Provided by James A. Carolan, CWS®, CTFA | Sr. Estate Planning Attorney for EWM Legal Solutions
To answer these questions, we first must define estate planning. I like to use the following:
“I want to control my property while alive and well. Take care of me and my loved ones if I become disabled. Then give what I have to whom I want, when I want, and the way that I want.”
The goal of estate planning is more than determining who will get my stuff when I’m gone. Estate planning includes planning for while you are alive and well, and maintaining control over your “person” and possessions when you are “not well.” Statistically, we are all more likely to become disabled during any given year than we are to die, so planning for potential disability is a critical component of successful estate planning. If the estate planning attorney doesn’t address control and disability issues in planning, then only part of the planning process is being addressed.
According to a Gallup poll, only 46% of Americans have a will. A survey by caring.com in 2022 found that 1 out of 3 Americans with no estate plan thought that they have “too few assets” to leave to someone, so they see no need to prepare an estate plan. However, asset distribution only focuses on death and “who gets my stuff when I’m gone.” That is the last piece of the estate planning puzzle. Addressing your incapacity is more important; once that is handled, then we can decide what to do with “the stuff.”
What is a will?
A will is, first, an instrument of death. It only operates when we die and does nothing for us while we are alive. It is a set of instructions to the Probate Court that says: “Please appoint this person to manage my estate.” Then it says, “After the judge appoints you, pay my creditors (including the IRS, the court, and the attorney) first. Then do this with my stuff.” Probate is the process by which the person you selected is appointed and given the authority to act on your behalf. It is a public process, meaning all your assets are listed on schedules in the public court records, and all of your creditors will be listed in the reports.
Since a will is an instrument of death, it does nothing for disability planning. We try to cover incapacity planning through ancillary documents (i.e., durable powers of attorney, patient advocate designation). The durable power of attorney relies upon third parties honoring it at the time that it is used. If it doesn’t meet their standards or policy provisions, it may be rejected. If it is rejected, yes, we can force them to honor it in Michigan through court action; but if we are in court, we have lost control and are forced to put someone through the “living probate” and get a conservator and guardian named in order to manage assets and personal decisions.
The living probate is just as invasive into our personal information as the death probate, and just as public. In the living probate, the court is given your medical history, your asset information and creditor information, and then the court will determine, in a public hearing, if you are incapacitated and who will be appointed to act for you. The person appointed isn’t necessarily the person you would choose.
What is trust?
Like a will, it is a set of instructions. The biggest difference from a will is that a trust is a living instrument; it has instructions for while you are alive and well when you are alive but not well, and instructions for what to do after death. With trust, you determine when you are incapacitated, and once triggered, who will take control. You provide the person that you selected with directions as to what you want to be done for you while incapacitated and any special instruction. If the time comes that you can’t make your own healthcare decisions, you determine who will step in for you. With trust and health care powers, there is no need for the court to appoint a guardian (essentially your Patient Advocate) or a conservator (your chosen successor Trustee). You determine who that person will be to fill those roles, privately, in your plan.
With a trust, you have the ultimate control as your own Trustee you are always in control of your assets in the trust. You control when you give up control, and you control to whom you give that control. You also control whom, when, and how your assets are distributed to your beneficiaries – again all done privately.
Your options are limited by only three rules: you can’t do anything illegal, immoral, or against public policy. After that, it is all up to what you want to do and the creativity of you and your estate planner.
Third parties are comfortable working with Trustees, and we rarely see any pushback when the Trustee assumes control of financial assets. It is extremely rare that we are forced into court to gain control of trust assets when incapacity hits. Typically, we only need to provide the new Certificate of Trust citing that the incapacity provisions have been met and who the current trustees are now.
