Your estate is your “stuff’. Each of us has several different “estates” for estate planning purposes.
The first is your “taxable estate” which consists of the assets you own that will be includable in your estate for estate tax purposes. This “estate” includes all the things you own or have control over at the time of your death. Your taxable estate will include all of your clothing, furniture, jewelry. collectibles, antiques. bank accounts, investments. real estate, retirement accounts. and life insurance policies – in short, everything. Since the estate tax is a tax on the transfer of assets, the value of the assets owned is the amount that is subject to the tax .
The other kind of estate is your “probate estate.” Your probate estate consists of the things that you personally own at the time of your death. Some of the assets excluded from your probate estate are those held jointly with another, pay on death (P.O.D.) and transfer on death (T.O.D.) accounts, or other assets held in a trust or having a beneficiary designation, such as IRAs, annuities, and life insurance policies. To summarize, everything in your probate estate is also part of your taxable estate, but not necessarily the other way around.
It depends. (What would you expect a lawyer to say?) Even though most out of state Wills are valid from state to state, it is always a good idea for a new resident to have their existing estate plan reviewed by a Florida attorney. The Wills of Florida residents will be probated here in Florida, and Florida law will determine the meaning and validity of those Wills.
Such a review will determine whether a Will prepared outside Florida will he admitted to probate in this State, whether your nominated personal representative (executor) will qualify to serve in Florida, whether it will .be necessary to locate the witnesses of your Will at your death (perhaps decades after it was signed), and whether a secondary probate will be required in another State. Additionally, a thorough Will review can help you decide whether your changed circumstances or the special provisions of Florida law make preparing of a new Will advisable.
A consultation with a Florida estate planning attorney will also give you a chance to examine your current plan and determine if additional planning designed to minimize taxation, avoid probate, or provide for illness and incapacity may be advisable. Other documents addressing additional areas of concern can also he discussed, such as a Durable Power of Attorney, Living Will, Designation of Health Care Surrogate, and HIPAA Authorization.
Some of the improvements to your current plan that may be suggested are:
- Adjustments in the scheme of distribution due to changes in your family’s circumstances;
- Designation of personal representatives (executors) who will qualify to serve in Florida;
- Use of a trust to avoid guardianships, probate and minimize estate taxes;
- Use of Florida’s provision which allows for a writing separate from the Will to dispose of tangible personal property. By using a separate writing to devise tangible personal property, a new Will need not be prepared each time you wish to make a change;
- Making your Will “self-proving”. A self-proved Will is admitted to probate without accompanying witness testimony or affidavits, thereby reducing the expenses often associated with probating a Will. If the witnesses to your old Will have died, or reside in another State, your estate may incur unnecessary additional delays and expenses;
- Use of special provisions in case you and your spouse, or another beneficiary, die simultaneously, such as in an automobile accident.
Probate is the court administration of an estate at death. Probate becomes necessary when you die owning assets titled in your individual name that have no beneficiary designation. Even if you die with a valid Will, the Will does not avoid probate. The Will acts essentially as a letter of instruction to the court defining who you want to administer your estate (your personal representative) and to whom you want your assets distributed (your beneficiaries). If you do not have a Will, the State in which you resided at the time of your death has laws that will determine the administration and distribution of your estate.
Assets such as life insurance, annuities, qualified retirement funds, such as, IRA accounts can avoid probate if a proper beneficiary is designated, as can pay on death (P.O.D.) or transfer on death (T.O.D.) accounts. Assets titled in joint tenancy will pass by law to the surviving joint owner and thereby avoid probate. In Florida, a life estate “Lady Bird” deed can be used to transfer real estate. However, the foregoing methods of avoiding probate can create tax issues, result in loss of control over the property, or result in transfers to unintended beneficiaries, or in the control of beneficiaries who are irresponsible.
In many situations, the best way to avoid probate and address the above-identified concerns, is through the use of a properly funded revocable living trust. Because the assets are not in your name (they are titled in the trust’s name), they avoid probate.
Probate is the administration of your estate, and estate tax is the transfer tax on all of the assets you own at your death (probate and non-probate).
