Estate Planning February 2016 Douglas A. Mielock Foster, Swift, Collins & Smith, P.C. Lansing, Michigan

Estate planning goals  Maximize and preserve wealth during lifetime  Transfer wealth at death to intended recipients  Minimize estate administration expenses  Reduce or defer taxes (estate tax, income tax, property tax)  Avoid conflict among family members

Property  “Real property” is land and everything permanently attached to land  Examples: house, condominium, vacant land, etc.  “Personal property” is all property other than real property  Examples: Stocks, bonds, bank accounts, jewelry, furniture, etc.

Effect of form of property ownership at death  Sole ownership  Co-ownership  joint tenancy  tenancy by the entireties  tenancy in common

Sole ownership  In general, property held in sole ownership by an individual at death must go through probate  If A owns property in his name alone at death, then that property passes through probate at his death

What is probate?  “Probate” is the court process of proving the validity of a will  Probate administration is the court supervised process of:  collecting the decedent’s property  paying valid claims and taxes  distributing the remaining property in accordance with the will or by intestate succession

How much does probate cost?  Filing fee: $150  Probate court inventory fee:  $ for a $100,000 probate estate  $ for a $500,000 probate estate  $ 1, for a $1,000,000 probate estate  Legal fees (attorney/paralegal fees)  preparation of application, inventory, etc.  guidance on other statutory requirements

Testate vs. Intestate  If you die with a valid will you are said to have died “testate,” and the will controls the distribution of your property  If you die without a valid will, you are said to have died “intestate” and the state’s intestate succession statute controls the distribution of your property

Joint tenancy  Property passes to surviving joint tenant(s), not by decedent’s will  If A and B own property as joint tenants, and A dies, then B becomes the sole owner of the property

Joint tenancy  Advantages  probate avoidance  convenience  Disadvantages  possible lack of cooperation by joint tenant  possible exposure to joint tenant’s creditors

Tenancy by the entireties  Only available for a husband and wife  Property passes to surviving spouse, not by decedent’s will  Property is protected from creditors of an individual spouse (benefit not available under joint tenancy)

Tenancy in common  Property passes by will (or intestate succession), not necessarily to surviving tenant(s) in common  If A and B own property as tenants in common, and A dies, then A’s interest passes in accordance with his will, or if he has no will, in accordance with the intestate succession statute

Beneficiary Designation  Property may pass by beneficiary designation at death  Examples:  life insurance  individual retirement account (IRA)  401(k) plan  annuity  TOD (transfer on death) security registration

How to avoid probate  If we know that: Sole ownership property and tenancy in common property pass through probate at death  Then: To avoid probate, you must avoid owning property in sole ownership or as a tenant in common at your death

Methods of probate avoidance  Die impoverished  Joint tenancy  TOD accounts (POD accounts)  Revocable living trust

What is a trust?  A trust is a relationship in which a person holds title to property subject to an obligation to keep or use the property for the benefit of a another person  The terms of the relationship are normally described in a written instrument:  trust instrument or trust agreement  will

A trust involves three parties:  the “Grantor” or “Settlor” (the person creating the trust)  the “Trustee” (the person who holds the property)  the “Beneficiary” (the person who benefits from the property held in trust)

What is a “living trust”?  A trust created during the lifetime of the grantor is called a “living trust” or an “inter vivos trust”  A trust created upon the death of the grantor (through directions in the grantor’s will) is called a “testamentary trust”

Revocable Trust vs. Irrevocable Trust  A revocable trust may be revoked or amended as provided in the trust instrument  The phrase “living trust” typically refers to a revocable living trust  An irrevocable trust may not be revoked  Irrevocable trusts are generally associated with more sophisticated techniques used to reduce estate tax

How to use a revocable living trust to avoid probate  Create a revocable living trust  Name yourself as initial trustee and sole beneficiary during your lifetime  Provide directions to successor trustee on how to distribute property (or continue to hold property for the benefit of others) at your death  Transfer all your property to your living trust before you die

Transfer Taxes  Federal Estate Tax  Michigan Estate Tax (effectively repealed)  Federal Gift Tax  Federal Generation-Skipping Transfer Tax  Michigan Generation-Skipping Transfer Tax

Federal Estate Tax  gross estate  generally consists of the value of all property owned or controlled by the decedent at death  less deductions  funeral and burial expenses  administration expenses (e.g. attorney fees)  marital deduction  charitable deduction  equals taxable estate

Applicable Exclusion Amount/Top Estate Tax Rate n 2003: $ 1,000,00049% n 2004: $ 1,500,00048% n 2005: $ 1,500,00047% n 2006: $ 2,000,00046% n 2007: $ 2,000,00045% n 2008: $ 2,000,00045% n 2009: $ 3,500,00045% n 2010: $ 5,000,000/No Estate Tax n 2011: $ 5,000,00035% n 2012: $ 5,120,00035% n 2013: $ 5,250,00040% n 2014: $ 5,340,00040% n 2015: $ 5,430,00040% n 2016: $ 5,450,00040%

“Portability” of Deceased Spousal Unused Exclusion Amount  Beginning in 2011, the unused exclusion amount of the first spouse to die (“DSUE amount”) may be transferred to the surviving spouse and added to the surviving spouse’s own “basic” exclusion amount.  A federal estate tax return must be filed for the first spouse to die in order to transfer the DSUE amount to the surviving spouse.

Wills  Direct distribution of sole ownership property and interest in tenancy in common property  Name personal representative of estate  Nominate guardian for minor children  Create testamentary trusts

General Durable Power of Attorney  The “Principal” grants power to the “Agent” (attorney-in-fact) over specified areas of the Principal’s financial affairs  “Durable” means the Agent’s power continues beyond the incapacity of the Principal  The Agent’s power terminates at the death of the Principal

Patient Advocate Designation (Health Care Power of Attorney)  The “Patient” grants power to the “Patient Advocate” to make medical treatment decisions for the Patient if the Patient is unable to participate in his or her medical treatment decisions  A Patient Advocate Designation is not a “Living Will”