Tag: grand rapids estate planning lawyer

The Boilerplate Debate

November 25, 2017 /

I’ve heard it a lot over the years when meeting with client families: “I did not read the boilerplate”; or “that’s not important, it’s just boilerplate”.  The general feeling tends to be that boilerplate is a pain and really does not accomplish anything.  The truth may surprise you.

What really is “boilerplate”?  The definition is “standardized pieces of text for use as clauses in contracts or as part of a computer program”.   Contrary to what many may believe, the “boilerplate” can make or break your estate plan.  You see, it is impossible to predict what will happen in your life, your family and with the laws that affect your estate plan.  At least in documents I draft, the boilerplate is there to cover all the situations I can think of that may come up.  I do not draft it thinking it will happen; I draft it knowing that I want your plan to work how you want even IF it does happen.

We had a case recently where the boilerplate was critical to carrying out my client’s wishes after passing.  A disgruntled beneficiary brought a suit to have my client’s trust declared invalid.  We won.  Then, we petitioned the court to have her removed as a beneficiary.  How could we do that?  Because the “boilerplate” of the document stated that if a beneficiary challenged the validity of the document, they would no longer be considered a beneficiary of the trust.  It was very important to my client that his wishes be carried out.  He had several friends, family and charities he wanted to benefit from his hard work and he did not want a beneficiary’s lawsuit to upend that plan or lessen the amount his chosen beneficiaries would receive.  The “boilerplate” included a “no contest clause”, which was the key to minimizing the impact of the lawsuit on the other beneficiaries.

So, next time you review your estate plan documents, take some extra time to read through the “boilerplate”.  And if you have any questions about why a particular provision is there, just ask me.  I expect there is a good reason it’s there.

Michigan ABLE Accounts Arrive | Michigan Special Needs Planning

December 11, 2016 /

Going back almost two years, you may remember me mentioning in this post that Michigan enacted its version of the ABLE Act (Achieving a Better Life Experience Act).  Although Michigan passed its version of the ABLE Act in October of 2015, you could not form a Michigan ABLE account until just recently. This is because there was no established rule for how the accounts would be regulated and what financial institutions would manage them. Well, I have good news.  The wait is now over – Michigan officially has ABLE accounts.

Why does this matter?  Well, for many years, individuals with disabilities (and their caregivers) have faced a difficult decision if they received money in their own name via inheritance, personal injury settlement, or gift – spend it all, pursue a court-created trust or non-profit “pooled” trust, or risk losing vital government assistance.  As with many things, more choices mean a better chance of a choice that fits your situation.

The ABLE account offers a new, additional option for individuals with special needs.  In short, an ABLE account allows certain people with disabilities to have special savings accounts for disability-related expenses without losing eligibility under SSI, Medicaid, and certain other public benefits.  By putting funds in an ABLE account, those funds are not considered a “resource” for the person with the disability (it does not count against him or her).  There are limits on the contributions to the account: no more than $14,000 per year and no more than $100,000 total.  Anything above the maximum amount is considered a “resource”.  The account funds can be used generally for expenses related to the individual’s disability including education, housing, transportation, employment training and support, assistive technology and personal support services, legal fees expenses for oversight and monitoring and funeral and burial expenses.  A Michigan ABLE account has a $45 per year fee, plus the investment expense associated with the individual’s chosen investment option(s).  You can find more information, and open an account, at www.miable.org.

It is important to know that an ABLE account is not the solution in every situation.  Other planning strategies are still valid and may be a better option.  The ABLE account is an additional option.  If you have questions about or need help ensuring the maximum benefit and quality of life for a disabled family member or friend, please contact me.  As a Grand Rapids, MI special needs planning attorney, I am happy to help.

ATF Regulation 41F and Gun Trusts – Moving Forward

July 12, 2016 /

Well, the “dreaded” day is upon us.  The ATF’s rule 41F goes into effect tomorrow, Wednesday, July 13, 2016.  All Form 1 and Form 4’s that are postmarked July 12th or earlier will be processed under the current guidelines.  All that are postmarked on or after July 13th will be subject to the new guidelines.  If you are not familiar with 41F, you can read my previous blog post on it by clicking here.

I’m writing today because the ATF finally issued the new versions of the Form 1, Form 4 and Responsible Person Questionnaire that will need to be used starting July 13, 2016 going forward.  They have said they will not accept the existing forms for submissions on or after July 13, 2016.  Since the process takes plenty long on its own, do yourself a favor and make sure you use these new forms.  Here is where you can get each of them:

Form 1

Form 4

Responsible Person Questionnaire

If you need to order fingerprint cards, you can do that by clicking here.  You can find the ATF’s latest FAQ by clicking here.

