Estate Planning Focus - Spring 2005
Topics included in this issue:
Taking Control of Your
Health Care Decisions to Avoid
Being the Next Terri Schiavo
By Susan Gell Meyers
The case of Terri Schiavo has brought to the forefront the issue of patient rights for the incapacitated as well as the level of control (or lack thereof) that we have over determining our own health care. Regardless of your opinions regarding Terri's case, most people would agree it could have been handled differently, and perhaps better.
One of the main difficulties in Terri's case was that she did not leave any written direction as to the kinds of treatment she would want, or not want, provided to her if she was in various medical conditions. Given today's current medical technology, it has become increasingly important to make your wishes known to others who may be called upon to make decisions for you. Had Terri provided some direction in writing as to her wishes, some of the battles between her family members may have been avoided, and her family may have had a better idea as to her desires, which would have given them more information to be able to fulfill her wishes.
Michigan law permits individuals over the age of 18 to create a written document by which you designate the person(s) to make medical care decisions for you if you cannot communicate your own decisions. This is sometimes called a Patient Advocate Designation or a Health Care Power of Attorney. This person will then act as your patient advocate and be responsible for consenting to, or refusing, medical treatment for you. It is generally recommended that you name a backup to your initial patient advocate in case your first advocate cannot serve. If you have not selected a patient advocate in writing and you become incapable of making your own medical care decisions, it will be necessary for the probate court to appoint someone as your guardian. While this may very likely be a family member, it may not be the person you would prefer.
You can also include in your Patient Advocate Designation "living will" guidelines, or create a separate living will document. A living will is a statement as to the kinds of treatment you would, or would not, want provided to you if you are in certain medical conditions. Some living wills provide a laundry list of specific medical conditions, and give you the option of specifying the treatment you would want, or not want, in those situations. Because it is impossible to list all of the specific medical conditions you may experience at any given moment in time, it is advisable to include a more generalized statement of your desires and give your patient advocate the discretion to make decisions on your behalf within those parameters.
Living will guidelines are very important to include if you would like your patient advocate to have the discretion to terminate, or withhold, treatment, especially if it is life-sustaining treatment such as artificial feeding or water. If you do not indicate in writing that your patient advocate has the power to terminate or withhold life-sustaining treatment, it may be necessary for your patient advocate to petition the probate court for an order approving his or her decision. The court will require evidence as to your desires, and without any direction in writing from you, the court will rely on statements from relatives and friends. Their recollections at that time may or may not be an accurate recollection of your desires. In addition, while the court proceedings are under way, decisions as to your medical care may be delayed.
While the courts and medical care providers do give significant deference to your written directions, there can still be room for disagreement between your loved ones and medical professionals. Creating a document in writing will not necessarily prevent all battles about your health care, but it is an essential first step in taking control of your health care.
Social Security Primer - Part 2
By Jeffrey B. Power
Part I of this primer was published in a 2004 edition of this newsletter. This Part II explains one of the most confusing and important aspects of Social Security: the rights of your spouse, divorced spouse, or widow(er) to receive benefits based on your earnings record and contributions.
Benefits for Couples
There is no maximum benefit per family. Two-earner couples need not worry. Your monthly Social Security benefit can be based on your own work record, regardless of your spouse's work record or benefit. However, you may find that being married may actually increase your Social Security benefit if one spouse was the principal wage earner. This is because you may choose instead at age 62 to receive either your own benefit or a spousal benefit, whichever is greater. If you wait until your full retirement age to claim the spousal benefit, it will be equal to 50 percent of your spouse’s primary benefit (the amount received at full retirement age). Note that the age for receiving full benefits gradually increases from age 65 for persons born after 1939 until it reaches age 67 for persons born in 1962 and later.
Benefits for Widow(er)s
When your spouse dies, Social Security survivor's benefits can be paid to you based on your deceased spouse's earnings record. You will receive your spouse's full benefit at your full retirement age or reduced benefits as early as age 60. Your survivor's benefits also may be reduced if you receive a pension from a job where Social Security taxes were not withheld.
You may elect to commence receiving survivor's benefits before having reached your full retirement age. Those benefits currently range at ages 60 through 64 between 71% and 94% of the full benefit.
If you are receiving a survivor's benefit, you should remember that you can switch to your own retirement benefit as early as age 62. Your benefit based on your own earnings record may be higher than your survivor’s benefit. In many cases, a survivor may begin receiving a survivor benefit at a reduced rate at age 60 and then switch to the survivor's own higher benefit at a later age. If you delay claiming your own benefit beyond your full retirement age, your future benefit will increase for each year of delay by a certain percentage.
Benefits for Divorced Spouses
If you have been divorced after at least ten years of marriage, you can receive benefits on your former spouse's earnings record if you are at least age 62 and if your former spouse is entitled to benefits. If your divorced spouse dies, you can receive the same benefits as the widow(er). Benefits paid to a surviving divorced spouse will not affect the benefit rate for the widow(er). Both may claim a benefit based on the deceased worker's earnings record.
