DEFINITIONS OF BASIC ESTATE PLANNING TERMS
- means the fair market value of all your assets and other interests owned by you at the time of your death. Your Gross Estate includes assets that pass to beneficiaries outside of Probate, such as life insurance and brokerage and retirement accounts, even though payable directly to other persons. Other examples of Estate assets are bank accounts, stocks and bonds, real estate, household furniture and furnishings, investments, businesses, vehicles, jewelry, etc. Estate Taxes are based upon the value of your Gross Estate less estate administration expenses.
- is the process of administering your Estate. With a Will, the process involves, among other things, the hiring of a Probate attorney, the filing of a Petition in the Probate Court to admit your Will to Probate, the appointment of a Personal Representative and the granting of Letters of Authority, the marshalling and protection of assets, the filing of an Inventory, the preparation and filling of tax returns, the payment of your last expenses, debts, funeral expenses, and taxes, and finally, the distribution of the remainder of the Estate to your Heirs and/or Beneficiaries
Estate Planning Documents
- The documents most commonly used in Michigan for Estate Planning are: Wills, Trusts, Durable General Powers of Attorney for Finances, Durable Powers of Attorney for Health Care and Designations of Patient Advocate, Living Wills, HIPPA Authorizations, and Designations of Funeral Representative, along with Deeds and Assignments.
- is that portion of your Estate that passes to your heirs and beneficiaries under your Will and/or through proceedings in Probate Court.
- is that portion of your Estate that passes directly to your heirs and beneficiaries outside of the Probate process. Typical examples are (1) assets that have a beneficiary designation, such as, life insurance, annuities, and retirement accounts, (2) assets that are jointly owned and pass upon your death directly to the other joint owner, (3) assets that have "pay-on-death" or "transfer-on-death" instructions (bank and brokerage accounts, and certain deeds), and (4) property that has been placed into a Trust.
- is that portion of your Gross Estate that is over the Estate Tax Exclusion that is subject to Federal and/or State Estate Taxes. (Note that Non-Probate does not necessarily mean non-taxable.)
Estate Tax or Transfer Tax
- This is a tax on the transfer of property from you to your heirs and beneficiaries assessed by the Federal Government and some State Governments on amounts over the applicable exclusions. In 2017, the Federal Estate Tax rate was 40% of everything over the Federal Exclusion. Note that Michigan no longer has an Estate Tax.
- is that portion of your gross estate that is excluded from Federal Estate Taxes. In 2017 the Federal Exclusion was $5,490,000 ($10,980,000 for a married couple). Only that part of your Gross Estate over the Exclusion amount is subject to Federal Estate Taxes.
- is that portion of the Estate Planning process that deals with the avoidance or reduction of Estate, Gift, Capital Gains, and Income Taxes.
– In the past, if you gave an interest in property to someone during your lifetime (often called an inter vivos gift), the gift would reduce your Gross Estate and not be subject to the Federal Estate Tax. Therefore, in 1976, Congress unified the gift and estate taxes limiting your ability to circumvent the Estate Tax by gifting. There is now a lifetime Gift Tax Exclusion equal to the Estate Tax Exclusion of $5,490,000 ($10,980,000 for a married couple). However, in addition to the Lifetime Exclusion, there is still an Annual Exclusion of $14,000 per person ($28,000 for joint gifts from a married couple), to as many people as you desire.
- The last Income Tax return of the Decedent must be prepared and filed as a part of Estate Administration.
- The Trustee must file an Income Tax return each year of the Trust's existence reporting any income generated by the Trust assets. If the Settlor and the Trustee are the same person, that income is reported on the Settlor’s income tax return. After the Settlor’s death, the successor Trustee must obtain an IRS identification number for the Trust and file a separate Trust tax return.
- is a legal document (also called a Last Will and Testament) in which you give instructions to the Probate Court on how to distribute your property after your death. It becomes irrevocable when you die. In your Will you may name a Personal Representative, a Guardian and/or Conservator for your minor children, and the beneficiaries of your Estate. A Will must be admitted to Probate by the Probate Court before it becomes legally effective.
- is a Will that is written entirely in your own handwriting, and dated and signed by you. A Holographic Will does not have to be notarized or witnessed. Holographic Wills are recognized in Michigan, but have also been subject to numerous lawsuits over whether or not it is valid.
- Michigan (and some other states) provide for a "fill-in-the-blanks" Will form (see www.michigan.gov/documents/statwill_11444_7.pdf). This Will form is designed for persons with small Estates who want a Simple Will. The Will must still be Probated.
- is a Will that leaves your entire Estate outright to your spouse or children.
