You must consider many factors when selecting the estate plan that is most appropriate for your client. Among those factors are (1) the size of the client’s estate, (2) the present status of the title to the client’s assets, (3) whether the client or any prospective beneficiary will need assistance in managing the assets, (4) the tax consequences of alternative plans, and (5) whether relationships in the client’s family are reasonably harmonious. After choosing
the type of estate plan to recommend, you must resolve the technical difficulties encountered in drafting the documents required to put the chosen plan into effect.
This chapter covers meeting with the client, considering the client’s needs and desires, and selecting a suitable estate plan. The chapter’s primary focus, however, is on drafting the plan.
The forms presented in this discussion are basic. The following four types of wills are discussed and presented: a simple will that does not involve any trusts, a will that includes a testamentary trust for minor beneficiaries, a will that pours over to an inter vivos (or living) trust, and the Michigan statutory will form. The sections on trust drafting (§§3.37–3.56) analyze a trust designed primarily to minimize the federal estate tax burden of the combined
estates of a married couple. Such a trust can be modified easily to provide the single client with assistance in managing assets.
A conscious effort was made to use direct, precise language in the sample will and trust presented in this chapter. To this end, favorite trinity clauses such as “give, devise, and bequeath” and “all property, real, personal, and mixed” have been shortened or eliminated. In addition, the documents have been designed to serve as forms needing very little modification for the next client with a similar situation and similar desires.
In the trust, use of the generic terms, including settlor, settlor’s spouse, and trustee, facilitates the use of the form with only minor modification for another client. You may feel that the documents are depersonalized, but this problem is not serious and is entirely justifiable. Forms are absolutely necessary to the lawyer. They enable the lawyer to supply a high quality product at modest expense. To remain competitive, attorneys must be able to reuse the fruits of in-depth
and time-consuming research and drafting. Documents have greater utility if they can be prepared for broader application than the immediate task (without sacrificing any present objectives) or if they can be modified into a general approach. Document assembly programs can allow the lawyer to have the best of both worlds (standard forms that are personalized automatically), but using them often involves a substantial initial investment of time and money.
The observations and suggested solutions in this chapter are generalizations for various categories of clients. You must still investigate the facts and circumstances surrounding each individual client thoroughly and tailor this standardized approach to the specific situation. Although generalizations, standardized approaches, and forms are necessary to enable you to turn out a quality product economically, you must question the validity of any approach or any form—your own or from a formbook—each time
you use it. “No clause should appear in any will drawn by you unless you individually know precisely what it means, what objective it is designed to accomplish, what doctrine (if any) of the law it grows out of, and how it furthers the testamentary intentions of this particular client.” W. Barton Leach, Planning and Drafting a Will, 27 BU L Rev 157, 158 (1947).
Note that after the client executes the will or trust (or both), several additional steps may need to be taken to implement the estate plan. For instance, life insurance beneficiary designations may need to be changed to coordinate payment of proceeds with the new plan. Similar designations may need to be made for death benefits under retirement plans. In addition, if an inter vivos trust is part of the plan, assets may need to be retitled in the name of the trustee.
Adequate, complete planning involves a critical examination of alternative dispositive patterns, careful selection of a design appropriate to the needs of the specific client, attention to tax consequences, sophistication in drafting the written instruments, and diligence in guiding the implementation. This process requires many and varied lawyering skills. The planning framework discussed in this chapter provides a format for transposition into other patterns and a guide for drafting basic forms of wills and trusts.
For a more extensive discussion of drafting estate planning documents, see Michigan Estate Planning Handbook (Kathleen Hogan Aguilar & Geoffrey R. Vernon eds, ICLE 3d ed).
Selecting the Estate Plan
A. Meeting with the Client
A key ingredient to proper planning and drafting is securing complete, accurate information from the client. Without this information, you may draft a technically superb document that turns out to be either counterproductive or absolutely meaningless because it governs nothing. The initial interview, therefore, is crucial.
Information sheets or checklists can facilitate fact gathering. Form 3.1 is a sample estate planning information sheet. You should develop your own system, including forms, for eliciting and recording essential facts. Impress on the client the importance of his or her full disclosure.
Being a good listener and showing empathy are essential to this foundational stage of planning. A harmonious relationship between a married couple and their pursuit of common goals can usually be assumed, but that is not always the case. Be sensitive to signs of divergent opinions. Talk with each of the parties separately, if necessary, to explore any differences in desires. If the interests of the spouses differ or are in potential conflict, you may face a problem of professional responsibility.
In the course of gathering and reviewing a client’s financial information, you will routinely request or otherwise receive the client’s Social Security number. With the increasing incidence of identity theft and the importance of maintaining Social Security number confidentiality to prevent identity theft, you should implement appropriate procedures and controls to prevent the inadvertent or inappropriate disclosure of a client’s Social Security number. At a minimum, these procedures and controls should satisfy the requirements of Michigan’s Social Security Number Privacy Act, MCL 445.81 et seq.
B. Considering the Alternatives
The client’s desires and objectives ultimately will dictate the type of estate plan you recommend. Most clients’ desires can be fulfilled with varying degrees of success in a number of ways. Consider and discuss with your client all reasonable approaches to accomplishing his or her objectives.
Your client will want your opinion on the substantive advantages and disadvantages of each approach. He or she will also want to know the comparative costs of the various options, both immediate and long range. For example, simple wills that include testamentary trusts for minor beneficiaries are usually less expensive than trusts that include tax-planning provisions. If the former plan would be adequate for your client today but projections reveal that the more expensive tax-planning trust will be advantageous in three
to five years, selecting the tax-planning trust at the outset may be the most cost-efficient approach. Be prepared to discuss estimated costs. In appropriate cases, you may wish to point out that the Michigan statutory will form is an inexpensive option. See §3.10.
C. Choosing Intestacy in Combination with Joint Ownership and Beneficiary Designations as an Alternative
1. In General
A basic question is whether the client needs to execute a will. Property in joint tenancy with right of survivorship, life insurance proceeds or retirement plan benefits payable to a named beneficiary, and securities registered in beneficiary form (as defined in MCL 700.6301 et seq.) will pass automatically to the surviving joint owner or the beneficiary. For these items, the
presence or absence of a will is irrelevant.
Other assets held individually by the decedent, in the absence of a will, would pass in accordance with Michigan’s intestacy statutes, MCL 700.2101 et seq. Consider a married couple, neither of whom have a will, but who have living descendants. When the first spouse dies without a will, most, if not all, of the assets pass to the surviving spouse (see §3.6). When the
surviving spouse dies without a will, the spouse’s remaining property would pass to the spouse’s children and to the descendants of the spouse’s deceased children.
The distribution pattern under the intestacy statutes may or may not be compatible with the clients’ wishes. Even assuming that both spouses want to ultimately pass on their property to their descendants, there may be some client objectives that are not met by intestacy. They are discussed below and point to the conclusion that simply allowing joint property to pass by the survivorship feature, contractual assets to pass by beneficiary designation, and separate property to pass by intestacy is not the most suitable
alternative for most clients. Intestacy, however, may be satisfactory in some cases where there are no minor children or where the estate is sufficiently small to ensure that, at the first spouse’s death, all assets will pass to the surviving spouse.
2. Problem: Postponing Distribution
If all assets are owned in joint tenancy or subject to contractual beneficiary designations or intestacy is used to shift assets to the surviving spouse and if both the client and the spouse die before one or more children reach 18, a conservator would usually have to be appointed to receive the each minor’s assets. MCL 700.5401(2). Then each child would
receive his or her full share outright at age 18. Absent a will or trust agreement, a child’s consent is required for the continued management of assets for that child by a third party after the child reaches age 18. Many parents believe that 18 is not an ideal age for a significant amount of property to be turned over to a child.
3. Problem: Fragmented Ownership
What's New in this Section
The application of the intestacy law to the client’s separate property may result in an undesirable fragmentation of ownership. If the decedent is survived by a descendant or parent, after exempt property and allowances and the first $222,000 ($148,000 if none of the decedent’s descendants are descendants of the spouse) of the estate are allocated to the surviving spouse, the surviving spouse receives only a portion of the remainder of the estate. MCL 700.2102 (these dollar amounts are current for 2016 but subject to cost-of-living adjustments for subsequent years pursuant to MCL 700.1210). The decedent’s surviving descendants (or the decedent’s parents if there is no surviving descendant) receive the remaining portion. MCL 700.2103. This result is usually undesirable because it contradicts the common objective that the surviving spouse receive all of the property. It is also undesirable because of the difficulties created by multiple ownership of the property. Disposition of the property may be thwarted by the split ownership. Certainly, the property’s use and transfer are made more complicated, particularly if any of the owners is a child who,
until the age of 18, may act only through a court-appointed conservator.
4. Problem: Unmarried Clients
Intestacy and joint ownership of property are even less likely to be satisfactory alternatives if the client has no spouse. Joint owners, and sometimes the spouses of joint owners, must join in any action affecting the jointly owned asset; therefore, the client’s lifetime control may be compromised. If the client wants several people to receive the property on his or her death, joint ownership is even more cumbersome. Moreover, joint ownership with survivorship rights presents
an order-of-death problem. Ultimate distribution to the relatives of one tenant or the other depends solely on the fortuitous sequence of death. Thus, for a client who has no spouse or children and who wants to leave property to people other than parents, siblings, or nieces and nephews, neither intestacy, which favors those relatives, MCL 700.2103, nor joint ownership, with its awkward and inflexible provisions,
In addition, creation of joint ownership may have significant transfer tax implications. When the newly added joint owner is a spouse, the marital deduction available under IRC 2523 typically avoids any negative tax consequence (but see IRC 2523(i) if the spouse is not a U.S. citizen). When, as is the case with an unmarried client, the added joint owner is not a spouse, however, the creation
of the joint ownership arrangement may be a taxable gift by the original owner.
5. Problem: Custody of Minors, Incapacitated Adult Children, and Incapacitated Spouse
If both parents die leaving minor children and without having appointed a guardian, there will be uncertainty over the care and custody of those children. A guardian should be appointed for any minor children. The Estates and Protected Individuals Code (EPIC) grants every parent the right to appoint a guardian for his or her minor children in either a will or another writing signed by the parent and attested by at least two witnesses. MCL 700.5202. Compare MCL 700.5409 on the right to nominate, but not appoint, a conservator in a will. Thus, there is a strong incentive for a couple (or for a surviving or single parent) to make a will to designate a particular person as guardian. In practical terms this designation would prevent any family battle over
the custody of orphaned children. This incentive is present even if the will may have little or no effect on the transfer of property.
The same incentive exists for the parent or spouse who is serving as guardian of a legally incapacitated person. The parent of an unmarried legally incapacitated individual or the spouse of a legally incapacitated individual, if serving as the individual’s guardian, may also appoint a successor guardian in a will or another signed writing attested by at least two witnesses. MCL 700.5301.
D. Wills and Trusts
1. In General
The classic simple will gives outright gifts and has no complex provisions creating future interests or establishing trusts. Although a will is an integral part of almost every estate plan, you must determine whether a simple will adequately meets the client’s needs or whether some form of trust is indicated. Trusts are usually used to save taxes, to provide assistance in managing assets while delaying outright distribution, to provide for multiple or successive beneficiaries,
or to achieve some combination of these objectives.
Michigan recognizes three types of trusts. First, there is a trust that vests in the beneficiary the right to receive some ascertainable portion of the income or principal. This type of trust usually includes a spendthrift clause (restricting the beneficiary’s right to assign an interest in the trust to creditors) and is called a spendthrift trust. Second, there is a support trust, where the trustee pays so much of the income or principal as is necessary for the education
or support of the beneficiary. Third, there is a discretionary trust, which provides that a trustee may pay to the beneficiary so much of the income or principal as the trustee, in his or her discretion, determines. In re Ferguson Estate, 186 Mich App 409, 465 NW2d 357 (1990), rev’d on other grounds, 439 Mich 963, 483 NW2d 353 (1992). Although the concepts of a spendthrift trust, support trust, and discretionary trust are well established in common law, under the newly enacted Michigan Trust Code, they were codified effective April 1, 2010. See MCL 700.7501 et seq.
When a trust is discretionary and the beneficiary has no right to disbursement (other than what the trustee chooses to distribute), no creditor of the beneficiary may compel a trustee to pay any part of the income or principal to satisfy the amount owing the creditor. In re Johannes Trust, 191 Mich App 514, 479 NW2d 25 (1991); see also MCL 700.7505. This only applies, however, when the settlor and the beneficiary are different people. If the
settlor is the beneficiary, the creditor may reach the maximum amount that the trustee could pay to the beneficiary under the trust’s terms. Id. at 518 (citing 1 Restatement (Second) of Trusts §156 (1965)); see also MCL 700.7505.
2. Michigan Statutory Will
A Michigan resident has the option of using the Michigan statutory will. MCL 700.2519. The statutory will is intended to make the will process simpler and less expensive for consumers. The form is relatively short and straightforward and, when completed and executed correctly, provides a valid will.
The statutory will is not suitable for clients who have substantial assets or a complicated estate plan. It is intended for people who have small estates where tax planning is not a major consideration and the plan for disposition of the client’s assets is simple.
