Probate and Estate Planning Update


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At the State Bar of Michigan's Upper Michigan Legal Institute 2014, attorney Marlaine Teahan spoke on various Probate and Estate Planning updates, including durable powers of attorney and the importance of including digital assets in estate planning.

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Probate and Estate Planning Update

  2. 2. Topics to be Discussed Durable Powers of Attorney Trust Drafting Tips Probate Court Developments Digital Assets & Estate Planning
  3. 3. 1. Durable Powers of Attorney  Focus is financial DPOAs  Highlights of the new DPOA law New execution formalities Acknowledgement Form by Agent Default rules – Duties/Prohibitions
  4. 4. Durable Power of Attorney – Financial  In a power of attorney, a principal designates an agent (trusted spouse, child, parent, friend, or entity) to make financial decisions.  In a DPOA, the principal’s subsequent disability or incapacity does not end the agent’s authority to act.  Different types:  General  Limited  Effective:  Immediately (much more common)  Upon disability (somewhat problematic)  Usually avoids need for Conservatorship.
  5. 5. What can an Agent do?  Conduct banking  Buy/sell property  Conduct/manage a business  Prepare Tax returns  Apply for governmental benefits  Change beneficiary designations  Make gifts  Transfer property to a Trust  Plan for Medicaid  Anything principal could do personally (unless DPOA is limited in scope)
  6. 6. New DPOA Legislation  MCL 700.5501, Public Act 141 of 2012  Effective May 22, 2012 -- misleading as the new law impacts DPOAs that are executed on or after October 1, 2012  Purpose – reduce financial exploitation of the elderly; not an effort to codify all of agency law  Financial institutions take different approaches but seem to be aware of the new law.
  7. 7. New Execution Formalities – MCL 700.5501(2) A DPOA executed under this section shall be:  Dated;  Signed voluntarily and by the principal or a notary public on the principal’s behalf (MCL 55.293); and  Executed in one or both of the following ways:  2 witnesses, neither of whom is the agent  Acknowledged by the principal before a notary public
  8. 8. Responsibilities – MCL 700.5501(3) An agent designated and acting under a DPOA has the authority, rights, responsibilities, and limitations as provided by law including, but not limited to the following actions which an Agent shall do:  Act as fiduciary, except as provided in DPOA  Follow principal’s instructions  Keep principal informed of actions, on request  Upon request, provide accounting to principal, conservator or guardian, or pursuant to judicial order.  Maintain records of actions
  9. 9. Limitations – MCL 700.5501(3) The Agent shall not do the following unless provided for in the DPOA or as provided by court order:  Gift all or any part of the principal's assets.  Create joint tenancies between the principal and the agent (while acting as agent).  Receive reasonable compensation for the agent’s services.
  10. 10. Acknowledgement by Agent – MCL 700.5501(4-6)  Before acting as agent under a DPOA, agent must execute an Acknowledgement. Section 5501(4).  Acknowledgements to substantially follow format in Section 5501(4)  Consider having it notarized  Agent’s authority, responsibilities and potential liability to principal remain unaffected even if agent refuses to execute an acknowledgement. Section 5501(6)
  11. 11. Agent Liability and Exoneration  Agent may be liable for any damage/loss to principal; other remedies also available. Section 5501(3)(g)  Principal may exonerate agent of liability for breach of fiduciary duty EXCEPT [Section 5501(3)(g)]:  for actions committed in bad faith  for actions committed reckless indifference, or  if clause is inserted by an abuse by the agent of a fiduciary or confidential relationship to the principal.  Exoneration of an agent may be appropriate between spouses serving as each other’s agent.
  12. 12. Third Parties and Agent Acknowledgements  Third party – no liability to principal for requiring an acknowledgement before accepting agent’s authority under the DPOA.  Third party – no liability for complying in good faith with instructions from an agent even if the agent has not previously executed an acknowledgement. Section 5501(5).
  13. 13. The new law DOES NOT affect DPOAs that are:  Executed before October 1, 2012  Parental Delegations - EPIC Section 5103;  Patient advocate designations  Coupled with an interest in the subject matter of the power.  In or part of a loan agreement, security agreement, pledge agreement, escrow agreement, or other similar transaction.  In connection with a transaction with a joint venture, limited liability company, partnership, limited partnership, limited liability partnership, corporation, condominium, condominium association, condominium trust, or similar entity, including, without limitation, a voting agreement, voting trust, joint venture agreement, royalty agreement, license agreement, proxy, shareholder's agreement, operating agreement, partnership agreement, management agreement, subscription agreement, certification of incorporation, bylaws, or other agreement that primarily relates to such an entity.  Given primarily for a business or a commercial purpose.  Created on a form prescribed by a government or a governmental subdivision, agency, or instrumentality for a governmental purpose.
