Common Mistakes in Estate Planning (Part Two)

The first part of this article described five common mistakes made in estate planning and the kinds of trust protection that should be provided children. This second part will list other common mistakes in estate planning.

MISTAKE #6 – PARENTS WHO FAIL TO HAVE ENOUGH LIFE INSURANCE

I don’t sell life insurance, so readers with minor children should not view the following advice as self-serving. The average amount of life insurance provided by employers is two or three times annual salary. Additional accidental death insurance may be provided, but most people don’t die as a result of an accident and never collect on this type of life insurance. Two or three times annual salary sounds like a lot of money, unless the primary wage earner has just died and you are raising two or three minor children. Unless financial sacrifices are made or there is a surviving spouse willing and able to work, the typical amount of employer life insurance won’t last five years or provide nearly enough for the college education of each child. Additional funds in retirement plans should not be considered “life insurance” because it will be heavily taxed if withdrawn and may be needed for the future support of a surviving spouse. Until the youngest child has completed their education, most families need and should purchase additional life insurance protection to replace lost income and fund each child’s college education. Term life insurance is available from numerous companies and in most cases at an annual premium cost of 1/10th of 1% of the coverage provided. Parents with minor children should review their options with a life insurance advisor.

MISTAKE #7 - FAILING TO MATCH OLD BENEFICIARY DESIGNATIONS WITH NEW ESTATE PLANS

For many families with minor children, the parents’ life insurance and retirement plan accounts equal most of what their children may inherit. Only the most recent beneficiary designation forms on file with each life insurance company and retirement plan administrator will control these funds, even if the parents have adopted new estate plans with trust protection for their children. Most married persons know (or assume) their spouse is designated as primary beneficiary of all life insurance and retirement funds, but few persons are certain who is designated as secondary beneficiary. If there is no surviving spouse and the children have been designated secondary beneficiaries, each child will receive their share of the life insurance and retirement funds when they reach age 18, regardless of any different estate plan with trust protection adopted by the parents. To prevent this mistake, new beneficiary designation forms on all life insurance and retirement accounts should be updated at the same time new estate plans are adopted.

While it may be appropriate for the surviving spouse to remain designated as primary beneficiary, the new Will or Trust Agreement established to provide the children with standby trust protection should be specifically designated as contingent beneficiary. This action is critically important and due to privacy laws, cannot always be handled by the attorney who has assisted with the new estate plan.

MISTAKE #8 - DEFEATING AN ESTATE PLAN BY JOINT OWNERSHIP

An estate plan is not worth the paper it is written on, if the Will or Trust Agreement does not solely control the assets. Just as outdated beneficiary designation forms may still control the distribution of life insurance or retirement funds, an asset titled in joint names with one or more other persons may defeat the intent of an estate plan, result in additional taxes and risk loss of the asset itself. For example, joint ownership by a husband and wife typically results in the surviving spouse being the automatic and sole owner upon the death of the other spouse. Legal proceedings are usually not required and any contrary instructions in the Will or Trust Agreement of the first spouse to die will be disregarded. The same and a potentially worse result occurs when joint ownership with right of survivorship is created by a parent and their children in order to avoid probate. For estate tax purposes, such arrangements are often disregarded by the IRS. For asset protection purposes, creditors of a child listed as a joint owner may be able to attach or force the sale of such joint assets in order to collect against the child’s share.

Special care must be taken in creating joint ownership of real estate. Even if only avoiding probate is intended, all joint owners will be required to execute future transfer deeds or loan documents. In addition, the homestead tax and other exemptions available on a residence may be jeopardized.

MISTAKE #9 – DO-IT-YOURSELF ESTATE PLANNING

At the risk of sounding self-serving, this last item is too important to ignore. Because the services of an attorney can be expensive, estate planning is often delayed or attempted through internet or paralegal sources. Unfortunately, single parents and families with limited resources may need estate planning the most, but receive it the least. My recommendations are:

DO locate a qualified estate planning advisor by asking friends, tax or financial advisors or free legal referral services for one or more recommendations;

DO obtain an estimate of fees and any costs up front. Many attorneys charge only a nominal consultation fee and should be expected to discuss their fee and payment arrangement at that time. If the fee sounds too high, keep looking;

DO provide your advisor with a complete list of current assets and how titled, life insurance coverage and the current beneficiaries, copies of any existing wills or divorce decrees and information about family members, intended legal guardians and possible trustees;

DON’T rely on internet or other sources of legal forms that are not current, that are not specifically prepared for Florida residents or that you do not fully understand. The execution requirements for Florida documents is complicated, is different than some other states and should be supervised by some one familiar with these requirements; and

DON’T put off until tomorrow what you should do for your family today.