Using the Michigan statutory will, your client may leave property to his or her surviving spouse and then to his or her children or descendants. If there is no surviving spouse and no surviving children or descendants, the client can choose to (1) leave the property to heirs as if the client had died without leaving a will or (2) leave half of the property to heirs as if the client had died without leaving a will and half to the spouse’s heirs as if the spouse had died without leaving a will.
In addition, the statutory will allows the client to
- leave up to two cash gifts to charities or individuals,
- leave a list of gifts of specific personal items,
- select a personal representative and an alternate personal representative,
- name a guardian and alternate guardian for minor children,
- name a conservator and alternate conservator for the children’s assets, and
- elect to have the personal representative or conservator perform with or without a bond.
It is wise to advise and assist clients who want to make use of the statutory will to ensure that they do not use it in inappropriate situations and do not change it in any way.
3. International Wills
The Convention of October 26, 1973, Providing a Uniform Law on the Form of an International Will, encourages all countries to enact common statutes regarding the form and mode of execution to ensure worldwide recognition of a will. The law recommended by the National Conference of Commissioners on Uniform State Laws to achieve the goals of the 1973 Convention has been incorporated into EPIC. See MCL 700.2951–.2959.
For information about which countries have signed, ratified, and acceded to the Convention, see the UNIDROIT website (click on Instruments, then Succession on the left).
The statutory sections provide the formal requirements for execution of a will that will be considered valid by the signatory countries. An international will may be used to settle an estate in any jurisdiction, including an estate that possesses only assets in Michigan. Generally, a will is valid as an international will if it is in writing, the testator declares in the presence of two witnesses and an authorized individual (a member in good standing of the State Bar of Michigan is an authorized individual under MCL 700.2959) that the document is the testator’s will and he or she knows its contents, the testator signs the will or acknowledges his or her signature in the presence of the witnesses and the authorized individual (or, if the testator is unable to sign the will, the testator indicates the reason for the inability and the authorized individual makes note of it on the will), and the witnesses and authorized
individual sign the will in the presence of the testator. MCL 700.2953.
The authorized individual then attaches a certificate to the international will. The certificate must be signed by the authorized individual and establish that the will complies with the requirements for valid execution of an international will. The authorized individual also keeps a copy of the certificate and delivers a copy to the testator. The certificate must be in substantially the form provided by the statute. See MCL 700.2955.
In the absence of evidence to the contrary, the certificate is conclusive proof of a will’s validity as an international will. MCL 700.2956.
The statute also recommends a number of optional formalities, including placing the date and all signatures at the end of the will, having the testator or person signing on his or her behalf sign each page of the will, and indicating on the certificate the place where the testator intends to have the will kept. MCL 700.2954.
4. Honorary Trusts and Trusts for Pets
EPIC provides for two special use trusts that would fail under ordinary principles of trust law. The first is the noncharitable trust that has a stated purpose but no ascertainable beneficiary. EPIC permits such a trust to be performed for 21 years and no longer. MCL 700.2722(1).
The second type of special use trust permitted by EPIC is a trust for the care of a designated domestic or pet animal. Transfers to beneficiaries for the care of an animal are to be liberally construed in favor of creating a trust, with a presumption against finding such dispositions merely precatory or honorary. MCL 700.2722(2).
There are additional statutory provisions applicable to each kind of trust regarding the transfer of unexpended trust property on termination, enforcement, trustee appointment and duties, and other matters. MCL 700.2722(3). These provisions should be consulted by anyone drafting either type of special use trust.
5. Using Trusts to Minimize Estate Tax
What's New in this Section
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) brought a series of decreases in the top marginal federal estate tax rate and increases in the federal applicable exclusion amount over the period 2002-2010, culminating with a total repeal of the federal estate tax for one year only in 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub L No 111-312, 124 Stat 3296 (2010), however, restored the estate tax for 2010 (retroactively), 2011, and 2012, with an applicable exclusion amount of $5,000,000 (with inflation adjustments beginning in 2012). Estates of decedents dying in 2010 had the option to elect to apply the former 2010 law—no estate tax and modified carryover basis rules—rather than the new $5,000,000 applicable exclusion amount. The American Taxpayer Relief Act of 2012, Pub L No 112-240, 126 Stat 2313 (2013), retained the inflation-adjusted $5,000,000 applicable exclusion amount on a permanent basis and established a 40 percent top marginal federal estate tax rate.
Accordingly, the applicable exclusion amount for recent years is as follows:
Applicable Exclusion Amount
$5,000,000 (with option to elect no estate tax and modified carryover basis)
See IRC 2010, 2210; Rev Proc 2015-53. When a client’s gross estate at death (augmented by the amount of the client’s taxable gifts during life) exceeds the applicable exclusion amount for the year of death, you will have to file a federal estate tax return. IRC 6018(a).
As the size of the gross estate climbs above the applicable exclusion amount, the tax consequences increase and tax considerations begin to influence the shape of the estate plan. Because of the charitable deduction, see IRC 2055, and marital deduction, see IRC 2056, however, a person’s estate generally will not pay estate tax on assets that are given
to charity or to the surviving spouse. Accordingly, any tax burden for a married couple typically falls on the surviving spouse’s estate.
Present estate and gift tax law provides an unlimited marital deduction. Nevertheless, planning for tax savings becomes a factor when the client-couple’s combined estates exceed the applicable exclusion amount. This was particularly true before the estate tax exclusion amount became portable between spouses in 2011 (discussed further below), but traditional estate tax planning remains important even in the new era of portability. To illustrate the critical importance of estate tax planning in the absence of portability, assume that your client had a $7 million estate, the client’s spouse had no assets, and that death occurred in 2009. If your client allowed everything to pass outright to the surviving spouse, because of the marital deduction, there was no federal estate tax on your client’s death.
On the surviving spouse’s death however (assume the surviving spouse also died in 2009 without having remarried, with no change in asset value, and no gifts from the surviving spouse’s estate to charity), with only the surviving spouse’s applicable exclusion amount available, the federal estate tax would have been $1,575,000 (the surviving spouse’s estate of $7 million, reduced by the $3.5 million applicable exclusion amount, left $3.5 million subject to estate tax at the then-applicable rate of 45 percent). Had the client instead sheltered the applicable exclusion amount ($3.5 million) in a properly structured trust (typically called a family
trust, credit trust, or bypass trust) described below, no federal estate tax would have been due on either estate. This example illustrates that you do not need an unlimited marital deduction to avoid tax on the first death, and, if you take it, you may be shifting assets from an estate tax–insulated position in the bypass trust to an estate tax–exposed position in the surviving spouse’s estate.
In its most basic form, traditional estate tax planning for a married couple involves dividing the assets of the first spouse to die into two portions. One part absorbs the decedent spouse’s applicable exclusion amount. The excess is put into a form that qualifies for a marital deduction, either an outright gift to the surviving spouse or a transfer to a trust that satisfies the requirements for the marital deduction. See IRC 2056. Although the value of the applicable
exclusion amount may be distributed in any manner and to anyone the client selects, this portion is often put into a trust that permits the trustee to distribute the income and principal of the trust to the surviving spouse. The terms of the trust, however, stop short of giving the spouse elements of control that would cause the trust to be included in the spouse’s taxable estate at death. Because this trust takes advantage of the effective credit against estate taxes provided by the applicable exclusion amount and bypasses estate
taxes completely in the surviving spouse’s estate, it is often referred to as a credit trust or bypass trust (the sample trust agreement provided as form 3.2, however, refers to this trust as the family trust). By properly structuring this trust, the objective of benefiting the spouse with the entire estate can be attained while making full use of the applicable exclusion amount available in each spouse’s estate.
Where traditional estate planning is desired, a key element in fully using the applicable exclusion amount in both spouses’ estates is dividing assets between the spouses so that each has a separate estate of individually owned assets. Although nontax factors may make this division difficult in some circumstances, to take full advantage of the potential estate tax benefit, neither spouse should have an estate larger than the applicable exclusion amount until both estates approach that figure. If this division is accomplished and if each spouse’s estate plan establishes a trust to
receive the applicable exclusion amount, full use can be made of the applicable exclusion amount regardless of the order of death.
Recent changes in estate tax law, however, allow for so-called portability of the estate tax exclusion between spouses by allowing a surviving spouse to benefit from the “deceased spousal unused exclusion amount” or DSUEA, now incorporated into IRC 2010(c). Portability was initially authorized as a temporary, self-sunsetting provision of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, but was made permanent by the American Taxpayer Relief Act of 2012. To illustrate how portability works, consider the dramatically different outcome for the hypothetical couple who failed to plan in the preceding example had they died in 2011 rather than in 2009. If, at the first spouse’s death, an estate tax return was filed (even if not otherwise required) and an election was made to preserve the unused portion of the first spouse’s applicable exclusion amount, then at the surviving spouse’s death, the surviving spouse’s estate would have available not only his or her own applicable exclusion amount, but also the unused portion of his or her predeceased spouse’s applicable exclusion amount. The combination of the two exclusion amounts would have covered the surviving spouse’s entire estate, resulting in no estate tax. Even better, because the entire estate was taxed as part of the surviving spouse’s estate, the entire estate would receive a step-up in basis at the surviving spouse’s death. Had the couple employed traditional estate tax planning, the assets of the first spouse’s credit shelter trust would not have received a step-up in basis at the surviving spouse’s death.
The DSUEA may mitigate the potential estate tax consequences for a married couple who has failed to affirmatively plan to minimize estate taxes, but for couples who have significant potential for estate tax liability, the DSUEA may prove to be an inferior substitute for affirmative estate tax planning because (1) it does not shelter growth during the surviving spouse’s lifetime from estate tax, (2) it may be lost through the surviving spouse’s remarriage, and (3) it does not address generation-skipping transfer tax issues. By contrast, as noted above, for married couples who are unlikely to incur estate tax liability, use of the DSUEA may result in a better income tax result than traditional estate tax planning by allowing a step-up in cost basis for all assets at the surviving spouse’s death that would not be available with traditional estate tax planning. Although a full discussion of the DSUEA is beyond the scope of this chapter, these simple examples highlight the difficult choice between the estate tax protection offered by traditional estate planning and the potential income tax advantage of relying on portability.
The discussion in this section assumes that both spouses are U.S. citizens. A full discussion of estate taxation of non–U.S. citizens is beyond the scope of this chapter, but note, in particular, that if the surviving spouse is not a U.S. citizen, the normal rules governing qualification of a transfer for the marital deduction do not apply. See IRC 2056(d), 2056A.
When planning for clients with significant wealth, some of which may or will pass to grandchildren or more remote descendants, it is important to consider the potential application of generation-skipping transfer (GST) tax under Chapter 13 of the IRC. A full discussion of GST tax issues is beyond the scope of this chapter.
6. Using Trusts to Provide Management Assistance
In addition to tax planning, an important question in considering the need for trusts is whether the client seems content to let the designated beneficiaries have complete control of the estate. The client may feel that outright control would be appropriate at some point (e.g., when the beneficiary reaches age 25) but not if the client were to die tomorrow. On the other hand, the client may feel that outright control will never be appropriate. For instance, the client may wish to meet
a beneficiary’s needs, but he or she may also wish to control the transfer of property when the beneficiary dies, remarries, or has no further need for assistance.
Finally, the client may want a trust for management assistance purposes during his or her own lifetime. Michigan has a very liberal statute governing powers of attorney, which can be useful in providing management assistance without the use of a trust. MCL 700.5501–.5505. See the discussion beginning at §3.62. Many fiduciaries, particularly corporate fiduciaries, however,
will feel more comfortable with the traditional trust arrangements. If long-term property management is contemplated, a trust agreement permits more comprehensive treatment of potential problems.
7. Testamentary Versus Inter Vivos Trusts
If you decide that your client’s estate plan should include a trust or trusts, you must determine whether to use a testamentary trust (a trust that is contained in a will) or an inter vivos or living trust (a trust that is established during the settlor’s lifetime). If the client wants the trust to be used for asset management during his or her lifetime, a testamentary trust is not an option. In all other
cases, you have a choice.
From the standpoint of client comprehension, testamentary trusts are probably preferable to inter vivos trusts because only a single estate-planning document is involved. From the standpoint of privacy, inter vivos trusts are preferable because testamentary trusts are a matter of public record. Inter vivos trusts require additional work initially to retitle assets into the name of the trust, but they offer the future advantage of avoiding the probate process entirely at death. By contrast, a testamentary trust requires the
assets to be probated as part of the decedent’s estate before being funded into the trust. Once funded, both types of trusts are generally administered without probate court filings and hearings. As a general guideline, a testamentary trust is most suitable when the trust may never become active or when, if activated, it will continue for a relatively short period of time. Trusts for minor beneficiaries are an example. In most other cases, an inter vivos trust may be more advantageous.
Drafting Wills and Testamentary Trusts
A. In General
A number of problems can arise in drafting wills and testamentary trusts. To highlight these problems, the following sections examine the various components of a sample will and testamentary trust, including variations suitable to different dispositive schemes. Most of the following sections refer to portions of the sample will form included as form 3.3, which includes alternative language to create either a simple or a pourover
will (discussed in §§3.22–3.23). Other sections include optional or alternative language that can be added to, or substituted for, the provisions of form 3.3. In each section below, portions of the sample will form are referenced (or alternate prototype clauses are stated) and the various provisions are discussed.