  14. 14. MTC agent provisions - no impact by new law DPOA law does not change agent sections in the MTC:  MCL 700.7303 (representation rules-agents)  MCL 700.7405 (enforcement of charitable trust by agent if in DPOA)  MCL 700.7411 (receipt by agent of notice of modification or termination of noncharitable trust if settlor is an incapacitated individual)  MCL 700.7602 (to extent expressly authorized by trust or DPOA, an agent may exercise settlor’s powers to revoke, amend or distribute trust property)
  15. 15. Issues with financial institutions  Are there problems with banks requiring acknowledgement pre-Oct. 1, 2012?  DPOAs often don’t include acknowledgement  Banks providing blank forms to agent  Banks may require notarization  Banks not happy when agent brings in DPOA! (Advise the principal to bring DPOA to bank)  Title companies may require notarization of acknowledgement for use in sale of real property  Education needed – be patient
  16. 16. Recommendations  Update your DPOA Form. See Exhibit.  Take care with DPOAs in a Medicaid- planning setting. See Exhibit.  Advise clients (principals) when to vary from default rules and to bring DPOAs to banks.  Attach Agent Acknowledgements and use “Prepared for the Principal by:”  Educate agents how to act properly.  Consider exoneration clauses (esp. for spouse) and provisions related to trusts
  17. 17. Other resources  Drafting for Changes in the Durable Power of Attorney Statute, Marguerite Munson Lentz, ICLE 22nd Annual Drafting Estate Planning Documents, January 2013  The Top Ten “Super Powers” in Your Durable Power of Attorney, Michele C. Marquardt, ICLE 53rd Annual Probate & Estate Planning Institute
  18. 18. 2. Trust Drafting Tips  Comply with the requirements for creating a trust. MCL 700.7402  Is your client's mental capacity sufficient?  The capacity required to create, amend, revoke, or add property to a revocable trust, or to direct the actions of the trustee of a revocable trust, is the same as that required to make a will. MCL 700.7601 and MCL 700.2501.
  19. 19. Trust Drafting Tips – Learn 7105(2)  Learn the non-modifiable provisions of the MTC  16 provisions in EPIC Section 7105(2) cannot be modified by the terms of a trust  Other than these 16 provisions, terms of a trust prevail over any provision of MTC
  20. 20. MTC 7105(2) - highlights  Follow requirements of 7401 for creating trust  Trustee must follow 7801, acting in good faith and for benefit of trust beneficiaries  Court has many powers that cannot be changed by terms of trust (to terminate, modify, make trustee account or provide information, take action and exercise jurisdiction.  Periods of limitations regarding commencing judicial action  No contest clause ineffective if probable cause
  21. 21. Adopt execution formalities  Drafters should be consistent in execution formalities  Client, witnesses and attorneys present at signing  Eliminate children and others  Identify each document and its purpose  Read aloud the self-proving language prior to signing  Provide trust funding letter  Send follow up letter on funding  Memo to file after signing  Letter terminating client relationship
  22. 22. Federal Estate, Gift & GST Taxes YEAR ESTATE & GIFT TAX EXEMPTION TOP ESTATE, GIFT & GST TAX RATE LIFETIME GIFT TAX EXEMPTION* BASIS OF INHERITED ASSETS 2011 (begin portability) $5 million 35% $5 million Fair market value 2012 (begin COLA) $5.12 million 35% $5.12 million Fair market value 2013** $5.25 million 40% $5.25 million Fair market value 2014** $5.34 million 40% $5.34 million Fair market value 2015 and beyond Increases each year by a COLA 40% Increases each year by a COLA Fair market value *Annual gift tax exemption for 2014 is $14,000 (COLA adjusted since 1997) **American Taxpayer Relief of Act of 2012 made permanent the 40% rate and the $5 million as
  23. 23. Income tax planning  May be more important than estate tax planning  Consider how the estate plan results in a step-up in basis after death of BOTH spouses  Review old plans – marketing issue, malpractice issue?  Funding formulas – may not work as intended; and at 2nd death, no step up in assets in credit shelter of 1st to die  Collapse old trusts of 1st to die? (Using trust terms or MTC 7416 -- go to court)  Review joint trusts – will all assets receive step up at 2nd death? (See John Martin, Lou Harrison materials)
  24. 24. Portability • Portability – What is it?  An irrevocable election to preserve the deceased spousal unused exemption of the 1st spouse to die that makes it “portable” to the estate of the 2nd spouse to die.  Began in 2011 and was extended indefinitely by the American Taxpayer Relief Act of 2012. • How do you elect portability?  On a timely filed Form 706 return for the 1st spouse (w/extensions).  Who elects it? – Personal Representative of 1st spouse.  Form 706 is streamlined – estimates can be used for some assets. Forms & Instructions for 706 and 709 were significantly modified.  New temporary treasury regulations for portability issued.
