What Happens To My Trust If I Lose It? This is a question we sometimes get from clients who are concerned about management of their trust and finances if they become incapacitated, mentally or physically. First, let's clarify the terminology. "Incompetence" used to be the common term in the days of asylums. It meant a person would be or could be confined involuntarily to an institution. The term commonly used today is "capacity" or "incapacitated", which means lack of capacity to perform a specific act or make a specific decision. That lack of capacity may be a permanent or temporary condition of the brain, or it may be a physical condition that inhibits normal activity.
Just as an example, a person may be heavily medicated and thereby unable to make medical decisions. In such a case, physicians may provide the necessary written determination of lack of ability or capacity to make medical decisions. Those decisions would trigger the patient's Medical Power of Attorney (MPOA).
How Does This Relate to Your Trust? The typical Living Trust is revocable by the trust maker, sometimes called a "Settlor" or "Grantor". The Settlor typically retains the power to amend the trust and is usually the Trustee. As Trustee, the Settlor continues to manage his or her property in the same manner that he or she would do without a trust. However, as people age, their ability to make financial decisions and judgments often wanes.
Trusts typically contain a provision stating that if the initial Trustee is unable to manage the trust, or becomes "incapacitated" (which in this case refers to management of trust property), a Successor Trustee takes over. Usually, a trust will contain a provision stating that the new Trustee (often designated as "Successor Trustee") can or shall take over management of the trust, when one or two physicians make a written determination that the initial Trustee is not able to manage trust affairs. (There does not need to be any further medical diagnosis or reasoning, so most physicians do not feel that they are revealing confidential information.)
Delicate Situation. Often the designated Successor Trustee is a spouse or child. In some cases, the Successor is reluctant to confront the initial Trustee, a parent or spouse, with the realities of the situation, perceived or actual. Sometimes the initial Trustee is reluctant to admit reality or give up control. Those situations often involve the intervention of a third party such as a physician, attorney or CPA, to help smooth the transition.
In many cases, the transition to Successor Trustee is made easier by accident, stroke or advanced dementia, where there is no resistance on the part of the initial Trustee.
However, the purposes of this discussion are to bring the matter of potential transition to our readers' attention, and to inform the potential Successor Trustees of their duties and responsibilities.
What Does the Successor Trustee Have To Do? The job of Successor Trustee should not be taken lightly. A trustee is a fiduciary, meaning that the Successor is accountable to the trust Settlor and the ultimately beneficiaries of the trust, often the spouse and/or children. A fiduciary has a relationship of trust, as "trustee" indicates, and is legally responsible to all interested persons. A trustee has duties of fairness, royalty and responsibility to all interested persons, without self-aggrandizement.
The thrust of this month's newsletter is dealing with a situation where the initial Trustee is still living, but is incapacitated for one reason or another, so that a Successor Trustee has taken over. The new Michigan Trust Code spells out the duties of a Successor Trustee while the Settlor is incapacitated. The principal rule is set forth in MCL 700.7603(2). That section states that the Successor Trustee shall account to the Settlor's designated agent (in a Power of Attorney), or if the sole agent is the Trustee, the Successor Trustee has to account to all "qualified trust beneficiaries" , informing them of the existence of the trust and keeping them reasonably informed about its administration.
Trust Language and the DPOA. Everyone who has a trust, which will include most readers of this newsletter, should be especially aware of the provisions of their trust and their DPOA (Durable Power of Attorney) relating to the power of an agent to amend the trust and withdraw funds from the trust. To save controversy and expense, the provisions in these two documents should be consistent. If an agent has a power to withdraw funds from the trust, the instruments should state whether that power is individual or only as a fiduciary. In other words, does the agent have the power to withdraw funds or make trust amendments in any way the agent sees fit and for any purpose, or is the power to be exercised only for the benefit of the trust Settlor?
Duty To Account and Report. The new Michigan Trust Code has extensive provisions about the duties of a Successor Trustee to report to the Settlor, the Settlor's Agent, and "qualified trust beneficiaries". At the risk of oversimplification, a "qualified trust beneficiary" is any current permitted beneficiary or a beneficiary who would take if the trust terminated on that date (which usually means the death of the trust Settlor).
Trust administration is not to be taken lightly. The Michigan Trust Code provides specific duties for Successor Trustees and clarifies their duties, obligations and responsibilities concerning reporting and accountability. We find more Successor Trustees taking over responsibilities for disabled spouses or parents, without proper counsel. It is a situation fraught with controversy in many families. Professional counsel and assistance will save a family from disharmony, litigation and expense.
Conclusion. The purpose of this newsletter is to highlight a situation which is becoming more common as we live longer, i.e. a trust Settlor who is unable to properly manage trust property. If you have a trust, or if you are designated as Successor Trustee, with a prospect of taking over trust management, please contact Jim Modrall or Priscilla Hirt, or any of the other attorneys listed below at (231) 941-9660. Our assistance can save you time, money and aggravation.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., James R. Modrall, III, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe, Nicole R. Graf, Priscilla V. Hirt at (231) 941-9660
BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
http://www.bfarlaw.com
This newsletter is provided for informational purposes and should not be acted upon without professional advice.
