Small businesses are the engines for innovation. They not only account for 75% of all businesses in the U.S., they also provide for over 50% of jobs. It is readily apparent that small businesses are vital to the U.S. economy and help shape our great nation. Yet, a majority of small businesses fail to pass to the next generation. Even worse, only 13% of small businesses survive to the third generation. Why is this? As Benjamin Franklin said, “failure to plan is planning to fail.”
Think of business succession planning as a plan to manage issues that create a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved - and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs. In most cases, the "killer" is taxes or family discord, both issues that a good family business succession plan will cover.
When considering your business succession plan, it is easiest if you break your planning into three main issues: management, ownership, and taxes. Let’s start with the easy one. Estate taxes. Currently, the Unified Credit (the coupon the federal government gives everyone to pass their assets upon death free from estate tax) is set at $3.5 million. In 2011, it drops to $1 million. Any excess is taxed at approximately 50%. If a person dies owning a successful small business, that business may have to be liquidated to pay the estate tax.
Let’s assume that either the estate tax is not an issue. What other issues may derail all the hard work someone put into growing a business? It could just be family dynamics. Sibling rivalry could hinder the succeeding generation for management. Or the older generation may not wish to let go of management because of the fear of losing their leadership role in the family. Or there may be different expectations and ideas on the direction the business should grow in the future. Consider the sacrifices the founding member made to make the business successful. 80 hour work weeks. Missing baseball games and dance recitals. The younger generation may not understand or appreciate the hard work.
So what can be done? First, ensure that the business is structured properly so that it may be passed easily to the next generation and ease the tax burden if needed. There are many, many ways to do this based upon the goals of the family.
Second, schedule family meetings where business planning such as short and long term strategies are discussed. It is important that the older generation explain the values in which the business was started and grown, while the younger generation decides whether they are willing to manage the business and if so, what direction they envision the business heading. These meetings are also an opportune time to facilitate identifying if, or which child can be groomed to be an heir. Erase the concept that the only fair thing to do is to divide the business equally between your children. While this is a nice idea in theory, it may not be in the best interests of your business. Remember that management and ownership are separate business succession planning issues. It may be fairer for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Or it may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children. Consider inviting a third party advisor, the business’s CPA or attorney, to identify this protégé.
Finally, it may be that the next generation simply does not want the family business. While that can be disheartening, it is best to address this issue when both the business owner and business is healthy. If you want to pass your family business along to the next generation, putting off business succession planning is the worst thing you can do. By discussing the issues with the family and creating a plan unique to your business and your family you can ensure that you have the funds you need to retire and that the business you have built continues to thrive in the hands of the next generation.
Stephen J. Lacey, JD, LLM-Tax is a partner in the law firm of McClelland, Jones, Lyons, Lacey & Williams, LLC. Mr. Lacey concentrates his practice in the areas of Estate Planning, Asset Protection, Medicaid Planning, Probate and Real Estate. To contact Stephen call (321) 984-2700 or visit www.mjlandl.com.
Showing posts with label power of attorney. Show all posts
Showing posts with label power of attorney. Show all posts
Tuesday, October 20, 2009
Tuesday, August 18, 2009
10 Good reasons to have an Estate Plan
1. No matter your net worth, it's important to have a basic estate plan in place.
An estate plan ensures that your family and financial goals are met after you die. It is a process. It involves people—your family, other individuals and, in some cases, charitable organizations of your choice. It also involves your assets (your property) and the various forms of ownership and title that those assets may take. Overall, it addresses your future needs in case you ever become unable to care for yourself. It is not only for the elderly – even young people are faced with unfortunate circumstances: health related, automobile accidents and so forth.
2. An estate plan has several elements and considerations. It can determine:
* A will.
* How and by whom your assets will be managed for your benefit during your lifetime if you ever become unable to manage them yourself.
* The assignment of a power of attorney (POA)
* When and under what circumstances it makes sense to distribute your assets during your lifetime.
* How and to whom your assets will be distributed after your death.
* A living will or health care proxy. How and by whom your personal care will be managed and how health care decisions will be made during your lifetime if you become unable to care for yourself.
* For some, the establishment of a trust, may also be suitable.
3.What is involved in estate planning?
Taking inventory of your assets is a good place to start.
