2-Mar-20
Pending Michigan Legislation
Take-Away: While there were few, if any, relevant last-minute statutes passed in Lansing in late December that impact estate planning in general, or Wills and Trusts I particular, we can expect some helpful legislative activity in the coming months before the state Legislature takes a long summer break in this, yet another, election year. Much of this summary comes from the periodic reports that I receive from Cadillac’s Nathan Piwowarski who heads the State Bar’s Probate and Estate Planning Section’s Probate Council Legislative Committee. Some of the pending legislation (in various stages before the Council and various Legislative committees) include the following:
Entireties Trusts: A Bill would permit married spouses to own property as tenants-by-the entireties to retain that classification, even when title to their assets are held in the name of a joint trust. Existing joint trusts would have to be modified by a simple amendment to manifest the spouses’ intent to accord entireties treatment to all of the assets held in the name of their joint trust. This Bill addresses the long-standing concern that by transferring title to tenants-by-the-entireties owned assets to a revocable trust, in order to avoid probate, causes the asset to lose its entireties creditor-protection feature, as it is no longer technically owned as tenants-by-the-entireties. All assets owned in the name of the entireties trust would be classified as tenants-by-the entireties, which means that a companion Bill would also be adopted to expand the type of assets that can be owned by Michigan spouses as tenants-by-the-entireties. If adopted, this legislation would be an ‘all-or-nothing’ entireties classification for all of the assets titled in the name of the joint trust. The Michigan Bankers Association has some concerns with this Bill, so it is hard to project just when the Bill might find a sponsor to shepherd it through the Legislature to enactment. While tenants-by-the-entireties creditor protection is desirable, remember that there would only be a 50% basis adjustment to the trust’s assets on the death of one spouse.
Uniform Marital and Premarital Agreement Act: A couple of Bills are before the Legislature to adopt the Uniform Martial and Premarital Agreement Act. These Bills are in response to the three Allard court decisions a few years back that found that a divorce judge’s equitable powers ‘trumped’ the terms of a premarital agreement where the parties had identified their separate property, and where they tried to remove that separate property from the judge’s consideration in a later divorce. As such, while prenuptial agreement are generally enforceable in the event of the death of one spouse, there exists a genuine concern if they are enforceable in the event of a future divorce. These Bills would adopt a standard for the enforceability of a premarital agreement outlined in the Uniform Act, with the goal to provide more consistency among divorce judges if a prenuptial agreement purports to control the outcome of a divorce where separate property, i.e. gifted, inherited, or acquired prior to the marriage, exists. The Family Law Section of the state bar has some concerns with regard to the adoption of the Uniform Law with its effort at creating a bright-line with regard to enforcement of a premarital agreement. If adopted, the Uniform Act would also provide more likely enforcement of a post-nuptial agreement between spouses as well.
Cohabitation is Not a Crime: This Bill (SB 308) would repeal Section 335 of the Michigan Criminal Code, which makes it a misdemeanor for an individual to cohabit lewdly and lasciviously with an unmarried person. I suspect this Bill is prompted by the dramatic increase in the number of couples who live together without a formal marriage license.
Transfer of Title to Vehicle by Death Certificate: A Bill would authorize the use of a beneficiary designation to transfer title to a vehicle or watercraft on the death of the titleholder, either to a named individual or to the vehicle owner’s trust. Three statutes would be amended (MCL 257.236b, for motor vehicles) (MCL 324.80312, for watercraft) and (MCL 700.1104 (m), to expand the definition of governing instrument under the Estates and Protected Individuals Code to include vehicles and personal watercraft titles that are registered in beneficiary form (TOD).) Currently feedback on the Bills is sought from the Michigan Secretary of State.
Repeal Michigan Estate Tax: This Bill (HB 4922) would repeal the Michigan Estate Tax (MCL 205.201 to 205.256.) The Michigan Estate Tax was assessed when a state estate tax credit was available for the calculation of a decedent’s federal estate tax liability. It is also known as a pick-up tax. This federal estate tax credit for state death taxes was later was converted to a federal estate tax deduction. Due to the current dramatic size of the federal gift and estate tax applicable exemption amount, and portability, virtually no estates are subject to federal estate tax these days, where the Michigan Estate Tax could produce minimal revenues for the state. Consequently, the thought is that if the statute is no longer generating any revenue, why have the statute on the books? Of course, Congress could yet again change the federal estate tax to provide a credit for state estate taxes assessed, and we would be back looking at adopting this statute yet again, which is why some folks feel like ‘leaving the statute on the books’ since it is doing no harm and Congress as we know only too well, is fully capable of reversing itself in its incessant search for revenues.
Michigan Income Tax Deductions: This Bill (HB 4171) would amend the Michigan Income Tax Act to allow a widow or widower to claim some of the income tax deductions that are allowed under the Act that would have applied and been available if the deceased spouse had continued to live.
Powers of Attorney: One Bill, part of the expansive Elder Abuse Task Force initiative (see below), would amend the durable power of attorney statute [MCL 700.5501] to induce third-parties, primarily banks, to rely upon the agent’s assertion of authority to act and bind his/her principal. The problem is that banks (in particular) have adopted their own policies when they will rely upon an agent who presents a durable power of attorney. The banks often cite their internal policies as why the agent’s assertion of authority can be ignored by the bank. A frequent example is that the proffered durable power of attorney is stale under the bank’s unilateral policies. This Bill would authorize damage claims to induce third parties, aka banks, to rely on an agent who acts under an apparently valid durable power of attorney. This Bill is intended to create that inducement, much like the provisions of the Michigan Trust Code, which make a third party liable in damages if the third party refuses to accept a Trust Certificate that is furnished by a settlor or trustee and demands a copy of the entire trust instrument. [MCL 700.7913(8).] Such a damage provision would come close to penalty-provisions in the Uniform Durable Power of Attorney Act, which Michigan as not adopted.