Drafting an inter vivos trust is considered in §§3.37–3.56. See form 3.2 for a sample trust form.
B. Introductory Clause
As shown in the introductory text preceding Article I of the sample will (form 3.3), the opening paragraph of the will should identify the testator by full legal name and any other name or names under which he or she has taken title to property. Reciting the location of the testator’s home may assist in establishing the place of domicile should a dispute later arise. It may also determine proper venue for probate purposes.
The revocation clause should be inserted routinely in all new wills. This clause will negate any possible effect of a long-forgotten will, such as one executed when the client was inducted into the military service, and the clause will avoid assertions that a prior dispositive plan should be given partial effect by being integrated into the new will.
Although not legally required, the names of the testator’s spouse and children may be placed, for identification purposes, in the first article of the will (see form 3.3, Article I). This article may also contain funeral and burial instructions (although, in many cases, the funeral will have already taken place by the time someone looks at the will) and any wishes relating to anatomical gifts.
If the client desires to treat a person or class of persons differently than would be the case under applicable law (for example, the testator’s stepchild being treated as though he or she is the testator’s child) or if a person who might ordinarily expect to receive a share of the estate is to be intentionally omitted, it is imperative to explicitly state these instructions in the will. This article is a logical place to include special instructions of this type. The drafter should take care to ensure
that any class descriptions or defined terms used elsewhere in the will are consistent with these special instructions.
D. Designating Fiduciaries
The will should also identify those who are to serve in various fiduciary capacities (see form 3.3, Article II). Nomination of a personal representative in a will confers priority for the nominee to be appointed by the probate judge in formal proceedings or by the probate register in informal proceedings. MCL 700.3203. Note that
the nominee does not have the power to transfer his or her priority by nominating another person to act as personal representative unless authority to nominate another has been conferred expressly in the will.
The testator may appoint a guardian of a person and provide for the substitution of another if the first nominee cannot serve. See MCL 700.5202, .5301. Nonresident status does not disqualify a nominee from the position.
If the will establishes trusts for minors, it is unlikely that a conservator of a minor’s estate will be necessary. Nevertheless, in case a conservatorship is needed, the testator should nominate a conservator.
Designating a trustee is appropriate only if the will includes testamentary trust provisions. The use and design of testamentary trusts are discussed in §§3.22 and 3.25–3.33.
If the client has negotiated a fee arrangement with the nominated fiduciaries, you should include the terms of the arrangement in a provision of the will. This practice is appropriate where there is already a contractual agreement between the testator and the nominated fiduciary regarding the fee the fiduciary will charge for his or her services. A nominated personal representative who has not agreed in advance to serve for a particular fee remains free to renounce (before qualifying) any particular compensation provision included in the will and instead to receive “reasonable compensation” for his or her services. See MCL 700.3719(3).
A compensation clause may be appropriate even within families to avoid awkward misunderstandings. Because economic changes are difficult to foresee and the circumstances of the actual estate settlement impossible to predict, the statutory guideline, which provides for reasonable compensation, is generally the wisest approach for compensating the personal representative
and other fiduciaries. See MCL 700.3719(1), .5216.
Under EPIC, a bond is not required of a personal representative appointed in informal proceedings unless directed by will or unless a person with an apparent interest in the estate of at least $2,500 requests it. MCL 700.3603(1). In a formal proceeding, if the will relieves the personal representative of bond, the court will not order bond at the time of appointment unless an
interested person requests bond and the court is satisfied that bond is desirable. MCL 700.3603(2). In addition, bond is not required of a personal representative who deposits, as determined by the court, cash or collateral with the county treasurer to secure performance of the fiduciary duties. MCL 700.3603(3).
A bond is not required of a trustee unless the trust instrument requires it (and the court has not dispensed with that requirement), or the court finds it necessary to protect the beneficiaries. MCL 700.7702.
The determination that a fiduciary is disabled is treated as the resignation of that fiduciary. Because others may need to have access to a fiduciary’s health information to determine whether he or she is able to continue to serve and because the information needed for that determination may be protected under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the suggested language in the will form requests that each fiduciary execute an authorization for the release of his or her medical
information for this limited purpose. An example of an authorization of this type is included as form 3.4. For further discussion of estate planning issues related to HIPAA, see §§3.69–3.71.
E. Specific Gifts, Including Tangible Personal Property
1. Gifts of Tangible Personal Property
Frequently, clients will want to make gifts of specific items (see form 3.3, Article III). A few specific gifts present no significant problems, but including longer itemized lists in the will is awkward. Even worse, a codicil must be drafted each time the client changes his or her mind. Accordingly, a list of property and recipients outside the will that can be changed from time to time without significant delay or expense appeals to many clients. EPIC, MCL 700.2513, permits the disposition of tangible personal property by an extrinsic writing that is mentioned in the will and either in the testator’s handwriting or signed by the testator at the end. The writing may be prepared before or after the execution of the will and may be altered by the testator after its preparation.
The phrase tangible personal property should be free from ambiguity, but a nonexclusive list is often included for clarity. If the client uses tangible personal property in a profession or business, the clause should be altered to specify whether the business property is included or excluded by that phrase.
The disposition of tangible personal property is separated from the disposition of all other property for several reasons. Quite often these items can be distributed and enjoyed by the distributee before he or she reaches the age at which the balance of the estate should be transferred. Moreover, these items often are not suitable for a trust, particularly if there is a surviving spouse. Income earned during probate administration may be minimal, so the income tax consequences would not be significant planning factors. Note,
however, that specific gifts of tangible personal property and even the gift of all tangible personal property separate from the residuary devises come within an exception to the general rule that any distribution of property transfers income from the estate to the transferee. IRC 663(a)(1); Treas Reg 1.663(a)-1.
Under the suggested language of ¶3.2(b) of form 3.3, only the children are takers of tangible personal property, while descendants (that is, both children and living descendants of deceased children) will be the beneficiaries of the residue. The type of property dictates this distinction in most cases. The monetary value of tangible personal property is generally small, not justifying retention for grandchildren or more remote descendants.
The principal value of such property is emotional, and the sentiment inherent in the property is important primarily to the children.
If the plan is for a young family and it will take effect, if at all, within five to ten years, the children, if they take, probably will be minors. It may be appropriate to hold some items of personal property until the recipients are of a suitable age and discretion. As provided in ¶3.2(b) of form 3.3, these items may be distributed to the trustee or custodian for the child. An equally appropriate alternative would be to distribute the items to the minor’s guardian to
hold for the child. If all of the distributees are likely to be adults, the last sentence of ¶3.2(b) could be eliminated.
If all of the children are minors, it is unlikely that disputes will arise between them about which person takes what items. Because one or more could be of age and because distribution of family heirlooms and similar items seems to precipitate controversies, however, a provision regarding dispute resolution (¶3.3, sometimes referred to as a family harmony clause) has been inserted in form 3.3. The mere presence of this clause should encourage the recipients
to compromise their differences. As an alternate to ¶3.3, the will could direct the personal representative to allocate the items to the takers in equal shares, with the decision of the personal representative being final. Note, however, that allowing the personal representative’s decision to control is probably not the best choice if the personal representative is one of the potential takers of the tangible personal property.
2. Cash Bequests
Clients often desire to leave specific cash gifts to individuals or charities. Provisions like the following can be easily added at the end of Article III of form 3.3 to effect these gifts:
3.5 Individual bequests. I give the sum of $250 to my aunt, Jane Q. Smith, if she survives me [or, if she does not survive me, to her then living descendants by right of representation].
3.6 Charitable bequests.
(a) Gift to church. I give the sum of $250 to the trustees of Suburban Community Church of Muskegon, Michigan. This gift is unrestricted, and the organization’s governing body may use and expend the gift in any manner.
(b) Gift to Red Cross. I give the sum of $250 to the Muskegon County Chapter of the American Red Cross and express my desire (which is precatory only) that this be used for disaster relief.
Obviously, specific gifts to individuals must sufficiently identify the intended recipient. Including the recipient’s relationship to the testator can avoid ambiguity in some cases. The drafting should clearly identify whether the gift lapses or passes to alternate takers if the named recipient predeceases the testator (see also §3.35 for a discussion of the antilapse statute).
You must exercise diligence in learning the nature and status of any organization that the client wishes to benefit. Small gifts for benevolent purposes can create large problems. At common law and in Michigan, an unincorporated association lacks the capacity to hold title. Trustees for an unincorporated society, including a religious society, however, may receive, hold, and convey property. Incorporated groups, of course, may hold property in the corporate name. Use care in naming the entity so that no dispute arises regarding
the identity of the client’s choice.
If the testator intends a particular use for the gift, consider stating this intent as an expression of hope or desire (rather than a legally binding obligation) to negate the inference that a trust is intended. Although language of request rather than direct command can be interpreted as a polite direction that a trust be created, the modern tendency is to treat precatory language as a nonbinding expression of motive. See 1 Austin W. Scott, The Law of Trusts §§25–25.2
(4th ed 1987 & Supps).
If the estate may be subject to federal estate tax, a direct, outright gift to a charitable organization will obtain a charitable deduction. If your client desires to give a partial interest or a future interest to charity, consult IRC 2055(e) for the required dispositive arrangements to obtain a charitable deduction. The Pension Protection Act of 2006 included several provisions to address perceived abuses relating to the deductions associated with charitable gifts. A full discussion of these provisions is beyond the scope of this chapter. Note, however, that in the case of gifts of fractional interests in tangible personal property, IRC 2055(g) may result in a mismatch between the value included in the decedent’s estate for federal estate tax purposes and the charitable deduction available for federal estate tax purposes. For a comprehensive treatment of estate and gift tax charitable deductions, see Edward J. Beckwith, Estate and Gift Tax Charitable Deductions, 839 Tax Mgmt (BNA).
Specific cash gifts of the type described in this section are most appropriate for relatively small amounts. If the specific gifts represent a significant portion of the total estate, you should remind your clients that the specific gifts will be satisfied in full before the takers of the residue receive anything and that an unexpected reduction in the value of the estate could result in a much smaller share passing to the residuary beneficiaries.
F. Disposing of Residue
1. Disposition of Residue: Simple Wills or Wills with Testamentary Trusts
A will that provides for the residue of the estate (after payment of debts, taxes, expenses, and specific gifts) to be immediately paid out to specified beneficiaries is sometimes referred to as a simple will. Form 3.3, Article IV, Alternative 1, creates a simple will, which provides that the balance of the estate is paid to the testator’s spouse, if he or she survives, and otherwise to the testator’s children and
to the descendants of deceased children.
In the first alternative, the statutory definition of the term descendants, MCL 700.1103(l), is modified by the added stipulation that those who take have their shares determined according to a right of representation scheme of distribution. It is insufficient to indicate the takers (descendants) without further stipulating the share for each taker
(by right of representation), inasmuch as takers might be intended to share per capita, per stirpes, or in the same manner as under the jurisdiction’s law of intestate succession (if different). Here, the definition of the term representation is as specified in ¶6.2 of form 3.3. See §3.35.
Note also that ¶4.1 under the first alternative version of Article IV provides that the residue include assets that may be appointed without a specific reference to the power being exercised. For a discussion of the blind exercise of powers of appointment, see §3.23.
To provide for the possibility that some beneficiaries may be minors or too young to prudently manage an outright distribution of their shares of the estate, you may want the will to also include terms under which assets will continue to be held in trust for certain beneficiaries. Because the terms of the trust are found within the testamentary instrument, these trusts are frequently referred to as testamentary trusts. The form of simple will created by the first alternative version of Article IV, form 3.3, can be modified to accommodate testamentary trusts by adding language similar to the following before the last sentence of ¶4.1b:
The share, however, of each beneficiary who has not attained age  shall be held, administered, and distributed as a separate trust, as provided below.
If there is a testamentary trust, the will should always provide that descendants who have attained the stipulated age for outright distribution receive their shares directly from the probate estate, so that the expense and delay of channeling them through a trustee is avoided. Under the language suggested above, shares for all descendants under age 25 (or another age selected by the client) are delivered to the named trustee. Sections 3.25–3.33 discuss suggested terms for
the separate trusts and alternative schemes for dividing and allocating the residue with a testamentary trust.
If there is not a testamentary trust, you should include another mechanism, like ¶4.2 of the first alternative version of Article IV, form 3.3, to avoid a conservatorship for any minor beneficiaries’ shares by, for example, providing that such beneficiaries’ shares may be held by or distributed to a custodian for the beneficiary under the Uniform Transfers to Minors Act, MCL 554.521
2. Disposition of Residue: Pourover Will
As an alternative to providing the terms for immediate or future distribution of the residue of the estate to the ultimate beneficiaries, the will may instead provide for the residue to be paid to and distributed in accordance with the terms of a trust created under a separate agreement. This is frequently referred to as a pourover will. The second alternative version of Article IV in form 3.3 creates a pourover will transferring the
residue from the testator’s estate to the testator’s living trust.