Now, despite saying “dreaded” in my opening paragraph, the sky is not falling on gun trusts.  No doubt, there is definitely more red tape going forward.  But, gun trusts will remain the best option for many people who have (or plan to have) NFA items and/or a firearms collection.  The multiple authorized user and inheritance options will stay (and are very important).

If you have any questions, please contact me.

What Is a Trustee Supposed to Do?

September 6, 2015 /

This summer has brought an increase in contested probate matters – that is, family and/or friends not getting along, or people taking advantage of others based on their position of power in someone’s estate planning documents. In many of the cases, it was actual or alleged breach of duties by a person appointed as Trustee.

I will not get into the gory details of the cases we’ve had this summer (several of which are still pending), but I do think they emphasize one thing – we all should know who/what a Trustee is, what they are required to do, and what they can be liable for. Of course, I am not going to be able to go into too much detail in this post . . . well, I could, but it would put you to sleep, if you are not asleep already 😉

In short, a Trustee owns and manages property for the benefit of someone else. Most commonly, this is someone named to administer and distribute your revocable living trust during a period of your incapacity or after you pass away. It is not like managing your own finances. A Trustee has the power and the obligation to manage someone else’s (your) assets for the benefit of the beneficiaries named in the trust. It is not a role to take lightly.

As far as the powers the Trustee has, basically they can do anything you can do. Sell, buy, transfer, get loans, make loans, and, if the your trust specifically gives them the power, they can handle your business, specially regulated assets (e.g. firearms), and many other things.

But, as they say, with great power, comes great responsibility. The Trustee has several duties and obligations, all of which fall under the general heading of “fiduciary duties” – that is, duties that are owed to others based on the Trustee’s relation to them as Trustee. A short and non-exhaustive list of Trustee duties are:

  • Marshalling assets: gathering all of your assets together
  • Acquire a tax ID number, if the trust does not already have one
  • Inventory and appraise (formally or informally) trust asset
  •  Send legally required notices to trust beneficiaries within a certain timeframe
  • Keep the trust beneficiaries informed of trust assets
  • Invest trust assets as a “prudent person” would
  • Keep “accountings” (e.g. values, income and expenses) of trust assets and provide reports to beneficiaries no less than annually
  • Prepare and file trust tax returns (or, preferably, work with a qualified CPA to prepare and file them)
  • Make distributions as required in the Trustee agreement
  • When the trust is fully administered, close the trust

As you can see, there is a lot for a Trustee to do and to do correctly. The top two recommendations I make to Trustees are: (1) keep meticulous records on everything you do and why you did it, and (2) enlist the assistance of professionals, such as an Attorney, Financial Advisor, and CPA, to make sure you are properly administering the trust and the assets owned by it.

When choosing a Trustee, you should choose someone you trust and who is either capable of handling the above items on his/her own, or is willing to work with professionals who can guide him/her through the process. Given what is involved, it is not uncommon for families to choose a professional Trustee, such as a bank or trust company.

In closing, I would recommend that you bookmark this post.  Or, better yet, keep it yourself and share it to anyone who is named as a Trustee in your plan or who may be named in someone else’s plan (friend or family member).  It will be a good starting point if you (or they) are called upon to act as Trustee.

And remember, if you ever have a questions, please contact me.

The Importance of Planning Communication

February 21, 2015 /

grandmaI have had a lot of conversations recently centered around communication and financial information.  Each had its own twist, the context rarely being the same.  But, the two recurring themes were: (1) lack of organization and communication about your financial situations can cause a lot of frustration and expense if you are disabled or pass away, and (2) the process of creating and properly funding a living trust can help keep #1 from happening. I know it is not necessarily fun or exciting to talk about. Be that as it may, it can make a HUGE difference.

Here is one of the “bad” examples.  The person had a will-based estate plan that was put in place some time ago.  It will not shock you to know that a lot changed over the years.  In addition to not keeping the estate plan updated, the person never shared anything about the person’s financial situation (what they had, where it was, etc.).  I am now working with their family to try and sort everything out.  It is proving quite difficult.  Each financial institution seems to have different requirements for finding out information about accounts, and quite honestly, the family does not even know where to look.  It has led to a lot of frustration on their end and much higher legal fees as we help walk them through it and get the information they need.

