Estate Planning - Wills
What is Estate Planning? It used to be not much more than deciding to write a Last Will and Testament and hiring a lawyer to follow through with this decision. Along with the rest of life, Estate Planning has become more complicated. Generally, estate planning includes advance planning for handling your financial and personal affairs should you become incapacitated while still living, as well as planning how you want to dispose of the assets held in your name after your death (this is your estate). Even this last part of planning is more complicated, because there are more choices. Now, not only can you use a Will to dispose of your assets, but a Statutory Will, a living trust, a pour-over trust, and many other possibilities need to be considered.
There are a couple of legal documents that are used to set out your directions for handling your financial affairs. Although these documents have similar names, they each serve specific purposes that are not interchangeable.
[Back to Top]This is a document that appoints another person to handle some or all of your business affairs while you are unavailable. It is a contract between you (the principal) and the other person (the agent), which means you both must be competent adults. The person appointed is an attorney in fact, commonly referred to as an agent. You can give your stockbroker a Power of Attorney to buy and sell stock shares for you. You can give your sister in Tulsa a Power of Attorney just to sell your share of the family homestead so you don't need to be in Oklahoma in person. You can give your daughter broad authority to handle all your financial affairs while you are on a world cruise. It is important to know a power of attorney does not give the agent any authority to act after your death or if you become legally incapacitated.
As people age they begin thinking about not being able to handle their financial affairs if something happens to them. A stroke or other type of disability can render a person legally incapacitated. To address this problem a person can sign a Durable Power of Attorney. To qualify as a Durable Power of Attorney, the document must have specific language, required by Michigan law, which says you intend the authority of the Durable Power of Attorney to continue while you are legally incapacitated. This is what makes it "durable" and differentiates it from a regular Power of Attorney. You must be legally competent to sign either form of Power of Attorney.
A Durable Power of Attorney can start when you sign it, or it can be triggered to go into effect at a later date, and under the circumstances picked by you. If it takes effect at a later date or event it is called a "springing" Power of Attorney because it springs to work later.
Pointers
In planning your Power of Attorney orDurable Power of Attorney, you need to decide:
- Who do you trust with the authority to have access to your finances? The person to pick as your agent may be the most important consideration.
- Do you have a back-up second choice you want added to the power of attorney?
- How much authority do you want to give this attorney in fact -- just to pay the bills out of one bank account, or the authority to handle any financial matter that might come up, including selling your home if you are no longer competent to sign the deed? Often the agent is given a broad, general authority to act for the principal. (Note: if you want to use a Power of Attorney or Durable Power of Attorney to buy or sell real estate, the document needs to be prepared by your lawyer to meet all the requirements for filing with the register of deeds.)
- When do you want the Power of Attorney to start and when do you want it to end? As discussed above, if you want it to be used while you are incapacitated, it must specifically say so. Unless otherwise stated, a Durable Power of Attorney lasts until you revoke it, your death, or a court revokes it because the agent is not acting in your best interests.
- A Power of Attorney, whether regular or durable, is usually honored by third parties, e.g. a bank. But there is no law requiring anyone to honor it. A document drafted by an attorney is going to have the most likelihood of being accepted. If you can not afford the services of an attorney you may be able to get help through one of the resources listed at the end of this Handbook.
Wills
As you can see, a Power of Attorney can handle your financial affairs during your lifetime. It does not have any legal authority for disposing of your assets after your death. For this, you must use a testamentary document, such as a last will and testament.The bundle of goods passed along by your will is known as your estate. This is what is in your name after your death, and isn't necessarily the same bundle of goods you owned during your lifetime. The biggest difference is the assets you own as joint tenants with right of survivorship or under a life estate. These items go to the survivor owner, and not into your estate. A Living Trust offers another mechanism to pass assets in your control to others, after your death, outside of probate (see below).
Most people go to a lawyer to have a will written for them. The will sets out 1) how they want to pass on their belongings, and 2) who they want appointed to administer their estate (the probating). In Michigan, there are two variations that also are legal wills. One is the Statutory Will; the other is a holographic will.
