Perhaps the most important lesson an estate planning attorney can convey to a client is that your end-of-life decisions will be made for you-and possibly expose your estate to significant and unnecessary expense-unless you create legally enforceable estate plan documents. Without a clear expression of your wishes, some of your most important decisions may be made by a family member, a stranger, or a probate judge who may have no idea what your real wishes were. This can lead to increased costs, family disagreements, and other forms of waste. Several types of legal documents can help you and your family avoid these problems:

• A medical power of attorney is used to appoint someone to make your medical decisions and provide that person with guidance regarding your wishes.

• A financial power of attorney appoints someone to make your financial decisions. There are many different types of financial powers of attorney with significant differences between them. For example, whether your agent has the power to make gifts to others can have tax implications, as well as expose your estate to risk. On the other hand, without gifting authority, Medicaid planning can become more difficult.

• A living will can provide detailed instructions for how you wish to be treated during disability.

• A will is a set of instructions to the probate court for the distribution of your estate. This is one area that causes some financial loss to many families. The probate process is time-consuming and often expensive. It is not uncommon for the cost of administration to equal 4-8% of the value of an estate. In this economy many people are putting off their estate plans. A failure to plan altogether will almost certainly result in much more in the way of expense down the road.

• A revocable living trust is a document that provides instructions and authority to another person for handling your estate both during your lifetime and after your passing. Because the trust agreement is revocable, you can make changes to the agreement or remove property from the trust at any time before your death. A revocable living trust is useful for avoiding probate only and does nothing to protect against creditors or the cost of long-term care.

• An irrevocable trust is a set of instructions regarding your estate that generally cannot be changed by the creator of the trust in at least one way. So, for example, a trust would be irrevocable if the creator of the trust could not receive any principal placed in the trust.

If you should die or become disabled without at least some of these documents in place, it is very likely that your family will need to seek authority from a probate court to make decisions for you. The probate court has a number of procedures and powers that correspond in many respects to the estate plan documents listed above. In Michigan, the court receives its jurisdiction over these matter from the Estate and Protected Individuals Code, MCL 700.1101:

• A conservatorship is a procedure of the probate court in which a person is appointed to have authority over your property. The conservator must make regular accountings of your trust property

• A guardianship is a procedure by which the court establishes a decision-maker related to issues concerning your physical well-being, such as your medical care and where you live.

• A protective order can be granted that will provide authority for a specific action having to do with your estate, such as the transfer of your home.

• An estate of a deceased person can be distributed to creditors and heirs by means of probate. This procedure will generally take at least six months and cost at least 4-8% of the value of the estate. In the alternative, a trust administration will generally be less time-consuming and expensive and can be handled in a more discrete manner.

The difficulties with going to the probate court are many. First of all, the process will be much more time- consuming and expensive. Secondly, probate proceedings are generally public matters, though they often deal with subjects that are precisely things that people would prefer to keep private. But above all, it is very difficult for a probate judge to know exactly what a person may have wanted. And the judge must err on the side of safety and caution. The approach is understandable, and it is certainly not an error on the part of the judge who must be cautious, but it can nonetheless be costly when long-term care or disability issues are being handled and, more to the point, differ from what the protected person may have wanted.

One final point about decision-making: failure to execute proper estate plan documents will leave you in the default position. That is, your estate and your decisions will be governed by the state’s default rules. That is usually not a good position to be in for tax purposes and it is almost always disastrous when it comes to disability planning.

The simple will is an important estate planning document to understand. One easy way to understand how a will works is to think of it as a set of instructions to a probate judge for distribution of a deceased person’s property. These instructions replace the default rules established by state law. Without a will, a deceased person’s estate will be distributed according to rules established by the state called the rules of intestacy. A probate court is a special division of the state court system that is given authority over incompetent persons and decedent’s estates.
The property to be distributed by a will is called the probate estate. A probate estate includes all property not jointly owned or having a designated beneficiary at the time of a decedent’s death. For example, real estate can be owned jointly by individuals who will assume the other’s interest at the passing of the other. But real estate owned by just one person will generally become part of that person’s probate estate. Ownership of such property may only be distributed to others with authority from the probate court.