On the flip side are a couple of clients who passed away in 2014.  Both had a trust-based plan that was fully funded.  If you are curious about what I mean by “fully funded”, you can read a blog post of mine on the topic by clicking here.  Because I work with clients to make sure their trust is fully funded, including putting together a spreadsheet of their assets, there is a list of the “what” and “where”.  I also tend to find that by talking through the financial side of things with clients, they seem to be more willing to talk about it with those they have trusted with handling their financial affairs during their incapacity or after their passing.  In both of these cases, those people who were called upon to act as successor Trustees were able to quickly get a handle of the financial side of things which, in turn, led to a quick, smooth, and less costly transition.

Now, don’t get me wrong – there are always exceptions to these examples.  Having a will-based plan does not mean that administering your estate will be a frustrating and costly experience.  And likewise, just having a trust does not guarantee that everything will be smooth sailing.  But, I have generally found the exceptions to be few and far between.  Whether a will-based plan or a trust-based plan, the important part is to make sure to keep track of your financial affairs and communicate with those you choose to help with your estate.  A well-qualified financial advisor can be a big help with this process too, so do not overlook them.

As you know, I welcome questions, comments, and stories about the topic, so please let me know if you have any.

ABLE Accounts and Michigan Special Needs Planning

January 18, 2015 /

In the flurry of new laws passed at the end of 2013, there was a law that provides additional options for individuals with special needs or disabilities.  The law is called the ABLE Act – the “Achieving a Better Life Experience” Act. It had overwhelming support from all political parties, something that is rare these days. As you might expect, I am not able to cover all the details one blog post, especially when much of the “nuts and bolts” of how ABLE accounts will work has yet to be figured out through the regulatory process.  So, I will attempt to summarize the act and some important considerations.

10674802805_a9b0103bf6_mThe ABLE Act recognizes that there are additional financial strains faced by individuals with disabilities and their families, including those in the Grand Rapids, Michigan area.  In short, the ABLE Act allows for individuals to utilize a tax-free, state-based private savings account, referred to as an ABLE account, for the care of people with disabilities. This ABLE account can be used to supplement government benefits for “qualified disability expenses” such as medical and dental care, education, employment training, housing, and transportation, while not disqualifying a disabled individual from governmental benefits. As a result of the ABLE Act, eligible individuals and families are now allowed to establish ABLE savings accounts that will not affect their eligibility for Supplemental Security Income, Medicaid and other public benefits.

The ABLE Act states that eligibility will be limited to those individuals with “significant disabilities” with an age of onset of disability before turning 26 years of age. It is important to note that the person does not have to be under 26 years of age, just that the onset of the disability was before turning 26 years of age. Additionally, there are dollar limits on the amount that can be contributed to an ABLE account, both on an annual basis and as a total dollar amount in the account.  The annual contribution limit is $14,000 and the overall amount allowed in the account is $100,000.  To exceed either limit would disqualify the account as an ABLE account, a potentially disastrous result.

Keep in mind, this is not something you can set up immediately. Congress put the general structure in place and it was signed in to law, however regulations must be established before states can begin to set up procedures for managing ABLE accounts. It will likely be late this year before you can set up an ABLE account.

Keep in mind, an ABLE account is not a one size fits all solution for everyone.  An ABLE account is not without its drawbacks.  One of the biggest drawbacks of an ABLE account is that any money remaining in the account upon the passing of the ABLE account holder must be used first to pay back the State for care provided to the account holder.  Many of the planning options that are already available for someone with different abilities continue to provide a better approach for many families.  For example, a special needs trust will likely continue to be the best option for many Grand Rapids, MI area individuals and families.  Why?  For a few main reasons:

  • There is no maximum annual contribution amount
  • There is no maximum allowed amount
  • There is much more flexibility in how the assets are invested
  • You maintain more control over how the assets are used
  • Assets in a special needs trust are not subject to the Medicaid and/or SSI payback to which an ABLE account is subject.

I cannot overemphasize the importance of that last point.  If you, as a family member or friend put money into an ABLE account for someone, that money will be subject to Medicaid and/or SSI claims upon the ABLE account holder’s passing.   Yet, if you established a special needs trust (or contributed to one that was already established), no such “payback” is required and you can specify what happens with the remaining trust assets when the beneficiary passes away.  In short, you have more control.

All that said, an ABLE account is another “tool” in the planning “toolbox” and will help some families and individuals who may otherwise be disqualified from government benefits.

