The Right and Wrong ways to Avoid Probate

Probate is a system of laws and court procedures that exist in every state to assure a decedent’s assets pass to the intended heirs and the decedent’s bills are paid. In most cases, Probate can and should be avoided because it is expensive, time consuming and unnecessary.

While adopting a Last Will and Testament allows a person to specify their heirs, designate a Personal Representative in charge of estate administration and conduct most estate business without court order, a Will does not avoid probate. Under most circumstances, the probate process takes nine months or longer and requires the hiring of attorneys, accountants and appraisers. Professional fees typically range from 3% to 5% and any required probate court hearings may take months to schedule.

Probate can be avoided by both intentional and unintentional ways, some which are better than others.

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP

The joint owners of an asset can provide for the surviving owners to inherit without probate in two different ways. First, joint ownership by a husband and wife automatically transfers to the surviving spouse and is known as “tenants by the entirety” or “TBE”. Second, the same result occurs with joint ownership by two or more other persons that specifies “with right of survivorship”. Except for assets titled in the joint name of a husband and wife, ownership by other surviving owners will not be automatic unless “with right of survivorship” is specified. In that case, probate will be necessary. Following the death of a spouse and the automatic transfer of joint marital assets without probate, the surviving spouse often wants to create new joint “with right of survivorship” title with their children or other heirs. Two common pitfalls should be pointed out:

First, transfers of homestead property may result in a loss of all or part of the homestead tax exemption and other tax benefits, unless the surviving spouse retains a “life estate.” Second, future judgments or other claims against one of the new joint owners could jeopardize all or part of the asset that has been retitled.

“POD”, “ITF” AND OTHER BENEFICIARY DESIGNATIONS

The transfer of bank, credit union and brokerage firm accounts without probate following the death of the accountholder can be accomplished by having the accounts designated as “Payable on Death” (POD) or “In Trust For” (ITF). Different financial institutions offer different types of options. While these arrangements avoid the risk of joint ownership, they are not suitable for beneficiaries who may be minor children and must be kept updated in the event a designated beneficiary later dies. These arrangements also do not work for real estate and should not be used if the estate later needs funds for expenses and taxes from a beneficiary who may refuse to contribute their fair share.

Beneficiary designations also control and avoid probate on all types of life insurance, annuity contracts, retirement funds and individual retirement accounts. As discussed in previous articles, care must be taken and professional advice obtained when selecting beneficiary options and reviewing the possible tax issues that may exist.

INTER VIVOS OR “LIVING” TRUSTS

A properly drafted and funded trust agreement prepared during a person’s lifetime will avoid probate without the pitfalls described above. The owner retains complete control of the assets in the trust and has the right to amend the trust at any time. No additional tax returns or maintenance costs are necessary. An outside or successor trustee is not involved until the owner dies or becomes disabled.

The only criticism that can be made against living trusts is they involve more paperwork and effort than simply preparing a Will for the heirs to probate later. Such criticism comes mostly from probate lawyers and whose motives you can judge for yourself.

Spending the extra time, money and effort to adopt a living trust is especially important for the following persons:

1) Persons who are elderly or disabled and want to avoid the expense and complexity of guardianship proceedings;

2) Persons who own real estate outside Florida and want to avoid the delay and expense of probate in two or more states;

3) Persons who want to discourage litigation among family members and keep their financial affairs private;

4) Persons who own an active business that needs to continue operating without court interference or delay; and

5) Persons who want their heirs to save time and money.

Estate Planning in Second Marriages

Estate planning by both spouses in a second marriage can be difficult. Divided loyalties may exist between providing for the surviving spouse and providing for the children of a prior marriage. In addition, various state laws made interfere with each spouse’s intended estate plan.

This article will point out both the pitfalls of having no or an outdated estate plan following a second marriage and the importance of taking the right steps both before and after the new marriage to avoid these pitfalls. Let’s start by looking at the pitfalls or what the law entitles every surviving spouse to receive—whether at the end of a 50-year first marriage or 50-day second marriage:

HOMESTEAD PROPERTY

In many second marriages, the husband and wife establish their marital residence in the former home of one or the other. No intention may exist between the spouses to make a gift of the home and the non-owner spouse may be expected to vacate the home if the owner spouse dies first.. The Florida Constitution provides a very different result. In Florida, every surviving spouse is provided a “life interest” in the marital residence, whether or not the surviving spouse chooses to live there. While this right to a life interest can be released voluntarily, a surviving spouse may be unable due to poor health or unwilling due to poor relations with other family members to provide such a release.

ELECTIVE SHARE

As a matter of public policy, every state provides surviving spouses with some minimum inheritance which they can “elect” to receive instead of the inheritance that may or may not have been provided them by their deceased spouse. Florida law refers to this amount as the “Elective Share” and Florida has one of the most generous elective share laws in the country. While there are exceptions to the Elective Share beyond the scope of this article, a surviving spouse in Florida may be entitled to receive a share of 30% of most probate and non-probate assets.

JOINT MARITAL PROPERTY

Bank accounts, real estate and other assets titled jointly in the names of both the husband and the wife are commonly referred to as “Marital” property or “Tenancy by the Entirety” property. For inheritance purposes, all such Marital property automatically and completely passes to the surviving spouse. Contrary instructions in the Will or Trust Agreement of a deceased spouse will not change this result.

RETIREMENT PLAN BENEFITS

Retirement plans governed by the federal law known as “ERISA” and certain other types of plans require that the surviving spouse automatically be beneficiary of any death benefits. While a spouse can voluntarily waive all or part of these death benefits, such a waiver can only be exercised after marriage and according to the specific procedures and forms provided by the employee’s Plan Administrator.