Tuesday, May 24, 2011
Monday, May 2, 2011
ESTATE PLANNING - WHERE DO WE GO NOW?
Estate Tax - Not Dracula for Most. For most clients, the estate tax Dracula has gone away. The compromise tax bill raised the individual exemption to $5 million. This means that most clients will not be concerned about minimizing estate tax. For a married couple, total marital assets have to exceed $5 million before concern arises. The new "portability" provisions of the tax law mean that for a married couple, marital assets will have to exceed $10 million before tax reduction strategies need to be considered.
This is a huge change from the 90's when the individual exemption was $600,000, and the maximum tax rate was 55%. Estate taxes could and did take a huge bite out of family wealth. We estate planning attorneys devised all sorts of strategies, many of which included charitable trusts, to minimize or legally avoid estate taxes. Now estate taxes will not be a factor, except for high net worth clients. Note: we will still put savings language in our trusts just in case the estate tax comes back. However, this seems highly unlikely at this point.
Michigan, of course, has no state death taxes. The Michigan inheritance tax went out in 1993, and the Michigan legislature has failed to enact an estate tax. Many states have done so, however. Before a Michigander moves to another state, he or she should consider the estate tax as well as other potential tax costs.
Out of a Job? Did the change in the federal tax law mean that we estate planning attorneys are out of a job? On the contrary, the human factors of daily life, including family dynamics mean that structuring trusts and estates is just as important as ever.
Second Marriages. Non-tax factors are especially important in designing trusts which are fair to the children of both spouses. Fairness, of course, is in the eyes of the beholder. Spouses can differ about what is fair, but the important thing is frank discussion and good communication to avoid disruption and expensive legal battles when one or both spouses are gone.
Who Will Administer. Administering a decedent's property, whether in an estate, trust or both, is a key decision. In second marriages, with children of each spouse, the writer has found that co-trustees - the surviving spouse and a child of the deceased spouse - rarely works. Relations with a step-parent are almost never the same when the birth parent dies. A disinterested trustee is a much better way of protecting the interests of the children of the deceased spouse.
When is Property Distributed? The senior generation still needs to decide whether property just goes to children, or also to grandchildren. Whether one or both is selected, the Trust Settlor needs to decide if there is any delay in distribution of property based on age of the child or grandchild, in order to protect the property from improvidence, creditors, predators or spouses. We see distributions from trust at later ages for all of these reasons, especially protection from a divorce or assurance of retirement funds.
Trusts for a child or grandchild's lifetime have become more rare for moderately wealthy Midwestern clients. Mostly, the senior generation wants to protect inheritances, but not prevent access for the whole lifetime of a child or grandchild.
Surviving Spouse. Decisions for a married couple involve access to funds by the surviving spouse. The provisions in a husband's trust, for example, if he is the wealthier spouse, involve discussions of:
How much property does the wife have in her name or have access to?
What are her support needs likely to be?
How much wealth should pass to the kids?
Should there be any control on wife's withdrawal of funds from the husband�s trust?
If there is control, who exercises it?
Sweetheart Estate Plans. The relatively high estate tax and low exemption pretty much made "sweetheart" estate plans a non-starter. A sweetheart estate plan means that the surviving spouse basically gets everything, without any restrictions. With an individual exemption of $5 million, this means that many nuclear families (single marriages), with joint children will mean that simple sweetheart estate plans will probably come back in vogue. There may not be a tax reason to have a trust for the surviving spouse. Some couples endorse the idea of a sweetheart estate plan for each spouse. Others want some protection of the marital assets after the first death, either to protect the surviving spouse from improvidence and creditors, or to assure some inheritance to the kids. Sometimes, of course, there are dual motivations. However, we generally do not recommend sweetheart estate plans for several reasons. First among these is the fact that a surviving spouse can live many years after the first death. That means that support may be needed for a long time and some professional management or assistance in protecting assets will be needed. Secondly, there are a lot of late life marriages which expose the assets to a late arriving spouse. Thirdly, elderly people are often vulnerable to abuse or undue influence, especially as mental faculties fail. Continuing trusts can help prevent financial catastrophes for any or all of these reasons.
Communication is Important. Considering all of the factors discussed in this newsletter, it is also important that a couple's estate plan be discussed with children and if it is a second marriage, with the children of both spouses, so that everyone knows the couple's decisions about fairness, estate administration and ultimate benefit of financial assets are known. Often times, the older generation is accustomed to secrecy about financial matters, is uncomfortable discussing these matters with family, or perhaps does not trust children or in-laws. Trust is important, of course, but communication is also important. We find that failure to communicate is frequently the cause of litigation, uncertainty, mistrust and sometimes misappropriation.
Conclusion. I hope that this newsletter has provided some food for thought. Saving estate taxes is not the only reason for a carefully, well thought out estate plan, both for married individuals and single persons. Disputes can arise after the death of single individuals. Some of the biggest and most expensive court battles have erupted where there are no children. The new estate tax liberalization may be a good reason to review your estate plan documents and bring them up to date to reflect current ideas, current finances and current family circumstances. Please call Jim Modrall or Priscilla Hirt, to schedule a no-obligation appointment, at (231) 941-9660, or any of the other attorneys listed below,
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., James R. Modrall, III, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe, Nicole R. Graf, Priscilla V. Hirt at (231) 941-9660
BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.