Note that ¶4.1 of the second alternative includes in the gift of the residue to the testator’s living trust a so-called blind exercise of any power of appointment held by the testator. This is designed to exercise powers of which the testator is unaware when executing the will. Although some respected commentators advise against blind exercises, the reasons they give for nonexercise (both tax and nontax) seem outweighed by the testator’s desire to leave everything possible to the takers of his
or her choice. If the instrument that creates a general power of appointment fails to provide for a gift in default, a residuary clause in a will that does not mention the power will, nevertheless, operate as an exercise of the power of appointment. MCL 556.114.
EPIC permits the trust instrument to be executed “before, concurrently with, or after the execution of the testator’s will” and permits the trust itself to be subsequently amended unless the will provides otherwise. MCL 700.2511. It is recommended, however, that the trust be executed before or concurrently with the will, so that its date can be included for identification
3. Disposition of Residue: Ultimate Takers Provision
In the case of a simple will or a will with testamentary trusts, make certain the testator is cognizant of the possibility that none of the named beneficiaries will survive the testator. Quite likely, this would result from a common disaster, such as a fire or an automobile accident. Paragraph 4.3 recognizes this possibility and, in the event all named beneficiaries predecease the testator, leaves equal amounts to the testator’s family and to the spouse’s family. The
last sentence prevents the State of Michigan from inheriting one-half of the estate as an heir if there is no other heir on one side of the family. If this simple clause is used, a similar provision should appear in the spouse’s will so that the proportions going to each family do not depend on the fortuitous order of death.
Paragraph 4.3 also provides for alternative takers if—because of failure of issue, a common disaster, or some other unexpected event—there is no one at some point to take the funds held in trust. Good planning requires a provision to cover this possibility, however remote it might appear. If the will is silent, the result is partial intestacy and the takers are those identified by the intestacy laws applied as of the testator’s death—a result not particularly satisfactory if the contingency
occurs many years after the testator’s death. The sample paragraph illustrates one solution. Quite clearly, the testator might prefer different takers, such as charities.
Although this “absence of beneficiaries” provision is only included in the sample will form under the simple will alternative, a provision of this type could also be added to a pourover to provide for the possibility that the trust to which the residue is to be given will be subsequently revoked or will fail under applicable law.
G. Testamentary Trusts
1. Sample Separate Trust
If form 3.3 has been modified to provide testamentary trusts (see §3.22), the will must also include additional provisions to govern the administration and distribution of those trusts. This section includes a relatively simple set of provisions to be added to Article IV, Alternative One. Note that, if testamentary trusts will be used, ¶4.2 entitled “Distribution to custodian” should
be removed and ¶4.3 entitled “Absence of beneficiaries” should be renumbered as ¶4.2. Sections 3.26–3.33 describe these suggested provisions as well as alternative provisions for sample trusts.
4.3 Separate trusts.
(a) Income. Trustee may distribute net income or may accumulate income of a separate trust and add it to principal. The distribution of current and accumulated income is governed by the provisions that authorize the use of principal.
(b) Principal. Trustee may use principal for the beneficiary if, in Trustee’s discretion, it is appropriate to
(1) provide care and support for the beneficiary if [he / she] is not self-supporting through no fault of [his / her] own;
(2) educate the beneficiary (including technical or trade training; camp, travel, or other informal training; college, postgraduate, and professional training) if [he / she] is striving diligently for an education;
(3) provide the beneficiary with a home of [his / her] own;
(4) enable the beneficiary to embark on or pursue a business or professional venture;
(5) meet extraordinary expenses caused by illness or other misfortune; or
(6) provide the beneficiary extra funds for well-being and comfort.
In exercising this discretion, Trustee shall consider all other resources available to the beneficiary, including [his / her] earnings or potential earnings and, if the beneficiary is married, the earnings or potential earnings of the beneficiary’s spouse. Trustee may also distribute to the beneficiary of a separate trust, at whatever times seem proper, tangible personal property held in [his / her] trust.
(c) Payments to guardian. If there is a guardian appointed for the beneficiary, Trustee shall supply funds to the guardian that are adequate to maintain and support the beneficiary and to protect the guardian, to the extent possible, from suffering any significant financial burden by reason of the appointment. Trustee may also pay to the guardian fair and reasonable compensation, determined in Trustee’s sole discretion, for services as guardian.
(d) Age distribution. After the date on which the beneficiary attains age 25, the beneficiary has a continuing right to withdraw the entire trust fund.
(e) Testamentary limited power of appointment. If the beneficiary dies before complete distribution, Trustee shall distribute the trust fund to or in trust for whatever persons other than the beneficiary, the beneficiary’s creditors, the beneficiary’s estate, or creditors of the beneficiary’s estate and in such amounts as the beneficiary appoints by will.
(f) Substitute transfer. If the power of appointment is not exercised, or to the extent it is not effectively exercised, Trustee shall pay the trust fund, on termination by death, to the beneficiary’s descendants then living by right of representation or, if there is no descendant then living, to the then-living descendants by right of representation of the beneficiary’s nearest ancestor in my lineage who has then-living descendants.
2. Tax Matters
The repeal of the throwback rules and the compressed income tax rates for trusts have virtually eliminated the tax incentives for accumulating income. Accumulation of income is permitted in ¶4.3(a) of the trust in §3.25 more because the power to accumulate income provides the trustee added flexibility than for any potential income tax savings.
The power of appointment given the trust beneficiary in ¶4.3(e) is nontaxable in his or her estate for federal estate tax purposes.
3. Variations for Separate Trusts
The separate trust provisions in §3.25 represent just one of several ways to achieve your client’s objectives. To illustrate the variety of designs available to the drafter, seven ways of creating trusts to protect minors and to provide for essential needs when both parents are deceased are briefly described below.
- The testator’s entire estate is allocated into separate
shares at his or her death. Each living child is treated equally, regardless of differing needs. The separate shares can be held in trust until the recipients each attain the age set for outright distribution. This alternative is illustrated in the provisions in §3.25.
- A separate educational trust is carved out of the testator’s assets and funded according to a formula. For example, an amount determined by multiplying the total number of years of college education remaining for all children (the maximum per child being four years) by some figure, say $20,000, can be specified. The balance of the testator’s assets at death is allocated to all recipients by right of representation, and the share of each who has not attained the age
stipulated for outright distribution is held in trust until he or she reaches that age.
- A separate educational trust is created in the same way as described in design 2, except that the shares for all who are under the age for outright distribution are aggregated and held in a common trust from which distributions can be made in varying amounts based on need. The testator must choose when the common fund is to be allocated into separate shares—for example, when the oldest attains a stipulated age, when the youngest reaches that stipulated age, or when the needs of all
have been satisfied.
- No separate educational trust is created. Instead, the estate is allocated into shares at the testator’s death, with those over the stipulated age taking outright and those under that age becoming beneficiaries of one common trust. Each time a beneficiary of the trust reaches the age at which he or she can take free of trust, a share is peeled off and distributed outright to that person.
- A trust is created as described in design 4, except that as each trust beneficiary becomes entitled to an outright share, he or she takes a reduced amount (such as a one-half share) to give more assurance that an adequate fund is left for the needs of the youngest beneficiaries. When the trust terminates, any remaining balance is distributed among all who took reduced shares.
- The testator’s entire estate is held in trust until the needs of the youngest child have been satisfied, at which point the trust principal is allocated. The shares of the recipients who are then still under the age for outright distribution are held in separate trusts until the date for each is attained.
- The testator’s estate is held in trust as described in design 6, except that there is no allocation into separate shares until the youngest child has attained the age at which he or she is entitled to receive a share free of trust. The trust is allocated, distributed, and completely terminated at that point.
This smorgasbord of alternative designs is illustrative only. Many other variations are possible. Common and often desirable modifications that could be incorporated into any of the preceding examples include (1) making the outright distribution on an installment basis at different ages (for example, ages 25 and 30, or 25, 30, and 35); (2) broadening or narrowing the purposes for which invasions of the principal may be made (e.g., education could be limited to four years of college); and (3) providing trust arrangements,
including age distribution requirements, for the descendants of deceased children.
4. Factors Affecting a Trust’s Design
a. In General
Although there are factors that influence the ultimate choice between alternative trust designs, it is difficult, in the abstract, to indicate compelling reasons for choosing one over another. The evaluation of the different designs rests on the hopes, desires, and attitudes of individual clients faced with the uniqueness of their family situations. Nevertheless, some circumstances would indicate the use of one trust design over another. These include a significant age disparity between
the oldest and youngest children; the size of the estate; the identity of the trustee and its fees; the testator’s feelings about equality between children; and the special, uncommon needs of some beneficiaries that require a radical departure from typical arrangements.
b. Age Disparity
A significant age disparity between the oldest and youngest children points toward selecting a scheme that will give the older children something immediately on the testator’s death or as soon as the children attain the age that the parent decides is appropriate for outright distribution. It seems somehow unfair to make the older children wait many years for a share of the parent’s wealth until the very youngest has all of his or her needs satisfied. Thus, the presence
of a broad range in ages makes designs 1 and 4 of §3.27 more attractive.
c. Size of the Estate
The size of the estate is another important consideration. The greater the value of assets, the more likely it is that the needs of a younger family member can be satisfied out of an equal share. A larger estate is also more susceptible to division simultaneously between an educational trust and separate shares for individuals. Thus, designs 1 and 3 in §3.27 are more likely to be used when ample funds are present. On the other hand, with
a smaller estate there is concern whether the available funds are sufficient to meet the needs of younger children, let alone yield a share for the older ones. In these situations, designs 5, 6, and 7 are more attractive.
d. The Trustee
The trustee’s identity and fees need to be considered along with the size of the estate. Corporate fiduciaries usually have a fee schedule stipulating a minimum fee for each separate trust. When assets are small or modest, such a fee schedule may make it prohibitively expensive to establish separate trusts for each recipient and perhaps even too expensive to set up a separate educational trust. You can reduce costs and still take advantage of using a corporate trustee by using
a single trust, as suggested in designs 4, 5, 6, and 7 of §3.27. Some or all of the expense can be avoided if an individual, particularly a family member, is named as trustee. Although naming an individual as trustee may permit the creation of multiple trusts, the savings, of course, could be illusory if the individual named lacks the expertise necessary for proper administration of the assets.
e. Desire for Equality Among Beneficiaries
The testator’s feelings about equality among the children must be considered and explored in some depth. Several of the alternatives in §3.27 (1 and 4 particularly, and 2, 3, and 5 to a lesser extent) allocate a share to older children who, because of their age at the testator’s death, have received many benefits not yet obtained by the younger ones. The younger children must pay for these benefits out of their separate
shares, which means they might receive fewer benefits from the parents. In designs 6 and 7, however, the basic needs of all of the children are met before any excess is distributed. If the focus is on needs, absolute equality can never be ensured because needs will vary over time, but a holdback until certain basic requirements have been met for everyone has the connotation of greater fairness. If equality is an overriding concern and a single trust for multiple beneficiaries is used, the trustee can be directed to take into account
the invasion made for each beneficiary when the trustee allocates separate shares at the termination of the trust. This action may involve significant accounting problems for the trustee.
f. Special Needs of Some Beneficiaries
Some beneficiaries will have special needs that would indicate a radical departure from typical trust arrangements. A child with a mental or physical handicap may require a trust to last for the child’s lifetime or force the parent to designate a larger proportion of the available wealth to him or her. On the other hand, the client may decide that equality or some other concern is an equally important goal and leave only a proportionate share for the child with special needs.
There is no scale for weighing these factors. The balance must be struck by the client after considering the benefits and detriments of the various alternatives.
H. General Provisions
The provisions of Article V in form 3.3 address issues that should be considered each time a will is prepared.
Choice of law. EPIC permits the testator to select the law of a particular jurisdiction to control the interpretation of the will. MCL 700.2705. The language suggested in ¶5.1 of form 3.3 adds assurance that the testator’s intentions will be understood and observed.
Simplified probate. Under General Provisions, the will might well include the phrase, “I direct unsupervised administration of my estate.” Including this phrase does not preclude supervised administration, but it does impose a more restrictive standard that must be satisfied before a petition for supervision is granted. The judge must find that supervision is not only necessary but “necessary for protection of persons interested in the estate.” MCL 700.3502(3)(b). On the other hand, a failure to direct unsupervised administration does not preclude it, as unsupervised administration is the default form of administration. The language suggested in ¶5.2 of form 3.3 provides the personal representative with flexibility to determine the most suitable mode of administration.
Statutory benefits. Under EPIC, the amount of homestead, exempt property, and family allowances are in addition to shares of an estate otherwise given to the recipients of those benefits. This is a change from the Revised Probate Code, which charged those amounts against the recipient’s share of the estate. Including ¶5.3 of form 3.3 is optional. It overcomes the new statutory default under EPIC and returns to the treatment provided under the RPC.
Payment of charges. In Michigan, absent a contrary direction in the will, the estate taxes are apportioned among the beneficiaries of the residuary estate. MCL 700.3920. Other charges against the estate are also paid out of the residuary estate without apportionment among any other beneficiaries. MCL 700.3902.
