DIY Estate Planning – Another Cautionary Tale

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“I don’t need a lawyer. I don’t have an estate, just have a house and some bank accounts. My family can help me out, and look, here’s a form I found on the internet I can use. What can go wrong?”

Yet time and again, what appears to be a simple and effective way to avoid some legal fees ends up creating a legal quagmire costing tens of thousand of dollars to remedy. Do-it-yourselfers mostly turn to family members or the internet for help. A recent case out of Macomb County Probate Court gives us another example of just how “well” that can turn out:

In mid-2016, Martin met with several members of his family for the purpose of preparing his last will and testament. The meeting was attended by Martin’s brother, John, John’s son Paul, John’s daughter Elise, and Martin’s niece, Theresa.

John downloaded and printed a will form off the internet, and Elise completed the fill-in-the-blank form according to Martin’s instructions. The form provided that all of Martin’s assets were to be distributed equally among Martin’s 3 siblings. The family members also discussed the status of Martin’s bank accounts. After completing the form, the group went to Comerica Bank so Martin could sign the will before a notary. While there, Martin and Theresa also signed new signature cards for each of Martin’s 6 accounts at the bank to give Theresa access to the accounts as the family explained to Martin. Unfortunately, Martin died about 4 months later.

As you may have guessed, a dispute arose after Martin’s death over ownership of the Comerica bank accounts, a dispute which ended up in the Macomb County Probate Court.

At trial, Theresa asserted the funds belonged to her as the surviving joint owner. According to Comerica, signing the new cards by Martin and Theresa established them as joint owners of all 6 accounts (containing about $680,000). Martin’s niece, Elise, now personal representative of Martin’s estate, countered that the funds belonged to the estate for distribution to his siblings per the terms of Martin’s will. Martin had discussed this with the family and that certainly was his understanding and intention when he added Theresa onto the accounts. Following a bench trial, the probate judge sided with Elise that the money belonged to Martin’s estate.

Not satisfied with the probate court loss Theresa appealed to the Michigan Court of Appeals, which again sided with Elise and Martin’s estate. The court opined that although creation of the accounts in Martin and Theresa’s names was prima facia evidence of Martin’s intention to vest title of the accounts in Theresa’s name upon his death, Elise was able to overcome Theresa’s prima facia case that Theresa was entitled to survivor rights to Martin’s accounts. The court noted that Martin did not seek independent counsel and was advised only by his family. Further, the evidence at the trial showed Martin discussed creating “convenience accounts” with his family members and may have mistakenly believed that by adding Theresa as a co-owner, she was only going to be a signer on the accounts, which was consistent with what Martin and his family discussed.

Nothing is simple and straightforward when it comes to estate planning or any other legal matter. You may think you are doing one thing, but the result is something completely unexpected, which can lead to disastrous, and costly, results. (Imagine what it cost in legal fees to settle Martin’s mess.) You should look to family members for a referral, not legal advice. Yes, attorneys cost money, but you are paying for their expertise and advice, which can save you or your family much more in the long run.

Engage knowledgeable legal counsel whatever your problem. Work with an attorney you trust. Don’t be afraid to spend some money up front for good legal advice to save a lot more money later on.

The case is In re Estate of Martin Langer. You can read the full opinion of the Michigan Court of Appeals here.

UTMA Account Seized in Bankruptcy – What Can We Learn?

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Uniform Transfers to Minors Act (UTMA) accounts are a popular tool for gifting assets to minors. They can easily be set up without the services of an attorney or accountant. A contribution to an UTMA account is considered a completed gift for tax purposes, but the minor beneficiary is prohibited from accessing the funds in the account until their 18th (or even 21st) birthday.

The account is managed and controlled by a custodian, who can be the minor beneficiary’s parent, guardian, or some other responsible adult. Once an UTMA account is created, any funds or other property transferred to the account cannot be returned to the person making the gift. When the minor reaches age 18 or 21, depending upon the state in which the account was created, he is entitled to access the funds in the account.