This is a huge change from the 90's when the individual exemption was $600,000, and the maximum tax rate was 55%. Estate taxes could and did take a huge bite out of family wealth. We estate planning attorneys devised all sorts of strategies, many of which included charitable trusts, to minimize or legally avoid estate taxes. Now estate taxes will not be a factor, except for high net worth clients. Note: we will still put savings language in our trusts just in case the estate tax comes back. However, this seems highly unlikely at this point.
Michigan, of course, has no state death taxes. The Michigan inheritance tax went out in 1993, and the Michigan legislature has failed to enact an estate tax. Many states have done so, however. Before a Michigander moves to another state, he or she should consider the estate tax as well as other potential tax costs.
Out of a Job? Did the change in the federal tax law mean that we estate planning attorneys are out of a job? On the contrary, the human factors of daily life, including family dynamics mean that structuring trusts and estates is just as important as ever.
Second Marriages. Non-tax factors are especially important in designing trusts which are fair to the children of both spouses. Fairness, of course, is in the eyes of the beholder. Spouses can differ about what is fair, but the important thing is frank discussion and good communication to avoid disruption and expensive legal battles when one or both spouses are gone.
Who Will Administer. Administering a decedent's property, whether in an estate, trust or both, is a key decision. In second marriages, with children of each spouse, the writer has found that co-trustees - the surviving spouse and a child of the deceased spouse - rarely works. Relations with a step-parent are almost never the same when the birth parent dies. A disinterested trustee is a much better way of protecting the interests of the children of the deceased spouse.
When is Property Distributed? The senior generation still needs to decide whether property just goes to children, or also to grandchildren. Whether one or both is selected, the Trust Settlor needs to decide if there is any delay in distribution of property based on age of the child or grandchild, in order to protect the property from improvidence, creditors, predators or spouses. We see distributions from trust at later ages for all of these reasons, especially protection from a divorce or assurance of retirement funds.
Trusts for a child or grandchild's lifetime have become more rare for moderately wealthy Midwestern clients. Mostly, the senior generation wants to protect inheritances, but not prevent access for the whole lifetime of a child or grandchild.
Surviving Spouse. Decisions for a married couple involve access to funds by the surviving spouse. The provisions in a husband's trust, for example, if he is the wealthier spouse, involve discussions of:
How much property does the wife have in her name or have access to?
What are her support needs likely to be?
How much wealth should pass to the kids?
Should there be any control on wife's withdrawal of funds from the husband�s trust?
If there is control, who exercises it?
Sweetheart Estate Plans. The relatively high estate tax and low exemption pretty much made "sweetheart" estate plans a non-starter. A sweetheart estate plan means that the surviving spouse basically gets everything, without any restrictions. With an individual exemption of $5 million, this means that many nuclear families (single marriages), with joint children will mean that simple sweetheart estate plans will probably come back in vogue. There may not be a tax reason to have a trust for the surviving spouse. Some couples endorse the idea of a sweetheart estate plan for each spouse. Others want some protection of the marital assets after the first death, either to protect the surviving spouse from improvidence and creditors, or to assure some inheritance to the kids. Sometimes, of course, there are dual motivations. However, we generally do not recommend sweetheart estate plans for several reasons. First among these is the fact that a surviving spouse can live many years after the first death. That means that support may be needed for a long time and some professional management or assistance in protecting assets will be needed. Secondly, there are a lot of late life marriages which expose the assets to a late arriving spouse. Thirdly, elderly people are often vulnerable to abuse or undue influence, especially as mental faculties fail. Continuing trusts can help prevent financial catastrophes for any or all of these reasons.
Communication is Important. Considering all of the factors discussed in this newsletter, it is also important that a couple's estate plan be discussed with children and if it is a second marriage, with the children of both spouses, so that everyone knows the couple's decisions about fairness, estate administration and ultimate benefit of financial assets are known. Often times, the older generation is accustomed to secrecy about financial matters, is uncomfortable discussing these matters with family, or perhaps does not trust children or in-laws. Trust is important, of course, but communication is also important. We find that failure to communicate is frequently the cause of litigation, uncertainty, mistrust and sometimes misappropriation.
Conclusion. I hope that this newsletter has provided some food for thought. Saving estate taxes is not the only reason for a carefully, well thought out estate plan, both for married individuals and single persons. Disputes can arise after the death of single individuals. Some of the biggest and most expensive court battles have erupted where there are no children. The new estate tax liberalization may be a good reason to review your estate plan documents and bring them up to date to reflect current ideas, current finances and current family circumstances. Please call Jim Modrall or Priscilla Hirt, to schedule a no-obligation appointment, at (231) 941-9660, or any of the other attorneys listed below,
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., James R. Modrall, III, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe, Nicole R. Graf, Priscilla V. Hirt at (231) 941-9660
BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.
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