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Frequently Asked Questions
 

Frequently Asked Questions
on
Wills, Trusts, and Estate Planning

TOPICS:
A.Wills
B.Trusts
C.Joint Ownership
D.Beneficiaries
E.Probate
F.Taxes

A. Wills

1.What is a Will?

A Will, or a Last Will and Testament, is a legally binding document that you sign directing the disposition of your assets at your death. Your Will does not take effect until you die. You can change your Will at anytime before your death as long as you have the required mental capacity.

2. What are the Advantages of having a Will?

First, you decide who will receive your assets and in what amounts. Without a Will, a state statute directs who will receive your assets. While the assets will go to your closest next of kin, these might not be the people that you would choose. Or the amounts given to your heirs by statute may not be what you would wish. The statue will leave assets to minor children if they are your heirs which means that the Probate Court must appoint a Conservator to handle their money for them until they reach age 18; then at age 18 they receive their full inheritance. Many parents dislike this provision. By having a Will you decide who will receive your assets, how much each receives, and when each will receive it. Second, you get to choose the person to administer your estate, known as your Personal Representative (often referred to as an Executor). Third, if you have minor children, you can designate the persons you wish to care for your children as Guardian until they reach the age of 18.

3. What are the Disadvantages of a Will?

The major disadvantage of a Will in most people’s eyes is that a Will must go through Probate. Probate is a court process to prove the Will valid and then
transfer title (change ownership) of the deceased’s assets to the heirs. Many people seek to avoid probate because it involves a loss of privacy, delays, and can incur significant attorney fees. Another perceived disadvantage to the Will is that a Will controls only assets in the deceased’s name alone; assets which are jointly owned or have a beneficiary designation are not distributed by the Will.

4. Who should have a Will?

Any person over the age of 18 with proper mental capacity can make a Will. Every person over the age of 18 should make a Will.

5. How do I avoid Probate?

Assets do not have to pass through Probate if they are jointly owned, have a beneficiary designated, or are owned by a living trust. Each of these probate avoidance techniques has its own advantages and disadvantages.

B. Trusts

1.What is a Trust?

A trust is an agreement to hold property for the benefit of another. There are three parties involved in a trust: the person who creates the trust (the settlor or grantor), the person who manages the trust (the trustee), and the persons who receive the benefits from the trust (the beneficiaries). These can all be different people. For example you (the settlor) could but money in trust to pay for college for your grandchildren (the beneficiaries) and have the money managed by your son (the trustee). But these can also all be the same person: you (as settlor) can set up a trust which you (the trustee) manage and which pays benefits to you (the beneficiary).

2. What is a living trust?

A living trust is a trust that you set up and put assets into (fund) while you are alive. It is the opposite of a testamentary trust. A living trust has many advantages: married couples can use living trusts to reduce their federal estate tax liability, assets in a trust will avoid probate, assets in a living trust will avoid the need for a conservator if you become incapacitated.

3. What is a testamentary trust?

A testamentary trust is a trust that is contained in your Last Will and Testament and does not become effective or active until your death. It is the opposite of a living trust. Testamentary trusts are often used by couples with young children to provide a trust for the management of their assets for the children should both parents pass away.

4. What is a revocable trust?

A revocable trust, as the name implies, can be revoked or cancelled by you at anytime provided you have the proper mental capacity. A revocable trust can be amended or changed by you at anytime provided you have the necessary mental capacity. A revocable trust is the opposite of an irrevocable trust. A revocable trust is a form of a living trust and is by far the most common type of living trust.

5. What is an irrevocable trust?

As the name implies, an irrevocable trust is one which cannot be revoked or cancelled. This also means that the trust cannot be amended or changed once it is created. An irrevocable trust cannot be adapted to changes in family circumstances or assets like a revocable trust can. An irrevocable trust is the opposite of a revocable trust. Irrevocable trusts are infrequently used and the most common use is to remove assets from your estate to reduce your federal estate tax liability. An irrevocable trust must be carefully thought out and planned since it cannot be changed once it is created.

6.How does a living trust avoid probate?

A living trust avoids probate by changing ownership of the assets during your lifetime. Then, when you pass away, there are no assets in your name alone which require probate administration. Think of it this way: while you are alive any assets which you own in your own name can be transferred by you at any time. This is one of the rights of being an owner. But, when you pass away, you are no longer here to change the ownership, so only the probate court can change the ownership for you. By creating a living trust, a trust set up during your lifetime, you change the ownership of the asset and preclude the need for the probate court to do so.