However, UTMA accounts are not without their drawbacks. Like other planning tools, unforseen circumstances can arise that defeat the good intentions of the gift maker.

One such example is illustrated in a recent bankruptcy case out of Rhode Island, In re Marcus Soori-Arachi. In 1998, when Marcus was 15, his father purchased an UTMA annuity for him with Fidelity in Nebraska. Under Nebraska law, the UTMA annuity should have terminated when Marcus turned 19 and the proceeds distributed to him. However, Marcus’s 19th birthday came and went and the account went undisturbed for another 10 years.

In 2017 Marcus, then married and living in Rhode Island, filed a petition for bankruptcy under Chapter 7 of the bankruptcy code. As required by bankruptcy law, the trustee appointed to administer Marcus’s case began the process of gathering and liquidating all of Marcus’s non-exempt assets.

The case trustee notified Fidelity that the UTMA annuity (now worth $105,000) should be turned over to the trustee. Marcus objected in the bankruptcy court, arguing that the UTMA annuity was not part of his bankruptcy estate and could not be liquidated by the trustee. (Marcus did claim a basic exemption protecting about $6,500 from the trustee.)

The bankruptcy court disagreed, finding that the UTMA annuity belonged to Marcus when he turned 19. The court ruled that it did not matter that the annuity was still in the account as of the date Marcus filed bankruptcy. Under Nebraska’s UTMA law, the custodial nature of the account terminated on his 19th birthday. Marcus gained an immediate right of ownership, possession, and control of the annuity, regardless of whether he actually exercised that right. The UTMA annuity could not be sheltered from his creditors in bankruptcy.

While this case interpreted Nebraska law, a bankruptcy court interpreting Michigan law would reach the same conclusion. While Michigan law protects the proceeds of an annuity from the claims of the creditors of a beneficiary, it does not protect the annuity proceeds from the claims of the creditors of the annuity owner, which Marcus became at age 19.

The facts of this case are unusual in that the annuity remained untouched in the UTMA for so long after Marcus reached age 19. When Marcus turned 19, he more than likely didn’t have any debts. But as time went on, he acquired a debt burden that grew to the point that he had to seek bankruptcy court protection, losing about $99,000 in the process.

Still, the case serves as an important reminder for those of you planning your estates. How well do you really know your children or other beneficiaries? Do they have excessive debt? Have they filed bankruptcy in the past? Are they being sued, or is a lawsuit threatened? What about a divorce – is a child’s marriage on the rocks? Knowing the answers to questions like these can help you structure or revise your estate plan, including beneficiary designations, to protect an inheritance from being lost to a beneficiary’s creditors.

The bankruptcy court’s opinion can be accessed here.

Middle Aged Man Dies Leaving Substantial IRA With No Beneficiary – What Happens Next?

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A client, “Susan,” contacted me recently to help settle the affairs of her recently deceased son, “Frank.” Frank owned a traditional IRA that has a fairly substantial balance. Unfortunately, Frank did not list a beneficiary for the account. Shelly is Frank’s only living heir. Frank was 57 when he died in 2018. What are Susan’s options with regard to Frank’s IRA?

Because Frank’s IRA had no identifiable beneficiary, by default the IRA is payable to his estate. And since Frank died before age 70½, a special 5-year rule applies to the distribution of his IRA. In general, the entire balance of Frank’s IRA must be distributed by December 31 of the year containing the fifth anniversary of Frank’s death. In this case, the entire balance of Frank’s IRA must be distributed by December 31, 2023.

An estate does not have a life expectancy, so distributions cannot be “stretched” beyond the 5 years. However, the entire account balance does not have to be taken in one distribution, it can be broken up over multiple years to reduce the taxes payable as long as the entire account balance is distributed before the end of the fifth year following the year of the account owner’s death.

(Now, had Frank died after April 1 following the year he attained the age of 70½, Susan would have been able to stretch distributions from Frank’s IRA to the estate over his remaining life expectancy, avoiding the special 5-year distribution rule.)