Wills vs. Trusts – The Battle Continues

March 24, 2012 /

In a previous post we discussed many of the differences between wills and trusts. That discussion was from more of a “technical” standpoint, which can still leave a lot of questions. And those questions are typically the practical questions, such as “I have a couple of retirement accounts . . . would a will or trust be better for me?”

Generally speaking, here is a brief comparison of wills vs trusts relating to some practical considerations:

Wills tend to be sufficient in situations such as: simple and outright distribution of assets when privacy is not important.

Trusts tend to be better for handling the following: life insurance policies, qualified retirement plans (IRA, Roth IRA, 401k, 403b, etc.), somewhat more involved distribution of assets, maintaining privacy, possible or probably mental disability, desire to make it as easy as possible for family and loved ones, out-of-state real estate, out-of-state trustees (and beneficiaries), tax planning, protection of inheritance for spouse, children and grandchildren (or other loved ones), second marriages, and loved ones with special needs.

Keep in mind that there is no “one size fits all” answer to estate planning questions because each individual and each family is unique. Each estate plan should be too! Beware of the standard form document and a “telling you” versus “listening, learning and sharing with you” approach.

Call us at 616-827-7596, if you have questions or want to make sure your family’s plan is specific to who you are and what’s important to you.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™. This goes beyond merely planning for finances – it’s about who your are and what’s important to you. He focuses on estate and asset protection planning for the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning. He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

Wills vs Trusts – Which Is Better For Your Family?

March 11, 2012 /

Is seems like the most common question I receive as a Grand Rapids, Mi estate planning attorney – what is the difference between wills and trusts?  Does my family need a will or a trust?

Well, as you might expect, the answer to the second question is different for every family.  Why?  Because no two families (or individuals) are the same.  Oh, sure, there are plenty of attorneys out there who will look at your family’s assets and tell you what you should have.  That approach doesn’t sit well with me.  I think it’s best to share with you some of the advantages and disadvantages of wills and trusts, and let you determine what is best for your family based on who you are and what’s important to you.

So, here are some examples of how wills and trusts differ on a few key considerations:

  • Privacy:Wills – with a Will there is no privacy.  Documents and proceedings after death are public record.  Trusts – totally private, unless court intervention is required, which is usually a result of poor drafting, lack of funding, or loss of Trustee.
  • Disability Planning:Wills – no provisions for physical or mental disability.  The disabled person is subject to the court process for guardianship. Need a power of attorney, updated over the years. A power of attorney can provide that disability be determined privately by family members and friends.  Trusts – Handles assets upon disability without court intervention.  Need a power of attorney for non-trust assets. A trust can provide that disability be determined privately by family members and friends.
  • Creditor/Predator Protection:Wills – None while alive. Testamentary trusts can give protection.  Trusts – None while alive. Creditors have only a specified amount of time to present claims after death or they are forever barred. Trusts which become irrevocable at death can give protection.
  • Effort Required:Wills – Less effort now unless you require tax planning and asset protection for your heirs, but more work for your heirs after disability or death.  Trusts – More effort now to properly design the trust to accomplish all of your goals upon disability and after death, but far less work for your heirs after disability or death if done correctly.
  • Cost Now:Wills – less.  Trusts – more.
  • Costs to Amend:Wills and Trusts – similar.
  • Cost Later:Wills – average all-inclusive cost of a probate in Michigan is 3-5% of the value of the estate.  Trusts – No probate fees if the trust has been fully funded and properly maintained and trust administration fees less than estate administration fees.

In a future post we’ll look at how wills and trusts compare on common family goals.  Make sure to contact us at 616-827-7596 if you have any questions and to schedule a Peace of Mind Planning Session to see how wills and trusts compare in your family’s specific situation.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

Michigan Celebrity Dies Without An Estate Plan

February 12, 2012 /

If you are a sportsman who lived in Michigan over the past 30 years or so, the name Fred Trost may sound familiar to you.  Fred Trost was a celebrity among Michigan outdoorsmen, hosting “Michigan Outdoors” and “Practical Sportsman” on PBS.  I remember growing up watching his show, having an affinity to it over the others because he was from right here in Michigan.  Sadly, Mr. Trost passed away unexpectedly in 2007.

And to add to the shock, he died without an estate plan.  This caused no small problem in his family, with the in-fighting recently coming to an end with his wife winning a $195,000 lawsuit against his son (not her son).  You can read about it by clicking here.  Although we’ll never know, it is quite possible that much of the conflict and hurt could have been avoided with a caring and comprehensive estate plan.