Your assets include your investments, retirement savings, insurance policies, and real estate or business interests. A good place to start is to ask yourself the following questions:
1. What are my assets and what is their approximate value?
2. Whom do I want to receive those assets—and when?
3. Who should manage those assets if I cannot—either during my lifetime or after my death?
4. Who should be responsible for taking care of my minor children if I become unable to care for them myself?
5. Who should make decisions on my behalf concerning my care and welfare if I become unable to care for myself?
6. What do I want done with my remains after I die and where would I want them buried, scattered or otherwise laid to rest?
Once you have some answers to these questions, our office can help you create an estate plan, and advise you on such issues as taxes, title to assets and the management of your estate.
4. Everybody needs a will.
A will tells the world exactly where you want your assets distributed when you die. It's also the best place to name guardians for your children. Dying without a will - also known as dying "intestate" - can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.
5. Trusts are only for wealthy people.
Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.
6. Don’t I only have to discuss my estate plans with my family (heirs) to prevent disputes or confusion?
That would be nice, but upon death emotions rise and there are often hard feelings among those you loved. Inheritance can be a loaded issue and at times full of mixed emotions and even greed. By being clear about your intentions with your loved ones, you may help dispel potential conflicts after you're gone, however, there may be issues you do not wish to speak of. Discussing your true wishes in confidence with your attorney can help provide you with peace of mind.
7. The federal estate tax exemption - the amount you may leave to heirs free of federal tax - has hit $3.5 million in 2009.
The estate tax is scheduled to phase out completely by 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 and you will only be allowed to leave your heirs $1 million tax-free at that time.
8. You may leave an unlimited amount of money to your spouse tax-free, but this isn't always the best tactic.
By leaving all your assets to your spouse, you don't use your estate tax exemption and instead increase your surviving spouse's taxable estate. That means your children are likely to pay more in estate taxes if your spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until your spouse's death.
9. There are two easy ways to give gifts tax-free and reduce your estate.
You may give up to $13,000 a year to an individual (or $26,000 if you're married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.
10. There are ways to give charitable gifts that keep on giving.
If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.
An estate plan ensures that your family and financial goals are met after you die. It is a process. It involves people—your family, other individuals and, in some cases, charitable organizations of your choice. It also involves your assets (your property) and the various forms of ownership and title that those assets may take. Overall, it addresses your future needs in case you ever become unable to care for yourself. It is not only for the elderly – even young people are faced with unfortunate circumstances: health related, automobile accidents and so forth.
2. An estate plan has several elements and considerations. It can determine:
* A will.
* How and by whom your assets will be managed for your benefit during your lifetime if you ever become unable to manage them yourself.
* The assignment of a power of attorney (POA)
* When and under what circumstances it makes sense to distribute your assets during your lifetime.
* How and to whom your assets will be distributed after your death.
* A living will or health care proxy. How and by whom your personal care will be managed and how health care decisions will be made during your lifetime if you become unable to care for yourself.
* For some, the establishment of a trust, may also be suitable.
3.What is involved in estate planning?
Taking inventory of your assets is a good place to start.
Your assets include your investments, retirement savings, insurance policies, and real estate or business interests. A good place to start is to ask yourself the following questions:
1. What are my assets and what is their approximate value?
2. Whom do I want to receive those assets—and when?
3. Who should manage those assets if I cannot—either during my lifetime or after my death?
4. Who should be responsible for taking care of my minor children if I become unable to care for them myself?
5. Who should make decisions on my behalf concerning my care and welfare if I become unable to care for myself?
6. What do I want done with my remains after I die and where would I want them buried, scattered or otherwise laid to rest?
Once you have some answers to these questions, our office can help you create an estate plan, and advise you on such issues as taxes, title to assets and the management of your estate.
4. Everybody needs a will.
A will tells the world exactly where you want your assets distributed when you die. It's also the best place to name guardians for your children. Dying without a will - also known as dying "intestate" - can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.
5. Trusts are only for wealthy people.
Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.
6. Don’t I only have to discuss my estate plans with my family (heirs) to prevent disputes or confusion?
That would be nice, but upon death emotions rise and there are often hard feelings among those you loved. Inheritance can be a loaded issue and at times full of mixed emotions and even greed. By being clear about your intentions with your loved ones, you may help dispel potential conflicts after you're gone, however, there may be issues you do not wish to speak of. Discussing your true wishes in confidence with your attorney can help provide you with peace of mind.