If the entire account balance is not withdrawn by the end of the fifth year following Frank’s death, then the IRS could impose a penalty equal to 50% of the balance remaining. The penalty could be waived by the IRS if it finds there was a reasonable basis for the error.

Failing to designate a beneficiary of an IRA (or other retirement account for that matter) is one of the costliest mistakes you can make. Two problems are created: First, because distributions cannot be “stretched” beyond 5 years, there is little tax-deferred growth that can be achieved in such a short period of time. Second, since distributions from the account must be accelerated, the larger distributions create larger income tax bills.

It always pays to double check beneficiary designations on your retirement accounts (and life insurance, too). I recommend at least annually. Make sure you have beneficiaries named on all of your accounts, and to make sure those beneficiary designations are up to date. Has a beneficiary died, or is there some other reason to replace a beneficiary? If so, update your beneficiary designations immediately.

Do you have an issue concerning distributions from a retirement account, or planning for distributions from a retirement account? If so, call me, I can help.

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The Law of Unintended Consequences – and Failure to Plan.

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According to a recent story in the Boston Globe, Marcelle Harrison’s family has lived in a three-story home in Cambridge, Massachusetts for almost 40 years, during which time four generations of her family have lived. She and her family (two generations worth) may have to vacate the home because her stepfather died intestate (without a will) in 2011 after the passing of her mother two years earlier, meaning that legally her stepfather’s blood relatives back in his native country of Barbados have a stronger legal claim to her childhood home than she.

The home was purchased by her mother and step-father in 1980 for $23,000. It is now worth over $1 million. When her mother died in 2009, her step-father continued as the sole owner of the property. When he died in 2011, without naming a beneficiary for the property, Massachusetts law allows his blood relatives to claim the house over Marcelle, a stepchild.

According to Marcelle and those close to the family, her stepfather, Noel Aimes, always wanted the house to stay in the family, and in the 1990s he built additions to accommodate his growing family.

Marcelle received the news in a letter delivered to her shortly before the end of last year. “Since you were not an heir-at-law, your appointment is in jeopardy of being set aside,” wrote the state public administrator. It appears that Mr. Aimes’s relatives in Barbados plan to sell the property as soon as the estate is settled. Marcelle is terrified and unsure where her family will live if forced out of the Cambridge property.

This story illustrates the importance of having a will. Without one, it doesn’t matter what you desire to happen with your assets. The laws of the state in which you reside will dictate the disposition of your assets. This is especially relevant in second-marriage situations. Marcelle’s stepfather may have wanted the property to pass on to her and her family, but without a will that said so, Massachusetts laws dictates it go to his distant relatives in Barbados. A sad outcome to be sure.

All it takes is a bit of planning to avoid disaster. If you don’t have an estate plan in place, hopefully what’s happening to Marcelle will motivate you to take action!

You can read the entire article here.

If your estate planning house isn’t in order, give me a call, I can help. While you won’t have to live with the oftentimes disastrous consequences of dying without an estate plan, your family will.

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Should Have Put A Ring On It.

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Pellie was in a long term relationship with Tony that lasted over 40 years. They never married. Pellie became Tony’s caretaker when his health began to fail. Tony died in 2015. Pellie had received about $300,000 in assets from Tony up to and after his death. But Pellie believed she was entitled to much, much more. After Tony’s death, Pellie filed a claim against Tony’s trust for over $2,700,000 based upon Tony’s purported promises to take care of her. The trustee disallowed the claim. Pellie sued the trust in probate court, claiming that she and Tony had an agreement that he would take care of her after his death.

At the trial, the evidence showed that over the course of their relationship, Tony had often told here that he wanted her to take care of him and in return he would take care of her needs. Tony had verbally told Pellie that she would share in his estate. Tony’s estate plan did provide some stock and other assets to Pellie, including four bank accounts owned jointly with Pellie.

The county probate court dismissed Pellie’s lawsuit. The probate court reasoned that Tony’s promises were, in effect, a contract to make a will, and since it wasn’t in writing, the “agreement” wasn’t enforceable. Pellie appealed to the Michigan Court of Appeals, and the Court of Appeals affirmed the probate court decision.

