Topics included in this issue:
How to Avoid Will Contests
By David L. Skidmore
As a litigator specializing in probate disputes, I regularly represent clients involved in will contests. In general, a will contest is any dispute over the validity of a property transfer - whether made during lifetime or upon death - related to a person's estate plan. Probate controversies frequently concern the validity of trust agreements, durable powers of attorney and wills, or the propriety of the exercise of powers under those documents.
While a will contest is disquieting for everyone involved, under Michigan law, the intentions of the person who made the estate plan are the primary consideration for the court in resolving a will contest. The most important evidence of the person's intentions are his or her estate planning documents. If the terms of the documents are clear, then the court generally will not consider other evidence of the testator's or trust settlor's intentions.
Interpreting an Ambiguous Document
Sometimes a will contest involves an ambiguous provision in an estate planning document. In that case, the court will establish the actual intent of the person who made the will by considering evidence of intent outside the documents. For example, a will may contain one provision directing that a bequest be distributed immediately upon the testator's death, but also contain another provision providing that the bequest be held in trust for the beneficiaries until a certain age. Another example of ambiguity is a bequest to a named charity, but there are two charities in existence operating under the name used in the will.
Determining Whether a Document is Valid
A will contest may arise from a claim that an estate planning document is invalid and should be set aside because of mental incapacity or undue influence.
Mental Incapacity: There are different standards of mental capacity for different types of estate planning documents. In order to make a trust agreement or a lifetime gift of property, a person must reasonably understand the nature and the effect of the transaction. In order to make a will, however, a person must be able to: (1) understand that he or she is writing a will; (2) know the nature, condition and extent of his or her property; (3) know the identity of the persons who would be the "natural objects of his or her bounty"; and (4) understand the scope and meaning of the provisions of the will.
Undue Influence: Not all influence qualifies as undue influence. It is not improper for a person to seek to influence the estate plan of another by appealing to considerations such as family ties, affection or gratitude. Undue influence is influence that is so great that it overpowers the intentions of the person who made the estate plan and substitutes the intentions of another person. Because it is difficult to produce direct evidence of undue influence, the law will presume that there was undue influence if: (1) there was a confidential or fiduciary relationship between the person who made the estate plan and the alleged influencer, (2) the alleged influencer had the opportunity to influence the person who made the estate plan and (3) the alleged influencer received a benefit under the estate plan. Once the presumption is established, the alleged influencer has the burden of presenting evidence that the benefit received under the estate plan was not the result of undue influence.
A person making an estate plan should follow a few basic guidelines in order to reduce the likelihood of either the occurrence or success of a will contest. First, have your estate planning documents prepared by an attorney with expertise in Michigan probate law. Second, thoroughly communicate your estate planning intentions to your attorney. Third, carefully review the estate planning documents before you sign them to ensure they are consistent with your intentions. Fourth, review your documents periodically with your attorney to determine whether they need to be revised in light of changed circumstances or changed intentions.
Finally, you can avoid unnecessary litigation if you refrain from making statements that create expectations of specific gifts. Although you may make a gift to an individual in your current estate plan, you retain the legal right to change your estate plan at any later date. If, however, you have told the individual about the gift, then he or she may be disappointed to find that the gift was deleted from the final version of your plan. Disappointed expectations can lead to a will contest, even if the estate planning documents are valid and enforceable.
New Act BushWhacks Taxes
By Todd W. Simpson
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act") introduces several significant changes to the tax code. It lowers several of the income tax rates and alters the brackets of income to which the rates apply. It also reduces the tax rates applied to certain capital gains and dividends and allows more generous depreciation provisions for businesses.
Nearly all taxpayers will be affected by the Act's new income tax rates and brackets. The top four marginal rates have been reduced to 25%, 28%, 33% and 35% (each down 2% or more). The bottom two marginal rates remain at 10% and 15% but apply to slightly expanded brackets of income. Additionally, the standard deduction for a married couple is increased to exactly double the amount for a single taxpayer, partially eliminating the "marriage penalty." The marriage penalty will return after 2004 but will be incrementally reduced through 2008.
The new Act also significantly reduces the tax rates applied to capital gains and dividends. For sales and exchanges from May 6, 2003, to December 31, 2008 (including installment payments received during that period), the maximum long-term capital gains rate is reduced from 20% to 15%. For taxpayers in the 10% and 15% brackets, the rate is reduced to 5% and drops to 0% in 2008. Similarly, for calendar years 2003 through 2008, "qualified dividend income" will be taxed at 15%. "Qualified dividend income" includes dividends of domestic corporations and certain foreign corporations. For taxpayers above the 15% bracket, these changes create an interesting tax parity between the taxation of dividend distributions during the life of an investment and the taxation of the investment's appreciation recognized upon liquidation.
Businesses also benefit from the new Act. For 2003 to 2005, the allowable current write-off under § 179 is increased from $25,000 to $100,000 (returning to $25,000 thereafter). Additionally, computer software is now eligible for expensing under § 179. The deductible under § 179(b)(2) is also increased for these years from $200,000 to $400,000. For depreciable personal property acquired between May 6, 2003, and December 31, 2004, the bonus depreciation allowance is increased to 50% of the adjusted basis of the property for the year in which the property is placed in service.