A Will is what estate planners typically refer to as a “testamentary instrument.” That means that a Will takes effect only upon your death.
A living trust, on the other hand, starts managing your estate as soon as it is signed and assets are transferred to it. Both a Will and a living trust are, at their core, a set of instructions for the administration and disposition of assets and payment of administration expenses and taxes at death. A living trust, however, also directs the management of assets during life. As a result, if you have a properly funded living trust, your incapacity will not require a guardianship proceeding; your successor trustee can simply continue to manage the assets in your trust without court intervention or supervision.
Likewise, if you have a living trust to which your assets have been transferred, your estate will avoid probate at your death. Because you don’t hold title to these assets in your name (they are “owned” by your trust), there is no need for a probate court to transfer these assets to your beneficiaries, they will simply be transferred by the successor trustee you have named according to the instructions you left in your living trust and, although an administration process is still necessary, it is accomplished outside the control of a court, in a shorter period of time, and at a much lower cost.
Even if you have a properly funded living trust, you still need a Will, although it will be a different kind of Will. A Will that is a companion to a living trust is often called a “pour-over” Will. A pour-over Will serves several functions. including the appointment of a personal representative (executor). the appointment of a guardian for minor children, the disposition of personal property, and the transfer (pour-over) of probate assets into your living trust, if necessary.
In some circumstances, joint tenancy can be an acceptable form of holding title to your assets to avoid probate. However, joint tenancy may present a variety of problems, including:
- You lose control over your property;
- You subject it to the other joint tenant’s creditors;
- You may be creating unintentional gift tax problems;
- You create potential estate tax problems.
To expand, a parent who puts a home in joint tenancy with a child cannot sell the home without the child’s consent. Also, If a child, or another party, is named as a joint owner with you on a home, bank or investment account, and they are sued as the result of a traffic accident, go through a divorce, files for bankruptcy, or has IRS liens placed against them or their spouse, their creditors can attach your property or accounts.
It is highly recommended that you consult with an estate planning attorney before you make the potentially costly mistake of putting other parties on your assets with you as a joint tenant.
A personal representative (the term used in Florida for an executor) oversees the administration of a Will. The personal representative is named in your Will and in a probate situation is appointed by the court. The personal representative is charged with the duty of notifying heirs of estate proceedings, taking an inventory of the estate assets, giving notice to creditors, evaluating and paying claims against the estate, filing income and estate tax returns as needed, managing the properties of the estate within the limitations established by the decedent’s Will and the probate laws, and eventually distributing the estate which remains after payment of attorneys’ fees, personal representative’s fees, appropriate estate and income taxes, and other costs of administration.
Some of the qualifications of a personal representative are that they must be a resident of Florida, or related to the decedent, over 18 years of age, and not convicted of a felony.
Any candidate for personal representative is often a good candidate to serve as a trustee. You should refer to the next question to learn further about the qualifications of the party you select to serve in either one of these positions.
A good candidate for trustee, whether an individual or corporate fiduciary, needs to possess certain fundamental characteristics. First, and above all, the candidate must be knowledgeable about what a trustee is and does. A trustee must be trustworthy, reasonable, well-organized, responsible and must possess good listening skills. A trustee should also have either direct experience with investments, tax laws, legal issues and accounting, or access to those professionals who provide such expertise. Last but not least, the candidate must be able to get along with the beneficiaries of the trust and work effectively with them.
In choosing a trustee, keep in mind that a trustee’s duties may last over a long period of time if trusts of longer duration are established. An individual candidate for trustee must be a person of good reputation, have personal integrity and be impartial and free of potential conflicts of interest. If you would like to name a family member as trustee, you should realistically assess whether the family circumstances are such that the proposed trustee could be effective in administering the trust. Family harmony is sometimes very difficult to maintain when one child is given power as trustee to determine when or whether a sibling will receive discretionary distributions from the trust. Second marriage situations may present a potential conflict of interest when either the surviving spouse or a child from the first marriage is named to act as trustee. Where the trust will hold stock in a family business, naming a child as trustee who is also a principal in the business may give rise to conflict with beneficiaries who are not employed by the business. An individual serving as trustee should also be familiar with your philosophy and be capable of implementing that philosophy within parameters of appropriate trust administration and according to the terms of your trust. A major reason for naming an individual trustee is to have a trustee who matches well with beneficiaries: someone who is understanding, yet not controlling or controllable.