Statutory Wills
Statutory Wills are preprinted, fill-in-the-blank wills, that when filled out correctly, are a valid will according to a 1986 Michigan law. The form provides for the distribution of assets according to the most commonly used plan. That is, if you have a surviving spouse, everything goes to the spouse. If there is no spouse, everything goes to your children in equal shares. In the Statutory Will, you choose whom you want as first and second choice to handle the probating (called your personal representative). You can choose to give up to two cash gifts to other people or charities, and you can write up a list of personal items you want to give to specific people, but that is the limit to the flexibility you have with the Statutory Will. If you want to leave your estate in unequal shares, if you are in a second marriage where you agreed to not leave everything to each other, or if you have a family business to pass on to heirs, then the Statutory Will is not a good choice for you. You can obtain a statutory will without charge, by calling your state representative or senator.
Holographic Wills
It is possible to have a valid will you write yourself. This is called a holographic will. In Michigan, a holographic will is valid if both of the following requirements are met:
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It is all in your own handwriting, and
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It is dated and signed by you.
Holographic wills are more likely to be challenged, or have your wishes misunderstood, so they are not recommended when any other option is available. This type of will needs no witnesses. A holographic will is probably better than having no will but if possible, you should use the Statutory Will or have a lawyer draft a will for you.
Effect of a Will
Once you and your witnesses sign your will, what effect does it have? The terms of a will only go into effect on your death. Planning to give your daughter your house on your death by putting it in your will does not give her any ownership rights during your lifetime. You can still refuse to let her move in with you, sell the house and spend all the money or change your mind (and the will) to leave the house to your niece. This is a key difference from leaving her the house by adding her to the deed as a joint tenant. If you make your daughter a joint owner by deed, she can move in with you, she can stop the sale by refusing to sign off to the buyer, and you cannot change your mind and take her off the deed unless she agrees.
How to Change Your Will
Don't try to change your will by crossing out parts and writing in new terms or names. A probate court might consider this canceling your will. For changes to your will to be legally binding, they too must meet the minimum requirements for wills -- signed, dated and witnessed. The name for a will change is a codicil. Use it if you are making minor changes. If you are making a number of changes at the same time, it makes more sense to do a new will. While it may be possible to prepare a codicil yourself, the smarter option is to have a lawyer draft it for you. Your lawyer will also be able to ensure that you execute it properly.
Disinheriting Relatives
Under current Michigan law, the only person you cannot completely cut out of your will is your spouse, and this is only true if you are still married and living together and do not have a prenuptial agreement to the contrary. Prenuptial agreements in later-life, especially second marriages, are becoming more common as both spouses prefer to leave some or all their estate to their own children. When disinheriting a relative, you do not have to leave them the token dollar. It is better to clearly state you are purposely leaving them out of the will.
Probating the Will
Many people talk about avoiding probate as the key advantage for estate planning. Probate is the process of using the directions in the will to divide up and distribute your estate in an orderly way. Recall that as mentioned previously, your probatable estate consists solely of assets you own individually, in your own name only. Thus, if your estate planning consists only of a will, and you own some things individually, you will not "avoid" probate. If you selected someone to do the probate work (the personal representative), they are appointed by the probate court to handle the following steps, and to then report to the court:
- Gather and value everything that is in your estate.
- Notify your creditors of your death, so your last bills can be turned in for payment.
- Pay any legitimate claims turned in within 4 months of the notice.
- Give out any specific gifts you put in your will.
- Divide the rest according to the terms of your will.
- If there are any disputes by your heirs about who gets what, the personal representative usually has the authority to sell it all and divide the cash instead of the property or goods.
The personal representative then reports progress on this work to the court. After paying any taxes that may be due, the personal representative is given the authority to make the final distribution of the estate, turn in a final accounting of how the distribution took place, and then close the estate. How long this takes depends on how complicated it is to gather and value the estate, sell assets, and whether there are disputes among heirs. The less complicated it is, the shorter time it takes. Probate is rarely shorter than six months, because the proceeding must be open for at least 4 months for creditors to file a claim.
If the personal representative is not a lawyer, he or she usually hires one to do the probate paperwork, and again, depending on how much there is to do, and how long it takes, the total costs of probate can add up.
Small Estates
An estate valued under $18,000 (2007) is referred to as a small estate and can be handled much more quickly and simply, sometimes even without a lawyer, through the small estate process. This amount is adjusted each year based on inflation. Here, the estate must be used to pay the funeral bill, and the rest is given to the surviving spouse or heirs without waiting for other creditors.