LIFE INSURANCE AND ANNUITY BENEFITS

The distribution of life insurance and annuity benefits is generally governed by the specific beneficiary designation forms on file with each insurance company. Typically, such an important decision is only made once when the application form is first filled out and with little thought to other estate planning documents. If a spouse is designated on the beneficiary form, the insurance company will follow those instructions regardless of any intent or other documents to the contrary. Even worse, some courts have ruled that such the designation of a spouse continues even after divorce and until new a new beneficiary forms is filed.

To summarize these pitfalls, Florida law will do more to protect the surviving spouse of a short term second marriage than the surviving children of a long term first marriage.

Let’s look now at how to avoid these pitfalls:

PRE-NUPTIAL AND POST NUPTIAL AGREEMENTS

Written agreements entered into either before or after marriage are not just for movie stars. Most second marriages (and many first marriages) would benefit from a signed agreement that provides for both the financial protection of the surviving spouse (if needed) while assuring the current or future inheritance of assets by the original family. Don’t look at such agreements as adversarial, but rather as the mutual desire of both parties to protect each other from the pitfalls described above.

To make such agreements valid and enforceable, the following steps should be followed:

1) Hire legal counsel with experience in preparing and enforcing such agreements. Both parties should also be represented by separate counsel.

2) Each party should make full financial disclosure of all their assets and income in order that any waivers to future income or assets are made by the other party with full knowledge and understanding.

3) Avoid the “last minute” preparation and negotiation of such agreements on the eve of the marriage. Such hasty agreements could later be challenged as signed under “duress.” If circumstances and budget permit, consider videotaping the meeting at which the final agreement is discussed and executed

4) Be sure any specific waivers of homestead, retirement benefits or elective share rights are clearly spelled out and the impact of such waivers understood by both parties.

5) While the marriage itself may qualify as sufficient “legal consideration”, the party with the greatest financial means should be careful to provide adequate consideration to the other party, often measured by the length of the future marriage.

6) Last, but not least, leave the children and other family members out of it. Rely on the advice of your legal counsel and tell the family you intend to treat every one fairly. They will find out when the time comes.

After the marriage, follow up immediately on any necessary changes to your previous estate planning documents, beneficiary designations and property titles. Don’t forget to address the right of the surviving spouse to continue using any automobiles, household furnishings or other personal property that has been shared during the marriage. Also update your previous Living Wills and Designation of Health Care Surrogates ( Medical Power of Attorney) to either designate the new spouse or confirm your other choices.

Business Succession Planning - Part 2

The previous article on business succession planning described why such planning is important and that it is seldom accomplished without outside help. Besides tax, accounting and legal issues involved in any change of ownership, succession planning in a family or closely-held business also involves personal relationships that can both help and hinder the process.

In the minds of many current “senior” owners succession planning is seen as the first step towards retirement and their own morality. These emotions mixed with and often accurate assessment of the abilities of the younger generation results in procrastination, reluctance and even rejection of proposed changes.

In the case of the younger generation, or aspiring new owners, what needs to be said is often left unsaid because the communication between business partners is different than between parents and their children. Rather than expressing disagreement or constructive criticism, both generation, but especially the younger generation, may either remain silent or simply abandon the process.

While any type of business planning will benefit from the “team” approach, committed succession planning may need the added ingredient of family counseling. A few such firms exist and can often salvage a business succession plan that is in danger due to personal conflicts.

The older generation is entitled to keep what they earned, have certain financial security and a post-retirement role to plat if they want it. The younger generation is entitled to respect for their own abilities, a chance to succeed and the right to make a few mistakes. The older generation should remember that they probably made a few mistakes of their own.

In-laws are a “wild card” in every family situation. In-laws can be the best or worst influence and are often both the sounding board for silent frustration and force behind final confrontation. If mom and dad consider themselves a “team”, they should have no less respect for the support showed by a daughter-in-law or son-in-law. A family or a personal relationship that prompts business owners to pursue succession problem create its own set of obstacles. Like obstacles to any objective, they can cause defeat or be dealt with as something to be expected. In the next article we will cover how to spot and develop good successors.

Succession Planning

We can all remember our favorite restaurants or other small business that closed upon the death or retirement of its’ owners. We can also think of a restaurant or other small business that was never quite the same after its owners sold out. Between these two results is what estate planners call the challenging world of “Business Succession Planning.”

In the world of small businesses, more fail than succeed at succession planning and even more fail to even attempt succession planning. While we can all point to automobile dealerships or other examples of successful transition between one generation and the next, these success stories are more the exception than the rule. Looking behind the scenes of these “success stories”, you often find disappointment, hard feelings, and even lawsuits. Having participated myself in a number of both failures and success stories, the two main ingredient of success are good parenting and good advise. While some family businesses can rely on a product or franchise that will succeed on its own, most small business owners face constant challenges of government regulations, competition and taxes. It is no wonder that so many small business owners are both too tired to continue and too busy to quit. A family committed to succession planning and a smooth transition of control between generations face a daunting challenge. Succession planning is not a short term project or a task that many business owners can accomplish without outside help.

Unfortunately, many advisors who provide good legal, accounting, and insurance or investment counsel face succession planning challenges in their own business. While my next few articles will discuss succession planning for a family business many of the points and pitfalls apply to any business or to the passing of wealth between generations. The older generations often needs as much training in their role as the younger generation. In my next article, we will start by speaking to the current owners about how to succeed in succession planning. The children or other perspective new owners will get their turn, including the responsibility they have to look in both directions as the mantle is passed.