11 Minute Read
The purpose of estate planning is to maximize current investments, and for the private transfer of property to selected beneficiaries with a minimum of taxes, expenses and inconvenience.
The objective is to:
- Distribute property to the people you choose (“who”, “what”, “where”, “when”, but not “why”);
- Minimize estate, income, and/or capital gains taxes (plan properly and keep it, or incur avoidable taxes);
- Avoid lengthy public probate proceedings; and
- Satisfy your emotional needs.
The Dangers of Probate
Probate offers the following disadvantages:
- Public proceedings;
- Long and tedious delays for your family; and
- High “handling fees” even for the smallest of estates.
MOST PROBATE COSTS CAN BE AVOIDED BY PLANNING PROPERLY.
Emotional Issues
Estate planning encourages you to think about the importance of the many things you’ve acquired in your lifetime, and how you want to gift those assets. You have the opportunity to decide for yourself what gifts you do (or don’t) want to make; you will feel relieved afterwards!
Taxation of the Estate
Despite recent changes in the law, taxation of the estate is still an important aspect of estate planning. The federal tax laws regarding the estate, gift, and generation-skipping transfer (GST) taxes changed significantly in 2001, 2010, 2012, 2017, and 2019.
The important aspects of the current laws are as follows:
ESTATE, GIFT AND GST PROVISIONS:
Calendar Year | Estate, Lifetime Gift, and GST tax exemption amount | Annual Gift tax exclusion amount | Highest Estate tax, highest Gift tax, and flat GST tax rates |
2025 | $13.99 Million* | $19,000* | 40% |
* Amount subject to annual inflation.
- The “Estate” includes, but is not limited to, the fair market value of your personal effects, automobiles, savings, investments, real estate, residence(s), life insurance on your life (whether or not you have named someone else as the beneficiary), inheritances, joint property, retirement accounts, pension plans and other tangible or intangible assets you have an ownership interest in;
- In year 2025, each person (both a husband and wife) may bequeath $13,999,000.00 without paying estate taxes;
- A surviving spouse can protect $27,980,000.00 from estate taxes, regardless of the married couple’s planning, due to “portability” of the first-to-die spouse’s unused exemption amount. A surviving spouse must file an estate tax return within five (5) years of his/her spouse’s date of death in order to utilize his/her deceased spouse’s unused exemption; and
- In year 2025, each person can gift up to $19,000 per beneficiary per year tax-free.
Maximize new Required Minimum Distribution Rules for Qualified
The new Required Minimum Distribution Rules allow qualified plan beneficiaries to “stretch” distributions over their lifetime, if beneficiary designations are properly structured by the plan owner.
Estate Planning Tools:
Will
A Will is a formal or informal document that provides how you want your assets distributed at death. A Will is always needed (it tells us “who”‘ “what”‘ “where”‘ and “when”‘ but not “why”) If you don’t have a Will at death, the state intestacy rules will dictate the “who”, “what”, “where”, and “when” questions.
In addition, the failure to have a valid Will at death decreases the amount your beneficiaries receive.
A WILL DOES NOT AVOID PROBATE; ONLY A TRUST AVOIDS PROBATE.
Trust
A Trust serves numerous purposes:
- To avoid probate;
- For the protection of children and adults;
- For the protection of a disabled child or adult from having his or her government benefits reduced or eliminated after receiving an inheritance;
- For gifting; and
- To save on estate
Typically stocks, bonds, bank accounts and life insurance are put into the trust, and you are the trust beneficiary. There are, however, certain types of assets, primarily tax deferred investments, which may not be appropriate to put into a trust. Trusts can be expressly exempted from probate, which keeps the contents of the trust secret. There are many types of trusts, including revocable trusts, joint trusts, irrevocable trusts and charitable trusts. A trust also provides protection against incapacity and can be tailored to meet virtually any need. A trust is a vital component of a complete estate plan.
Durable Power of Attorney
A Durable Power of Attorney appoints someone else (your “Agent”) to make important decisions for and on your behalf when you are unable to do so. A Durable Power of Attorney effectively authorizes your Agent to act in your stead when you are incapacitated, without the need to appear before a judge. A Durable Power of Attorney is always needed; it is a necessary part of a complete estate plan.
Durable Power of Attorney for Health Care
The Durable Power of Attorney for Health Care (also known as a “Patient Advocate Designation” or “Living Will”) is a document that appoints someone as your “Patient Advocate” to make medical treatment decisions when you cannot make decisions for yourself. The appointment provides specific instructions, which your Patient Advocate must execute on your behalf, regarding what kinds of medical treatment you want, and what kinds of medical treatment you don’t want (including “life sustaining medical treatment” and “food and water”). A Patient Advocate Designation usually eliminates the need for court intervention when dealing with an uncooperative “for profit” medical facility. You should speak with your doctor, attorney, clergy and the person you have chosen to be your Patient Advocate about this important document. A Durable Power of Attorney for Health Care is always needed; it is a necessary component of a complete estate plan.
Long-term Care Insurance
Long-term nursing home care has devastating effects for both the patient and his or her spouse and children. The state and federal government, through Medicaid and Medicare programs, have placed the financial responsibility on the individual patient for nursing homecare.
The only way to make certain that you are protected from financial failure, in the event of a catastrophic long-term illness, is to invest today in a well-drawn long term care insurance policy.
