Important Considerations for Estate Plan Design in Michigan
Revocable living trusts are popular estate planning tools. They can protect your estate from both serious and costly financial mistakes during life and after your death, expedite and simplify the settlement of your estate, minimize your tax liability, and provide clear rules and guidelines for your beneficiaries reducing the likelihood of disputes and confusion. But they must be executed thoughtfully and carefully to reap these benefits. Moreover, they may not be the best option for every client’s estate.
Some clients are skeptical of whether they need a trust and of the benefits of a trust versus a will. This is a legitimate concern, especially for modest estates. There’s unfortunately a good reason for this skepticism: trusts are routinely oversold by both attorneys and non-attorney advisors, who sometimes use aggressive sales tactics relying on overblown claims about the cost and complexity of the probate process or misstating the tax benefits of a trust. Sometimes the motivation for this erroneous advice is a hefty fee or commission on an investment product. In other cases it’s due to a one-size-fits-all approach to estate planning, and a neglect to consider each client’s individual circumstances. The problem is so prevalent that the State Bar of Michigan formed a special committee of estate planning attorneys to hold educational seminars educating senior citizens about this practice, in an attempt to dispel the popular myths regarding probate and trusts.
I’ve conducted such seminars for the State Bar, and found that participants are highly engaged, with many questions usually stemming from misinformation read on the internet, or from misinformed friends or advisors.
While a revocable living trust is often a powerful estate planning tool, less costly options should be considered to meet a client’s needs if the circumstances are appropriate. Therefore, it’s important to fully understand a client’s needs from multiple perspectives beyond just financial considerations. A client should feel that before drafting the estate plan, the estate planner takes enough time to understand their assets, health condition, family dynamics and values, how the estate is distributed, and client concerns about privacy, creditor protection, and special needs.
Whether a living trust is right for you, however, depends on several factors.
What IS a Living Trust?
A living trust is a trust that you set up during your lifetime and to which you transfer most or all of your assets. You can think of a trust as both a contract, and an entity. As a contract, it is an agreement between the settlor (the person who creates the trust and transfers property to the trust), the trustee (the person who manages the trust’s property), and the beneficiary (the people who receive distributions of trust property). During your lifetime, you are the settlor, the trustee, and the beneficiary. This is why a revocable living trust is called a “living” trust. You receive the income from the trust and also have the right to withdraw principal and income as if you owned the trust’s assets outright. You can revoke or cancel the trust at any time during your life. At death, the trust (or a portion of the trust if the trust is a joint trust created by a married couple) becomes irrevocable, , meaning that it cannot be modified. Thereafter, the trust’s income and assets are disposed of under terms specified by you in the trust documents.
Why would you do this? The most cited advantage of living trusts is that, upon the trust owner’s death, trust assets are distributed without going through the probate process. In contrast, assets passing pursuant to a will require opening a probate estate with the relevant court. By avoiding probate, people generally expect to reduce or eliminate executor and/or attorney fees and probate court costs. Whether a trust actually saves your estate money on administration costs and fees depends upon the size and complexity of your estate, and whether the trust was properly funded during your lifetime.
Is Avoiding Probate an Advantage in Michigan?
First, to avoid probate, title to all of your assets, including your personal property, must be transferred to the trust. Oftentimes, people forget or ignore this important procedure, and a probate estate must then be opened to administer an asset omitted from the trust. A pour-over will can ensure that the assets in your probate estate are distributed to the trust so that the assets can be administered according to the terms of the trust, but this still entails the cost and time of probate. A probate proceeding also may be required if you have minor children. Although a trustee can administer your assets to safeguard a child’s financial well-being, only the probate court can appoint someone to act as a child’s guardian.
In 2011, Michigan enacted the Estates and Protected Individuals Code (EPIC) and the Michigan Trust Code (MTC) to replace the former probate code. One of the goals of this legislation was to simplify the probate process and decrease the administrative burden and costs on estates. EPIC provides that an estate must be open for at least 5 months before the estate can be terminated and wound down. There are strict rules and deadlines for the notices, inventories, and accounts required for filing with the court and serving to interested parties. EPIC did away with the requirement for court hearings for most probate estates, and most estates are administered informally by the probate registrar. Unless a matter is contested, or an ambiguity or other issue arises in the estate, a hearing is generally unnecessary.