Other aspects of the Act will have significant, but more limited, application. The Child Tax Credit is increased from $600 to $1,000 for 2003 and 2004. The $400 increase, however, is being paid in advance beginning in July 2003 based on information contained in the taxpayer's return for the previous year. Accordingly, no additional benefit is provided at the time of filing the 2003 return.
Tax laws are complex and constantly changing. If you have any questions about the new tax provisions and how they apply to your situation, contact your Warner Norcross & Judd LLP attorney.
Planning Funeral Arrangements - Part 2
By Jeffrey B. Power
In the Spring 2003 issue of Estate Planning Focus, Part 1 of this series on funeral planning discussed some of the specific issues that need to be addressed in planning a funeral. To help relieve their families of some of these decisions, an increasing number of people are planning their own funerals, designating their funeral preferences and sometimes even paying for them in advance. They see funeral planning as an extension of estate planning.
Advance planning permits better informed and more thoughtful decisions about your funeral arrangements. You choose the specific items and services you want and need and can compare prices at your leisure. It also spares your family the stress of making these decisions under the pressure of time and strong emotions.
Regardless of the formality of your advance planning, put your preferences in writing. Give copies to appropriate family members and your attorney. Do not rely upon funeral directions stated in your will, because a will often is not found or read until after the funeral. Avoid putting the only copy of your preferences in a safe-deposit box.
Although you may make decisions about funeral arrangements in advance, you may, but need not, pay in advance. If you do prepay the funeral costs, tell your family to avoid their paying a second time. Although most states have laws to help ensure that advance payments are available to pay for the funeral products and services when needed, protections vary widely from state to state.
You can learn much about Michigan's Prepaid Funeral Contract Funding Act by visiting the Michigan Funeral Directors Association Web site at www.mfda.org/consumers/consumer.protection.
Some families prefer cremation for emotional or financial reasons. A funeral home can arrange cremation or you can look into the arrangements through a memorial society. Before you dispose of the ashes on your own, check your local ordinances; some townships will not allow the disposal of ashes in any place other than a licensed burial ground.
Caskets are not required for a direct cremation. Funeral directors who offer direct cremations are required by law to disclose in writing your right to buy an unfinished wood box or an alternative container for a direct cremation, and must make an unfinished wood box or other alternative container available. You can rent a casket from the funeral home for the visitation and funeral, eliminating the cost of buying a casket.
Heirs' Rights to Make Arrangements
Notwithstanding your best laid plans, your family may have entirely different ideas about appropriate funeral arrangements. The law of many states, including Michigan, remains primitive in this area. Technically, your body is not considered property and, therefore, you cannot give your body to another person nor designate an agent who is empowered to make all decisions regarding the disposition of your body. Rather, a right to possess a body for purposes of burial belongs to the next of kin, typically starting with the spouse, then children, then parents.
A limited exception that most states, including Michigan, have is a version of the Uniform Anatomical Gifts Act permitting heirs to make a gift of all or a part of a body for medical, educational or scientific purposes where there is no contrary intent evidenced by the deceased.
The heirs' right to dispose of the body occasionally results in funerals or burials that would have offended the deceased person's sensibilities. A more difficult situation emerges when heirs with equal priority have irreconcilable differences over funeral arrangements.
Michigan law permits a person named as personal representative (i.e., executor) in the decedent's will, both before or after appointment, to carry out the decedent's written instructions relating to the decedent's body, funeral and burial arrangements. Practically, this is of little utility because both the will and the written instructions must be found and acted upon and because action by the personal representative is merely permissive.
Better statutory approaches found in other states either mandate a duty to comply with the decedent's written instructions or permit designation of an agent for body disposition. A full list of state personal preference and designated agent laws is found at www.funeral.org.
Split-Dollar Insurance Arrangements
Review Them Before Year-End!
By Susan Gell Meyers
In September 2003, the IRS issued long-awaited final regulations on split-dollar life insurance arrangements that change the income tax consequences of split-dollar arrangements. If you have a split-dollar arrangement, you should review it with your life insurance agent or attorney to determine the income tax consequences of the arrangement after 2003.
A typical split-dollar life insurance arrangement is a contractual arrangement between an insured under a life insurance policy and the insured's employer whereby the parties agree to have the employer pay for part or all of the life insurance premiums in exchange for a promise to be repaid the aggregate premiums paid when proceeds are collected or the policy is terminated.
The rules of the final regulation are too complex to detail in depth in this issue. If you have a split-dollar arrangement, however, you will be well served to review the policy before December 31, 2003. For policies with equity buildup in excess of premiums paid (typically this will be for policies that have been in place for a while), there is a limited opportunity to roll the policy out of the split-dollar arrangement on an income tax-free basis if done prior to January 1, 2004.
Low Interest Rate Planning Opportunities
Low interest rates continue, making several planning opportunities more advantageous than ever. Installment sales of assets to family members or trusts can be achieved at all-time low rates of interest. Similarly, Grantor Retained Annuity Trusts ("GRATS") are exceptionally well suited when interest rates are low. Both techniques "freeze" the growth of your estate to the interest rate used for the transaction. Qualified personal residence trusts can also be advantageous if the property is appreciating at a rate greater than the current rate of interest.
Estate Planning Focus
Editor: Susan Gell Meyers
Trusts & Estates Group Chairman: Mark K. Harder
Estate Planning Focus is published by Warner Norcross & Judd LLP to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the firm's Trusts and Estates Group.