You should consider the apportionment problem for every will and include a clause in the will specifying the fund or funds from which taxes and other charges are to be paid. Under the suggested language of ¶5.4 of form 3.3, charges are to be paid from the residue of the estate, without apportionment among the other beneficiaries. Placing the burden on the residue of the probate estate to the relief of the takers of tangible personal property, nonprobate assets, and specific gifts may not
be appropriate for all plans. Under the following alternative language, which may be substituted in place of ¶5.4 in form 3.3, charges instead are apportioned proportionately among all transfers (except tangible personal property):
5.4 Payment of charges.
I direct my personal representative to pay the following items and to allocate the burden proportionately among all beneficiaries of transfers made by reason of my death, except that no allocation shall be made to transfers of tangible personal property:
- my legally enforceable debts (other than debts secured by real or tangible property, which property shall pass
subject to those obligations)
- funeral expenses
- expenses of administering my estate
- taxes, including any interest and penalties attributable to those taxes, imposed by reason of my death on any transfer of property
The suggested provisions of ¶5.4 from form 3.3 and the alternative language stated above represent only two of the many ways in which charges may be apportioned. Each time a will is drafted, careful attention should be given to the most appropriate method of apportionment.
Powers. The powers given to personal representatives by statute are quite broad and generally satisfactory. You may wish, however, to state them directly in the will. See, for example, the statement of administrative powers in the inter vivos trust agreement (form 3.2, Article VII).
Other provisions. It used to be fairly common in Michigan to expressly prohibit implication of a contract between spouses in connection with the execution of reciprocal wills. EPIC obviates such a provision by requiring affirmative evidence of a contract. MCL 700.2514. The execution of mutual wills or a joint will does not create a presumption of a contract not to
revoke the wills. Rau v Leidlein (In re VanConett Estate), 687 NW2d 167 (2004).
Article VI of form 3.3 addresses definitions used in the will. Those definitions are discussed below.
Survival defined. In the absence of a contrary provision in a will, EPIC requires a beneficiary to survive the decedent by 120 hours to be an eligible recipient. MCL 700.2702. Paragraph 6.1 of form 3.3 requires a 30-day survival period rather than the 5-day statutory requirement because a beneficiary who dies within 30 days of the decedent certainly
will not have an opportunity to receive and enjoy the property given to him or her. Requiring a survivorship period also eliminates the expense and inconvenience that would result from a double probate.
If the beneficiary fails to satisfy a condition of survival, the antilapse statute, MCL 700.2603, may substitute descendants of the original beneficiary as alternate takers if the original beneficiary is the decedent’s grandparent, a lineal descendant of the decedent’s grandparent, or the decedent’s stepchild. If your client does not want substitution under the antilapse
statute, it is not sufficient simply to condition the gift on survival or survival for a set time period. MCL 700.2603(1)(c). To avoid the antilapse statute, the last sentence of ¶6.1 of form 3.3 has been added.
If it would be advantageous to qualify a gift in the will for the marital deduction, the 30-day requirement for survival should exclude the spouse. In those circumstances, add a presumption of the spouse’s survival to provide for cases in which it is difficult or impossible to determine the order of survivorship. See ¶4.3 of the inter vivos trust agreement (form 3.2) and related discussion in §3.43.
Representation defined. The definition in ¶6.2 of form 3.3 provides for a per capita at each generation method of allocation, which is consistent with the definition of representation in EPIC. If a per stirpes method of allocation is desired, the definition of representation in ¶6.2 should be altered accordingly. See the definition of per stirpes in MCL 700.2718.
Child and descendant defined. Under EPIC, adoptees are included under the definitions of child, grandchild, heir, descendant, beneficiary, or any equivalent term unless a contrary intent appears in the will or other estate-planning document. MCL 700.2707; In re Estates of Leggett, 424 Mich
77, 378 NW2d 467 (1985), cert denied sub nom Papalini v Fithian, 476 US 1171 (1986). If the testator is not the adopting parent, an adopted individual is not considered the child of the adopting parent unless the adopted individual lived while a minor as a regular member of the household of the adopting parent. MCL 700.2707(3). A child conceived and born before a marriage is deemed born in wedlock for purposes of intestate succession if his or her parents marry after the child’s conception or birth. MCL 700.2114. If the testator desires that stepchildren be treated as children for the purposes of the will or that certain
children or descendants be excluded for the purposes of the will, ¶6.3 of form 3.3 should be altered accordingly to express these desires (see §3.18 for related discussion).
J. Signing the Document
The attestation clause provided in form 3.3 both reflects observance of the formalities EPIC requires for a will and satisfies the requirements for making a will self-proved. See MCL 700.2502, .2504. The statute provides that a will may be simultaneously executed, attested, and
made self-proved by acknowledgment of the will by the testator and two witnesses’ sworn statements, each made before a notary public (who is not the testator or one of the witnesses) using the statutory language. As an alternative, a will may be made self-proved without the presence of a notary public if the testator and two witnesses sign written statements declaring under penalty for perjury under the law of the State of Michigan the facts regarding the testator and the formalities observed at the signing of the will.
If you prefer this approach, you should replace the attestation clause in form 3.3 with the following:
, the testator, sign my name to this document on [date]
. I declare under penalty for perjury under the law of the State of Michigan that the following statements are true: this document is my will; I sign it willingly; I sign it as my voluntary act for the purposes
expressed in this will; and I am 18 years of age or older, under no constraint or undue influence, and have sufficient mental capacity to make this will.
, the witnesses, sign our names to this document on [date]
. We declare under penalty for perjury under the law of the State of Michigan that all of the following statements are true: the individual signing this document as the testator signs the document as [his / her]
signs it willingly, and executes it as [his / her]
voluntary act for the purposes expressed in this will; each of us, in the testator’s presence, signs this will as witness to the testator’s signing; and, to the best of our knowledge, the testator is 18 years of age or older, under no constraint or undue influence, and has sufficient mental capacity to make this will.
[Witness name and address]
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[Witness name and address]
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MCL 700.2504(1). In addition, wills may be made self-proved after execution and codicils may be self-proved. MCL 700.2504(2)–(3). Making a will self-proved precludes the necessity for the testimony of a witness when the will is offered for probate in a
formal proceeding. Otherwise, the will can be contested like any other will, for all reasons except signature requirements. Wills that are not self-proved may be admitted to informal or formal probate without the need for witness testimony. See MCL 700.3303(3), .3406(2).
Although not required, you may wish to have the testator sign each page of the will. This precaution would make insertion of substitute pages almost impossible. Having the witnesses print their names and addresses anticipates the practical problem of identifying and locating them if their testimony is required at the testator’s death.
Drafting Inter Vivos Trusts
A. In General
Form 3.2 is a prototype inter vivos trust agreement using the marital deduction and bypassing family trusts. Given the scope of this chapter, by necessity, the sample trust agreement is relatively simple. The multitude of dispositive and administrative provisions that could be included in a trust agreement is limited only by the drafter’s imagination (and the client’s willingness to fund the endeavor). The following sections will reference
portions of that sample trust agreement or present optional or alternative language with very general commentary on each portion. The emphasis of this section is on drafting, not tax or estate planning. Use the material as both a starting point for drafting and as a general introduction to trusts.
B. Introductory Clause
The introductory text preceding Article I of form 3.2 identifies the date the trust is created, the person creating the trust, and the initial trustee of the trust. The suggested clause assumes that the settlor wishes to act as sole trustee and will name a bank or another individual to be the successor trustee. Instead, the settlor may wish to have a cotrustee if he or she is establishing the trust to secure assistance in managing assets during his or her
lifetime. The preamble should be adjusted accordingly.
C. Establishing the Trust
The suggested provisions of Article I of form 3.2 make certain declarations regarding the trust, including its name and purpose. Traditionally, attorneys have deposited a small sum (e.g., $10) with the trustee to constitute the initial corpus of the trust. Such a deposit is not necessary to create a valid receptacle for a pourover from a will. MCL 700.2511.
Paragraph 1.5 exempts the trust from registration. Even though MCL 700.7209 does not require that trusts be registered, the settlor may wish to expressly exempt the trust from registration to encourage the trustee to keep private the information that registration makes of public record, including the identities of the settlor, the original trustee, and the current trustee and the date of the trust
instrument. On the other hand, registration does serve the useful purpose of fixing the forum for court proceedings that will bind all interested persons, MCL 700.7202, and for this reason the paragraph might well be eliminated.
Article II of form 3.2 provides that the trust is revocable. You should always state whether the settlor reserves the power to amend or revoke the trust agreement. The typical inter vivos trust is made revocable so that it, as with a will, can be modified later during the settlor’s lifetime. Thus, all assets will be included in the settlor’s estate for federal and state death tax purposes.
Irrevocable trusts are generally designed to gain some tax advantage and are beyond the scope of this chapter. Approach the drafting of an irrevocable trust with caution and a thorough understanding of your client’s goals and the tax implications of the terms of the trust.
Paragraph 3.5 grants authority to the income beneficiaries to remove a bank that is acting as trustee. This is a feature that many clients desire. Although a power to remove should not cause adverse tax consequences, Estate of Wall v Commissioner, 101 TC 300 (1993); Rev Rul 95-58,
1995-2 CB 191, you should be aware that for many years the Internal Revenue Service (IRS) asserted that this power, if held by the settlor or beneficiary of an irrevocable trust, would cause the discretionary powers of the trustee to be attributed to the settlor or beneficiary, with the result that the trust assets could be taxed in the estate of the powerholder. See Rev Rul 79-353, 1979-2 CB 325; Priv Ltr Rul 8916032 (Jan 19, 1989). Vesting the appointive power (see ¶3.6) in a third party should be sufficient to negate any potential adverse tax consequences that may come from holding a power to remove. As an alternative, the powerholder may be given the appointive authority if there is a restriction against appointment of a related or subordinate party. In ¶3.6, that authority is given to the court, a neutral and independent third party. Moreover,
the one who holds the power to remove is not eligible to be appointed a successor trustee, nor is a related or subordinate party eligible to be appointed.
Paragraph 3.8 provides a mechanism to appoint a special trustee to act in circumstances in which these or other limitations would prevent the trustee from performing a desirable action. Paragraphs 3.13(a) and 3.13(b) limit the trustee’s powers to avoid inclusion of the trust assets in the trustee’s estate for estate tax purposes solely because of powers granted by the trust agreement.
F. Distribution During the Lifetime of the Settlor and the Settlor’s Spouse
Article IV of form 3.2 deals with the operation of the trust during the time that the settlor or the settlor’s spouse is alive. The provisions in ¶¶4.1 and 4.2 could be omitted if it is certain there will be no funding during the settlor’s lifetime. There are many possible reasons, however, for lifetime funding—for example, to obtain management assistance while avoiding the need for a conservator or to avoid ancillary
probate of an out-of-state vacation home. The paragraphs provide a ready vehicle should the need for lifetime funding arise.
Some practitioners routinely draft revocable trust agreements to permit the trustee to make distributions during the settlor’s life to the settlor’s children or to others dependent on the settlor’s support. Local property tax assessors have become increasingly aggressive in asserting that a provision of this type, even if no distribution is ever made, causes the potential distributee to be a “present beneficiary” of the trust within the meaning of MCL 211.27a(6)(c). This conclusion results in the taxable value of any real property transferred into the trust to be “uncapped” for property tax purposes at the time of the transfer unless all of the current trust beneficiaries are close family members (as defined in MCL 211.27a(6)(c)(ii)), the property is classified as residential, and the property will not be used for any commercial purpose after the transfer (before the amendments to MCL 211.27a that became effective on December 31, 2014, this was a concern for all real property, regardless of the classification or use of the property, and for any current trust beneficiary other than the settlor or the settlor’s spouse). This interpretation is dubious, but until it is foreclosed by legislation or litigation, the conservative approach is to permit only distributions to the settlor or the settlor’s spouse during the settlor’s lifetime. If the settlor’s children or other dependents are in need of funds, trust distributions can be made to the settlor or the settlor’s spouse, who in turn, either directly or through an agent under an appropriately drafted durable power of attorney, can make the desired transfer.
This is a revocable trust, which for income tax purposes remains fully taxable to the settlor. IRC 676. Even with funding during the settlor’s lifetime, the settlor remains liable on all trust income and takes all items of trust income and deductions directly into his or her own Form 1040. Treas Reg 1.671-4(b).
G. The Marital Deduction
Paragraphs 4.3–4.7 are relevant when there may be a surviving spouse and the marital deduction plus a bypassing arrangement appears advantageous. In cases in which the marital deduction is unnecessary, see §3.44.
With the significant fluctuations in the federal estate tax exemption in recent years (see the chart in §3.13), if a traditional family trust/marital trust division was contemplated, the drafter was required to be keenly aware of the potential shift in funding that could occur depending on the year of death. The permanent $5,000,000 inflation-adjusted exemption under the American Taxpayer Relief Act of 2012, Pub L No 112-240, 126 Stat 2313 (2013), will dramatically reduce this uncertainty. For all but the wealthiest clients, all or nearly all of the assets will be allocated to the family trust. A further discussion of the intricacies of marital deduction planning is beyond the scope of this chapter. See, however, the general comments regarding tax-oriented estate planning in §3.13.