  25. 25. Pros & Cons of Portability of DSUE  What are some of the benefits?  Increase exemption for 2nd spouse to die – save on estate taxes!  2d spouse can make gifts in life using unused exemption of 1st spouse  Extensive estate planning not needed for some clients  Easy to get step up in basis if all assets owned by 2nd spouse at death  Allows for post-mortem planning  What are a few of the problems or pitfalls?  Second marriage – fight over who pays for tax return or if should even be done  Remarriage is an issue – only available to claim for last deceased spouse  Estate and gift tax is portable; GST tax is not portable
  26. 26. Draft with flexibility in mind  Provide terms allowing trustee to terminate non-economic trust  Provide terms allowing trustee to terminate trust to accomplish tax- related goals  In trust administration where terms not flexible, consider invoking court’s jurisdiction
  27. 27. Include statement of intent  What is the purpose of trust? Spell it out.  Language of intent will help: Trustee in administration Court determine intent when exercising jurisdiction re: terminating, reforming or modifying trust
  28. 28. Learn about decanting  Trustee’s ability to “pour” trust assets from one trust to another.  Helpful to fix administrative terms of trust  Helpful for special needs trusts  Possible under MCL 556.112(c) and MTC 7820a  Materials – Jim Spica’s Chapter 7 of Trust Administration Under the MTC (ICLE); Jennifer Remondino – ICLE 54th Probate Annual Institute
  29. 29. New legislation- IN THE WORKS  MI Domestic Asset Protection Trusts  Directed Trusts  Tenancy by the Entireties property in joint trusts  Uniform Ladybird Deed Legislation
  30. 30. More new legislative projects  Amendment to MCL 211.27a(7)(s)  Currently provides no uncapping if conveyance to 1st degree of consanguinity – blood or affinity on or after December 31, 2013  Possible technical amendment (Probate Council)  HB 5552 – passed House June 5, 2014 with ~80 sponsors  Goes beyond technical changes  Grandchildren, Grandparents (and steps) included  Parts are effective December 31, 2014 and after
  31. 31. Trust Tips – Fund the Trust  Avoid deeds in the drawer  Provide instructions on funding to clients List Letter  Assist with funding as needed  Follow up on funding  Review funding when updating EP
  32. 32. 3. Probate Court Developments  Inventory Fee Calculation  Project in the works – increased filing fee, no inventory fee  Estate Recovery Litigation Grosskopf (2013) Salemka-Shire (2012)  Foreign Guardianships –new forms/rules  New Probate Court Forms – petition/order for approval and sale of real estate
  33. 33. Probate Court Developments  DNR changes – EPIC and DNR Act amended (eff. 2-5-14) – guardian can consent to DNR for ward under certain circumstances  Foreign Language Interpreters in court beefed up. See MCR 1.111  Peace of Mind Registry – central online registry for health care directives. MCL 333.10301  Probate Appeals Project
  34. 34. Inventory Fee Calculation  Public Act 596 of 2012 amended MCL 600.871 (Fees in decedent’s estates); effective March 28, 2013.  Overturns Wolfe-Haddad v Oakland County, 272 Mich App 323, 725 NW2d 80 (2006).  For deaths on 3-28-13 and after, the inventory value of an estate's real property encumbered by/used as security for indebtedness, until 12-31- 17, is the date of death value less the amount of the indebtedness.  Negative values are not permitted on Inventory; lowest value is $0.00.  Calculate each piece of real estate separately.  No deductions for liens on personal property.
  35. 35. 4. What are digital assets?  3 Main types:  Online accounts (Facebook, LinkedIn, Twitter, PayPal, eBay, Pinterest, iTunes, Email accounts, blogs)  Files stored on client’s computer, phone, DVDs, CDs, in the Cloud, IMs, saved emails  Intellectual property rights client may have in any digital assets  Includes client created digital assets and purchased assets  In future – digital estate planning documents?
