The Right and Wrong ways to Avoid Probate

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

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

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

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP

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

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

“POD”, “ITF” AND OTHER BENEFICIARY DESIGNATIONS

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

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

INTER VIVOS OR “LIVING” TRUSTS

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

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

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

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

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

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

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

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

Estate Planning in Second Marriages

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

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

HOMESTEAD PROPERTY

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

ELECTIVE SHARE

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

JOINT MARITAL PROPERTY

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

RETIREMENT PLAN BENEFITS

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

LIFE INSURANCE AND ANNUITY BENEFITS

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

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

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

PRE-NUPTIAL AND POST NUPTIAL AGREEMENTS

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

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

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

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

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

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

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

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

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

Business Succession Planning - Part 2

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

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

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

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

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

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

Succession Planning

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

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

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

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.

Smart Business ~ Don't Lose Everything & The Kitchen Sink!

Everywhere we turn, dark clouds are all around us. The stock market is down. Real estate values are down. Layoffs are up. But, it could be even worse!

A 2008 survey of corporate law departments shows increased expectations for litigation. Unfortunately, people often look to hold others accountable for their difficulties. Which is why lawsuits tend to rise as the economy sinks. So, what can you do to protect yourself?
Consider placing your business or rental property in a limited liability entity. Let's say you own a corner market. If you own it directly, then someone who is injured on the premises could collect against all your assets, including assets not involved in the business. This could include things like your personal investments, savings you've set aside for your children's education and even future inheritances. Let's say your business has assets of $500,000, you have investment and savings accounts worth $500,000 and a future inheritance from your parents worth $500,000. The entire $1.5 million could be in jeopardy.

However, if your business were owned by a corporation or a Limited Liability Company (LLC), the injured person could only collect against the $500,000 of assets in your business, regardless of the amount of the damages awarded to the injured party. Your other personal assets would be safe.

We can't stop there though. Many clients believe that if their business is in a S Corporation, then their business is also protected from the business owner's personal liabilities. Unfortunately, this is not the case. If you are a business owner with a corporation, you own that corporation by holding shares. Your personal creditor can seize those shares and therefore your business just as a personal creditor could seize your Exxon or GE shares.

There are relatively few types of assets that are statutorily protected from claims of creditors. One such asset is a membership interest in a LLC. With a LLC, the business is owned by way of membership interest which is essentially the same thing as stock but with an extremely important difference. If a creditor seeks to enforce a personal judgment against the business owner's interest in a LLC, that creditor will only be entitled to a charging order remedy, NOT seizure of the business owner's membership interest in the LLC. A charging order remedy means the judgment creditor will only be able to attach any distributions that come out of the LLC. These distributions are made at the discretion of the business owner as managing member and the courts generally will not have the authority to order that distributions be made. Therefore, in order to more fully protect the business, and likely the business owner's livelihood, the business should be placed inside a LLC.

Many readers may be rightfully concerned that their business interests are held in a S corporation and are not fully afforded the asset protection benefits of a LLC. Thankfully, the Internal Revenue Service and Florida statutes allow a change in structure whereas the S corporation can be turned into a LLC with no tax consequences as long as certain conditions are met. After converting to a LLC, the business can still elect the tax advantages available to S corporations if recommended.

Additionally, consider liability insurance. If someone sues you, that is your first line of defense. There is separate liability coverage for your home and your auto. In addition, you may need a separate policy for a rental property or any business-related liability, like malpractice insurance for a doctor. In addition to these separate liability policies, consider an "umbrella" policy which provides coverage on top of the underlying coverage. If you had a premises liability policy for your corner market, that policy would protect you up to the policy limit, let's say $300,000. This would pay first. Then your umbrella coverage would add its limit, let's say $1 million, on top of that. So, you would be protected for the first $1.3 million of court award against you. However, that would still leave some exposure to liability above the $1.3 million, if you did not have a limited liability entity.

Therefore, protect yourself, your business and your family!

Stephen J. Lacey, ESQ.

The Law Office of McClelland, Jones, Lyons, Lacey & Williams, is not offering legal advice. With respect to the material contained, some of the material may be affected by current and future changes in law. For those reasons, the accuracy and completeness of such information, and the opinions of its author, are not guaranteed.