7. The federal estate tax exemption - the amount you may leave to heirs free of federal tax - has hit $3.5 million in 2009.
The estate tax is scheduled to phase out completely by 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 and you will only be allowed to leave your heirs $1 million tax-free at that time.
8. You may leave an unlimited amount of money to your spouse tax-free, but this isn't always the best tactic.
By leaving all your assets to your spouse, you don't use your estate tax exemption and instead increase your surviving spouse's taxable estate. That means your children are likely to pay more in estate taxes if your spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until your spouse's death.
9. There are two easy ways to give gifts tax-free and reduce your estate.
You may give up to $13,000 a year to an individual (or $26,000 if you're married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.
10. There are ways to give charitable gifts that keep on giving.
If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.
Wednesday, August 12, 2009
I have a will, so why do I need an Estate Plan?
Many people mistakenly think that estate planning only involves the writing of a will. Estate planning, however, can also involve financial, tax, medical and business planning. A will is part of the planning process, but you will need other documents as well to fully address your estate planning needs.
Who needs estate planning?
You do—whether your estate is large or small. Either way, you should designate someone to manage your assets and make health care and personal care decisions for you if you ever become unable to do so for yourself.
If your estate is small, you may simply focus on who will receive your assets after your death, and who should manage your estate, pay your last debts and handle the distribution of your assets.
If your estate is large, your attorney will also discuss various ways of preserving your assets for your beneficiaries and of reducing or postponing the amount of estate tax which otherwise might be payable after your death.
If you fail to plan ahead, a judge will simply appoint someone to handle your assets and personal care. Your assets then, will be distributed to your heirs according to a set of rules known as intestate succession.
Contrary to popular myth, everything does not automatically go to the state if you die without a will. Your relatives, no matter how remote, and, in some cases, the relatives of your spouse will have priority in inheritance ahead of the state.
Still, they may not be your choice of heirs; an estate plan gives you much greater control over who will inherit your assets after your death.
What is included in my estate?
All of your assets. This could include assets held in your name alone or jointly with others, assets such as bank accounts, real estate, stocks and bonds, and furniture, cars and jewelry.
Your assets may also include life insurance proceeds, retirement accounts and payments that are due to you (such as a tax refund, outstanding loan or inheritance).
The value of your estate is equal to the “fair market value” of all of your various types of property—after you have deducted your debts (your car loan, for example, and any mortgage on your home.)
The value of your estate is important in determining whether your estate will be subject to estate taxes after your death and whether your beneficiaries could later be subject to capital gains taxes. Ensuring that there will be sufficient resources to pay such taxes is another important part of the estate planning process.
Who needs estate planning?
You do—whether your estate is large or small. Either way, you should designate someone to manage your assets and make health care and personal care decisions for you if you ever become unable to do so for yourself.
If your estate is small, you may simply focus on who will receive your assets after your death, and who should manage your estate, pay your last debts and handle the distribution of your assets.
If your estate is large, your attorney will also discuss various ways of preserving your assets for your beneficiaries and of reducing or postponing the amount of estate tax which otherwise might be payable after your death.
If you fail to plan ahead, a judge will simply appoint someone to handle your assets and personal care. Your assets then, will be distributed to your heirs according to a set of rules known as intestate succession.
Contrary to popular myth, everything does not automatically go to the state if you die without a will. Your relatives, no matter how remote, and, in some cases, the relatives of your spouse will have priority in inheritance ahead of the state.
Still, they may not be your choice of heirs; an estate plan gives you much greater control over who will inherit your assets after your death.
What is included in my estate?
All of your assets. This could include assets held in your name alone or jointly with others, assets such as bank accounts, real estate, stocks and bonds, and furniture, cars and jewelry.
Your assets may also include life insurance proceeds, retirement accounts and payments that are due to you (such as a tax refund, outstanding loan or inheritance).
The value of your estate is equal to the “fair market value” of all of your various types of property—after you have deducted your debts (your car loan, for example, and any mortgage on your home.)
The value of your estate is important in determining whether your estate will be subject to estate taxes after your death and whether your beneficiaries could later be subject to capital gains taxes. Ensuring that there will be sufficient resources to pay such taxes is another important part of the estate planning process.
Thursday, July 16, 2009
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.
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.
Wednesday, July 15, 2009
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.
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.
Friday, July 10, 2009
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.
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.
Wednesday, July 8, 2009
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.
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