What About Attorney Fees?
One myth of a trust versus will is that the cost in attorney fees to prepare a trust-based estate plan versus a will-based estate plan is significantly higher. Therefore, attorneys steer clients to a trust to earn additional fees. Sometimes this might be true of an individual attorney, but in my experience, and in having compared fees with numerous other estate planning attorneys, the range of fees, and the cost difference between creating a trust-based plan versus a will-based plan is fairly uniform. For an ethical attorney who relies on repeat business and client referrals, providing an unnecessary service of dubious value to the client is a poor business practice.
Most Michigan attorneys will charge either a flat-fee or an hourly fee for creating an estate plan. The variation between the total fee between attorneys depends mostly on practice location (downstate urban and suburban fees are higher), the attorney’s experience and level of specialization in estate planning, and the amount of time that attorney estimates it will take (or actually takes) to create the plan. An experienced, highly specialized attorney will generally charge more, while a more novice attorney or a general practitioner will charge less. Typically, for an estate without business or tax planning needs, you can expect to pay from $1000-3000 for a will-based estate plan, or $2,000-4,000 for a trust-based estate plan.
While a trust costs more in initial fees to create, the difference is not enough to justify recommending a trust when it’s not in the client’s best interest. Additionally, trust administration after death is usually simpler, requires fewer mandatory filings and reports to distributes. This usually results in less attorney fees than probating a will. Even if an attorney was purely interested in profit, steering every client to a trust probably wouldn’t generate additional revenue in a mature law practice (meaning one that both creates and administers estate plans). In fact, probate estates are more prone to conflicts between heirs and third parties like creditors because the process is open to the public and requires notifying more interested parties than a trust. A contested estate is exponentially more expensive than an uncontested estate, and attorney fees rise in line with the time required to defend a contest.
For even a simple, uncontested estate, a trust can potentially save you attorney fees and court fees compared to the probate process. As a rough guide, for every $500,000 of estate property requiring probate, you can expect to pay about $1,000 in inventory fees to the probate court. In contrast, a trust does not have to pay this fee. As for attorney fees in probate, Michigan does not adhere to a percentage-based system for payment of attorney fees as mandated in other states like California. Instead, attorney fees are charged at a “reasonable rate”, which almost always means on an hourly basis at the attorney’s usual rate. For a simple probate estate requiring only distributions of cash or undivided interests in real property to heirs that agree to the distribution terms, without any creditor issues to litigate, you can expect to pay $3,000-7,000 (in present dollars) in attorney fees depending upon the number of heirs, number of different assets, and the responsiveness and due diligence requirements of your asset custodians.
A trust is usually simpler and less expensive to administer. However, if trust assets are retained and administered for a long period of time before distribution, the trustee’s fee and attorney fees may approximate those of a probate estate. Even with trusts, a period of administration is necessary to file income and estate tax returns, collect assets, pay debts, and distribute assets. The deadlines and rules for required filings can be relaxed in the context of trust administration as compared to probate, but this cost should be considered.
As a rough guide, the cost-benefit analysis of a trust over a will from a purely monetary standpoint begins to make sense when you expect that more than $400,000 of your assets will require probate.
The Importance of Trust Funding
Importantly, the terms of a trust govern only those assets conveyed to the trust. You must retitle assets to the trust during your lifetime, or name the trust as the beneficiary once you pass. If you neglect to fund the trust using these methods, or forget to fund the trust with a particular asset, that asset will require probate administration. Therefore, maintaining a properly funded trust imposes an increased administrative burden on you during your life compared to a will. For this reason, a trust may not be suitable for a young family that frequently changes jobs, location, and asset holdings.
Finally, a trust cannot hold your tax-qualified retirement accounts (IRA’s, 401K’s, 403(b)’s, etc.) as those accounts can only be held by an individual. If your trust is named as a beneficiary of these accounts, required minimum distributions will first need to be paid to the trustee. The trustee will then be required to distribute the same distribution to the trust’s beneficiaries. This imposes an additional layer of administrative complexity and additional trustee fees (if your trustee is charging a fee). Unless there is a compelling reason to name the trust as a beneficiary of the account(s) (i.e. creditor protection, special needs planning, planning for a second marriage/blended family, funding a charitable endowment), it is usually recommended to nominate individual beneficiaries for these accounts to receive the accounts outright.