- is a Will that provides that after taxes and expenses are paid, the remainder of any assets still owned by you at the time of your death passes into your Trust to be handled per the terms of the Trust. In other words, the Will "catches" any assets that are still solely in your name at your death, and "pours them over" into your Trust.
- is an amendment to an existing Will which changes certain provisions of your original Will. It is generally a much less expensive way to make minor changes to a Will without having to rewrite the entire Will. A Codicil must be drafted and executed with the same formalities as a Will.
- means dying without a valid Will.
- is the State statutory scheme, in the absence of a valid Will, of distributing your assets to your legal heirs.
- means dying with a valid Will.
- A Trust is a legally binding, fiduciary, contractual relationship between the creator of the Trust (known variously as the Settlor, Grantor, Trustor, or Maker), and one or more other persons (Trustee) to hold certain designated property for the benefit of the Settlor or one or more named third persons (Beneficiaries). It is generally not a separate legal entity, except for Federal Income Tax purposes, and, therefore, cannot directly hold title to trust property. Instead, title to property is held in the name of the Trustee.
Declaration of Trust (or a Trust Agreement)
- With a few exceptions, a Trust is created by a written document. If the Trust is created and funded during the lifetime of the Settlor, it is known as a Living Trust or Inter Vivos Trust. If the trust is created in a Will, it is known as a Testamentary Trust. A Trust may be Revocable or Irrevocable, depending on the terms of the Trust and its purposes. Usually a Revocable Trust becomes Irrevocable upon the death of the Settlor.
Funding the Trust
- As Settlor, you must convey the property you want to be held and administered by your Trust to your Trustee, either during your life or through your Will. Remember that any property not conveyed to the Trustee before your death will be subject to Probate and administered in accordance with your Will or the laws of Intestate Succession.
- means that the Trust Agreement can be changed or terminated by you at any time for any reason during your lifetime.
- means that the Trust cannot be changed or terminated by you. Note that a Revocable Trust becomes Irrevocable upon your death.
- is the judicial process in which a testamentary document is established to be a valid Will (admitted to Probate), and your Estate is administered.
- is the Court with the power to declare Wills valid or invalid, to appoint a Personal Representative, issue Letters of Authority, and to oversee the administration of Estates. Probate Court is also the Court with the power to appoint Guardians and Conservators during your lifetime if you become incapacitated.
- is the person designated in your Will and appointed by the Probate Court who has the authority and duty to gather and protect your assets, pay your debts and other last expenses, file your tax returns, pay your taxes, and distribute the remainder of your Estate to your Beneficiaries.
- is a person appointed by the Probate Court who has the legal authority and duty to care for another person.
- is a person appointed by the Probate Court who has the legal authority and duty to manage the property of another person.
Power of Attorney
- is a written agreement wherein one person (the Principal) appoints another person (the Agent or Attorney in Fact) to transact business on behalf of the Principal and do those things that the Principal could do if he/she were there in person. An ordinary Power of Attorney terminates automatically upon the disability of the Principal. A Durable Power of Attorney continues in effect during the Principal's disability or incapacity, but both kinds of Powers of Attorney automatically terminate upon the death of the Principal.
Power of Attorney for Health Care
- (Also called a Patient Advocate Designation in Michigan) is a document that appoints an agent for you (here called a Patient Advocate) who will have the power to make medical and mental health decisions on your behalf if you are unable to make those decisions for yourself.
– The name of this document (also called an "Advance Directive for Health Care" or a "Directive to Physicians" in some states) is a misnomer. It is not a Will. It is a written declaration made by you that instructs your Patient Advocate, family, physicians, and others regarding the medical care and treatment you are to receive in the event you cannot make your own decisions, including, but not limited to, withholding or withdrawing certain health care treatments and CPR in the face of certain death. Although recognized as a binding legal document in some states, Michigan is not one of those states. Even though not legally binding in Michigan, I nevertheless recommend executing one so that your Patient Advocate and family have express and clear written instructions in the event you cannot make your own decisions about your care and treatment.
Lady Bird Deed
- This is Michigan's version of a Transfer-on-Death Deed that many other states have adopted by statute. It is sanctioned by the Michigan Land Title Standards, but is not a statutory creation. In effect, if properly drafted, this deed transfers title to real property, such as, your home, directly to a named beneficiary or beneficiaries immediately upon your death, thus avoiding probate. The primary benefit of a Lady Bird Deed is that the Grantor reserves a Power of Appointment over the property that allows the Grantor to keep complete control over the property, including the right to sell or otherwise dispose of the property during their lifetime, and also gives no legal rights to the property to the beneficiary or their creditors prior to your death.