The major parts of the cost of probate are the inventory fee and the attorney fee. The inventory fee is paid to the court and is about ½ of one percent of the gross value of the estate, e.g. the fee for an estate valued at about $100,000 would be under $500. The lawyer’s bill is the other part of the total cost. Lawyers charge by the hour for this type of work and it’s never easy to predict how much time it will take. If the estate is modest-sized and uncomplicated, and the easiest form of probate is used (called informal probate), then the total cost should be well under $3,000.
Living Trusts
Living trusts are an alternative to wills and probate. Living trusts have been around for a long time but have only recently been aggressively marketed to the average person. Despite any magazine advertising you may see, or what you may hear at an "estate planning seminar," living trusts are not the best choice for everyone. It depends on what you own and how, as well as whom you want it to go to upon your death. While the living trust is a good, safe way to avoid probate, avoiding probate may not be the smartest choice for you.
The risks that come with making your intended heir a joint owner with you are a big reason why living trusts have become popular. The concept works this way: a trust avoids probate because the trust, not you, owns everything. By the terms of the trust, you (the grantor) usually set yourself up as both the beneficiary and administrator (referred to as the trustee) of the trust, with a successor trustee and successor beneficiaries. This means that during your lifetime you are the business agent of the trust who uses the trust for your benefit -- to pay your bills. If you are no longer able to act as trustee, the person or organization you picked as successor administrator is to use the assets in the trust for your benefit while you are alive. Then, on your death, the trust assets are to be used for the benefit of, or turned over to, your successor beneficiaries. Because you no longer own the assets in the trust, they do not need to go through probate to be transferred to your heirs.
The downside of living trusts is that you need to spend money up front to have the trust document prepared by an attorney ($750 to $1,500 is not unusual for an uncomplicated trust) and to prepare all the legal documents to change the ownership of your assets (your home, stocks, bank accounts, etc.) to the trust. If an asset is missed, and stays in your name, it will still need to be probated on your death to be transferred to your heirs. This is why it is advisable to also have a will, just in case an asset needs to be probated. The transfer of assets into the trust is referred to as "funding" the trust. If you decide to have a living trust, make sure all of your assets get re-titled into the name of the trustee.
The other inconvenience to living trusts comes with the more complicated paperwork for taxes, buying and selling assets, etc., when you don't personally own the items. This can mean more costs. It might not be worth the expense and inconvenience to you, to avoid the "expense and inconvenience" probate causes your heirs after your death. Depending on when you make the trust, and how long you live, it might be smarter to invest the money it would cost to buy the trust; the investment could grow to be larger than the cost of probate.
No Will
Seniors sometimes mistakenly think that they must rush into their estate planning choices, otherwise everything will go to the state on their death. This is not true if you have any surviving relatives. A major revision of the Probate Code which went into effect April 2000 makes the state of Michigan an heir of your estate but only if there are no surviving heirs.
If you die without a will, and leave any estate assets, it is called intestacy, and a set of rules in the Probate Code on how to divide your estate among your heirs is used. Remember that an estate consists only of assets that you own solely in your name.
There are formulas for dividing an intestate estate. Here are the most common situations:
- Surviving Spouse Only
When you are survived by a spouse, but not by children or parents, your spouse receives your entire estate.
- Surviving Spouse and Children
When you are survived by both a spouse and children, the first $183,000 of your estate goes to your spouse and the remainder if the amount was over $183,000 is split half to your spouse and half to your children in equal shares, providing those children are children of a surviving spouse. The amount of $183,000 was determined in 2006 and is adjusted annually for inflation. If you have a surviving spouse and children from a previous marriage, then the first $122,000 of your estate goes to your spouse, plus half the balance, and the other half goes to the children of the previous marriage in equal shares.
- Surviving Children Only
If you are survived by your children, your estate goes to them in equal shares. If one of your children died before you, but left grandchildren, those grandchildren would receive their parent's share equally.
- No Surviving Spouse or Children
If you have no surviving spouse, no children or grandchildren and no surviving parents, then your estate is divided equally among your sisters and brothers (or their children).
Should I have a Will?
For one reason or another, many people die without any estate planning or a will. It’s a good idea for everyone to have a will. Because it’s easily available and free, a Statutory Will is a good choice for a basic estate planning option. There are some good, sensible reasons to have a will:
- A will ensures that your assets will go to who you want to receive them at your death;
- A will allows you to name the person to be in charge of administering your estate;
- A will can save some costs of probate; and
- A will can bring peace of mind knowing your affairs are in order.