7. Does a trust automatically avoid probate?

No. A living trust will avoid probate only for assets which are titled to or owned by the trust. Once you set up the trust you must complete the appropriate paperwork (which varies from asset to asset) to actually change ownership of any assets which must be in the trust to the trust. This is often referred to as “funding the trust.” Any assets which are not transferred to the trust, but are owned in your sole name at the time of your death will require probate administration.

8. My dad did not transfer his house to his living trust before he died. What happens now?

When you create a living trust you should also sign a new Last Will and Testament. This Will, known as a pour over Will, contains a provision that provides that any assets not in the trust be placed in the trust. This way the distribution provisions in the trust will pass the assets to the persons you wished. Unfortunately, the assets left outside the trust will have to pass through probate to be placed into the trust. By failing to transfer those assets to the trust during lifetime, the probate avoidance benefit of the living trust was lost.

9. I don’t have a large estate. Do I need a trust?

That depends. While trusts can be used by persons with very large estates to reduce their federal estate tax liability, there is no minimum amount required to establish a trust. Any amount of assets in a living trust will avoid probate. Probate avoidance is considered the major advantage of a living trust. Use of a living trust in a smaller estate becomes a judgment call you must make, weighing the advantages against the disadvantages. Since the living trust will avoid probate, if all of your assets are placed into the trust, you will save the cost of probate. Probate costs at a minimum are somewhere between $3,000.00 and $5,000.00. A living trust is also easier to administer, generally distributes assets quicker, and maintains your privacy. On the other hand, a trust is much more complex than a will and therefore costs more initially. The average cost for a trust generally range between $1,500.00 and $2,000.00. You also have to be sure that the trust is funded – that all of your assets are transferred to the trust in order to avoid probate. Your family circumstances, such as a second marriage, spend-thrift beneficiaries, a dependent with special needs, etc., may favor having a trust. We can discuss all of these advantages and disadvantages with you in detail and help you formulate a plan that is best for you and tailored to your particular family circumstances.

C. Joint Ownership

1. What are the advantages of joint ownership?

As long as there is a surviving joint owner, there will be no probate of the asset at the death of any one of the joint owners But if there is no living owner, the asset will pass through probate. For example, if John and Mary own a home together as joint tenants and John dies, the home automatically becomes the property of Mary without probate. However, if Mary then dies without making a change of ownership, or if John and Mary die together in an accident, there is no living owner and the home will pass through probate. For this reason joint ownership is referred to as “probate deferral” rather than “probate avoidance.”

2. What are the disadvantages of joint ownership?

First, joint ownership is only a temporary avoidance of probate because if there is no living owner the asset will pass through probate. Second, joint ownership involves a loss of control. If Jane owns her house jointly with her son, Bob, and Jane wished to sell the house, Bob must agree to the sale since he is a joint owner. If Bob does not agree to the sale, Jane cannot sell the home. If Bob is married, Bob’s wife must also agree to the sale and sign the deed. Also, if Bob causes a car accident and is sued, has a failing business, gets divorced, etc. there may be some claims by Bob’s creditors against Jane’s house—remember, Bob is a joint owner. Third, joint ownership ends your right to dispose of the property as you wish. If Susan has three children and puts her daughter, Nancy, on the house as joint owner to avoid probate, even though Susan’s Will says to divide the house equally among the three children, at Susan’s death the house is legally owned by Nancy and she has no legal obligation to share the asset with her two siblings. By creating the joint ownership Susan gave up her right to dispose of the property by Will.

3. Can’t I avoid these problems by having multiple joint owners?

Yes, to some degree. By having three or four joint owners, there is less probability that all of the joint owners will die simultaneously forcing the asset through probate. But at some point in time all of the joint owners will pass away. Unless some alternate provision is made, such as adding additional joint owners or some other probate avoidance mechanism, the asset will eventually pass through probate. And adding multiple joint owners multiplies the loss of ownership control. By having three or four joint owners, there are that many more people who must agree to sell or make some other disposition of the asset.