Under Michigan law, a contract to make a will or devise, not to revoke a will or devise, or to die without a will (intestate) may only be established by either: a) provisions in a will stating the material terms of the contract; b) an express reference in a will to such a contract with extrinsic evidence proving the terms of the contract; or c) a writing signed by the deceased establishing the contract.

A party seeking to enforce such a contract must prove an actual express agreement and not merely a statement of intentions. Since Pellie could not produce a writing evidencing Tony’s agreement to provide her financial security after his death or to compensate her for caretaking services, she could not prevail.

It is pretty clear from the evidence that Tony made promises of care and support to Pellie. We don’t know why Tony didn’t adjust his estate plan to fulfill those promises; Nor do we know to whom Tony left the bulk of his assets.

Their’s was a 40 year relationship. However, without the benefit of marriage or a some type of written agreement, Pellie didn’t have a leg to stand on. Purely moral obligations are not enforceable. Had they been married, Pellie may have had claims to Tony’s assets.

When it comes to the distribution of a deceased person’s assets, oral promises or intentions aren’t worth the paper they’re written on. The moral of this story is that if you are in a relationship with another — without the benefit of marriage — you need to make sure to get any promises of financial support or security from your partner in writing.

The case is Norton-Cantrell v Anthony Bzura Trust Agreement.

You can read the Court of Appeals decision here.

Saving for College Off the FAFSA Radar

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Many of my clients have a desire to incorporate a college savings component into their financial plans to help with their grandchildren’s college education expenses. In many cases, a 529 college savings account has already been set up for the grandchild by the parents, and the client would like to contribute to that account. Simple yes, but there is a better way.

First, any person who wants to save for a college education should consider using a 529 college savings plan. “529″ is the section of the Internal Revenue Code that makes tax-favored college savings accounts possible. Under section 529, funds contributed to a 529 account grow on a tax-deferred basis, and may be withdrawn tax-free if the funds are used to pay for qualified education expenses in the year the expenses are incurred.  “Qualified education expenses” include tuition, fees, books, supplies, and equipment required for the enrollment or attendance of the account beneficiary at an eligible educational institution (most colleges and universities, public or private).  A section 529 account may be set up by anyone who desires to save money for college expenses, including a grandparent for a grandchild.

A grandparent who sets up a 529 account for a grandchild gets the tax-advantaged savings, but there’s another benefit for the grandchild: Funds in a 529 account established by a grandparent will not affect the grandchild’s eligibility for student loans, grants, work/study programs, and even scholarships.

The vast majority of college bound students must fill out the Free Application for Federal Student Aid (“FAFSA”). The FAFSA identifies those assets that will be taken into account to determine a student’s financial aid eligibility. Financial aid eligibility is typically determined from the student and parents’ income and assets disclosed on the FAFSA (including 529 accounts established by the parent or student). Money contributed by a grandparent to a 529 account in the student’s name or in the parent’s name will be counted against the grandchild on the FAFSA.  Thus, the grandchild is penalized for the grandparent’s generosity.

However, the student’s FAFSA does not consider the assets of a grandparent. So, a grandparent may establish a 529 account in their name for a grandchild and the account is not reported on the grandchild’s FAFSA. The grandparent is able to put money away for a grandchild’s college education, without penalizing the grandchild.   In addition, the grandparent still controls the funds in the account. If the grandchild decides to not go to college or she receives substantial scholarship awards, the grandparent may substitute out one grandchild for another as the account beneficiary.

Each state must set up its own section 529 program, and nearly all the states have done so. But you can establish a 529 account in any state, not just the state of your residence. These programs are state-specific, and they have differing contribution limits, investment options, and costs. Some states (including Michigan) offer income tax benefits for their residents who use the Michigan 529 plan. So it pays to research carefully before opening a 529 account.

Are you thinking about setting aside money for your child or grandchild’s college education? Give me a call, I can help.