  36. 36. Prevalence of Social Media  World's largest professional network on the internet: 277 million members (up from 200 million last year) in more than 200 countries and territories  Professionals are signing up at a rate of approximately two new members per second (LinkedIn, as of Dec 31, 2012)  #3 Most searched platform on the Internet (comScore, 2011)  4 billion views a day vs. last year’s 600+ Million mobile views a day  6 billion hours of video watched per month!  100 hours of video uploaded per minute! LinkedIn YouTube
  37. 37. Prevalence of Social Media  #1 Most visited website in the world (Alexa, Jan 2013)  1.28 Billion users (up from 1 Billion last year)  Average time spent per visit on Facebook: 28 minutes  Average time spent on websites: 58 seconds  Twitter is now processing half a billion tweets a day!  • 32% of all Internet users use Twitter (Marketing Land, Dec 2012)  • 65% of Fortune Global 100 companies actively use Twitter (Twitter CEO, Dick Costolo, Oct 2011) Facebook Twitter
  38. 38. Importance to estate planning  Prevalence of social media and digital assets  Almost all clients own this type of asset  Some clients may prefer they are never accessed  Do you address it in your documents?  If not, what will happen to your client’s digital assets?  Advance planning may be helpful  Importance will only increase in the future
  39. 39. Are there laws on digital assets?  Yes in increasing number of states  Michigan pending legislation –  SB 293, amends PR powers, MCL 700.3715:  HB 5366, 5367, 5368, 5369, 5370 (tie barred; introduced 2-26-14)  Probate and Estate Planning Council committee  Following Uniform Law model  May substitute for HB 5366-5370  Uniform Law Commission, drafting stages – Fiduciary Access to Digital Assets – final reading July, 2014
  40. 40. Problems with Digital Assets  Permanent nature? Future – no delete button.  What type of asset is it? License to use or personal property? The answer to this question varies from asset to asset and sometimes even within assets.  Terms of service (TOS) control; contracts with users
  41. 41. Powers and duties of fiduciary  Current Michigan law inadequate; see powers of PR (MCL 700.3715) and Trustee (MCL 700.7817);  Terms of governing instruments will control; however, Terms of service contracts may still limit access and control.
  42. 42. Estate Planning Update Idea Digital Assets. My _____[type of fiduciary] shall have the power to access, use and control my digital devices, including but not limited to, desktops, laptops, tablets, peripherals, storage devices, mobile telephones, smartphones, and any similar digital device which currently exists or may exist as technology develops or such comparable items, as technology develops, for the purpose of accessing, modifying, deleting, controlling or transferring my digital assets, and the power to access, modify, delete, control and transfer my digital assets, including but not limited to my emails received, email accounts, digital music, digital photographs, digital videos, software licenses, social network accounts, file sharing accounts, financial accounts, domain registrations, DNS service accounts, web-hosting accounts, tax preparation service accounts, financial accounts, retirement accounts, online stores, affiliate programs, other online accounts and similar digital assets which currently exist or may exist as technology develops or such comparable assets as technology develops. My _____[type of fiduciary] is also entitled to acquire and use my logins and passwords for all digital assets; my password list is located at ____________. Modified slightly from a format proposed by attorney Sue E. Fabian and submitted to the Elder Law
  43. 43. Recommendations with client  Discuss digital assets with clients  What are they?  What does client want done with them?  Who should have control at disability/at death?  Have clients create a password-protected inventory of digital assets and a list of Site name/URLs/user name/password/security questions that family or trusted fiduciary can access  Have clients update estate planning documents to name digital asset fiduciaries (agent, conservator, PR, trustee)  For PR/Trustee Client - Review Mining a Decedent’s Computer for Digital Assets, exhibit Michele C. Marquardt.
  44. 44. Recommendations in your practice  Develop language for various estate planning documents  Watch for new laws in this area  Keep up to date on how various providers are dealing with access to digital assets at death; modify forms accordingly
  45. 45. QUESTIONS? © 2014, Fraser Trebilcock Davis & Dunlap, P.C. Fraser Trebilcock Davis & Dunlap, P.C. 124 W. Allegan Street, Suite 1000 Lansing, Michigan 48933 Phone: (517) 377-0869 Fax: (517) 482-0887 Marlaine C. Teahan, Chair Trusts and Estates Department 517-377-0869 Additional offices located in: Detroit and Grand Rapids