You can think of the need to get authority from the probate court in the following manner. When a person dies, assets titled in that person’s name alone can no longer be accessed by anyone. Privacy laws prohibit financial institutions from disclosing or distributing assets to anyone but the owner. It is therefore necessary to get a judge’s permission and authority to access and control such accounts. This is done by opening an estate proceeding with the probate court and appointing a personal representative to carry out the decedent’s wishes as expressed in a will.

As you might imagine, the process of obtaining a probate judge’s authority can be expensive and time consuming. For this reason, people often speak of the need to avoid probate. It is not uncommon to see probate fees range from 4-8% of the gross value of an estate and to take a year or more to complete. For this reason, many people create an estate plan designed to avoid the cost of probate.

Mr. David Goldman has raised some interesting points regarding the free durable power of attorney posted here and free durable power of attorneys generally. There are many problems with such documents and I have mentioned them in the previous post. Above all, you should certainly understand that any decision you make to use such documents will be your own and cannot be based upon anything written here. Mr. Goldman takes the argument a bit further. The first point he makes is that one should read carefully to be sure “free” documents are in fact free. He found a “free” power of attorney form elsewhere that only revealed in the fine print that you would be charged $19.95 per month for downloading the document.

Mr. Goldman’s second point is that the durable power of attorney that was purportedly adapted for his Florida had some significant problems under Florida law:

[The free document] allowed me to simply revoke prior designations by putting a line in my document. Anyone who has been to a Florida Estate Planning Lawyer knows that to revoke a valid Durable Power Of Attorney one must file a revocation in the county where they live.

Michigan has fewer constraints on durable power of attorneys, but one must wonder why and for how long this may be the case. A durable power of attorney is a dangerous document for a variety of reasons and recording the document and any subsequent revocation makes some sense. This is the law in Florida, where it is arguably necessary to have a more fully developed body of law on the subject. Michigan’s comparatively lax standards may need to be tightened as the state’s population ages and the issues common enough to reach the attention of our legislators.

A power of attorney is only effective to the extent that it is accepted by institutions. Home made documents or free documents from the internet may raise enough suspicion that an institution will not accept them.

The nightmare scenario that I can imagine with a free power of attorney or any document is that it might not work for some reason. Irregularities with the signatures or imperfections in the enumerated powers could cause a document to by rejected at a critical time. And at that point the family will find themselves heading to probate court and paying hourly for an attorney’s services.

The durable power of attorney is an extremely valuable estate plan document. It allows one person to designate an agent to conduct all financial affairs. These documents are typically durable meaning that the power continues through the disability of the principal (the person naming an agent). Alternatively, there can be springing powers of attorney, which only come into effect when the principal is incapacitated. Springing powers of attorney can be attractive in many ways since the principal’s assets remain untouchable while they can still be used and enjoyed by the principal. But many financial institutions will not honor a springing power of attorney. The apparent rationale goes like this: “You didn’t trust him while you were able to watch over your own affairs. Why should we trust him now?”

The durable power of attorney is clearly susceptible to abuse. When another can act with full authority on your behalf, it is entirely possible that the power will be used to make self-interested transactions or even unauthorized gifts to the agent.

But if a trustworthy agent can be found, the power of attorney can save countless hours of worry, avoid dissipation of an estate (what would happen if no one paid your heating bill over the winter?) and, most importantly, avoid the need for probate court orders to handle your affairs. The durable power of attorney is worth the modest fee charged by most attorneys but, for what it is worth, here is a blank durable power of attorney form for free.

You should understand that a free form is not a substitute for an attorneys advice. Moreover, a typical form will not allow some of the more nuanced maneuvers that are necessary for accelerated Medicaid qualification. Also, you should understand that estate recovery avoidance techniques will typically require some form of planning for after one’s death.

Nonetheless, this form will work to appoint someone to pay your electric bill when you are not able to and that is certainly worth something. You should read the warnings very carefully on the linked page and understand that reading a blog and printing out a form is no sense a substitute for consulting with an attorney. Moreover, please understand that I have posted this link to be helpful. You and I are not entering into an attorney-client relationship at this time. See the disclaimer below.