For a trust to work as designed, however, it must be funded. Funding is the process by which we change the title to assets so that they are owned by the trust. If an asset is owned by the trust, the Trustee is always in control of that asset. If it is left out of the trust, then we are faced with the need to try to gain control through a durable power of attorney and the possible rejection of that power by the third-party provider. In our practice at EWM Legal Solutions, our goal is that have fully funded trust-based plans and durable power of attorney, and the pour-over will be the only safety net if we find assets outside of the trust upon disability or at death.
Should a married couple use a Joint Trust or separate spousal trusts?
Let me give you the “attorney answer” to that: it depends. There is no “one size fits all” when it comes to determining how a client plan should be designed. That is part of legal counseling to determine what your plan needs to look like, whether married or single.
For married people, a separate spousal trust plan was very common for many years. This was especially true in states like Michigan, which are “separate property” states compared to California and Wisconsin for example that follow community property. It was also very common when we had an estate tax exemption of $600,000, and it was a “use it or lose it” situation. We had to divide assets so that each spouse had the estate tax exemption amount because we had no way to use the unused exemption amount after a spouse died. With low estate tax exemption amounts and the need to divide assets to be sure we used all of a spouse’s exemption no matter who died first, it was very common to create separate trusts for each spouse.
Today, in 2023, we have a $12,920,000 exemption. So very few estates face an estate tax load. In addition, the exemption is no longer a “use it or lose it” proposition. In 2017, Congress enacted legislation making portability permanent. With portability, if one spouse dies and does not use their full exemption, we can elect portability to transfer the unused amount to the surviving spouse and increase her estate tax exemption.
Due to the estate tax exemption changes, more often we see joint trusts used rather than separate spousal trusts.
There are many reasons why married people opt for separate or joint trusts. A joint trust fits the way most couples manage their assets today. Think of your joint bank accounts and other forms of joint ownership between spouses. It is “comfortable” and easy for clients to use a joint trust; lifetime management is simpler for them. Separate trusts require more work to establish and maintain; we must determine which trust will own the asset and try to balance out the asset ownership with the reality of how the assets are managed.
At the death of a spouse, a separate trust is more easily settled since the assets are clearly in one spouse’s estate. With a joint trust, the settlement still must be made, and we must determine which assets are allocated to the deceased spouse’s estate during the settlement period.
When might a joint, or separate trust plan, be more advantageous than the other?
Separate trusts might make sense if spouses have different ideas on distribution; or if it is a second marriage with kids from prior marriages and want to control what they leave to “my kids” eventually. If the distribution plan, however, in a second marriage is the same for both spouses, then the joint trust can easily work for the client. A separate trust plan may be a good option for those couples who have executed a prenuptial agreement or where one spouse expects to receive an individual inheritance that they wish to keep separate.
Joint trusts are good options for first-marriage couples and for those with the same beneficiaries and distribution plans. They are also a good option for those who feel the emotional twinge about separating assets and like to keep the joint arrangement in their marriage.
Whichever plan you use, work with an experienced estate planning attorney who listens to what YOU want to do and designs the plan to achieve your goals. Whether it is a will-based plan (will, power of attorney, patient advocate), or a trust-based plan, it has to fit your goals and be drafted for you.
Our process with clients is a multi-step one. We first ask that you provide us with the completed EWM Legal intake before our first meeting. This intake gives us some insight into who you are, what your concerns are, and what assets we are going to be working with. Whether it is a will-based plan or trust-based plan that is ultimately designed, we must be sure that the asset ownership and beneficiary designations are in line with your plan.
The steps to our estate planning process are:
1. Initial meeting
2. Design meeting
3. Signing meeting
4. Funding meeting
James A. Carolan, CWS®, CTFA
Sr. Estate Planning Attorney
Executive Wealth Management and EWM Legal Solutions are separate but affiliated companies. Executive Wealth Management (EWM) is a Registered Investment Advisor with the Securities and Exchange Commission. Reference to registration does not imply any specific level of qualification or skill. Investment Advisor Representatives of EWM offer Investment Advice and Financial Planning Services to customers located within the United States.