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The Brevard Association of Human Services – 2009 BAHS Annual Senior Health Fair
November 11, 2009
8:00am – 1:00pm
Hilton Rialto Hotel


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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.

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.

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.

Estate Planning Lessons from the Rich and Famous

Despite the jokes on late night TV, the continuing saga of Anna Nicole Smith and the pending birth of Vice President Cheney’s sixth grandchild by a lesbian daughter point out that “Paternity” can affect any family and any estate plan. Without passing judgment on some modern beliefs or lifestyles, estate planning must now take into account such future family possibilities as gay unions, cross culture or same sex adoptions, sperm banks, stem cell research and children born or raised outside conventional marriages.

“Paternity” means the acknowledgment of a parental relationship. Paternity can be a very serious estate planning matter when that acknowledgment is disputed or when it involves an heir that is not what the parents or grandparents may have expected.

Following are some general rules of paternity that apply in most states:

1. A husband is presumed to be the father of the children born to their wife;

2. Children are provided certain limited inheritance and support rights, but only until they attain the age of majority;

3. Both biological and adoptive parents are free to exclude or disinherit all or some of their children (subject to Rule # 2 above);

4. If a written and valid estate plan does not exist, the state law of a decedent’s legal residence governs the order of inheritance (known as “intestate succession”). The intestate succession laws of most states provide that all born or adopted lineal descendants are the rightful heirs of the decedent; and

5. A written and valid estate plan can exclude or place conditions on inheritance by both known and unknown heirs, provided no law is broken and the estate plan does not violate “public policy”. Your guess is as good as mine as to what laws may exist or what public policy will be in the future.

Following are examples of circumstances that exist in many families and where ignoring paternity or the difference among heirs could have unintended results:

FAMILY BELIEFS:

John and Mary are active members of their church and have bestowed the same beliefs on their only child, Jim. John and Mary’s estate plan provides for outright distribution to Jim, or if deceased, to three grandchildren born during son’s Jim’s prior marriage. One of the grandchildren has recently renounced the family and joined a satanic cult. To make matters worse, son Jim has been diagnosed with a terminal illness.

THE “MISSING” GRANDCHILD:

Walt and Sarah have three sons and six grandchildren. Unfortunately, the oldest son’s marriage ended when he was sent to prison for stock fraud and the daughter in law was awarded sole custody of their only child. The daughter in law has since moved out of state and refuses to allow Walt and Sarah any contact with this grandchild. Walt and Sarah has typical Wills that divide their estate equally among their three sons, “per stirpes” (which means to the surviving children of any deceased son).

THE “IMPAIRED” HEIR:

Thanks to the family business, Widow Sally and both of her daughters (see Mary and Sarah above) are very wealthy. On the advice of her estate planning attorney, Sarah has created “generation skipping” trusts that provide for some direct distributions to each of her current or after born grandchildren in order to reduce or at least delay the amount of estate taxes to be paid in the future. Besides the one great grandchild who has recently joined the satanic cult and another great grandchild who is estranged from the family, there is a family history of substance abuse and mental disorders.

As these examples show, parents and especially grandparents may need to create special safeguards such some heirs need to be treated differently than other heirs. In addition to dealing with known circumstances, parents and grandchildren may need to also address the possibility of unknown circumstances as both scientific and social changes continue in our society.

Following are some of various recommendations that the families described above may want to consider in their estate plans:

1. Rather than providing for equal division and outright distribution, some heirs are better protected by extended trust arrangements managed by am independent Trustee. If circumstances later change and the same heirs gain maturity or stability in their lives, then the Trustee can be authorized to “loosen the reins”.

2. Despite instructions to make distribution at a certain age, it may be appropriate to permit a Trustee to delay or modify the form of that distribution should an heir then be afflicted with a medical condition or be under threat of a legal attachment by creditors.

3. Some future heirs may benefit from a “carrot and stick” form of distribution that ties the amount they will receive to the amount fair earning through gainful employment.

4. In those cases where an independent Trustee has been designated, one or more “Trust Protectors” should also be designated. Such Trust Protectors are typically family members or close friends not burdened with the duties of Trustees but who have the authority to mediate disputes, approve or disapprove distributions or select a substitute independent Trustee in the future.

5. As a final recommendation, grandparent should consider giving their own children the limited ability to modify those shares of an estate that will be or maybe payable to grandchildren. If properly drafted, this limited power has no tax consequences, but does enable a family to look further into the future.

On final bit of advice – if you intent to exclude someone as a beneficiary of a Will or Trust, language along the following lines is appropriate: In providing for the foregoing division and distribution of my estate, I have in mind my son, Harry, but for whom I expressly chose to make no provision under this Will. Leaving a token $1 can create headaches for those responsible to administer the estate, by the same token, failing to mention a person who has been listed as a previous beneficiary or would normally be a beneficiary could raise concerns about over sight, competence, or undue influence.

Asset Protection for Florida Residents

While people in financial trouble often resort to bankruptcy to protect their assets and stop collection harassment, new federal laws take effect later this year that will limit that option. Florida law provides Florida residents with other options.

Following is a brief description of the major exemptions and other ways Florida residents can protect their assets:

1) HOMESTEAD PROPERTY – the Florida Constitution provides that the homestead property of Florida residents is exempt from attachment by creditors. This protection does not apply to mortgages or liens that are recorded against the homestead or most contents in the homestead. Only homestead property one-half (1/2) acre or less inside a municipality and 160 acres outside a municipality is protected. The new federal bankruptcy law will restrict this exemption for some future Florida residents.

2) JOINT MARITAL PROPERTY - real estate, bank accounts, investments and other property owned jointly by a husband and wife as “tenants by the entirety” cannot be attached to satisfy the debts of only one spouse. This protection may not extend to taxes owed the Internal Revenue Service or to jointly owned property that does not qualify as tenants by the entirety or includes additional joint owners.

3) RETIREMENT PLANS AND IRA ACCOUNTS - both federal and Florida law protect a debtor’s retirement account assets. This protection may be lost if the retirement plan is not qualified under federal law or has been established to defraud creditors.

4) ANNUITIES AND LIFE INSURANCE - Florida law provides Florida residents with creditor protection for the cash value held in annuity contracts and life insurance policies. Death benefits paid on the life of a debtor are also exempt. This protection may not apply to the annuity and life insurance beneficiaries themselves.

5) WAGES AND WAGE ACCOUNTS – both federal and Florida law provide some protection from garnishing the wages of a Head of family. Certain types of wage only accounts established in financial institutions may also be protected.

6) LIMITED LIABILITY COMPANIES AND PARTNERSHIPS – Compared to corporation stock or general partnership interests, attachment of a Debtor’s interest in these type of legal entities is restricted under Florida law and in many other states.

Readers are cautioned that the asset protection options described above are in general terms only. Exceptions and pitfalls exist that will be discussed in a future article. Readers who are debtors and creditors alike are encouraged to recognize these options and to work together toward settlements that avoid bankruptcy.