Note also that the suggested provisions of the sample trust are intended to be used only when the spouse is a U.S. citizen. Additional planning will almost always be appropriate if that is not the case. See IRC 2056(d), 2056A. The provisions offered are a few examples of the nearly limitless offerings found in almost every estate-planning formbook or textbook. Several observations can be made with respect to particular language:
- Paragraph 4.3 covers the problem of survival between spouses. If traditional estate planning is intended, generally, the spouse with the smaller estate should be presumed to have survived a common disaster, thereby securing maximum advantage from the marital deduction.
- The section entitled “allocation between family and marital portions” referenced in ¶4.3 is discussed in §3.47.
- Paragraph 4.4 provides for payment of charges out of the family portion to preserve the qualification of the entire marital portion for the marital deduction.
- The trustee’s power to distribute principal to the spouse from the credit trust in ¶4.6(b) is limited to an ascertainable standard to avoid having the property included in the spouse’s estate as a general power of appointment if the spouse is or could be the trustee. See IRC 2041.
- The primary objective of a marital trust, as opposed to an outright marital deduction gift, is typically assistance to the surviving spouse in managing assets or a degree of protection from the surviving spouse’s creditors.
- The marital trust qualifies for the marital deduction as a general power of appointment trust. IRC 2056(b)(5). This trust must give the spouse all income and a general power of appointment (whether lifetime or testamentary). Another common marital trust, a qualified terminal interest property (QTIP) trust under IRC 2056(b)(7),
is used if the settlor wishes to control the ultimate disposition of the assets or wants to allocate part of the settlor’s GST tax exemption to the assets. A discussion of GST planning is beyond the scope of this chapter.
- The special inter vivos power of appointment in the marital trust and the special testamentary power in the family trust add flexibility without changing the federal estate tax consequences. These powers may not be desirable in all instances. In particular, an inter vivos power of appointment is not compatible with the QTIP form of marital trust described above.
- The special powers in the family and marital trust are defined in ¶6.17 as the broadest possible nontaxable powers. See §3.51.
H. Alternative Distribution Provisions
If the situation does not call for using the marital deduction in the settlor’s estate but does suggest creating a trust to benefit the spouse, the drafter might substitute the ¶4.3 set forth below in place of ¶4.3 provided in form 3.2; omit ¶¶4.4, 4.5, and 4.7; and renumber ¶4.6.
4.3 At Settlor’s death. On the death of Settlor, Trustee shall pay all charges against Settlor’s estate as provided in this paragraph. Trustee first shall allocate to a separate asset account any funds that are not liable for debts or expenses of administration or that are excludable from the tax base for transfer tax purposes. Trustee
may either advance to Settlor’s personal representative funds to meet any deficiency caused by debts, fees, expenses, taxes, and other charges against Settlor’s estate exceeding property in Settlor’s probate estate that can reasonably be liquidated or pay such charges directly. Trustee, however, shall not pay debts or claims against Settlor’s estate with any funds that, at their source, are exempt from claims of Settlor’s creditors. In addition, to the extent that other assets are available, Trustee
shall not use for the payment of debts, transfer taxes, or expenses of administration any benefits payable to the trust under a retirement plan for which a trust beneficiary is treated as the designated beneficiary. All charges against Settlor’s estate, if paid by Trustee, shall be paid as an expense of administration without apportionment among the beneficiaries, unless otherwise directed in Settlor’s last will. In determining liabilities and charges under this paragraph, Trustee may act on evidence it deems
reliable. If Settlor’s spouse survives Settlor (regardless of the length of the survival period), Trustee shall administer the remaining principal as provided in the section of this Article entitled “Spouse’s Trust.” If Settlor’s spouse fails to survive Settlor, Trustee shall administer the balance of the trust assets as provided in Article V. If it is difficult or impossible to determine whether Settlor or Settlor’s spouse has survived the other, or if there is not sufficient
evidence to make that determination, [Settlor / Settlor’s spouse] shall be deemed to be the survivor. In all events, however, Trustee shall satisfy any general or specific devises in Settlor’s last will as directed by Settlor’s personal representative; or if none is appointed, Trustee shall do so in accordance with the instrument Trustee determines to be Settlor’s last will.
Other provisions in ¶4.6, such as the name “Family Trust,” need to be revised to “Spouse’s Trust” or omitted if the above alternate of ¶4.3 is used.
When the settlor has no spouse and the trust fund is to be distributed immediately to children or more remote descendants, the sentences regarding the spouse can be deleted from this alternative ¶4.3, along with the rest of Article IV (¶¶4.4–4.7) and the Trustee can be directed to distribute the balance of the fund in accordance with directions in Article V.
I. Distribution Following the Death of the Settlor and the Settlor’s Spouse
Paragraphs 5.1–5.4 provide sample terms for the distribution of assets after the death of the settlor and the settlor’s spouse. See the discussion of reasons to separate tangible personal property from other dispositions in §3.20.
The provisions in ¶5.4 detailing separate trusts for descendants after the death of both the settlor and the settlor’s spouse are but one example illustrating a possible design for family distribution. The extended discussion of this topic in the context of the sample will form in §§3.25–3.33 applies also with respect to the trust agreement.
J. Provisions Applicable to All Trusts
The remainder of Article V of form 3.2 includes additional provisions to ease administration of the trust and to provide for certain special cases. Many of these provisions may also be found in wills. See §3.35 for a discussion of defining representation, §3.22 for a discussion of retaining minors’ shares, and §3.24 for
a discussion of providing alternate ultimate takers in the case of an absence of all named beneficiaries.
K. General Provisions
1. Allocation Between the Credit and the Marital Portions
Paragraph 6.1 of the sample trust agreement provides the formula by which the trust is divided into a family portion and marital portion at the settlor’s death. The formula describing the share for the family (bypassing) trust is a hybrid, fractional-share provision. Under it, the total value of the federal applicable exclusion amount and the amount of deductions claimed on the federal estate tax return is allocated to the family (bypassing) trust. The excess, without limitation,
is allocated to the marital deduction share.
2. Provisions Relating to Distributions
Paragraphs 6.2–6.10 provide additional guidance to and protection for the trustee with respect to distributions being made from the trust. In particular, ¶6.4 protects the eligibility of the marital trust for the marital deduction when the trust assets include non–income-producing assets. The spendthrift provision in ¶6.8 provides some protection against a beneficiary’s creditors.
The definition of the term disability in ¶6.10 is used in conjunction with ¶¶3.4, 4.1, and 6.6. Because others may need to have access to a trustee’s health information to determine whether he or she is able to continue to serve as trustee and because the information needed for that determination may be protected by HIPAA, the suggested language in the trust form (see the statement following ¶9.1 of form 3.2) requests the trustee
to execute an authorization for the release of his or her medical information for this limited purpose. An example of an authorization of this type is included as form 3.4. For further discussion of estate planning issues related to HIPAA, see §§3.69–3.71.
3. Provisions Relating to Trust Termination and Management
Paragraphs 6.11–6.14 of form 3.2 address the termination and combination of trusts. Paragraph 6.11 ensures that the trust complies with the rule against perpetuities, which, in most states (including Michigan), limits the duration of a trust. Paragraph 6.14, “Termination of trusts,” addresses two problems. One is the possibility that the value of the trust may decline to such an extent that it is uneconomical to continue its existence.
The other is that changes in circumstances, including possible changes in the tax law, might remove all reasons for continuing the trust. While authorizing termination, the paragraph does emphasize that this action is permissible only when there is no other reason for the trust’s continued existence. Clearly, use of this paragraph must be consistent with the settlor’s intentions.
The perpetuity savings clause in ¶6.11 of form 3.2 ensures that all trust assets will fully vest within the common-law perpetuities period (commonly described as “lives-in-being plus 21 years”). Since 1988, Michigan allowed a potentially longer 90-year “wait-and-see” period for an interest to actually vest, even if (contrary to the common-law rule against perpetuities) it was not certain to do so from creation. Effective May 28, 2008, 2008 PA 148 and 149 made significant additional changes to Michigan’s rule against perpetuities. These acts are quite complex, and a full discussion is well beyond the scope of this chapter, but it is worth noting that Michigan law now permits perpetual trusts—at least with respect to personal property. The language in ¶6.11 of form 3.2 is still valid and effective to prevent any violation of the rule against perpetuities, but the drafter should be aware that this language makes no attempt to avail of the new, longer periods of trust duration now permitted under Michigan law (or even the 90-year wait-and-see period that has been available since 1988). If maximum trust duration is desired, the drafter should carefully consider the provisions of 2008 PA 148 and 149.
4. Provisions Relating to Trust Modification
Paragraph 6.15 discusses the power of a probate court of applicable jurisdiction to modify the terms of the trust. Although the probate court has this power even in the absence of express authority in the trust agreement, this section is included to provide additional guidance to a probate court attempting to determine whether a requested modification is consistent with the settlor’s intent. Of course, this paragraph must be modified to correctly reflect the settlor’s
5. Powers of Appointment
Paragraph 6.17, which deals with powers of appointment, should be compared with the Powers of Appointment Act of 1967, MCL 556.111–.133. The act is not sufficiently specific to obviate all powers-of-appointment provisions in a trust agreement. For example, the specific reference requirement in ¶6.17(c) and the limitation to avoid estate tax inclusion in ¶6.17(g),
which are very useful, are not found in the statute and must be specifically inserted.
Be aware that ¶6.17(a)(2)(A) contains the broadest possible definition of special power. The client may want a more limited definition, e.g., to descendants (other than the holder of the power), spouses of descendants, and charitable organizations.
6. Other General Provisions
The remainder of Article VI of the sample trust, form 3.2, includes provisions to guide the interpretation and administration of the agreement and safeguards to prevent beneficiaries from receiving a larger than intended share. These provisions include the following:
Separate asset account. A separate asset account, described in ¶6.18, functions in connection with ¶¶4.4, 4.6, and 6.1. The account acts as a receptacle for assets that are exempt from estate tax pending payment of all charges against the estate. If exposed to liability for those charges, these assets might forfeit the exemption.
Election against will. Paragraph 6.24 reflects the fact that either spouse may elect against the other’s will. MCL 700.2202. It negates the possibility that a dissenting spouse might claim both an elective share and benefits under the trust agreement.
L. Administrative Powers
Article VII of form 3.2 contains a fairly comprehensive set of fiduciary powers. As an alternative to this long list, you might incorporate by reference the powers EPIC grants to trustees. See MCL 700.7817. A separate statement of powers in the trust agreement, however, may be useful so that the trustee has
administration information in one place.
The set of powers in the sample provision is more than just a restatement of those in EPIC. For example, ¶7.4 authorizes the trustee to invest in life insurance without regard to diversification, production of income, and other elements of the prudent investor rule that would otherwise apply. Note that the Michigan Trust Code made several changes to the statutory default trustee powers. These changes are not reflected in form 3.2. When using form 3.2, consider these new provisions of MCL 700.7817, in particular subsection (ii), relating to exercising powers over employee benefit and retirement plans; (kk), regarding making loans; (ll), regarding pledging trust property as security for beneficiary loans; (mm), regarding alternate dispute resolution; and (nn), regarding powers to wind up the trust.
Paragraph 7.7 references the requirements of the Michigan prudent investor rule. See MCL 700.1501 et seq. While this is the default rule for a trustee, see MCL 700.7817(b), a trust agreement may broaden or limit the trustee’s investment authority according
to the settlor’s wishes. Broad investment authority is generally favored as long as a competent trustee is selected.
Paragraph 7.13 must be included if the client wants the trustee to have the ability to disclaim assets because a trustee possesses this power only if it is granted by the trust document. MCL 700.2902(1). The power to disclaim can be useful for a variety of reasons, including avoiding transfers of environmentally contaminated or otherwise undesirable property to the trust and providing
flexibility to the testator’s dispositive plan. Under EPIC, a disclaimer may be of a specific asset, an interest in a specific asset, a pecuniary amount, a fractional or percentage share, or a limited interest or estate. MCL 700.2902.
The power to appoint a substitute fiduciary for out-of-state assets, in ¶7.36, is a useful provision. Many clients own assets, particularly real estate, in other states, with respect to which a Michigan corporate (or even individual) fiduciary might not be permitted to act.
Article VIII of the sample trust addresses accounting requirements. Under EPIC, the trustee must account to current trust beneficiaries and keep them reasonably informed of the trust and its administration. MCL 700.7814. This requires that, at least annually, a trustee provide a statement of account reporting the trust’s assets, their market value,
trust liabilities, receipts, disbursements, and the source and amount of the trustee’s compensation. Id. Consistent with EPIC, ¶8.4 contains a one-year cutoff period for settlement of annual or final accounts that meet statutory requirements. MCL 700.7905.
Although the EPIC default rule regarding accounting may be modified by the trust agreement, the special one-year limitation period does not begin to run until the beneficiary receives a report adequately disclosing the basis of the potential claim.
N. Choice of Law
Article IX addresses the governing law for the trust. In a highly mobile society with laws and procedures differing greatly from state to state and with beneficiaries likely to reside in any number of them, a choice-of-law provision is necessary to ensure that the correct law is followed if litigation should occur.
A trust agreement may well have an impact on the title to real estate. Because this may necessitate recording the agreement, it is suggested that the settlor’s signature be acknowledged in addition to being witnessed. See MCL 565.47. Recording the entire trust instrument, however, may be undesirable because the agreement may be lengthy,
making recording expensive, and because recording will expose the distribution provisions to public view.