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The Pitfalls of DIY Estate Planning, Part ?

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According to an article at news.com.au, a woman from Queensland, Australia died of cancer in 2015. In an apparent effort to save money on her estate plan, she chose to use a cheap do-it-yourself will kit. The four page document had numerous hand-written attachments and contained multiple changes. It is likely to end up costing her estate tens of thousands of dollars in legal fees and costs to sift through the numerous errors and ambiguities contained in the document.

“‘No one should attempt their own will. It is very dangerous,’’’ barrister Caite Brewer, who represented the named executors of the will. “‘This case is a good example of someone trying to save a few hundred dollars, doing their own will, which ends up costing their estate potentially twenty thousand dollars. They should see a solicitor who specialises in estate planning.’”

Couldn’t have said it better myself. Will kits are advertised as the low cost estate planning alternative to using an attorney. The will-kit publishers advertise that you will end up with a will that is legal, but never advertise that it will be right. And that’s what you pay an attorney to do, to make sure the will is right – that it accurately expresses your intentions concerning the disposition of your estate. Yes, it costs more up front, but the extra money spent to make sure your estate plan is drafted correctly will save thousands in the long run.

Read the entire article here.

Struggling with your own estate planning? Contact me, I can help.

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Three Things Your College Bound Child Needs to Leave Behind

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Do you have a child getting ready to head off to college?  Whether your child goes away to school or commutes from home, don’t let them start the school year without leaving behind these three documents:

Medical Power of Attorney.  If your child is over the age of 18, you no longer have the right to speak to their physicians, or make medical decisions for them.  If your child has an accident or becomes seriously ill at school and is hospitalized, medical personnel will not discuss your child’s medical condition or treatment with you without authorization. Have your child sign a medical power of attorney. Commonly referred to as a “patient advocate designation,” your child can appoint you to speak with doctors and make medical treatment decisions for them in the event they cannot do so themselves.

HIPAA Authorization.  Have your child sign a separate HIPAA authorization.   A medical power of attorney will only help you and your child if your child is incapacitated AND in a hospital or similar facility.  There may be situations where your child is either not incapacitated or is not hospitalized, but you still need to speak to medical providers on your child’s behalf regarding treatment he or she is receiving.  A HIPAA authorization will enable you to talk to them or obtain medical records and other information regarding your child’s medical condition.  You may not be able to make treatment decisions for your child, but you can at least monitor their care.  Remember, even though you are the parent, medical providers will not speak or release information to you without your child’s prior consent, regardless of your child’s medical condition.

Durable Power of Attorney. Finally, have your child sign a durable power of attorney. Parents of college students have all heard the privacy speech from school administrators – “Due to federal privacy regulations, we cannot discuss anything regarding your student without prior written authorization” – and they mean it. In order for you to discuss a tuition or dorm bill, dispute a lab fee, or discuss any of your child’s financial or other affairs with any third party, you need written authorization. That’s where the durable power of attorney comes in to play.

Under a durable power of attorney, your child can appoint you as their agent to handle their personal and financial and other non-medical affairs, whether they are incapacitated or not. Everything from banking and bill paying to tuition or room and board issues can be handled by you as your child’s agent. If your child becomes ill or has an accident while at school, as your child’s agent you will be able to keep their affairs in order until they regain the ability to do so.

Make sure you and your child are prepared for the coming school year by making sure they leave behind a medical power of attorney, HIPAA authorization, and durable power of attorney.  Good luck!

Does your student need these documents?  Give me a call.  I can help.

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The Pitfalls of Do-It-Yourself Planning

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Ed owned a bank account at First State Bank. Two months before he died, he went to the bank and named one of his five children, daughter Ann, as a joint owner of the account. He specifically selected an account with rights of survivorship, which, under Michigan law, meant that the balance of funds in the account would become Ann’s property when Ed died. After Ed’s death, Ann asserted that the money was hers and did not have to be shared with her siblings. Ed’s other four children filed a petition with the local probate court claiming that Ed had added Ann’s name solely for convenience and that he actually intended for the account proceeds to be shared equally among all of his children. The probate court held a hearing and ruled that the evidence was sufficient to establish that Ed had indeed added Ann’s name to the account merely for convenience to assist with his bill paying should he die, and that he wanted the proceeds shared among all of his children after his death.  The Michigan Court of Appeals affirmed the ruling of the probate court.