Common Mistakes in Estate Planning (Part One)

This is the first part of a two-part article which will alert readers to changes they may need to make to their own estate plans. While not having any estate plan in the first place is the greatest mistake, this article assumes the reader has already adopted some form of Will or Trust Agreement. While the mistakes described below and in the next article can result in added financial costs, their impact on the lives of children can be even greater.

MISTAKE #1 – PARENTS WHO FAIL TO ESTABLISH TRUST PROTECTION FOR THEIR CHILDREN

Most people adopt their first Wills in order to designate legal guardians for their minor children. Unfortunately, the authority of a legal guardian terminates when a child attains age 18. At that same age, a child may also gain unrestricted control of their inheritance despite their lack of maturity or the wrongful influence of outside parties at that time. Parents can and should prevent this mistake by providing in their estate plan for the continued trust control of a child’s inheritance until the child’s education is completed and the child has attained a more mature age.
MISTAKE #2 –GRANDPARENTS WHO FAIL TO ESTABLISH STANDBY TRUST PROTECTION FOR THEIR GRANDCHILDREN

The typical Will or Trust Agreement provides that the inheritance due a deceased child shall instead be distributed to the surviving issue of that child. In the event one of their children later dies, grandparents often fail to provide the same trust protection for their grandchildren as recommended above. This mistake by the grandparents often involves an even larger inheritance than the grandchild may receive from their deceased parent and could also result in the control of a grandchild’s inheritance being managed by inlaws or non-family members.

MISTAKE #3 – CREATING UNEQUAL TREATMENT BY PROVIDING EQUAL SHARES TO CHILDREN

The age spread between the oldest and youngest children in a family often ranges from 5 to 15 years. Even when trust protection is provided to prevent a child from inheriting at age 18, an even worse result can occur if each child’s share is made equal without regard to each child’s age. For example, the three surviving children of the Jones family are ages 23, 18 and 12 at the time of their parents’ death. The estate plan of Mr. and Mrs. Jones provides for equal division among the children at their death, followed by distribution as each child attains age 23. Until distribution, each child’s separate share can be used in the discretion of the Trustee toward that child’s support, education and medical care. While Mr. and Mrs. Jones never intended such a result, the older child (whose college education has already been provided by the parents) will receive a full one-third share, the middle child will likely spend all or most of their share in order to complete college, while the youngest child may exhaust their share and never go to college due to lack of funds. This mistake can be prevented by providing trust protection and equal division of assets only after the youngest child has received the same opportunities as each other child (e.g., until the youngest child attains age 22). Until that time, the Trustee can provide support to each of the children according to their needs from time to time (not necessarily in equal amounts) and as the parents would do themselves if living. Once the remaining assets are divided after the youngest child attains the designated age, distribution of each child’s remaining share will occur at such later age of maturity as designated by the parents.

MISTAKE #4 – PARENTS WHO FAIL TO TREAT DIFFERENT CHILDREN DIFFERENTLY

Most parents love their children equally and treat their children equally in their estate plans. The reality in many cases is that once all of the children have reached adulthood, they have achieved different levels of maturity, career and marital success. While parents with a disabled child usually provide special trust protection for that child, the same parents often fail to protect the inheritance of those children threatened by creditors, broken marriages or bad lifestyles. Many options exist for parents to provide all or some of their children with added trust protection and should be discussed with their advisors.

MISTAKE #5 – PICKING THE WRONG TRUSTEE

In selecting a legal guardian who may become the caregiver, mentor and substitute parent for a minor child, my advice has always been to “let your heart rule your head.” In selecting a trustee to manage a child’s inheritance, make investment decisions and say “no” when necessary, you should instead “let your head rule your heart.” The family member or friend, who may be best choice as legal guardian, may be unqualified or overwhelmed with the responsibility of also being trustee. Parents and grandparents alike should consider designating an independent and qualified investment firm or other financial institution to serve as trustee or trust advisor and made responsible for investment management, bill paying and recordkeeping. This is especially important in trust protection arrangements that may last for many years and beyond the lifetimes of friends or family members. When an independent and qualified trustee is designated, I recommend a friend or family member be provided the authority to replace that trustee with another investment firm or financial institution if circumstances or personnel later change. The second part of this article will cover other common estate planning mistakes, including, purchasing life insurance, designating beneficiaries and using joint ownership.

Developing an Estate Planning Checklist

The only thing worse than having a Will or Trust Agreement that is out of date, is having no estate plan at all. Many estate plans become outdated as children grow older and financial conditions change. Because many people don’t fully understand all the legal provisions and “broiler plate” in their Wills or Trust Agreements, the need to update, and/or replace provisions may not be apparent.