4. Won’t all of my kids get my house if their names are on the Deed?

Generally, yes. But by having all of the children on the deed, you need all of them to agree to sell the home if you want to sell it prior to your death. Depending on how the ownership is held, the share of a predeceased child may pass to that child’s spouse or minor children when you want it to pass to your other children, or may pass to your other children when you want it to pass to your grandchildren. Also, if any of your children get involved in a divorce, bankruptcy, or get sued (from an auto accident, etc.), their creditors may lien a portion of your house to pay that debt.

D. Beneficiaries

1. How does a beneficiary designation avoid probate?

Where permitted by contract or statute, you as owner of an asset may designate a beneficiary— someone to receive the asset at your death. By the contract or by law the holder of the asset then pays the asset to the beneficiary and no probate administration is required to change the ownership. Common examples of assets having beneficiaries are life insurance policies and retirement accounts such as IRAs and 401Ks. Some bank accounts can have beneficiaries by being designated as POD (“Pay on Death”) or TOD (“Transfer on Death”) accounts. Unfortunately, there are certain types of assets which cannot be made payable to a beneficiary.

2. How important is it for me to keep my beneficiary designations up to date?

Extremely important. First of all, your estate plan—your plan for your distribution of your assets at your death—should always reflect your wishes. If your wishes change, your plan should be changed to reflect your wishes. Second, if there are no beneficiaries designated or no living beneficiaries at the time for distribution, the assets will have to pass through probate—destroying the whole reason for having a beneficiary designate. You should check your beneficiary designation on an annual basis to be sure that (1) all of the named beneficiaries are living, and (2) you have named contingent beneficiaries or secondary beneficiaries where permitted.

3. What happens if I fail to designate my beneficiaries or my beneficiaries are deceased?

If the beneficiary designation is made pursuant to contract (such as a life insurance policy or retirement account) the contract usually will provide that the asset be paid to your probate estate. So you will not avoid probate. Some newer contracts provide that the asset will be paid to your closest next of kin (not the beneficiary’s next of kin) which may include your spouse from a subsequent marriage, minor children, or other persons you would not want to receive the asset. Review your beneficiary designations at least annually to ensure that (1) all the named beneficiaries are living, and (2) you have named contingent or secondary beneficiaries where permitted.

E. Probate

1. What is Probate?

Probate is a court process to prove the Last Will & Testament (if any) valid and then transfer title (change ownership) of the deceased’s assets to the heirs. Think of it this way: while you are alive any assets which you own in your own name can be transferred by you at any time to anyone. This is one of the rights of being an owner. But, when you pass away, you are no longer here to change the ownership, so only the probate court can change the ownership for you. Many people seek to avoid probate because it involves a loss of privacy, delays, and can incur significant attorney fees.

2. How do I avoid Probate?

Assets do not have to pass through Probate if they are jointly owned, have a beneficiary designated, or are owned by a living trust. Each of these probate avoidance techniques has its own advantages and disadvantages.

3. What is an executor?

The term executor is commonly used to refer to a person appointed by the probate court to administer the estate of a deceased person. The precise meaning of the term executor is a person named in a will and appointed by the probate court to administer the will. In earlier times, the term executor referred to a male person while the term executrix was a female. The term (administrator or administratrix) was used to designate the person appointed to administer an estate where there was no will (known as an intestate estate). Nowadays the term executor is used generically. Under Michigan probate law, the Estate and Protected Individuals Code adopted in April, 2000, the term personal representative is used to refer to a person administering a probate estate with a will or without a will.

4.My mom just died and I’m named as personal representative. Can I start passing out assets immediately?

No! Simply being named (or as it is sometimes called “being nominated”) as personal representative does not authorize you to act. Probate administration must be commenced to (1) prove the validity of the will, and (2) appoint a personal representative. Once the personal representative is appointed and has received Letters of Authority from the probate court, then and only then does the personal representative have authority to act, power to transfer assets, etc.

5.I’m named as personal representative. Do I have to accept the job?

No. You always have the right to decline the appointment. Even after being appointed, a personal representative always has the right to resign from the job subject to any requirements the probate court may impose. While being named as personal representative shows that the deceased placed trust in you, serving as personal representative can be very demanding time-wise and emotionally. For that reason, or due to a change in family circumstances, relocation, job responsibilities, etc., you may not wish to take on the responsibility of serving as personal representative.

6.What are the responsibilities of a personal representative?