Effect of Remarriage
If you remarry, you are never eligible for a divorced spouse benefit during your former spouse's lifetime until your subsequent marriage ends. If your former spouse has died, generally you may not receive a survivor's benefit if you remarry before age 60 unless the later marriage ends. But, if you remarry after age 60, you may still receive a survivor's benefit based on your former spouse's earnings record. Furthermore, at age 62 or older, you may choose to receive the survivor's benefit on the record of your more recent spouse if it is higher.
Social Security severely limits benefits paid to foreign nationals living outside the United States. If you are a foreign national spouse or widow(er), you are ineligible for a benefit unless you lived at least five years in the United States during the marriage with respect to which benefits are claimed.
Lump Sum Death Benefit
Without regard to whether you are making a claim for a survivor's monthly benefit, there is a special one-time payment of $255 that can ordinarily be paid to your surviving spouse (or minor children). This benefit is not paid automatically. You must file a lump sum benefit application within two years of your spouse's death.
New Act (UPIA) Provides Many
Administration Answers and Fiduciary
Michigan recently became the 40th state to adopt the Uniform Principal and Income Act of 1997 ("UPIA"). The Michigan Act became effective September 1, 2004. By adopting UPIA, Michigan left behind six other states that continue to use the Revised Uniform Principal and Income Act of 1962 and four other states that operate without income and principal legislation.
Sound boring and irrelevant? I'm sure that for many this legislation brings new meaning to the concept of boredom. However, it is by no means irrelevant if you are: (1) serving in a fiduciary capacity as a personal representative or trustee; (2) the beneficiary of a trust or estate; or (3) the owner or beneficiary of a retirement account, other form of deferred income or a liquidating asset.
UPIA will have significant impact upon the administration of trusts and estates and the numerous conflicts that arise between income beneficiaries and principal beneficiaries. It applies to fiduciary accountings, distributions and taxation by providing default rules when there may otherwise be uncertainty regarding the allocation of disbursements (e.g., should the $5,000 real estate tax bill be paid out of trust income or principal) and receipts (e.g., should the proceeds from the sale of timber be distributed to the income beneficiary or retained as trust principal). It also provides numerous technical answers, like what portion of a Required Minimum Distribution from an IRA to a trust should generally be distributed to the income beneficiary (10%), what portion should be retained as principal (90%) and when do certain exceptions apply.
Possibly more important, UPIA potentially resolves a long-standing conflict between income and principal beneficiaries which has significantly influenced fiduciary investment selections. What conflict, you ask? Take, for example, any trust that pays a surviving spouse income for life, then distributes the remainder to the settlor’s descendants. Doesn’t a Trustee's decision to invest in a stock that pays no dividends (income) but grows significantly in value (principal) favor the children? Similarly, doesn’t a Trustee's decision to invest in CDs and bonds that generate income without increasing the principal value favor the surviving spouse?
The answer to each of those questions is "yes." To wit: the long-standing conflict between income and principal beneficiaries. Add this fundamental conflict to a fiduciary's underlying responsibility to treat all beneficiaries impartially, and you can now understand why many fiduciary investment decisions are influenced as much by a desire to balance a portfolio between income and growth as they are by what generates the best overall return on investment. In fact, the movement toward Total Return Investing and the Modern Portfolio Theory is hindered by the need to balance investments between income and growth.
The Conflict Resolution
So how does UPIA help resolve this conflict? Although the most important concept of UPIA remains the requirement that fiduciaries "administer a trust or estate impartially, based upon what is fair and reasonable to all the beneficiaries," UPIA now allows fiduciaries to "adjust between principal and income" when necessary if: (1) the fiduciary is investing as a prudent investor; (2) the governing instrument provides for distributions based upon income; and (3) an adjustment is not prohibited by the governing instrument and should be made to maintain impartiality among the beneficiaries. In other words, under certain circumstances you can now focus on the best overall investments and make income and principal adjustments, instead of focusing on the best investments that achieve fairness among the beneficiaries.
Because fiduciaries in Michigan are generally required to follow the Prudent Investor Rule and most wills and trusts do not specifically prohibit adjustments, requirements (1) and (3) above will often be met. Therefore, when a governing instrument provides for distributions based upon income, the fiduciary will frequently have the right to use this adjustment flexibility to focus investing on value and total return instead of what keeps the best balance between income and growth.
Conclusion and Caution
Let the adjustments begin, but be very careful. The above is a broad summary of a very technical set of rules. There are many limitations and prerequisites to consider before making these decisions and adjustments. While UPIA provides many safe harbors for appropriate actions, it also creates significant liability for abuses of discretion. You and your legal adviser should fully understand the circumstances and requirements before making adjustments under UPIA.