Following is a checklist of Estate Planning issues you should discuss with your advisors, whether to establish an estate plan in the first place or update an existing estate plan:

WHO PAYS THE BILLS?

While the primary purpose of most Wills or Trust Agreements is to designate who inherits your property, attention should also be given to who will pay the debts, taxes, expenses of administration, maintenance and repair of property. Where all or some of the heirs maybe under the care of a legal guardian, directions should be provided and arrangements made to reimburse the guardian for each additional expenses, including housing and transportation. Dividing expenses the same way you divide property is not always fair.

WHO GETS THE PERSONAL PROPERTY?

Most family feuds start over division of personal property rather than money. Emotions often run high and in-laws don’t help matters. Florida Law provides a very easy means to leave instructions concerning personal property and which don’t require constant trips back to your lawyer’s office to amend or update your instructions.

WHO IS IN CHARGE?

The appointment of one or more Personal Representative in a Will or Trustees in a Trust Agreement is often a difficult choice. Sometimes the wrong choice is made based on location, business experience or age. More important qualifications may be the abilities to delegate, supervise and communicate. In many circumstances, it may also be appropriate to select or include a third party or professional fiduciary. In preparing or updating your estate plan, be sure and talk to your advisors about the selection of both primary and backup legal representative of Trustees.

ARE THERE ANY TAX ISSUES?

The maximum federal estate tax rate in 2009 is 45%. If real estate is owned outside the State of Florida, separate and additional estate debt taxes may apply. In turn to ignore these taxes in favor of a simple estate plan is the same as listing the government as your favorite heir. While tax exemptions in various other means exist to reduce or avoid these taxes, they do not happen automatically. In addition, changes in the federal estate tax laws could be expected. An even up to date estate plan may require future revisions. Beside possible estate taxes, significant income taxes may arise on individual retirement accounts, pension plans and other forms of deferred compensation. While not easy to avoid, options do exist to defer these income taxes.

IS THERE A BUSINESS TO SELL OR CONTINUE?

Business succession planning will be the subject of future articles. Prevailing the business or professional practice has been the primary source of family support, will often vanish or quickly diminish without careful planning or good management. Where such a business exists, the Will or Trust Agreement should confirm the arrangements for the sale or continuation of that business in the hands of qualified managers.

DOES THE WILL OR TRUST AGREEMENT CONTROL THE ASSETS?

Previous articles have discussed the common estate planning mistake of not letting a Will or Trust Agreement control such substantial assets as life insurance, property, retirement plans, or jointly owned property. Exception in many cases, these types of assets pass outside the terms of a Will or Trust Agreement. It may be distributed:

1. To either the wrong people, or to the right people too early;

2. A Trust Agreement that is not properly funded; or

3. A Will that does not control important assets, is not worth the paper it is written on.

READ AND UNDERSTAND ANY ESTATE PLANNING DOCUMENTS YOU ARE SIGNING

Leases, mortgages and many other types of legal agreements are signed without reading the fine print. While this may be safe if the fine print cover terms you may not intent to violate, both Wills and Trust Agreements are not your usual legal agreements. Broiler plate provisions do exist to avoid court intervention, provide for tax election and confirm the authority of designated Personal Representatives or Trustees. Nonetheless, you should ask for an explanation of any provision that is not clear or its purpose apparent.

Common Mistakes in Physcian Asset Protection Planning

Any Physician named as a Defendant in a malpractice lawsuit can tell you there is a world of difference between the “what if” world of asset planning and the “what now” world of real litigation. While the vast majority of lawsuits are settled before trial and within policy limits, the resolution of one bad experience is no guarantee that another bad experience won’t follow it in the future.

At least some of the stress and concerns about financial security can be relieved by reviewing what asset protection is available and avoiding certain common mistakes.

ASSETS HELD IN MARITIAL JOINT NAMES (Tenancies by the Entirety):

Simply putting of the husband’s and wife’s name on the same asset title does not automatically protect that asset from the creditors of one spouse. The marital status of the owners must be clearly identified on the Deed for account title (e.g. Harry Jones and Sandy Jones his wife or Harry Jones and Sandy Jones Tenants by the Entirety). Common mistakes in this area include certificates of investments in privately held companies entitled to out of state real estate. The mare fact that the owners listed on the title are married does not automatically create marital protection.

Another common mistake occurs after one spouse is faced with an actual lawsuit for potential claim that could exceed insurance coverage. At that point, the spouse “at risk” should ask the questions “what happens to the joint marital property if my spouse dies before or after this lawsuit is over?” The answer in all cases is that the joint marital property loses its’ protection and can then be attached by a judgment creditor. In the face of a real threat, joint marital ownership is no guarantee of asset protection other steps (e.g. spendthrift Trust) must be taken.