Lawyers: The Probate Council is looking at a couple of proposed Bills that deal with lawyers. One Bill would amend MCL 700.1215 to provide that a bequest to a drafting attorney or a family member of the drafting attorney would be void and unenforceable. This proposed legislation would be in response to the Michigan Supreme Court’s 2018 decision in Mardigian. The second Bill would provide a bright-line test with regard to what is commonly called the fiduciary exception to the attorney-client privilege. This issue arises when a fiduciary consults with an attorney, and the question later arises if the beneficiaries served by that fiduciary can have access to that communication and the correspondence between the fiduciary and its attorney. Decisions in a handful of Michigan court cases are ambiguous on whether the communications between the fiduciary and attorney can be protected from the beneficiary in probate litigation pretrial discovery under the attorney-client privilege, or if those communications must be disclosed to the fiduciary’s beneficiaries (who usually are suing the fiduciary.) This clarification is desired in light of the fact that some Michigan court cases have announced that the attorney has a duty to both the fiduciary and to the beneficiaries who are served by that fiduciary.
Voidable Transactions: When Michigan adopted it’s Qualified Dispositions in Trust, aka self-settled asset protection trust, a couple of years ago, it shortly thereafter adopted its version of the Uniform Voidable Transactions Act. Unfortunately, there was some ambiguity between the two statutes. A pending Bill would eliminate that ambiguity with an amendment to the Michigan Voidable Transactions Act- apparently to protect a Qualified Dispositions Trust from judgment creditor claims.
Intentional Delaware Tax Trap: A Bill is proposed to amend the Michigan Powers of Appointment Act. The Michigan Powers of Appointment Act is currently written in a way that prevents a power of appointment holder from inadvertently triggering the infamous Delaware Tax Trap that would cause the value of the assets subject to a limited power of appointment to be included in the power holder’s taxable estate. In these days of high federal estate tax applicable exemption amounts and portability, many now actually want assets subject to a limited power of appointment to be included in the power holder’s estate in order to gain an income tax basis adjustment of the assets subject to that power. Due to the high estate tax exemption amount, there would be no estate tax liability resulting from that possible estate inclusion, but the assets subject to the Delaware Tax Trap would receive an income tax basis adjustment to their fair market value as of the date of the power holder’s death. Consequently, the Bill would permit a the holder of a limited power of appointment to intentionally trigger the Delaware Tax Trap to achieve an increase an inherited asset’s income tax basis.
Community Property Trust: A Bill would permit married couples to classify all of the assets that they hold in the name of a joint trust to be classified as community property. The benefit derived from such a community property classification is that there would be a 100% income tax basis step-up on the death of one spouse to the community property trust’s assets, not just a 50% income tax basis adjustment, which is currently the case with entireties or jointly owned assets. Similar to the proposed entireties trust Bill, a simple amendment would be required to an existing joint trust to convert it to a community property trust. No surprise, the creditor’s right committee of the Michigan Bankers Association has some problems with the classification of all assets held in the trust treated as community property, when only one spouse was obligated on a debt, e.g. a credit card obligation, thus making those assets ineligible to be used to satisfy a judgment against one spouse.
Artificial Reproduction: This Bill [HB 5321] would affect estate and trust administration by recognizing the rights of a child who is born after the death of one parent through artificial reproductive technology (ART). This Bill, if adopted, would confer rights of inheritance on children who are born through artificial reproductive means after the death of their parent, in the absence of a Will or trust provision that clearly expresses a contrary intent. In the case of intestacy, such an ART-child would be entitled to inherit a portion of the deceased parent’s intestate estate. Equally important, the Bill would address how long an estate would have to remain ‘open’ awaiting the birth of an ART-child long after the decedent-parent’s death, as well as the impact of that later-born ART-child on class gifts and bequests. Note that there is bipartisan support for this Bill.
EPIC Omnibus Bill: A Bill would amend over 30 sections of EPIC, the Michigan Trust Code and the Michigan Uniform Transfer to Minors Act. While many of the proposed changes are technical in nature, many changes would adjust the base dollar amounts e.g. small estate proceeding ceiling; value of vehicles that can be transferred via the Secretary of State application process, and expose those larger dollar amounts to annual COLA adjustments. The Bill would also alter/eliminate some beneficiaries who currently fall within the definition of qualified trust beneficiary, which is important to answer questions like: who has standing to bring claims against the fiduciary? Who is entitled to receive information with regard to a trust’s administration and assets? The Bill would also address (finally!) the long-lingering question of whether two individuals can serve together as co-patient advocates. More interesting changes include: (i) permitting quiet trusts for a period of time keeping the beneficiary ‘in the-dark;’ and (ii) how to go about protecting spousal lifetime access trusts, or SLATs, from the relation-back doctrine [where the donee-beneficiary spouse exercises a testamentary power of appointment and appoints the trust assets in trust for the benefit of the surviving settlor-spouse] which would protect assets held in the continuing-SLAT from the settlor’s creditors.
Elder Abuse Expansion: This Bill [HB 4260] would expand the definition of the crime of elder abuse by raising age when one is presumed to be an elder. It also addresses the existing statute’s presumption of when elder abuse actually occurs. There is also a companion Bill that would amend Michigan’s slayer statute [MCL 700.2803] to automatically exclude a person convicted of elder abuse from benefiting under any of the victim’s governing instruments, e.g. Will, trust, beneficiary designations, etc.
Conclusion: When some of these Bills actually become law, I will try to update you with regard to the changes that they make and their implications for some estate planning strategies.