Basically the job of the personal representative is to transfer assets in the decedent’s name to the heirs (if there is no Last Will) or to the devisees (the persons named in the Will to receive the assets). These duties include gathering and valuing the assets, paying any debts and taxes which may be owed, and distributing the assets to the persons entitled. While this sounds fairly straight forward, and many times it is, it can also be very complex depending upon the amount and type of assets in the estate, whether there is a contest over the validity of the Will, a contest disputing the ownership of an asset or assets, a disagreement among the heirs or devisees regarding the distribution, etc.

7.When is probate required?

Only when there are assets in the deceased person’s sole name, i.e. solely owned by the deceased. Any assets which are (1) jointly owned and having a living joint owner, or (2) have a beneficiary designated, or (3) are owned by a living trust do not have to pass through probate.

8.Is there any minimum dollar amount for probate?

No. A bank account having $50.00 in it, if in the deceased’s sole name, will have to pass through some type of probate proceeding to be distributed to the persons entitled to the account. There are affidavit procedures and small estate proceedings available for estates generally less than $18,000.00 in 2006. There are also summary proceedings for estates of less than approximately $100,000.00 under certain circumstances. So a full probate proceeding is not always required.

F. Taxes

1.Does Michigan have an inheritance tax?

No. The Michigan inheritance tax was abolished in 1993. After that date Michigan would receive a portion of any federal estate tax which had to be paid. Due to changes in the federal tax laws, this tax sharing was phased out finally in 2005. To compensate Michigan for this loss of revenue, there has been some talk in Lansing about reinstating the inheritance tax or establishing a Michigan estate tax. No legislation has been enacted as of November, 2007.

2.Do I have to pay income tax on my inheritance?

Generally, no. Assets which are inherited do not incur income tax; however, if the inheritance earns income, that income is taxed. For example, if you inherit $50,000.00 and then invest your inheritance in a certificate of deposit at your local bank and the CD earns $800.00 of interest, you are required to report the $800.00 as income and pay tax on that income. There may also be capital gains tax due if you sell an inherited item.

3.What is basis?

The term basis is a tax term that generally refers to the cost you paid to purchase an asset. You may also be able to include as part of your basis additional money you spent to improve or maintain the asset. If you buy some shares of stock and pay $1,000.00 for them, your basis in the stock is $1,000.00. If you later sell the stock for $1,500.00, you have a $500.00 capital gain. If you purchase a cabin up north for $50,000.00 and spend $10,000.00 in improvements, your basis in the asset is $60,000.00. If you subsequently sell the cabin for $75,000.00 you have a $15,000.00 capital gain (sale price of $75,000.00 minus basis of $60,000.00 equals $15,000.00 gain).

4.What is “stepped up” or “step up” basis?

Under certain circumstances when you inherit property or receive property because of someone’s death, your investment in the assets – your basis – is considered under the tax rules to be the fair market value at the date of death. This is usually an increase – or “step up” – over the basis held by the deceased person. Step up basis can be a great tax advantage. If your parents purchased their home 20 years ago and paid $50,000.00 and you subsequently inherit the home currently valued at $200,000.00, without a step up basis you would have to pay capital gains tax on the gain of $150,000.00 ($200,000.00 minus $50,000.00 basis equals $150,000.00 gain). But because you receive a step up basis, your basis in the asset is the fair market value or $200,000.00. If you subsequently sell the house for $200,000.00, you have no gain and do not owe any capital gains tax. If you sell the house for $210,000.00, your gain is only $10,000.00 (sale price $210,000.00 minus basis of $200,000.00 equals $10,000.00 gain). Assuming a capital gains tax rate of 15%, stepped up basis gives a tax savings of $21,000.00 (tax of $22,500.00 on $150,000.00 gain versus $1,500.00 tax on $10,000.00 gain).

This information provides only a general description of the matters discussed. You must consult with your legal advisor regarding further details and the specifics of your particular situation.

For a confidential consultation, contact:

BOOTH PATTERSON, P.C.
Attorneys at Law
4139 W. Walton Blvd. Suite F
Waterford, Michigan 48329
48328-3733
(248) 681-1200
www.boothpatterson.com


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4139 W. Walton Blvd. Suite F | Waterford, MI 48329 | Phone: (248) 681-1200 | Fax: (248) 681-1754

DISCLAIMER: The attorneys of Booth Patterson are licensed to provide legal advice in the State of Michigan only. Laws vary from state to state. This site and any information contained on this site is for informational purposes only and is not legal advice. You must consult an attorney for individual advice regarding your own situation.