasonable amount of time (perhaps an hour) to discuss the process and document involved in their legal services, in the form of a free initial consultation.  Why not take advantage of that?  If you are not sure who to go see, you can get some help from my earlier article here, on how to choose and attorney.

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