HAVE YOU PROPERLY FUNDED YOUR REVOCABLE LIVING TRUST?

If your estate plan includes a Revocable Living Trust, it’s critical to ensure that the trust is properly funded. Revocable Living Trusts offer significant benefits, including asset management (in the event you become incapacitated) and probate avoidance. But these benefits aren’t available if you don’t fund the trust.

The basics

A Revocable Living Trust acts as a will substitute, although you’ll still need to have a short will, often referred to as a “pour over” will. The trust holds assets for your benefit during your lifetime. The "pour-over" will serves as a safety net to "catch" assets that may not have been transferred to your Revocable Living Trust during your lifetime and directs them, through the probate process, to your Revocable Living Trust. If you have minor children, the pour over will is the document in which you can name guardians and conservators for your children.

You can serve as trustee or select someone else. If you choose to be the trustee, you must name a successor trustee to take over as trustee upon your death, serving in a role similar to that of an executor.

Essentially, you retain the same control you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. If you name a professional trustee to manage trust assets, you can require the trustee to consult with you before buying or selling assets.

The trust doesn’t need to file an income tax return until after you die. Instead, you pay the tax on any income the trust earns as if you had never created the trust.

Asset ownership transfer

Funding your trust is simply a matter of transferring ownership of assets to the trust. Assets you should consider transferring to your Revocable Living Trust include real estate, bank accounts, certificates of deposit, stocks and other investments, partnership and business interests, vehicles, and personal property (such as furniture and collectibles). Consulting with your legal counsel before making such transfers is a good practice.

Certain assets shouldn’t, however, be transferred to a Revocable Living Trust. For example, moving an IRA or qualified retirement plan, such as a 401(k) plan, to a Revocable Living Trust can trigger undesirable tax consequences. And it may be advisable to hold a life insurance policy in an irrevocable life insurance trust to shield the proceeds from estate taxes.

Don’t forget to transfer new assets to the trust

Most people are diligent about funding a trust at the time they sign the trust documents. But trouble can arise when they acquire new assets after the trust is established. Unless you transfer new assets to your trust, they won’t benefit from the existence of the trust.

To make the most of a Revocable Living Trust, be sure that, each time you acquire a significant asset, you take steps to transfer it to the trust. If you have additional questions regarding your Revocable Living Trust, we’d be happy to answer them.

 

POWERS OF ATTORNEY: SPRINGING VS. NONSPRINGING

Estate planning typically focuses on what happens to your assets when you die. But it’s equally important (some might say more important) to have a plan for making critical financial and medical decisions if you’re unable to make those decisions yourself.

That’s where the durable power of attorney (DPOA) comes in. A DPOA appoints a trusted representative (the “agent”) who can make medical or financial decisions on your behalf in the event an accident or illness renders you unconscious or mentally incapacitated. By statute, a Durable Power of Attorney contains language that makes clear that it is "not affected by the principal's subsequent disability or incapacity, or by the lapse of time." Typically, separate POAs are executed for health care and property. In Michigan, a Power of attorney for health care is usually referred to as a Designation of Patient Advocate. Without both types of Powers of Attorney, your loved ones might be required to petition a court for guardianship or conservatorship for you, a costly and public process that can delay urgent decisions. (Depending on the state in which you live, the health care POA document may also be known as a “medical power of attorney” or “health care proxy.”)

In Michigan, a question that people often struggle with is whether a DPOA for financial matters should be springing or nonspringing.

To spring or not to spring

A springing DPOA is effective on the occurrence of specified conditions; a nonspringing, or “durable,” POA is effective immediately. Typically, springing powers would take effect if you were to become mentally incapacitated, comatose or otherwise unable to act for yourself.

A nonspringing DPOA offers two advantages:

  • It allows your agent to act on your behalf for your convenience, not just when you’re incapacitated. For example, if you’re traveling out of the country for an extended period of time, your agent under a DPOA for financial matters could pay bills and handle other financial matters for you in your absence.
  • It avoids the need for a determination that you’ve become incapacitated, which can result in delays, disputes or even litigation. This allows your agent to act quickly in an emergency, making critical medical decisions or handling urgent financial matters without having to wait, for example, for one or more treating physicians to examine you and certify that you’re incapacitated.

A potential disadvantage to a nonspringing DPOA — and a common reason people opt for a springing DPOA — is the concern that the agent may be tempted to commit fraud or otherwise abuse his or her authority. But consider this: If you don’t trust your agent enough to give him or her a DPOA that takes effect immediately, how does delaying its effect until you’re incapacitated solve the problem? Arguably, the risk of fraud or abuse would be even greater at that time because you’d be unable to monitor what the agent is doing.

In Michigan, by statutory mandate, the Designation of Patient Advocate is a springing power of attorney. According to the applicable statute:

Except as provided under subsection (3), the authority under a patient advocate designation is exercisable by a patient advocate only when the patient is unable to participate in medical treatment or, as applicable, mental health treatment decisions. The patient's attending physician and another physician or licensed psychologist shall determine upon examination of the patient whether the patient is unable to participate in medical treatment decisions, shall put the determination in writing, shall make the determination part of the patient's medical record, and shall review the determination not less than annually.

What to do?

Given the advantages of a nonspringing DPOA, and the potential delays associated with a springing DPOA, a nonspringing DPOA is generally preferable. Just make sure the person you name as an agent is someone you trust unconditionally.

Contact us with any questions regarding DPOAs.

"ABLE" ACCOUNTS CAN BENEFIT LOVED ONES WITH SPECIAL NEEDS

For families with disabled loved ones who are potentially eligible for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI), estate planning can be a challenge. On the one hand, you want to provide the most comfortable life possible for your family member. On the other hand, you don’t want to jeopardize his or her eligibility for needed government benefits.

For many years, the most effective solution to this problem has been to set up a special needs trust (SNT). But beginning in 2014, the Achieving a Better Life Experience (ABLE) Act created Internal Revenue Code Section 529A, which authorizes the states to offer tax-advantaged savings accounts for the blind and severely disabled, similar to Sec. 529 college savings plans.

How ABLE accounts work

The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $14,000). To qualify, a beneficiary must have become blind or disabled before age 26.

The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.

An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.

Comparison with SNTs

Here’s a quick review of a few of the relative advantages and disadvantages of ABLE accounts and SNTs:

Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Michigan's program is known as MiABLE. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age restriction for SNTs.

Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.

Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.

After you die. After you die, money in your ABLE account will be used to pay back the Medicaid program for any benefits you got after you opened your account. If that could be an issue for your family, look into a third-party Special Needs Trust. 

Contact us with additional questions you may have regarding ABLE accounts.