You may say, “c’mon Mike, how could an estate plan have helped in this situation?  This was a matter of contract between his wife and his son.”  Well, you may be right.  But as a Grand Rapids, Mi wills and trusts attorney I’ve seen situations that were not too far off from this one that did not come to this level of conflict directly as a result of a caring and comprehensive estate plan.  Why?  Because the estate plan covered all the contingencies.  For example, in this case, Mr. Trost could have used an estate plan to say what would happen if he passed away before he received his anticipated inheritance and what would happen if his son received it as a result of Mr. Trost’s premature death (read the article to see how that caused a problem).  Or, he could have provided a way to “equalize his estate,” by using life insurance to make the monetary amounts more “fair.”  

One interesting item that was not mentioned in the article is what intrinsic value the show tapes had.  Sure, maybe they are financially valuable if they can be replayed, but I believe their bigger value to Trost’s wife is a way to remember the husband that she loved.  Remember, his “stuff” is still here, but he is gone.  When we lose someone for whom we care deeply, we usually look for something that reminds us of them.  It could be that the show tapes are that physical way for his wife to remember him.  Something of a family legacy.

Ultimately, we’ll never know what could have happened and how Mr. Trost’s family could have got along, because the fact is, he didn’t invest the time or money to do the planning that may have avoided it.  I encourage you to not make the same mistake.  Call us at 616-827-7596 to schedule a Peace of Mind Planning Session to help make sure your family is cared for and kept together in the most loving way possible.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

Watch Those Beneficiary Designations

February 4, 2012 /

Many families have retirement accounts and life insurance as a way to plan for the future.  As common as they may be, a lot of confusion remains about what happens with those accounts if something happens to you (the account owner and insured).  Many married folks believe they go to their surviving spouse and then maybe their kids.  Maybe yes, maybe no.

You see, retirement accounts and life insurance are what we call beneficiary designated assets.  This means that you instruct the retirement account custodian (the financial institution) and the life insurance company to distribute those asset to the person (or people) you name on a beneficiary designation form.  You may or may not remember filling one out, but you did.  As a Grand Rapids, Mi estate planning lawyer, I’ve seen many cases where beneficiary designations caused serious problems when the account owner passed away because they weren’t updated for changed life circumstances.

For instance, just this past week I had a family share just such a story with me.  They had a relative who got divorced 20+ years ago and who had a decent sized retirement account.  When he divorced his ex-wife, he decided to name his sister-in-law as the beneficiary on his retirement accounts because he did not want his minor children to receive the funds through the probate process.  By the way . . . that is NOT estate planning and is almost always a very bad idea from a planning standpoint.

So, time went on, his kids grew up into fine adults, and life kept rolling . . . until it stopped.  He died.  Guess what?  He never changed the beneficiary designation on his retirement account and it all went to his sister-in-law . . . his kids received NOTHING!  As you might expect, the kids challenged this by taking the sister-in-law to court.  The judge sided with the sister-in-law.  That may seem unfair, but the judge was correct.  The beneficiary designation is a contract you have with the financial institution that they are to pay the assets to the person (or people) you named – if they don’t, they are in serious trouble.

This is just one example of why it is SO important to review your financial planning and estate planning on a regular basis.  There are many more stories – some with more disastrous outcomes.  This is a large part of why we include ongoing 3-year reviews at NO CHARGE for all of our estate planning clients and why we are developing a ClientCare Plan Monitoring system for our clients.  Your life will change, the law will change, and  what you have will change . . . your plan needs to change with it so it doesn’t fail.

If you don’t have a plan in place for your family, call us right away to schedule a Peace of Mind Planning Session.  And if you have a plan but your planning experience was dry, transactional, not explained well, and form driven, give us a call for a plan review meeting. In both situations we will share with you how planning works and make sure you have an active role in designing your family’s estate plan – it is not one size fits all.  Call us at 616-827-7596.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

Using Trust Protectors to Maximize Estate Plan Flexibility

January 29, 2012 /

I’m the type of person who genuinely believes anything can be done.  And as a Grand Rapids, MI estate planning attorney I bring that same attitude to helping craft caring estate plans for wonderful West Michigan families.  How?  Flexibility.  That’s right – not the standard form document that seems to try and wedge your family into whatever box is the “standard,” but rather a plan that let’s you share your goals, aspirations, hopes, values, experiences and stories, and makes it a reality.  One of the biggest “wishes” is that a plan will be flexible enough to handle changed circumstances throughout life.  One incredibly powerful tool used to accomplish this is a trust protector.