Federal Estate, Gift and Income Tax Considerations
Perhaps the greatest misconception concerning living trusts is that they reduce federal estate taxes. This is not the case — transferring your assets to a living trust does not remove them from your gross estate, so the assets remain subject to estate tax. This misconception may be based on a standard estate planning technique for married individuals where a “bypass” trust is established at the first spouse’s death in order to use that spouse’s applicable exclusion amount from the estate tax ($13,990,000 in 2025). With the historically high lifetime exemption from the gift and estate tax, very few clients will need to consider a trust for this reason. However, it is true that for very large estates (those over $13.99 million in 2025), and estates approaching the exclusion amount, a trust is preferable. A trust allows your trustees and beneficiaries flexibility to make optional tax elections and possible modifications to trust terms to adapt to changing circumstances and changing tax legislation.
As for income taxes, the owner of a living trust is taxed on its income as if the assets were owned outright as a “pass-through entity.” Therefore, transferring assets to a living trust does not require you to file an additional return, or change how you use your assets. A separate tax ID and return generally are not required. You can continue to report the income from trust assets as your personal income on your Form 1040, and retitle trust assets using your social security number as the ID number for the trust. Assets held in a revocable living trust will receive a step-up in capital gains tax basis to the fair market value of the asset as of the date of the owner’s death. However, this is also true for assets passing through a probate estate. However, for very large estates with certain assets, a trustee’s power to transfer where the trust is administered to a state without state income tax like Nevada or South Dakota, can be useful to avoid state income tax.
Alternatives to a Trust
Trusts are not the only method to avoid probate of your assets after death. You can designate transfer-on-death beneficiaries for your financial accounts and liquid assets. For real estate, you can use a transfer-on-death (Lady Bird) deed for your home and other real estate to avoid the probate process. Although these methods are inexpensive and simple, they are not without their pitfalls. You should be aware that:
- They can create unforeseen undesirable consequences if one of the heirs or beneficiaries dies before the grantor(s). For example, if the grantor’s three children are remainder beneficiaries, and one of them passes away before the grantor, their interest belongs to that child’s probate estate. This defeats the goal of avoiding probate. Or, if remainder beneficiaries take the property as joint-tenants-with-rights of survivorship, and one remainder beneficiary dies before the others, that beneficiaries’ descendants are unintentionally disinherited. Additionally, if a charitable beneficiary is named in a beneficiary designation, and that charity no longer exists, or is otherwise unable to receive the bequest,, a probate court proceeding is necessary to obtain court approval for distribution to an alternative charitable organization.
- If one of your heirs has special needs, or your spouse requires long term care paid for by Medicaid, the property will be counted against them for Medicaid and Social Security Disability eligibility. Your heir or spouse will need to spend down the inheritance to become eligible for benefits. In this case, a trust is preferable to provide for such an heir.
- Likewise, if one of your heirs inherits the property and later gets divorced, declares bankruptcy, or has creditor issues, the property is not protected from these claims. Therefore, if these issues are a concern for you, a trust may be a better option for your estate plan.
- Beneficiary designation rules for most financial institutions are set by the institution and can be rigid and inflexible. For example, if a married couple dies in a mutual accident, a beneficiary designation naming the other spouse usually requires that the asset be distributed to that spouse’s probate estate, regardless of the spouse’s death. A trust, in contrast, can allow for immediate distributions to your remainder beneficiaries by bypassing a spouse’s estate in the event of a mutual disaster.
These simple probate avoidance strategies are advisable when your estate is truly simple. As general guidance, these methods are preferable when: (1) if besides your spouse there are one or two heirs who are not minors and who do not have special needs or creditor issues (or contemplating a divorce from their spouse), and (2) the estate will be well below the federal estate and gift tax unified exemption, and (3) the primary goal is to avoid probate.
Advantages of a Living Trust
The anticipated savings of a living trust must be carefully evaluated. But in addition to financial considerations, living trusts do offer several advantages in addition to reducing the cost of passing your assets to your beneficiaries and minimizing tax liability.