Joint Tenancy
Joint Tenancy is one of the most widely used, and most dangerous, methods of estate planning. Joint Tenancy is a form of legal ownership whereby each joint tenant has an undivided interest in the property in question. Typically, a spouse or child is put on the stock, bonds, real estate or bank accounts in order to avoid probate. By law, the surviving joint tenant (the last one to live) is legal owner of the property. The legal rules applicable to joint tenancy supersede any reference in the Will (or Trust) regarding that property; the Will (or Trust) does not control joint property. Parents that put a child on all of their assets as a joint tenant have effectively disinherited their other children from that property. Additionally, creditors of one joint tenant (for example, your child) are often successful in reaching property held in joint tenancy, even if that person’s name was put on the property only to avoid probate.
Additionally, using joint ownership as a method of estate planning provides serious adverse tax consequences to your beneficiaries that can be easily avoided by using a revocable grantor trust. Only under extreme circumstances should joint tenancy be used for estate planning purposes, and only upon the advice of competent legal counsel.
Enhanced Life Estate Deeds
We recommend that all real estate (except for real estate used for commercial purposes) is owned individually (or jointly, as husband and wife, if married). All such assets should be transferred into the Revocable Living Trust by using an Enhanced Life Estate deed (a/k/a “Ladybird deed”). A Ladybird Deed allows a person to transfer real property to a beneficiary (the Revocable Living Trust) upon the death of the owner(s), while retaining full use and enjoyment of the property during the owner’s lifetime.
A Ladybird Deed allows the owner to keep the exclusive use of the property while he or she is alive, and does not in any way affect the owner’s use of the real estate or the ability to sell, mortgage or gift the property at any time. Upon the death of the owner(s), the property passes to the named beneficiary or beneficiaries (typically the Revocable Living Trust or specific individuals for clients with no Trust), who will take the property free of any probate In addition to avoiding probate, an Enhanced Life Estate Deed is a nontaxable event and does not change the homestead designation.
Finally, a significant benefit to using an Enhanced Life Estate Deed for the primary residence is realized if Medicaid benefits are ever needed.
For Medicaid purposes: 1.) the execution of this deed does not count as a divestment; and 2.) the Enhanced Life Estate Deed avoids Estate Recovery. Estate Recovery is the State of Michigan’s ability to seek reimbursement of Medicaid benefits paid out from a Medicaid recipient’s estate, once the recipient dies. An Enhanced Life Estate Deed effectively transfers real property outside of an estate, while prohibiting the State of Michigan from seeking reimbursement from the value of that real property.
Additionally, any real estate that is owned outside of the State of Michigan should also be transferred into the Revocable Living Trust (either at death via an Enhanced Life Estate deed (a/k/a “Ladybird deed”, if allowed, or whatever transfer document the particular state allows) to avoid out of state (ancillary) probate proceedings.
Life Insurance and Annuities
Life insurance, annuities and investment/tax strategies are an important part of the estate plan. You should make sure that your named beneficiary is living, and that the proceeds will not disqualify the beneficiary from Medicaid/Medicare benefits. Life insurance is an investment used to avoid estate tax under certain circumstances, and provides your family with a cash payment when it is most needed.
Recent Examples of No Planning or Poor Planning:
Disabled Children/Adults
A client’s disabled brother and sister each lost their inheritance to the government because the Will did not create a special trust for their benefit. The money should have been placed in a special trust only to be used to supplement government benefits. If the estate plan was drafted correctly, the disabled brother and sister would have benefited from the inheritance and the government benefits would have remained intact.
Intestacy.
A client is the sole beneficiary of his father’s estate. Since the father died without a Will, there were unnecessary legal fees, probate costs and delay, and the client was unable to use the monies until the estate was closed by the probate court.
Joint Property.
A client’s divorced father remarried late in life. The father put all of his property into joint tenancy with his new bride (See II (F) above). Although his Will stated his child was to receive a generous portion at his death, the client was completely disinherited because all of his assets were held jointly with his new bride.
The rules of joint tenancy superseded the language in his Will regarding all property held jointly.
Probate
Aclient received all of his sister’s large estate under a Will drafted just prior to the decedent’s death. Since a Trust was not used, the probate costs and legal fees were much higher than if one had been used.
Beating the Odds
We recently set up a client’s estate plan at the hospital after she was admitted for terminal cancer. The client died several weeks after executing her estate planning documents. We were able to avoid probate and unnecessary legal and administrative expenses. Please do not use this type of last-minute estate planning; you may not be so lucky.
Long-term Care
A client found he was unable to adequately care for his ill He had no alternative but to admit her into a full-service nursing care facility. After a prolonged nursing home stay at $7,000.00 per month, my client found his family’s life savings depleted. Additionally, as he began losing his health, his children were confronted with a substantial financial burden to care for their father.
Proper Medicaid planning and a well drafted long-term care insurance policy would have prevented this unfortunate financial disaster.
Conclusion: Some Final Remarks on Estate Planning
Conclusion #1: Estate Planning is Your Responsibility.
Each person is personally responsible for their own estate planning needs so as to maximize the amount left for their beneficiaries and to minimize the emotional difficulties their family will experience at their death. The failure to have your estate and financial planning in order puts an unnecessary emotional and financial burden on your family. Only you have the responsibility to plan for your own legal and financial affairs.
Conclusion #2: Estate Planning is a A Continuous Process.
Estate planning does not stop with the executed Will or trust documents; it should be updated every 2 to 5 years, or even less. Estate planning documents drawn up even recently may not be effective against the new tax law changes that have occurred.
Conclusion #3: Estate Plans should be updated.
The plan should be updated if a beneficiary dies, a beneficiary’s health deteriorates, a fiduciary becomes disabled or dies, your estate increases, you or your spouse retires, or tax law, probate law, or Medicaid laws or policies change.
Conclusion #4: Take the First Step.
Speak with an estate planning lawyer, your financial planner, accountant, and even your favorite charity.