Trust protectors (aka Trust Advisors) have long been used in British Commonwealth countries, originating with offshore asset protection trusts. With these trusts, their role was limited mostly to overseeing the foreign trustee and to make sure the trust maker’s intent was fulfilled.

Today, trust protectors are increasingly being used with trusts that are located here in Michigan. And, while their main job is still to oversee the trustee and make sure your intentions are followed after unforeseen changes in the law and other matters, they can be given additional duties that will provide you and your beneficiaries with added flexibility, security and peace of mind.

What is a Trust Protector?
A trust protector is someone you name in your trust agreement to oversee your trustee and make sure your trust carries on in the way you intended. This should be a trusted friend or advisor, someone who knows and understands your motives, family values and desires when you created your trust. In the case of a trust that will last many years, like a multi-generational trust, a trust protector is often an institution rather than a specific person.

A trust protector can begin to act immediately (for example, if your trust is irrevocable), or can take an active role only under certain circumstances (for example, at your incapacity or death). Think of your trust protector as your substitute, someone who can speak for you if there is uncertainty in interpreting your trust’s instructions, or the law changes and that change affects your trust. Your trust protector also can provide guidance for the trustee and protect your beneficiaries from a trustee that is not meeting its responsibilities, is overreaching, or is unresponsive.

How Much Power Should You Give Your Trust Protector?
The trust protector’s duties and powers are defined in the trust document, and can range from extremely limited to extremely broad. How much power you give your trust protector is completely up to you. Traditionally, the trust protector’s role has been a defensive one: to ensure that the trustee carries out the trustmaker’s wishes and to protect the beneficiaries from an under-performing or over-reaching trustee. But if you give your trust protector more power, the role can become a proactive one, allowing your trust protector to act before wrongs occur.

Some of the duties and powers you can give your trust protector include:

Oversee, Remove and Replace the Trustee
Your trust protector can oversee your trustee, providing guidance in interpreting your trust’s instructions and holding the trustee accountable. You can also give your trust protector the power to remove and replace the trustee. This authority can be restrictive, limited to specific bad behavior by the trustee that can include being unresponsive to the beneficiaries, not providing acceptable record-keeping, reporting and tax filings, or charging too much for services. The authority can also be extensive, allowing the trust protector to remove and replace the trustee for no specific reason (without cause). Usually potential replacements (successor trustees) are named in the trust agreement, but it may also be possible for the trust protector to select a successor trustee.

Just having these oversight provisions in place is often enough to keep a trustee in line. And if it does become necessary to remove a trustee, it is much easier for the trust protector to do this (because he or she already has the authority) than for the beneficiaries to reach an agreement and ask for court removal, which is a time-consuming, expensive and unpleasant procedure.

You can also allow your trust protector to control spending by the trustee, and even limit the trustee’s compensation, which can go a long way toward preventing disputes.

Resolve Disputes
You can also make your trust protector the mediator if disputes should arise between co-trustees, between the trustee and a beneficiary, or even among beneficiaries. Having the trust protector as the final arbiter in disputes over interpreting the provisions of the trust document can sometimes avoid costly and unpleasant trust litigation.

You could even give your trust protector the ability to sue or defend lawsuits involving the trust assets.

Modify Your Estate Plan
You may also want to allow your trust protector to actually make some changes to your trust. For example, you could allow your trust protector to change the situs (location in which the trust is regulated) to a state that has more favorable asset protection or income tax laws, should the need arise.

You could also give your trust protector the power to amend or revoke the trust agreement, in its entirety or in part; to add or delete specific beneficiaries or classes of beneficiaries; or to change the terms of distributions to beneficiaries. These powers may be extremely beneficial to the trust’s ability to follow your intentions as tax laws change, as well as to protect the assets from potential predators and creditors.

Delegate Responsibilities among Advisors
Traditionally, and still with many trusts, the trustee handles everything – recordkeeping, tax returns, distributions, investing, etc. But over time, people have discovered that it is beneficial to allocate some of this responsibility to different parties that have different strengths. 