Preparing and recording a certificate of trust existence and authority is an alternative method for putting on the public record the trust provisions that are essential to confirm the trustee’s authority. Paragraph 3.14 of the trust agreement and Michigan law contemplate a separate certificate on which a third party may rely. The requirements for a certificate of trust existence and authority are contained in MCL 565.431–.436.
The content of a certificate will vary with each trust agreement because the certificate quotes provisions from the trust agreement. See form 3.5 for a sample certificate of trust existence and authority.
Health Care Directives
A. Health Care Decisions
Advances in modern medical treatment have allowed medical personnel to prolong human life through the use of such extraordinary tools and measures as respirators, heart-lung machines, and organ transplants. When a person is brain-dead or is in constant pain during the final stages of a terminal illness, the financial and physical toll that sophisticated life-prolonging procedures exact can overwhelm the family or the patient. As a result, many people wish to specify in advance the types
of treatment they do or do not want in the event of a terminal illness.
In Cruzan v Director, Missouri Dep’t of Health, 497 US 261 (1990), the U.S. Supreme Court held that an individual has a constitutionally protected liberty interest in refusing unwanted medical treatment, including artificially delivered food and water, under the due process clause of the federal constitution. The Court further held that this right may be restricted
by the states as long as any restrictions further legitimate state interests.
Clients who wish to state a preference that artificial means of life support not be used in face of imminent death may want to use a living will (see §3.58). Those who desire to appoint an agent to make medical decisions—which could include issues of life support—will want to designate a patient advocate (see §3.59).
B. The Role of a Living Will in a Michigan Estate Plan
The term living will is a misnomer. Such a document is not a will but rather a declaration that instructs physicians and others to withhold or withdraw life-sustaining procedures and equipment in the face of certain death. It is a written expression of the person’s right to dictate medical treatment for himself or herself. The word living in living will refers to the fact that the declaration is made by a person while
he or she is still alive and competent to make decisions regarding medical care. Although a number of states have enacted legislation dealing with living wills, the Michigan Legislature has not acted in this area.
Because the extent to which Michigan law recognizes a living will is not clear, a client who expresses a desire to prepare a living will should be advised of the greater certainty (and other potential advantages, including the ability to address more routine medical decisions) afforded by a designation of patient advocate (see §3.59). If a client definitely wants to state that extraordinary medical treatment not be used but does not want to designate a patient advocate,
you should explain carefully that the legal effect of a living will in Michigan is uncertain at this time, but that a living will may give useful guidance to family, friends, physicians, and hospitals. Because the presence of a living will can make difficult decisions a bit easier, the use of a living will may help meet a client’s desires.
C. The Designation of a Patient Advocate
In response to the Supreme Court’s confirmation of a person’s right to dictate medical treatment (see §3.57), the Michigan Legislature has authorized the designation of a “patient advocate.” See MCL 700.5506–.5512. A patient advocate may exercise powers concerning care, custody,
and medical treatment when the patient is unable to participate in treatment decisions. Unless the patient is pregnant, the patient advocate may make a decision, among others, to withhold or withdraw treatment and allow the patient to die if the patient has expressed in a clear and convincing manner that the patient advocate is authorized to make such a decision and the patient acknowledges that such a decision could result in the patient’s death. The statute requires the advocate to follow the oral or written instructions,
desires, and guidelines the patient gave while competent.
The statute prescribes the procedures to follow to create and execute a valid designation. See form 3.6 for a form for designating a patient advocate that contains guidelines to assist a patient advocate in deciding when to withhold or cease use of life-sustaining procedures and technology.
In re Rosebush, 195 Mich App 675, 491 NW2d 633 (1992), involved disconnecting a respirator from a 12-year-old girl who was in a persistent vegetative state. The court held that there is a right to withhold or withdraw life-sustaining medical treatment as an aspect of the common-law doctrine of informed consent. The court also held that in making decisions for minors or other incompetent patients, surrogate decision
makers should make the best approximation of the patient’s preference on the basis of available evidence. If such a preference was never expressed or is otherwise unknown, the surrogate should make a decision based on the best interests of the patient. Lastly, the court held that, in general, judicial involvement in the decision to withhold or withdraw life-sustaining treatment on behalf of a minor or other incompetent patient need occur only when the parties directly concerned disagree about treatment. See Advising the Older Client or Client with a Disability ch 13 (Lauretta K. Murphy & Alison E. Hirschel eds, ICLE 4th ed).
When a patient is conscious and before sustaining his or her present injuries was competent to make a decision to withdraw life-sustaining medical treatment, no one else may make a decision for or in place of the patient regarding his or her right to continue treatment. Martin v Martin (In re Martin), 450 Mich 204, 538 NW2d 399 (1995), cert denied, 516 US 1113 (1996). On the other hand, if a conscious patient was at one time, but is no longer, competent to make medical decisions regarding his or her treatment, a surrogate decision maker or a court may authorize the removal of life-sustaining medical treatment, but only if there is clear and convincing evidence of the patient’s preinjury statements expressing his or her decision to refuse the treatment under the present circumstances. Id. The Martin decision
suggests there must be prior statements that reflect a serious and consistent decision to refuse medical treatment in the specific situation in which the patient finds himself or herself. Therefore, it is important to be as specific as possible in the designation of patient advocate form regarding the circumstances under which the patient would want life-sustaining medical treatment ended.
The designation may authorize the patient advocate to make mental health treatment decisions if the patient is unable to give informed consent to the mental health treatment. The authority to make mental health decisions on behalf of the patient may, if expressed in a clear and convincing manner, include the ability to authorize forced administration of medication or inpatient hospitalization. The patient may waive the right to revoke the patient advocate designation with respect to mental health treatment, but the waiver
is only effective to suspend the revocation for 30 days.
A patient advocate may also be authorized to make an anatomical donation on behalf of a deceased patient, in which case the designation (and corresponding acceptance) must state that the authority remains exercisable after the patient’s death. MCL 700.5506–.5508. Under the Public Health Code, a patient advocate who has been authorized to make an anatomical gift is given the primary authority to make such a donation. MCL 333.10109. Paragraph 2(g) of form 3.6 contains optional language authorizing the patient advocate to make anatomical gifts, which can be tailored to suit a particular client’s wishes. The preferred practice should be to affirmatively state the client’s wishes with respect to anatomical gifts, regardless of what those wishes are.
The client should give a copy of the designation of patient advocate to the one named as patient advocate and to the client’s physician. This will facilitate the patient advocate’s ability to make medical decisions when the need arises and give greater assurance that the client’s desires are observed.
Because a disability may prevent a named patient advocate from being able to serve and because the named patient advocate’s medical information is protected under HIPAA, the named patient advocate should provide an authorization permitting the disclosure of health care information for the limited purpose of determining the patient advocate’s ability to serve. See form 3.4. For further discussion of estate planning issues related to HIPAA, see §§3.69–3.71.
D. Do-Not-Resuscitate Orders
The Michigan Do-Not-Resuscitate Procedure Act, MCL 333.1051 et seq., provides that a person who is at least age 18 and of sound mind, or a patient advocate of an individual who is at least age 18, may execute a do-not-resuscitate order. This order is a document directing that no resuscitation will be initiated if a patient’s heart stops beating and he or she stops breathing outside
of a hospital (as defined in MCL 333.20106(5)).
The statute mandates the use of one of two forms, both of which are included in the statute. One form is for an individual who belongs to a church or religious denomination whose members rely on prayer alone for healing. MCL 333.1056. The other is a general form for all other cases. MCL 333.1054. The do-not-resuscitate order must be
signed by (1) the declarant, the declarant’s patient advocate, or someone in the declarant’s presence acting under the declarant’s directions; (2) the declarant’s attending physician (unless the individual depends on prayer alone for healing); and (3) two witnesses age 18 or older, at least one of whom is not the declarant’s spouse, parent, child, grandchild, sibling, or presumptive heir. MCL 333.1053(2), .1055(2).
Effective February 2014, a guardian may execute a do-not-resuscitate order. The order must be dated, executed voluntarily, and signed by (1) the guardian, (2) the ward’s attending physician, (3) two witnesses aged 18 or older, at least one of whom is not the ward’s spouse, parent, child, grandchild, sibling, or presumptive heir. 2013 PA 155 (adding MCL 333.1053a, eff. Feb 4, 2014); 2013 PA 157 (amending MCL 700.5314, eff. Feb 3, 2014).
E. The Dignified Death Act
The stated intention of the Michigan Dignified Death Act, MCL 333.5651 et seq., is to increase the awareness of patients who have reduced life expectancy due to an advanced illness of their right to make decisions to receive, continue, discontinue, or refuse medical treatment with the hope of encouraging better communication between patients and health care providers
to ensure that the patient’s final days are meaningful and dignified. MCL 333.5652(2). Under the act, advanced illness is defined as “a medical or surgical condition with significant functional impairment that is not reversible by curative therapies and that is anticipated to progress toward death despite attempts at curative therapies or modulation, the
time course of which may or may not be determinable through reasonable medical prognostication.” MCL 333.5653(1)(a).
The act requires a physician to orally inform a patient who has a reduced life expectancy due to an advance illness, the patient’s patient surrogate, or the patient’s patient advocate about the recommended medical treatment; alternatives to the recommended treatment; the advantages, disadvantages, and risks of the recommended treatment and each alternative; and the procedures involved in the recommended treatment and each alternative. MCL 333.5654(1). The physician must also, both orally and in writing, inform the patient that the patient has the option of designating a patient advocate to make medical treatment decisions for the patient; that the patient, patient surrogate, or patient advocate has the right to make an informed decision regarding receiving, continuing, discontinuing, and refusing medical treatment; and that the patient, patient surrogate, or patient advocate may choose
adequate and appropriate pain and symptom management as a basic and essential element of medical treatment. MCL 333.5655.
The act confers immunity from civil or administrative liability on a physician who, in good faith, prescribes a controlled substance that is a narcotic drug to a patient who has reduced life expectancy due to an advanced illness as part of a medical treatment plan with the intention to treat the patient, alleviate the patient’s pain, or both. MCL 333.5658. According to MCL 333.5660, the act does not impair a legal right of a parent, a patient, an advocate, a legal guardian, or another individual to consent to or refuse medical treatment on behalf of another; does not create a presumption about a patient’s desire to receive or refuse medical treatment, regardless of the ability of the patient to participate in medical treatment decisions; does not limit the ability of a court making a determination
about the medical treatment decisions of a patient who has a reduced life expectancy due to an advanced illness to take into consideration such state interests as preserving life or preventing suicide; and does not condone, authorize, or approve suicide, assisted suicide, mercy killing, or euthanasia.
Durable Powers of Attorney
A. In General
Estate planning tends to focus on the management of a person’s affairs after his or her death, through a will or trust, or during disability, through an agent with a power of attorney. Unfortunately, the power of attorney, as developed under common law, clearly terminates when the principal becomes incompetent as well as on the principal’s death. Thus, from an estate planning perspective, the ordinary power of attorney becomes useless just when it is most needed.
Michigan statutory law has slightly less stringent rules than the common law for terminating the authority of a power of attorney on the principal’s incompetence or disability. MCL 700.5504 provides that the authority is not terminated until the agent receives actual notice of the principal’s death, disability, or incompetence. Although this rule validates actions taken by an agent
in good faith and without knowledge of an event that would otherwise terminate the authority, it still does little to provide a mechanism for managing the affairs of a disabled person.
Fortunately, Michigan, like many other states, has adopted the concept of a durable power of attorney, similar to that expressed in the Uniform Probate Code:
A durable power of attorney is a power of attorney by which a principal designates another as the principal’s attorney in fact in a writing that contains the words “This power of attorney is not affected by the principal’s subsequent disability or
incapacity, or by the lapse of time”, or “This power of attorney is effective upon the disability or incapacity of the principal”, or similar words showing the principal’s intent that the authority conferred is exercisable notwithstanding the principal’s subsequent disability or incapacity and, unless the power states a termination time, notwithstanding the lapse of time since the execution of the instrument.
An act done by an attorney in fact under a durable power of attorney during a period of disability or incapacity of the principal has the same effect and inures to the benefit of and binds the principal and the principal’s successors in interest as if the principal were competent and not disabled. Unless the instrument states a termination time, the power is exercisable notwithstanding the lapse of time since the execution of the instrument. A durable power of attorney that authorizes the agent to
convey or otherwise exercise power over real estate does not need to contain the real estate’s legal description.
This statutory revision of common law permits the authority of the agent to continue even when the principal is incompetent or otherwise disabled and the agent knows of that fact. Thus, the durable power provides a mechanism for managing the affairs
of a living person who becomes incompetent. The durable power, however, terminates when the principal’s death becomes known to the agent.
B. Use of a Durable Power
Before the advent of durable powers of attorney, only guardians and conservators managed the affairs of disabled persons. Those roles, however, are statutory in nature and require court appointment and supervision. This can mean delay, significant expense, and a public procedure that is often humiliating both for the disabled person and his or her family.
