ESTATE PLANNING – YOU ARE GONE BUT WHAT ABOUT YOUR ASSETS?
By: William G. Morris, Esq.
Estate planning is a popular topic, especially in a retirement mecca like Florida. That popularity brings with it much confusion. In season, the papers are full of advertisements for estate planning seminars. The internet is awash with "experts." And, after researching the internet and maybe attending some free seminars, many are tempted to utilize online services or forms to do their own estate planning.
This article might not appeal to the do-it-yourself readers. For the rest of you, this article will provide a brief summary of estate planning tools: what they are and what they do.
Last Will and Testament. The only true "Last" Will and Testament is the one done closest to death. A Will directs distribution of assets to take place after one dies and serves other important functions. A Will should appoint a Personal Representative (known as an Executor up north) to administer the estate. The estate is like a mini business and needs someone to operate it. A Will can also designate guardians for minor children and put conditions on gifts, including creating trusts to be administered over a period of time for the benefit of one or more beneficiaries. A trust can be particularly useful when a beneficiary is a minor or has a history of mismanaging money.
A Will goes to probate. Probate is the court administered process of marshalling assets, paying bills and distributing what is left. Probate is started by filing a petition with the court along with the Will and death certificate. It requires notice to creditors, so creditors can file claims in probate against the decedent's assets. It also requires notice to beneficiaries and other interested parties. Although there are expedited procedures for small estates and when the decedent has been dead more than 2 years, probate can take months if not years. Under relatively archaic rules inherited from England, real estate must go through probate in the state where it is located. There can be more than one probate required.
An increasingly popular alternative to the Last Will and Testament is a Revocable Trust also known as a Living Trust or Revocable Living Trust. With a Revocable Trust, the person creating the trust is usually the trustee and transfers assets into the trust. The trust provides that while living, the person creating the trust can do whatever he or she wants with the assets and directs that after death the assets be distributed in a specific manner. Instead of a Personal Representative, the trust appoints a successor Trustee. Instead of going to court to open probate, the successor trustee takes office when the person creating the trust dies. An added benefit of a living trust is that if a person is unable or unwilling to manage their assets, the person can appoint someone else to serve as Trustee while they are still alive.
The biggest benefit of a Revocable Trust is that it generally avoids probate. While the person creating the trust is alive, the trust is really a legal fiction and even the IRS recognizes that what is called a grantor trust does not even need a separate tax identification number. When the person creating the trust dies, the assets in the trust are considered owned by the trust and generally do not have to go through probate. That makes the Revocable Trust a particularly useful vehicle when someone owns real estate in more than one state, as multiple probates can be avoided.
Irrevocable Trusts can be used in estate planning, but use is generally for limited purposes. Perhaps the most common is to create an Irrevocable Trust to own life insurance so that the life insurance is not part of a decedent's estate for tax purposes. The life insurance proceeds go tax free and can be used to pay expenses of the estate or simply to provide a gift to beneficiaries. Sometimes, the do-it-yourselfer stumbles into an Irrevocable Trust instead of a Revocable Trust and can find himself or herself stuck with a vehicle that outlives its usefulness and may be difficult or impossible to change. Irrevocable Trusts can be used for Medicaid planning and other specific purposes, but for the typical person, an Irrevocable Trust may be a bad idea.
Planning for distribution after one's death is the core focus of estate planning, but there are other important concerns that should be addressed. Designating a Health Care Surrogate is a good example. The Health Care Surrogate is a person authorized to make medical decisions in event the principal is unable to do so. In some states, this is knows as a health care power of attorney. Designation of Health Care Surrogate allows a person to designate who makes medical decisions if the person is incapacitated. Florida Statutes provide a pecking order of relatives with authority to make these decisions, but conflict can arise and if family members do not agree, the individual may be subject to court action and ultimately the appointment of a guardian. Guardianships are expensive and cumbersome.
Living Will is a document related to Designation of Health Care Surrogate, but has a different purpose. A Living Will expresses ones intent with respect to end of life decisions. Without a Living Will, family members may fight over these decisions and result in costly court action to ultimately get a decision.
Power of Attorney authorizes someone to act as attorney-in-fact with respect to the areas of authority within the power. A Power of Attorney generally deals with property, contract and financial matters. Power to act under a Power of Attorney ceases when the principal cannot act, unless the power is made durable by use of specific language. A Durable Power of Attorney remains effective, even if the principal is incapacitated, as long as court action has not started to determine capacity or appoint a guardian. Danger of a Power of Attorney is that most give the attorney-in-fact authority to deal with the principal's finances and with that authority places the principal's finances at risk of wrongdoing. Without a power of attorney, insurance companies and others will not deal with the attorney-in-fact, even if he or she has medical decision making authority. A Power of Attorney can be as limited or broad as the principal desires, and the do-it-yourselfer may either fail to include needed provisions or end up with a power too limited as be useful.
Florida Statutes also allow individuals to designate who they want to be their guardian in event they need a guardian. That is through a document known as Designation of Preneed Guardian. Although the designation is not binding on the courts, it is quite persuasive and judges try to follow the expressed desire of someone who is incapacitated.
This next part will be addressed to the do-it-yourself estate planners. Many people decide that they do not need a Will or Trust and simply set up all their accounts and properties so that someone owns them when they die or place them on title now so they will own the asset when they die. Years ago, statutes prohibited establishing payable on death bank and stock brokerage accounts, but those prohibitions have vanished. There has never been prohibition on establishing an account of joint owners with right of survivorship. But, these alternatives to formal estate planning can miss the mark and create problems. What if someone adds death beneficiaries to accounts but misses one or ends up closing an account that was intended to go to a particular recipient? What happens if an intended recipient dies? Does that person's interest go to his or her children? Spouse? Or does the asset have to go through probate without a Will? What happens if the IRS or other creditors of a joint owner try to take the account?
Real estate is perhaps the most problematic. Some people add their children as joint owners with right of survivorship. That do-it-yourself approach has two significant problems. It is a present gift and a gift tax return may be required if the value of the gift is more than $15,000.00. Second, what happens if the "owner" wants to sell or mortgage and one of the others on title does not cooperate? Sure, the kids will always be cooperative, but what if one of the kids is incapacitated and the parent is now dealing with a guardian?
The gift may face unexpected tax consequences. If the newly added owners inherited the property at death, they would inherit for tax purposes as if they bought it for what it was worth at the time of the decedent's death. If they get it as a gift during life, the gifted interest is valued at the lesser of what the owner paid for the property or what it was worth at time of gift. It may not seem like a big deal, but the problem comes when the recipients sell the property and have to pay income taxes. Difference between sale price and their basis in the property is taxed as income. There will probably be no income tax if the property is inherited and sold near the time of the decedent's death. There could be a large income tax due if the property had been owned for a long time, the decedent had paid little for it and the recipient's tax basis was the amount paid by the decedent.
Even the simplest estate plan can become problematic if all does not go as planned. People die out of order and do-it-yourself efforts to avoid probate often overlook important factors. If you have learned anything from this column, I trust you have learned when it comes to estate planning, let the do-it-yourselfer beware.
William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.