HOMESTEAD PROPERTY:

The Florida Constitution provides absolute and unlimited protection against attachment of a “Florida homestead” whether owned in joint marital names or in a singe name. However, this asset protection extents only to one half acre inside a municipality and 160 acres outside the municipality. The lots and many upscale residential areas exceed one half acre and are not protected by the Florida Constitution.

RETIREMENT PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS:

Besides being a good financial and tax planning option, qualified retirement plans and individual retirement accounts are fully exempt from creditors under both state and federal law. The key word in the last sentence is “qualified”. While the IRS may allow you to correct discrepancies in coverage, contribution and permitted investments, a creditor may be able to seize Plan assets due to these technical defects. If asset protection is a concern, use of experienced third party plan administers is a must.

BENEFICIARY DESIGNATIONS AND INHERITANCES:

One of the most common mistakes occurs when an otherwise fully protected position unexpectedly receives life insurance proceeds, retirement plan benefits or an inheritance. While such assets may have been fully protected on the previous name of a spouse or other family member, that protection is lost the minute it is received by the beneficiary or heir. Asset Protection Trust should be used in the case of life insurance, annuities, or retirement plan assets payable to a Physician as beneficiary. In the case of a future inheritance a candid discussion with other family members may be necessary, no matter how difficult.

PRACTICE ASSETS:

A common concern and common mistake is the protection of accounts receivable. Leveraged life insurance “protection” programs are often promoted as a means for both large and small medical groups to shield their accounts receivable. In my opinion, these programs costs too much, provide uncertain protection and may result in IRS tax issues. Simpler and cheaper solutions include: (i) Pledging the accounts receivable toward a revolving line of credit to be used if and when necessary; (ii) Pledging the accounts receivable as additional security toward medical office lease payments (if the medical office is owned by related parties).

MALPRATICE AND OTHER LIABILITY INSURANCE COVERAGE:

The debate will never end whether minimum coverage is enough or extra coverage makes the Physician a “target”. Experienced Plaintiff and Defense attorneys alike can attach a “price” on almost any malpractice lawsuit once the full extent of permanent injury is ascertained. While many “worst case” injuries are still within minimum policy limits, certain procedures on certain patients can have catastrophic results. In my opinion, Physicians who perform high risk-high injury procedures should increase their coverage. The stress and worry of defending the claim for two or three times insurance coverage is a great deal worst that the extra premium expense.

Whether minimum or greater malpractice insurance is purchased, be certain the insurance company is solvent and determine if defense costs are “included” or in addition to the stated coverage amount. The legal fees and expert witness expense to fully defend a lawsuit through the stage of a jury trial can be expected to exceed $75,000.

In the case of other types of lawsuits (e.g., automobile negligence, teenage drivers and parties without adult supervision), every parent and every person with assets worth protecting should have “umbrella” liability insurance of at least $3 million (preferably $5 million).

LIMITED LIABILITY COMPANIES (LLC) AND OTHER GROUP ENTITIES:

LLC’s have become the entity of choice for group ownership of medical offices and substantial practice assets. Because the creditor of an individual member is only to entitled to a “charging order”, a member’s interest cannot be directly attached and the creditor cannot interfere with the operation of the LLC. However, the day will eventually come when the other members of the LLC will want to refinance, sell or otherwise make distributions as a return on their investments. At the time of such distributions, the charging order creditor can attach a member’s share and the asset protection of the LLC is lost.

In the case of a group medical practice, many LLC Operating Agreements are written to allow Physician Ownership only and to provide for forced sale in the event of a member’s bankruptcy or other financial trouble. In the case of all such group investments, the following questions should be asked and answered:

1. Can ownership be held by another protected entity (e.g., spouse or another LLC)?

2. Is the purchase of a distressed member’s interest mandatory or discretionary?

3. Is each member fully liable (jointly and severally) for the debts of the LLC or just their proportion and share?

TRENDS AND TRIBULATIONS:

While the states of Alaska and Nevada has been promoting themselves as asset protection havens, they have yet to be any federal court decisions on the effectiveness of this strategy. For those Physicians facing “last resort” asset protection planning, several offshore jurisdictions still offer the best “and most expensive” options.

As a result of one single Bankruptcy Court decision in Colorado, many advisors have become skeptical of singe member LLC’s. Because Florida law expressly limits creditors of a LLC member to charging order protection only, single member LLC’s remain a valid asset protection option in Florida. Where appropriate, additional LLC members (e.g., other family members eliminate this Bankruptcy Court issue altogether.

Given the recent opportunity to either expand or restrict various asset protections statutes, the Florida Legislature has favored increasing rather than reducing asset protection options.