The durable power of attorney offers an alternative to judicial guardianship and conservatorship. A person can anticipate the possibility of incompetence or other disability and provide an efficient, private, out-of-court mechanism for dealing with his or her affairs. Advance planning, however, is crucial. Once disability has occurred, it is too late for the person to sign a durable power. Most people probably do not anticipate disability, nor do they realize that they can make arrangements to have their affairs handled
during disability. Consequently, you, as the estate planner, have an opportunity to counsel clients about the problems attendant on a disability. This topic can and should be part of estate planning.
C. Effective on Execution or Disability
The agent’s authority can either take effect (1) immediately after the written durable power is signed or (2) only on the principal’s disability. Form 3.7 provides alternative language to create either type of document. If the client is aged or infirm, immediate authority is usually advantageous. On the other hand, if the person (the principal) is preparing and signing a durable power only to plan for a potential event of disability, he
or she may be reluctant to authorize another to act presently, wanting to retain full control over his or her affairs. If the power is effective immediately, the agent could act and bind the principal without the latter’s knowledge or consent. That danger exists no matter how apparently trustworthy the agent may be. Therefore, the client may prefer to sign a durable power that is effective only on disability.
Although there are dangers associated with a power that is effective immediately, there are also advantages. A primary advantage is that an immediately effective durable power eliminates the need to produce evidence that the agent’s authority has been triggered. When the power is to be effective only on disability, it is necessary to demonstrate that the disability has occurred for the agent to convince third parties that he or she may act. This step can take time and may be inconvenient as well. Because of this
triggering mechanism, the power of attorney with delayed effectiveness often is called a springing power.
If you prepare a springing power for your client, you will need to anticipate the problem of showing that the principal is disabled and create a method to clearly demonstrate that the agent is authorized to act. For example, the power of attorney could state that the principal would be considered disabled on a court determination or the written certification of a licensed physician. See the second alternative for paragraph 7 of form 3.7. Written certificates are the preferred route because
a primary objective of a durable power is to avoid the expense and delay of court proceedings. Third parties generally will recognize the agent’s authority when it is established by a doctor’s written certificate. With a workable method for demonstrating incapacity, a power of attorney that becomes effective at a later time may be an attractive alternative to a power of attorney that is effective at execution.
As an additional alternative to the traditional “effective immediately” and “effective only upon disability” variations, in appropriate circumstances, consider a hybrid authorization in which the primary agent is authorized to act effective immediately, but one or more successor agents are authorized to act only after the principal’s disability. The alternate versions of section 1 in form 3.7 can be modified to accomplish this result. The hybrid arrangement is particularly suitable when the principal has complete confidence in, and is willing to have financial information disclosed to, the primary agent (perhaps a spouse of many years), but a lesser degree of comfort or experience with the successor agents (perhaps children or siblings who have had limited involvement with the principal’s finances).
D. Selecting the Agent
Any competent adult may act as an agent for another person. Institutions may also act as agents. Most banks with fiduciary powers will agree to act as agents under a durable power. Choosing an agent, like choosing a personal representative or trustee, involves practical considerations. One consideration is the agent’s proximity to the principal. The agent may need to make bank deposits, pay bills, arrange for the physical care of both the principal and the principal’s
property, and engage in other transactions that make the agent’s physical presence extremely desirable. In many instances, the need for close proximity leads a principal to name a financial institution as agent because family members are geographically distant and scattered.
Another consideration is the extent of the agent’s authority. The agent can be authorized to conduct virtually all of the principal’s affairs. If such broad authority is contemplated, the agent should be a person or an institution in which the principal has the utmost confidence and trust. Theoretically, if a limited authorization is to be used, a lesser degree of trust and confidence might be permissible.
Because a disability may prevent a named agent from being able to serve and because the named agent’s medical information is protected under HIPAA, an individual named as agent should provide an authorization permitting the disclosure of health care information for the limited purpose of determining the agent’s ability to serve. An example of this type of authorization is included as form 3.4. For further discussion of estate planning issues related to HIPAA, see §§3.69–3.71.
E. The Agent’s Powers
1. Nature of Authority
The agent is subject to the principal’s control and supervision. Although the principal-agent relationship is primarily contractual in nature, in the context of planning for the management of a person’s affairs during disability, the fiduciary relationship is as important as the contractual one. EPIC authorizes the conservator to revoke or amend the power of attorney. The statute also states that the agent “is accountable to the fiduciary as well as to the principal.” MCL 700.5503(1). This reference suggests that the legislature intended the relationship under a durable power to be a fiduciary one. The power of attorney, however, should state explicitly that the agent is to act as a fiduciary and solely in the principal’s best interest.
As a result of 2012 PA 141, MCL 700.5501 has been expanded to provide additional guidance regarding the required formalities for executing a durable power of attorney, the duties of the agent, the standard of care to which the agent will be held, and certain acts of the agent that are prohibited unless specifically authorized in the durable power of attorney. These changes apply to most durable powers of attorney executed after September 30, 2012. Unless one of the enumerated exceptions apply, MCL 700.5501(2) will require that a durable power of attorney be (1) signed by two witnesses (neither of whom is the agent) who were present when the principal signed the document or (2) acknowledged by a notary public. Similarly, the revised statute will prohibit the agent from making gifts of the principal’s assets or from creating joint accounts or joint tenancies between the principal and the agent unless specifically authorized in the durable power of attorney or by judicial order. MCL 700.5501(3). Finally, newly added MCL 700.5501(4) describes the form and content of an acceptance that the agent will be required to sign before acting.
In general, the authority of an agent is strictly construed. Therefore, you should anticipate the various types of specific authority that the agent might require. If the agent selected is trustworthy and someone in whom the principal has full confidence, it might be appropriate to give the agent the broadest possible authority. In essence, the principal can state that the agent has “full authority to deal with my property and affairs as fully as I might or could if personally present.” Third parties, however,
usually have difficulty visualizing all of the powers that this statement encompasses and will often want to see that a particular transaction is authorized specifically. Therefore, you should also give a comprehensive list of the common types of transactions that fall within the scope of authority as well as a general grant of broad authority. The following are some specific powers found in form 3.7, which may be modified or omitted, depending on the circumstances and the client’s preferences.
- The agent may delegate authority to another. Very often such flexibility is desirable.
- The agent may transfer assets to the trustee of a trust the principal established for the principal’s own benefit. If separately owned property may be added to a trust, the trust might be a better vehicle for ongoing management. Such a transfer also will avoid the need for probate proceedings when the principal dies.
- The agent may file the principal’s tax returns and represent the principal in dealings with the IRS.
- The agent may initiate and conduct litigation on the principal’s behalf.
- The agent may make gifts. This power, as drafted in form 3.7, is restricted by the requirement that there is a court finding that the gifts are consistent with the principal’s desires and will not jeopardize the principal’s security. Some clients may be comfortable permitting an agent to make gifts within the annual exclusion amount of IRC 2503(b) to a specified class
of recipients without a court order. A durable power of attorney could also permit the agent to make direct payment of tuition and medical expenses as contemplated by IRC 2503(e).
You will also encounter situations in which the agent’s authority should be tailored to fit a unique need. An example is a client who owns and operates a business as a proprietor or general partner. Powers of attorney might grant the authority to continue the business, to borrow funds, to dispose of assets, or to incorporate the business. The planning in these instances may need to be as comprehensive as the planning for the testamentary disposition of property.
The actions of an agent under a durable power of attorney are not revoked by the death of the principal when the agent has completed all actions necessary for the transaction before the principal’s death and all that remains is completion of the transfer by a third party. Capuzzi v Fisher, 470 Mich 399, 684 NW2d 677 (2004).
2. Limitations on Authority
Although it is advantageous to grant broad authority to the agent, you might want to impose some limitations on his or her authority. For example, it seems appropriate to forbid the agent to make a will, codicil, or any will substitute for the principal. Likewise, the agent might be forbidden to make any changes in the designation of beneficiaries under life insurance policies. In addition, if you do not want the agent to have the ability to make gifts, an explicit restriction on making
gifts would remove the danger of an incorrect interpretation of the agent’s authority (but note the specific prohibition of MCL 700.5501(3)(d), which may make such an explicit restriction in the document unnecessary).
The broad authority granted to an agent could be construed as a general power of appointment and could lead to tax problems for the agent during his or her lifetime or for the agent’s estate at death. For example, unrestricted power over income could result in the agent being taxed under IRC 678. The agent’s ability to make transfers of assets could be construed as the ability to give the property to himself or herself
under a general power of appointment. As a result, all of the principal’s assets could be included in a deceased agent’s gross estate. Such an attenuated result should be negated by a clear statement in the durable power that the agent is serving only in a fiduciary capacity. If additional protection is desired, the durable power could include language restricting the agent’s ability to appoint to himself or herself.
F. Facilitating Transactions with Third Parties
Unless third parties accept the durable power and follow the agent’s instructions, the power of attorney is ineffectual. If third parties can be convinced that there is little or no risk in dealing with the agent, the agent will probably be able to transact the necessary business. For that reason, the durable power should include language directing third parties to rely on all representations of the agent. The provision might stipulate further that reliance on the agent’s
representations will cause third parties no liability and that if any such liability does arise, it will be discharged by the principal.
The agent may wish to be protected by an indemnification provision in the power of attorney. Often, the agent will be acting without compensation and will want to know that no liability will ensue if he or she has acted in good faith and with as much care and reasonableness as possible. Therefore, you might include an indemnification provision in the power of attorney.
Two other steps can facilitate transactions by the agent. The first is to have the power of attorney executed in recordable form because transactions involving real estate must become a matter of public record. The authority of the agent may not be recorded unless the execution by the principal is acknowledged by a notary public and otherwise complies with the statutory recording requirements. See MCL 565.201.
The second is to state that reproductions of the original power of attorney are as acceptable as an original power of attorney. It is usually difficult for principals, who might be aged or disabled, to sign a sufficient number of originals. Therefore, reproductions must be acceptable to third parties. Stating that the reproductions are as acceptable as the original may help persuade the recipient that they are, indeed, valid.
HIPAA and Confidential Medical Information
A. In General
HIPAA, codified at 42 USC 1320d et seq., has added an additional element to estate planning. Although covering a number of other topics, as a result of regulations promulgated under the act, 45 CFR Part 160, Part 162, and Part 164, HIPAA has become well known for its impact on the disclosure of a patient’s medical information.
Beginning in 2003 (2004 for certain small health plans), the HIPAA regulations prohibit certain health care providers from disclosing “protected health information” (a very broad term, which, in addition to the obvious types of information, includes patient billing records and even the fact that a patient is receiving treatment at all) unless the patient has explicitly consented in a prescribed manner to the disclosure or certain special circumstances apply (e.g., compliance with a court order).
Certain medical records may be subject to additional protections. In addition to the HIPAA authorizations described in §§3.70–3.71, further authorizations, releases, and waiver forms may be needed for the disclosure of psychotherapy notes; records relating to alcohol and drug abuse or employee exposure to toxic and hazardous substances; or HIV or sickle cell anemia information from a Veterans Affairs medical facility. The Medical Records Access Act, MCL 333.26261 et seq., has also been enacted to regulate how a patient or a patient’s agent may access the patient’s medical records and the amount that health care providers may charge for copying these records.
A full discussion of HIPAA, the HIPAA regulations, and other issues relating to the disclosure of medical information is well beyond the scope of this chapter. You should be familiar, however, with two particular implications of HIPAA and the HIPAA regulations on the practice of estate planning.
B. Disability of the Client
The client’s disability will have a number of consequences under the estate plan. In the case of a springing power of attorney (see §3.64) or a designation of a patient advocate (see §3.59), the client’s disability triggers the fiduciary’s authority to serve. In the case of an inter vivos trust of which the client was serving as trustee (see §3.15), a successor trustee will be needed to fill the vacancy. Accordingly, it is important to have access to the client’s medical information to determine whether a disability has occurred. In addition, once serving, those fiduciaries will likely need continuing access to protected health information to fulfill their roles (e.g., an agent under a durable power of attorney will need access to the client’s medical billing records to review and pay those charges
on behalf of the client). To address these concerns, the client should provide an authorization permitting the disclosure of the client’s health care information to the fiduciaries who are named to serve during the client’s disability. The scope of the authorization may be tailored to fit a particular client’s situation. See form 3.8 for a sample authorization.
C. Disability of the Client’s Fiduciaries
As discussed throughout this chapter, a fundamental aspect of estate planning is the designation of surrogate decision makers to serve in a fiduciary capacity on behalf of the client. Fiduciaries may be appointed during the client’s life (as is the case with a patient advocate, discussed at §3.59; an agent under a durable power of attorney, discussed at §3.62; and possibly a trustee
or successor trustee of an inter vivos trust, discussed at §3.15) or at the client’s death (as is the case with a personal representative of a deceased client’s estate, discussed at §3.19).
If individuals are named to serve in these fiduciary capacities, those individuals may later become unable to serve as the result of a disability. To determine an individual’s ability to continue to serve as fiduciary, access to that individual’s health care information will be required. In light of the limitations on the disclosure of health care information imposed by the HIPAA regulations, each individual serving in a fiduciary capacity should provide an authorization permitting the disclosure of health
care information for the limited purpose of determining the fiduciary’s ability to continue to serve. See form 3.4 for an example of this type of authorization.