Buy and Sell Agreements:
An Important Part of Your Family’s
Estate and Business Succession Plan
By Mark K. Harder
Many think of Buy and Sell Agreements as being solely the concern of shareholders of closely held businesses. Not as readily evident is the important role they play in the estate plans and succession plans of family business owners. Buy and Sell Agreements can be an important or even central part of the estate plan for members of the family business.
What Is the Buy and Sell Agreement?
A Buy and Sell Agreement is an agreement between a company and its owners setting forth the basis on which interests in the company may be transferred or sold. In the case of limited liability companies, these provisions most commonly are included within the company's Operating Agreement. For corporations, there may be one Buy and Sell Agreement between the company and all of the owners, or there may be separate Buy and Sell Agreements between the company and each owner.
The Buy and Sell Agreement typically restricts transfers of ownership interests in the company and provides a mechanism for the purchase and sale of ownership interests upon specific events, such as death, transfers to creditors, transfers to former spouses in conjunction with divorce or if an owner wishes to sell his or her interest. The Buy and Sell Agreement will provide a procedure for the purchase and sale of the interest, including a mechanism for establishing the price and terms upon which the ownership interests will be sold. In Buy and Sell Agreements involving S Corporations, the Agreement typically includes provisions designed to preserve the S election. Buy and Sell Agreements for companies taxed as S Corporations or partnerships also will often include provisions intended to ensure distributions of at least a portion of the profits to ensure the owners are able to pay the taxes due upon their allocable share of the company's income.
Why Is the Buy and Sell Agreement Important to the Estate Plan?
The Buy and Sell Agreement often supports several parts of the business owner's estate plan. These include:
The Agreement can ensure the existence of a market for the stock following a death. This can be important to ensure that funds can be made available to pay taxes levied upon the estate of the deceased owner.
During the owners' lifetimes, the Buy and Sell Agreement can ensure that owners do not improperly transfer shares to individuals deemed inappropriate or unworthy as owners of the business. A common example are ex-spouses following divorce. Another example is a change in trustee of a trust owning shares to an inappropriate person, such as someone who is not part of the family owning the business.
The Buy and Sell Agreement also can set the price at which the ownership can be transferred. If properly established, this price will be respected for estate tax and gift tax purposes.
The Buy and Sell Agreement can provide a mechanism to deal with otherwise difficult questions of treating members of a family fairly and equitably. For example, suppose a business represents 60% of mom and dad's wealth, and they have three children, only one of whom is active in the business. Further suppose that mom and dad want only the child who is active in the business to own it after they both die, but also want to ensure that all three children share equally in their wealth. A Buy and Sell Agreement that gives the children the right to force the purchase and/or sale of the stock from the children who are inactive establishes a means to achieve each of mom and dad's objectives: equal distribution of the parents' wealth among their children, and passing ownership of the business to the child active in the business.
What Are Some Common Mistakes Involving Buy and Sell Agreements?
There are many things that can go wrong with Buy and Sell Agreements, which illustrate the importance of careful planning and monitoring of the Buy and Sell Agreement. Some common pitfalls include:
Failing to update the purchase price. Many Buy and Sell Agreements require the owners to annually set a new price for the ownership interests. Failing to reestablish the price on a regular basis can result in a price that the IRS may not accept or that seriously shortchanges a buying or selling shareholder.
Using an inappropriate measure of the purchase price. Some Buy and Sell Agreements still use book value as a measure for the purchase price. Book value in nearly all instances fails to adequately measure the true value of the ownership interest. In addition, the IRS may not respect the price for purposes of estate or gift taxes. In other cases, a formula is used, but is not regularly monitored, which can result in buyers or sellers being treated unfairly.
Failing to provide adequate funding for future purchase obligations. Where known or likely repurchase events will occur, the ability of the prospective purchasers to pay for the interests should be considered. It may be important that adequate life insurance is obtained, and where insurance is important, it will be important that the amount keeps pace with changes in the value of the interests and purchase obligations, that the policies' performance is monitored on a regular basis, and that the purchaser and beneficiaries are aligned so that death benefits are paid to the proper party when a death occurs.
A Buy and Sell Agreement is an important part of the estate plan because it helps ensure a market and fair and equitable treatment of the members of a business-owning family. Frequent monitoring and review of the Agreement is an important and essential part of estate planning and planning for the succession of the business.
Newsworthy . . .
Todd W. Simpson and Amie L. Vanover have completed the requirements of the Probate and Estate Planning Certificate Program and received a Certificate of Completion.
David Skidmore, a partner in our Grand Rapids office who concentrates his practice on probate litigation, is the author of the "Wills" section in the second edition of the Michigan Law and Practical Encyclopedia, which is published by LexisNexis®. David spent more than a year researching and writing the 300-plus-page chapter on the law of wills, which includes changes to this area of law resulting from the Legislature's enactment of the Estates and Protected Individuals Code in 2000. The first edition of the "Wills" section was originally published in 1958.
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.