Under Michigan law, when you add a child or other person’s name to a bank account, a legal presumption arises that you intend that funds in the account belong to the survivor when you die.  Even if you intend that the account balance be shared after your death, the law presumes otherwise. This presumption can be overcome, but only if it can be proved in a court of law, by “reasonably clear and persuasive proof,” that you did not intend that the account funds vest in the survivor.  This type of proceeding can cost a fortune in legal fees. What gets less attention is the emotional cost.   Battles like this, pitting sibling against sibling, wreak havoc within a family. While Ed thought he was doing good, the actual effect of his actions was quite the opposite.

It is never a good planning move to add a child or other person’s name to a bank account or other asset without first carefully considering all of the ramifications. What Ed may have thought would be a simple way to make sure funds would be readily available to pay his bills turned out to be anything but. Ed could have given Ann his power of attorney to access the account, or created a trust to hold the account and named Ann a trustee. In either scenario Ann would have been able to pay Ed’s bills out of the account, and remainder of the account would have been shared by all of his children after his death. Sure, there may have been legal fees associated with employing those techniques. But, when one looks at the emotional and financial cost of this family’s battle, it would have been money well spent.

Many things people do in their DIY planning appear on the surface to achieve an intended goal, but end up creating serious problems that are very expensive to fix. Always, always, always, work with a competent professional. Get the peace of mind that your intentions will be fulfilled using techniques that are best suited to your individual situation. The cost to do so is pretty reasonable in the long run.

The case is: In re Estate of EDWARD SADORSKI, SR., Deceased. You can read it here.

Are you looking for solutions to your financial or estate planning problems?  Contact me, I can help.

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A New Estate Planning Tool – The Michigan Asset Protection Trust

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On February 5, 2017, Michigan became the 17th state (along with Delaware, Nevada, Ohio, and others) to permit residents to use asset protection trusts in their estate planning. Michigan’s new law, the Qualified Dispositions in Trust Act (the “Act”), allows an individual to create an irrevocable trust known as a domestic asset protection trust (DAPT) that, if set up correctly, will shield the trust’s assets from the claims of the individual’s creditors.

Until recently, asset protection trusts were available only in foreign (offshore) jurisdictions. The Bahamas, Bermuda, the Cook and Cayman Islands, Nevis, and several other jurisdictions developed highly favorable asset protection legal environments featuring sophisticated banking and trust services for clientele. Offshore asset protection statutes typically feature very short statutes of limitations periods for creditors to attack the trust, high burdens of proof for creditors, and require the creditor to challenge the trust in the jurisdiction of the trust’s location. However, with our federal government closely scrutinizing transfers of money away of the U.S., DAPTs are become more popular here in the states. In 1997, Alaska became the first state to enact a DAPT law for Alaska-based trusts.

Under the Act, a Michigan DAPT must be irrevocable, it must have a trustee located in Michigan, and, while the person who creates the trust (the “grantor”) may be a beneficiary of the trust, the grantor cannot have unrestricted access to the trust’s assets.

If a Michigan DAPT is set up correctly, a grantor’s creditors will be prohibited from reaching the trusts assets if the creditor brings a claim more than two years after the assets are placed into the trust. (A longer period applies to claims brought in bankruptcy.)  A Michigan DAPT cannot be created to defraud one’s existing creditors. Therefore, the trust must be created and funded before creditor claims arise.

The Michigan DAPT will be a useful planning tool for people with significant exposure to creditors, such as business owners and those engaged in high-risk professions, such as doctors and lawyers, where insurance may not offer adequate claim protection. A DAPT will not generally be suitable in a typical estate plan.