Consider giving your trust protector the ability to appoint, oversee and substitute other professionals. For example, the management of your trust could be divided like this:

  • An Administrative Trustee maintains trust records, accounts, and tax returns. If the trust is governed by laws in a different state (often for tax or asset protection reasons), the administrator will usually be a local institution or professional.
  • A Distribution Trustee or Adviser that has discretion and can make or withhold distributions from the trust to the beneficiaries. Typically this will be an objective third party, which insulates the trustee from pressure and liability associated with the power to distribute trust assets. This is especially important if a beneficiary’s creditor tries to force distributions from the trust.
  • An Investment Trustee or Adviser oversees or directs trust investments, and may be granted specific powers, including: to hold, maintain or cancel life insurance; to direct the sale or exchange of property; and to open, manage and close accounts. A general trustee is held to the prudent investment standard because of its fiduciary duty and, as a result, has restrictions on the investments it can make. Having an investment advisor that is not bound by the prudent investor rule or held to the same standard will provide more flexibility in investments.
  • The “General” Trustee handles everything that is not delegated.

Who Should Serve as Trust Protector?
Ideally, your trust protector should be someone who knows you, your motives, desires, and intentions when you established your trust. It cannot be you or a family member who is a beneficiary of your trust because of possible tax complications. An unrelated third party – a family friend, an advisor, the attorney who drafted your trust, or your family CPA – is often the best choice. They obviously must be willing to serve in this capacity, and your trust agreement should specify if they are to be paid for their services.

Who Should Have the Power to Remove or Replace the Trust Protector?
This probably should not be you, unless the replacement is explicitly limited in the document to someone who is not related or subordinate to you. You could possibly give this power to the beneficiaries or an unrelated third party. Leaving this decision to the courts would be time-consuming and costly.

If your plan has asset protection elements, no beneficiary should have the power to remove or replace the trust protector. Doing so could cause your trust to be under the control of a beneficiary and that could put the entire asset protection part of your plan in jeopardy.

Conclusion
The use of trust protectors is an excellent way to provide added flexibility, security and peace of mind in trust planning, especially since you can control how much power the trust protector is given. If you would like to discuss adding a trust protector to your estate planning, please call our office. We are ready to help.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.

Understanding How Trusts Work

January 14, 2012 /

In this week’s post, I thought we would cover something that is important to many Americans yet is sometimes misunderstood – trusts. In the right circumstances, trusts can provide significant advantages to those who utilize them, particularly in protecting trust assets from the creditors of beneficiaries.

Admittedly this can be a complex topic, but you see its implications in the headlines every day. So, let’s try  to simplify the subject and explain the general protection trusts provide for their creator (the “trust maker”) as well as the trust beneficiaries. Given the numerous types of trusts, only look at the most common varieties. I encourage you to seek the counsel of a Michigan attorney who focuses on estate planning to help you apply these concepts to your specific situation, or if you have questions about specific types of trusts.

Revocable vs. Irrevocable Trusts
There are two basic types of trusts: revocable trusts and irrevocable trusts. Perhaps the most common type of trust is revocable trusts (aka revocable living trusts, inter vivos trusts or living trusts). As their name implies, revocable trusts are fully revocable at the request of the trust maker. Thus, assets transferred (or “funded”) to a revocable trust remain within the control of the trust maker; the trust maker (or trust makers if it is a joint revocable trust) can simply revoke the trust and have the assets returned. Alternatively, irrevocable trusts, as their name implies, are not revocable by the trust maker(s).

Revocable Living Trusts
As is discussed more below, revocable trusts do not provide asset protection for the trust maker(s). However, revocable trusts can be advantageous to the extent the trust maker(s) transfer property to the trust during lifetime.   Revocable trusts can be excellent vehicles for disability planning, privacy, and probate avoidance. However, a revocable trust controls only that property affirmatively transferred to the trust. Absent such transfer, a revocable trust may not control disposition of property as the trust maker intends. Also, with revocable trusts and wills, it is important to coordinate property passing according to contract (for example, by beneficiary designation for retirement plans and life insurance).

Asset Protection for the Trust Maker
The goal of asset protection planning is to insulate assets that would otherwise be subject to the claims of creditors. Typically, a creditor can reach any assets owned by a debtor. Conversely, a creditor cannot reach assets not owned by the debtor. This is where trusts come into play.  The right types of trusts can insulate assets from creditors because the trust owns the assets, not the debtor.

As a general rule, if a trust maker creates an irrevocable trust and is a beneficiary of the trust, assets transferred to the trust are not protected from the trust maker’s creditors. This general rule applies whether or not the transfer was done to defraud an existing creditor or creditors.

Until fairly recently, the only way to remain a beneficiary of a trust and get protection against creditors for the trust assets was to establish the trust outside the United States in a favorable jurisdiction. As you might imagine, this can be an expensive proposition.

