No better place to start than from the beginning!

Estate planning is the process of assessing one’s lifetime and testamentary goals. Lifetime estate planning goals typically include providing for one’s own care in the event of incapacity. Testamentary estate planning goals include when and how to distribute assets at death, as well as the avoidance of probate and the elimination of estate tax.

The product of the estate planning process is the creation of an Estate Plan.

The typical Estate Plan (to the extent there is such a thing) includes three documents:

A Will, a Durable Power of Attorney and a Revocable Living Trust.

Each of these documents allows for the appointment of trusted individuals (or sometimes institutions) known as “fiduciaries,” to carry out the wishes of the maker at the time of death or incapacity. Ideally, an estate planning attorney works with the client’s financial advisor to identify the client’s wishes and then recommends the documents and steps necessary to implement those wishes.

Let’s take a closer look at the fundamental building blocks of estate planning:

LAST WILL AND TESTAMENT

A Personal Representative (formerly known as “Executor” or “Executrix”) is nominated by the decedent to make funeral arrangements, disburse personal property, and if necessary, to represent the estate in probate court. The Will is the proper document in which to appoint the Guardian of minor children. A Will used in conjunction with a Revocable Living Trust is known as a “Pour Over Will” and serves as a safety net to transfer probatable assets (i.e. assets which were not transferred into trust during life) into trust at death. A Will comes into effect only upon the Testator’s death.

DURABLE POWER OF ATTORNEY

A Durable Power of Attorney allows the maker to appoint an agent to manage his or her personal affairs, and a “patient advocate” to make medical decisions in the event the maker becomes incompetent. Since 1991, Michigan law allows for the appointment of a patient advocate to withdraw life support systems in the event of terminal illness. Depending on its terms, a Durable Power of Attorney comes into effect either on the date signed or upon the total incapacity of its maker (a “springing” power), and ends on his or her death.

REVOCABLE LIVING TRUST

The Revocable Living Trust is perhaps the most important and versatile estate planning tool. It may be used to avoid probate, provide for children of the current or prior marriage, minimize Federal estate tax and accomplish a whole host of other estate planning objectives. A Revocable Living Trust is effective upon execution and continues to be effective after the death of the Grantor. Assets passing through a Revocable Living Trust avoid probate since the death of the Grantor does not affect the continued existence of the trust.

Although, for some, Revocable Living Trusts may seem like a new concept, they have actually been around for centuries. The current popularity of Revocable Trusts is due to a number of factors including media attention, the changing American family, and inflation.

The increasing number of families with children from previous marriages has also added to the growth of Revocable Living Trusts. It is only through the use of Revocable Living Trusts that a parent can properly provide for his or her children not of the current marriage.

For example, a Revocable Living Trust can be designed to provide support to a second wife after the husband’s death, with the balance of the trust assets remaining at the death of the second wife being distributed to the husband’s children from his first marriage. Without such trusts, assets would simply pass outright to the wife with no guarantee that the husband’s children would receive an inheritance.

Revocable Living Trusts can be used to preserve each spouse’s Applicable Exclusion Amount, resulting in significant estate tax savings. Every person may leave up to $650,0001 (1999) to his or her beneficiaries without the imposition of Federal estate tax. Although this may seem like a very large figure, inflation, growth in the stock market and the popularity of individual account balance retirement plans place an ever increasing number of Americans in a taxable position.

Revocable Living Trusts help solve this problem by allowing married couples to leave up to $1.3 million dollars to the next generation estate tax free (1999). While the Grantor is alive, Revocable Trusts are not subject to income tax and thus do not file annual income tax returns.2 By retaining the power to amend, revoke and otherwise control the trust, the Grantor of a Revocable Trust reports all trust income on his or her personal income tax return.

The Michigan Legislature recently passed the Estates and Protected Individuals Code (“EPIC”), which becomes effective on April 1, 2000. Under EPIC, Successor Trustees will be permitted to identify and pay claims in much the same way as estates subject to probate. Successor Trustees may voluntarily register the decedent’s trust with the probate court. The effect of the new voluntary registration and notice procedure is to effectively shorten the statute of limitations on claims against a trust from six years to only four months. As with probate proceedings, the claims of creditors who fail to make a claim within the publication period are barred.

A number of more sophisticated estate planning concepts and strategies can be employed by larger estates to minimize or avoid estate tax. These concepts are discussed in the Questions which follow, and include discussion of Irrevocable Trusts, Family Limited Partnerships and Family Limited Liability Companies and Charitable Trusts.

MISCELLANEOUS DOCUMENTS

Other ancillary documents are used in estate planning. A “Letter of Instruction” identifies immediate steps to be taken at the time of death. A “Personal Property Memorandum,” indicates the individuals who are to inherit particular items of personal property such as jewelry, collectibles and other family heirlooms. Certain final arrangements such as funeral wishes, cremation and anatomical gifts can also be addressed in an estate plan. Other important documents, such as a company buy-sell agreement, may need to be reviewed to ensure that they are consistent with the client’s estate planning objectives.

HOW TO GET STARTED

Choose Fiduciaries
As with any important decision, the best place to start is by putting your thoughts down on paper. Start by identifying the people you want to act on your behalf in the event of your death or incapacity. A fiduciary is a person or entity appointed to act on another’s behalf. Fiduciaries are held to a high standard of care to act solely for the benefit of the person who has appointed them, and not for their own benefit. Certainly, if you’re going to make the effort to plan your estate, you want to be assured that your wishes will be carried out. Make sure that your fiduciariesare competent to act, understand your wishes and are likely to carry them out. The three most difficult jobs to fill tend to be the Guardian of minor children, the Patient Advocate charged with making medical decisions and the Successor Trustee appointed to manage Trust assets after the death of Grantor and Grantor’s spouse (if married). After making these tough decisions, it is advisable to choose alternates to act in the event your first choice is unable or unwilling to act.

Name beneficiaries
Who is to inherit your estate? Only in extremely rare circumstances should you leave your estate to your children any way other than equally. Unequal shares will surely leave a legacy of hurt feelings and estrangement between or among your children. Naturally, the distribution pattern is much more complex where a couple has children from prior marriages.

The “mine, yours and ours” syndrome of the modern family is quite real when you consider that nearly one-half of the marriages in this country end in divorce, and at least half of all divorced people marry again. Balancing among the needs and expectations of children from different marriages and the needs of the surviving spouse is a complex undertaking that requires mature and candid discussions between the couple and an informed and intuitive professional advisor.

Control from the grave
Controlling from the grave isn’t always a bad thing. Younger beneficiaries shouldn’t inherit too early. Certainly, eighteen year old children cannot be permitted unfettered control of their inheritance, nor should beneficiaries with emotional or substance abuse problems or beneficiaries with an acute allergy to work. One clever client, who placed a high value on hard work and self reliance, directed that no child, no matter what age, should inherit an amount in any year which exceeded the beneficiary’s earned (W2) income. In this client’s view, an inheritance should reward hard work, not take the place of it.

The job of the estate planning attorney is to apply the law to accomplish the objectives of the client. Ideally, probate is avoided, estate tax is eliminated, the surviving spouse continues to live the life to which he or she became accustomed during the life of both spouses, and the children of the marriage (or previous marriages) are properly remembered.