Estate Planning Definition

Estate Planning is the process of reviewing a person’s preferences for how they and their assets should be managed and who they should be managed by, creating plan that best fits their preferences, and preparing the documents that ensure that their preferences are honored.

Why it is called estate planning.

The term “estate” is a broad one but generally relates to all the property of a person.  So, estate planning is identifying all a person’s property, determining what will happen to it when they become disabled or die, and make any necessary changes to match the person’s preferences.

Basic elements of an Estate Plan

Most Michiganders would benefit from having a Will, General Durable Power of Attorney and a Medical Power of Attorney. Other planning documents may also be warranted in many circumstances.

A Will is a written document that expresses the writer’s instructions on how his property will be distributed after he dies. It can also appoint an executor, in Michigan the role is called a Personal Representative, hold property in trust, called a testamentary trust, and give other instructions the Personal Representative.

A General Durable Power of Attorney is written document where a principal appoints an agent to work on his or her behalf. A power of attorney is typically void when the principal doesn’t have legal capacity to make decisions.  When a power of attorney is durable, it survives the principal’s disability.  For estate planning purposes, they are used to avoid the need to have Guardian and or Conservator appointed by a Probate Court.

A Medical Power of Attorney is written document where a principal appoints an agent, in Michigan a Patient Advocate, to work on his or her behalf.  These powers of attorneys only become effective upon the principal becomes unable to make decisions.  For estate planning purposes, they are used to avoid the need to have Guardian and or Conservator appointed by a Probate Court.

Other Estate Planning Tools

In addition to the basic estate documents, estate planners use a variety of documents to avoid probate, protect beneficiaries, protect assets, minimize tax obligations and plan for other special needs.  Some of those tools are: Trust, Revocable Trusts, Irrevocable Trusts, Name on Death Beneficiary Designation, Lady Bird Deeds, Special Needs Trusts, Creditor Protection Trusts, Joint Ownership Agreements.

Trusts in Estate Planning are, in the simplest terms, an arrangement where the owner of property gives that property to a Trustee with instructions on how that property is to be managed including who is to benefit from the property. 

Revocable Living Trusts are a tool that allows a person to own and manage property during their lifetime and then name the next trustee and gives them instructions on how to manage the property.  Revocable trusts are used to maximize the flexibility of the original owner.  They are great for avoiding probate, managing assets for a person with cognitive decline, and managing assets for beneficiaries that would benefit from having their inheritance managed by a trustee.  The downsides are greater upfront costs and more administrative responsibilities during life.

Irrevocable Trusts are a Trust where the original owner of the property gives up all control to the trustee. They are used when a Revocable Trust stops being revocable, for tax planning purposes, and creditor protection.

Name on Death Beneficiary Designations are an arrangement offered, usually by an institution that is managing an asset or a policy, that lets that manager know whom they are to transfer the asset to after death.  Familiar users of Name on Death Beneficiary Designations are life insurance companies. Other institutions such as banks, brokerages, and retirement asset administrators also tend to offer them.  They are great for someone that wants their beneficiary to inherit the asset without constraints.  They only apply to the asset managed by the institution and don’t work well for children, others that need their assets managed for them, and for large number beneficiaries.

Ladybird Deeds are like a Name on Death Beneficiary Designation but for real estate.  A deed is recorded now that transfers real estate now but reserves the right of the transferor to control the property during his or her lifetime.  They are great for those that have a limited number of beneficiaries, that don’t need the property to be managed by a Trustee and who don’t intend to move in the foreseeable future.

Special Needs Trusts are Trusts set up with the purpose of providing protection for beneficiaries that aren’t going to be managing their own assets usually because doing so may impact their ability to receive government benefits such as Medicaid.  They are helpful to parents that want to supplement the lives of their special need child without having that child spend all of their inheritance on their care or losing their benefits.

Creditor Protection Trusts are Trusts where the beneficiary gets the benefit of the assets managed by the Trust but cannot be taken by creditors.  They are helpful where a beneficiary will not use the assets as the owner would want them to be used.  The downside is that the beneficiary has very little control of the assets to the point where the Trustee typically can refuse any distributions.

Joint Ownership is anytime more that one person or entity owns the same property.  Some examples are joint ownership such as a husband and wife, co-ownership where co-owners each own a portion, stock or membership, current owner, and future owner. For assets that can be titled, sometimes the title can spell out how the asset will pass on death.  Sometimes for titled assets and always for non-titled assets, an agreement that spells out the way the property will be handled after death is an important part of estate planning.

What happens when someone doesn't plan their estate

In Michigan, when a person becomes mentally incapacitated and has not done any estate planning, their loved ones are left without any direction about how their assets are to be managed and who should manage them.  Before anyone will be able to manage them, someone will have to petition the probate court to appoint a fiduciary to manage their affairs.  Who will manage their affairs will then be determined by the court.