However, the laws of a handful of states (including Alaska, Delaware, Nevada, Rhode Island, South Dakota, and Utah) now permit what are commonly known as domestic asset protection trusts. Under the laws of these few states, a trust maker can transfer assets to an irrevocable trust and the trust maker can be a trust beneficiary, yet trust assets can be protected from the trust maker’s creditors to the extent distributions can only be made within the discretion of an independent trustee. Note that this will not work when the transfer was done to defraud or hinder a creditor or creditors. In that case, the trust will not protect the assets from those creditors.  Although Michigan does not currently have a domestic asset protection trust law, I am hopeful that we will in the near future (I happen to be on a committee working on drafting such a law).

Given this insulation, asset protection planning often involves transferring assets to one or more types of irrevocable trusts. As long as the transfer is not done to defraud creditors, the courts will typically respect the transfers and the trust assets can be protected from creditors.

Asset Protection for Trust Beneficiaries
A revocable trust provides no asset protection for the trust maker during his or her life. Upon the death of the trust maker, however, or upon the death of the first spouse to die if it is a joint trust, the trust becomes irrevocable as to the deceased trust maker’s property and can provide asset protection for the beneficiaries, with two important caveats.

First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and can be attached by that beneficiary’s creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse’s creditor(s), or they may be available to the former spouse upon divorce.  Trusts for the lifetime of the beneficiaries provide prolonged asset protection for the trust assets. Lifetime trusts also permit your financial advisor to continue to invest the trust assets as you instruct, which can help ensure that trust returns are sufficient to meet your planning objectives.

The second caveat follows logically from the first: the more rights the beneficiary has with respect to compelling trust distributions, the less asset protection the trust provides. Generally, a creditor “steps into the shoes” of the debtor and can exercise any rights of the debtor. Thus, if a beneficiary has the right to demand a distribution from a trust, so too can a creditor compel a distribution from that trust.  The more rights a beneficiary has to compel distributions from a trust, the less protection that trust provides for that beneficiary.

So, where asset protection is a significant concern, it is important that the trust maker not give the beneficiary the right to automatic distributions. A creditor will simply salivate in anticipation of each distribution. Instead, consider discretionary distributions by an independent trustee.  Consider a professional fiduciary to make distributions from an asset protection trust. Trusts that give beneficiaries no rights to compel a distribution, but rather give complete discretion to an independent trustee, provide the highest degree of asset protection.

Lastly, with divorce rates at or exceeding 50% nationally, the likelihood of divorce is quite high. By keeping assets in trust, the trust maker can ensure that the trust assets do not go to a former son-in-law or daughter-in-law, or their bloodline.

Irrevocable Life Insurance Trusts
With the exception of domestic asset protection trusts discussed above, a transfer to an irrevocable trust can protect the assets from creditors only if the trust maker is not a beneficiary of the trust. One of the most common types of irrevocable trust is the irrevocable life insurance trust, also known as a wealth replacement trust, and often referred to as an ILIT.

Under the laws of many states, creditors can access the cash value of life insurance. Reasonable minds differ on whether that is the case in Michigan (read about it here).  But even if state law protects the cash value from creditors, at death, the death proceeds of life insurance owned by you are includible in your gross estate for estate tax purposes. Insureds can avoid both of these adverse results by having an irrevocable life insurance trust own the insurance policy and also be its beneficiary. The dispositive provisions of this trust typically mirror the provisions of the trust maker’s revocable living trust or will. And while this trust is irrevocable, as with any irrevocable trust, the trust terms can grant an independent trust protector significant flexibility to modify the terms of the trust to account for unanticipated future developments.

If the trust maker is concerned about accessing the cash value of the insurance during lifetime, the trust can give the trustee the power to make loans to the trust maker during lifetime or the power to make distributions to the trust maker’s spouse during the spouse’s lifetime. Even with these provisions, the life insurance proceeds will not be included in the trust maker’s estate for estate tax purposes.

Irrevocable life insurance trusts can be individual trusts (which typically own an individual policy on the trust maker’s life) or they can be joint trusts created by a husband and wife (which typically own a survivorship policy on both lives).

Conclusion
You can protect your assets from creditors by placing them in a well-drafted trust, and you can protect your beneficiaries from claims of creditors and predators by keeping those assets in trust over the beneficiary’s lifetime. By working a caring attorney who focuses on estate planning, you can help ensure that your planning meets your unique goals and objectives.  Why not get started now?  Call us at 616-827-7596 to schedule your Peace of Mind Planning Session and put a caring plan in place for you family today!

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.