Michigan Living Trust
A successful estate plan ensures that the client's loved ones are taken care of and that property is properly distributed according to the estate planning client's wishes. Many people hear about the common problems with probate and want to avoid them.
Probate is expensive, time consuming, public and can all too frequently involve inter-family conflict in the form of will contests and lawsuits. The amount of work involved in some probate estates, given these challenges, can be especially difficult given a family member passed away and now the heirs have to probate the estate.
A living trust is a better option because it can achieve many common estate planning goals. These goals generally include simplicity, control, flexibility, predictable outcomes, reduced costs of transferring assets, minimize taxes, and to ensure that the plan is carried out according to the terms of the estate plan.
A living trust, also commonly known as a revocable grantor trust, provides many benefits to achieve these goals and ensure that assets are protected and transferred according to the plan. A living trust can solve the problems that a will creates.
Below is an overview of different trusts, Michigan trust law, the purpose of a trust and important advantages and disadvantages.
What is a Trust?
A trust is a legal entity created under state law to hold or own assets for another person or entity. The person who creates and funds a trust is called the "settlor" of the trust. The person or entity that benefits from the trust is called the beneficiary. The person or entity that manages the trust during the trust's existence is called the "trustee". The trust legal document identifies who the settlor, beneficiary and trustee are, the assets of the trust, and the rights and responsibilities of each.
A trust may be a separate taxpayer and can be the subject of lawsuits.
Revocable versus Irrevocable Trusts
A key consideration is the decision to form a revocable versus an irrevocable trust. A revocable trust is far more common and like its name implies, can be revoked, changed, or modified by the settlor. A revocable trust can be set up, funded and managed by the same person.
It is common for the settlor, trustee and beneficiary to be the same person for a revocable trust, so modifying the terms of the trust is usually not a contested issue. Modifications might include changing the trustee, beneficiaries, the duration of the trust, when the trust becomes irrevocable, amount or timing of distributions, etc.
An irrevocable trust is one that cannot be changed after it is formed and funded without court approval. For some settlors, forming an irrevocable trust is important for tax purposes and creditor protection. Once assets are transferred, the settlor generally cannot regain total control over them. Creditors have difficulty gaining access to the trust funds, even after filing lawsuits or obtaining a judgment over the trust beneficiary.
Irrevocable trusts are commonly used to protect assets of individuals in high risk professions, like doctors, lawyers, dentists, pro athletes, etc. or people who may be subject to lawsuits. Children who may waste assets or be subject to lawsuits may also benefit from an irrevocable trust that has restrictions on the types and timing of distributions to beneficiaries.
It is difficult and expensive to modify an irrevocable trust, but this may occur when the purpose of the trust cannot be achieved without modification or when a trust is poorly drafted and all parties wish to modify the trust.
What is a Michigan Living Trust or Revocable Trust?
A revocable trust or "living trust" generally allows the settlor of the trust or a defined person or persons under the trust terms to change the terms of the trust. The settlor, beneficiary and trustee are the same person for a living trust and the trust operates to hold or own the assets of this person that are transferred to the trust. For tax purposes, a living trust's income is treated as the settlor's income. In other words, the trust is disregarded and treated as if all the assets and income or losses are owned by the settlor.
Why Use a Michigan Living Trust or Revocable Grantor Trust?
Estate planning using a trust or trusts should consider the need for creditor protection, the protection of potential spendthrift beneficiaries, the distribution of assets in the context of blended families, the ability of beneficiaries to effectively manage businesses, disability planning, and the need to retain control of assets. Trust administration can be expensive and should be carefully considered as part of an overall plan to manage and preserve wealth for spouses, children and future generations.
The settlor, or owner of the trust, typically has complete control over this type of trust during the settlor's lifetime. The settlor may revoke the trust while alive and change the trust terms without court supervision. This essentially allows the settlor or person who created the trust to take back all the assets.
Does a Michigan Living Trust Avoid Probate?
Assets transferred to a living trust are not subject to probate. These assets will not be made public in a probate court record but will be managed by the trust's trustee subject to the terms of the trust. Probate is expensive and time consuming. The probabte court requires a fee to be paid by the estate based on the value of the estate. Probate may also involve lawyers that can increase the cost.
Further a judge presides over the probate process and may be required to approve all actions of the executor
How Does a Living Trust Work After You Die in Michigan?
Upon the death of the settlor, the trust generally becomes irrevocable and the named trustee then administers the trust according to the terms of the trust. A careful review of the needs of the beneficiaries should be performed to ensure that the purpose of the trust is achieved. Importantly, assets held in the trust do not become part of the probate estate and the trust is generally administered outside of probate. Clients must take care to properly transfer and title assets in the name of the trust to avoid probate. This trust is commonly used in conjunction with a pour-over will.
The income of a revocable grantor trust is taxed to the settlor of the trust. For practical purposes, this means that the trust is disregarded as a separate taxable entity for income tax purposes while the settlor is alive. Planning is required to determine the tax consequences of the trust upon the settlor's death. Depending on the type of income earned, tax planning may be necessary to avoid excessive taxation of the trust and reduced value to the beneficiaries.
Domestic Asset Protection Trust
Michigan clients looking to protect assets from future creditors may utilize a domestic asset protection trust. The domestic asset protection trust is a recent statutory creation under Michigan law. This type of trust is an irrevocable trust that allows the settlor to be the named beneficiary and retain some control over the assets while preventing creditors from reaching the assets.
A domestic asset protection trust provides more certainty regarding when and if a creditor can gain access to trust assets. The downsides for the trust settlor is that they give up power over the trust but still have more influence over the trust than trusts under prior law. A settlor or beneficiary can create the trust under Michigan law, and is thus able to use Michigan courts to settle disputes instead of the state where the trust is created.
Contact Michigan Estate Planning Attorney Andrew Steiger
If you need assistance with a Michigan estate plan that includes trust planning, contact Michigan estate planning attorney Andrew Steiger for more information.