Incapacity. A living trust is an excellent means for planning for incapacity. The trust can instruct the trustee or successor trust to manage your assets and provide for your financial support. A durable power of attorney can authorize your agent to transfer additional property to the trust. Thus, a living trust and durable power of attorney used in conjunction with each other, can avoid the need for a court-appointed conservator.
Speedier distributions. Upon your death, the trustee of a living trust can begin to make distributions to surviving beneficiaries without the delays and procedures that the probate process requires. Delays are also avoided with joint accounts, insurance proceeds, and other assets that pass directly to the beneficiary without going through probate.
Out-of-state property. A living trust can be very beneficial if you own real property in more than one state because separate probate proceedings are required in every state in which you own property. Transferring such property to a living trust avoids the need for multiple probate proceedings.
Avoidance of disputes. A living trust offers an advantage over a will if you anticipate discord among your beneficiaries. Unlike a will, family members do not have to be notified of the existence of the trust. Under a new Michigan law, you can also limit the terms of a trust the beneficiaries are entitled to review. For example, if one beneficiary receives a higher amount of your estate in consideration for caring for you in advanced age, a trust is preferable because you can prevent another beneficiary from discovering the disparity in the amount of property each beneficiary receives. A living trust may also withstand legal attacks better than a will.
Privacy. The probate of a will is a court process, and court filings are readily accessible to the public. In contrast, a trust is a private contractual arrangement, and the parties entitled to any information regarding your trust are highly restricted by law and the terms of the trust. You can even avoid disclosure of trust terms to your asset custodians by providing them with an abbreviated “Certificate of Trust Existence” detailing only the identity of the trust’s parties, and the trustee’s powers. This can be an important consideration if you are concerned about nosy relatives, avoiding scammers and other financial opportunists, inquiries by the press and general public, and minimizing unwanted solicitations for financial products and services from vendors who routinely monitor court filings.
Creditor protection. A living trust can provide protection to a surviving spouse and your remainder beneficiaries by providing that property remains in the trust after the grantor’s death, with distributions made subject to a discretionary standard (usually for their “health, education, maintenance, and support”). If distributions are restricted to such a standard, the trust assets are considered the property of the trust, and not the property of the beneficiaries. This protects your trust property from your spouse’s and beneficiaries’ potential divorce, bankruptcy, and creditor claims. A trust can also ensure that when one spouse dies, and the surviving spouse remarries, the assets of the first spouse to die pass to their children rather than to the surviving spouse’s new spouse and their family.
Planning for uncertainty. In general, once a distribution is made pursuant to a transfer-on-death beneficiary designation or after probate of a will, that property can be used without limitation. In contrast, a trust is a flexible instrument. If tax laws change, your trustee can be given the power to make elections or amend trust terms to take advantage of these changes. For example, prior to 2020, the Michigan legislature was considering a bill that would allow the trustees of joint revocable living trusts to treat jointly owned property as community property if the trustee made an affirmative election to opt-in to this treatment. By opting in, the trust assets would receive a 100% step-up in income tax (capital gains) tax basis upon the death of the first spouse instead of the 50% step-up allowed for joint property at the death of the first spouse. A trust can also provide terms for alternative beneficiaries in the event of a failure of a bequest, binding terms for the sale of real property, and terms to protect trust assets in the event a beneficiary becomes disabled or has a substance abuse or gambling issue.
Planning for long term care. The cost of long term care is almost a universal concern among all clients, and becomes more pertinent for those clients over the age of fifty. The average cost of one-month’s care in a nursing home in Michigan is over $10,000. Importantly, in the event that one spouse passes away, and the surviving spouse would like to qualify for Medicaid benefits to pay for long term care expenses either at-home, in an assisted living facility, or in a nursing home, the property of the first spouse to pass can be protected from unnecessary spend-down and for the use of the surviving spouse by a “pour-back” provision establishing a testamentary discretionary trust with the deceased spouse’s assets for the benefit of the surviving spouse. This can generally save around one-half of a married couple’s assets from spend-down in this scenario.
Although a living trust can provide advantages over a will or other estate planning method, it is important for you to have realistic expectations of what a living trust can accomplish. Our goal is to ensure you can make an informed decision as to whether such a trust is appropriate for you. Brandon S. Dornbusch, PLC would be happy to assist you further in making the decision that’s right for you.