Serving as trustee is serious, time-consuming work. Therefore, it is highly important that you realistically assess whether the personal circumstances of a particular individual will allow him or her to perform the duties of a trustee. As a practical matter, an otherwise well-qualified individual may be unable to accept appointment for reasons ranging from existing personal and professional responsibilities to poor health. If you are considering a bank or trust company as trustee, you should meet with a representative of the institution to obtain answers to these fundamental questions:
- Experience: How long has this bank or trust company been in the personal trust business?
- Personnel: What personnel does the bank or trust company assign to a personal trust account? How often are statements distributed? Ask to see a sample statement. Does the person who markets and develops the initial relationship stay in the picture once the trust is accepted? When seriously considering a particular institution, the client should ask to meet the officer that would be assigned to the account. Ask how many accounts are assigned to each administrator and investment officer and about the process used for considering requests for discretionary distributions. Inquire about officer turnover; continuity in relationships is essential for establishing trust and confidence in the institution.
- Asset management: What amount of assets does the institution manage in personal trust accounts? Does the institution have a clear investment management philosophy? Is the institution willing to accept “special assets” such as real estate or stock in a closely held business? Who does the trust department’s investment research, outside services or in-house research staff? What is the frequency of portfolio review? How have the institution’s investments performed in the last 10 years? Five years? One year? Last quarter? Last month?
- Fees: Ask for a copy of the trust department fee schedule and for an example of how fees are calculated in a sample account. Inquire into the circumstances, if any, in which the institution charges “extraordinary” fees. Does the institution customarily assess a fee on termination or resignation? Are any other charges assessed in addition to the scheduled fee? What are the costs of trading securities in the trust account? Fees are frequently an issue in choosing whether to name an individual or a corporate trustee. Sometimes a family member or a friend is named as trustee on the assumption that the individual will not charge a fee. There are several reasons why such an assumption may be misplaced. An individual with expertise may choose to be compensated for acting as trustee. An individual without expertise may not charge a trustee’s fee, but will need to pay for the services of a range of other professionals, such as an investment manager, attorney, accountant and/or tax advisor, who perform services that are incorporated in the corporate fiduciary’s fee. In addition, the individual trustee will most likely have to pay higher investment transaction costs. It is therefore best to compare these costs with those of a corporate trustee before concluding that it “saves” to name individuals.
The “inappropriate” trustee. There are times when the selection of either an individual or a corporate fiduciary may be inappropriate for a particular trust. For example, an individual may be selected on an other-than-rational basis:
- “His feelings will be hurt if I don’t pick him to be trustee.”
- “I’ve got to choose her because she’s the oldest.”
- “I can’t play favorites; let them all be trustees.”
Estate planning is one of those times when individuals are brought face to face with things they do not like to think about: disability, death and taxes for certain. But it is also one of the few times when a person cannot avoid confronting potential or actual conflicts that may exist within family relationships. Where the relationship between a trustee and a particular beneficiary or group of beneficiaries is not good, trouble is likely to follow. An individual may find it difficult to serve as trustee of a trust specifically established for another family member who has had behavioral or financial “problems” in the past. Similarly, a child may not be able to act impartially when serving as trustee of a trust established for the benefit of a stepfather he or she has long resented. There are also times when the selection of a corporate trustee may be inappropriate. For example, the selected corporation may not be authorized to administer trusts in a jurisdiction where the trust holds real estate. Corporate trustees are also increasingly reluctant to accept appointments as trustees of irrevocable life insurance trusts prior to the deaths of the insured. A corporate trustee may also be an inappropriate choice for a small trust where the fees charged may not be proportionate to the size of the account.
Yes. All assets in which you have any ownership interest at the time of your death are subject to estate taxes. This includes insurance proceeds payable at death, interest in joint tenancy assets. retirement funds, homes – everything. However, the law provides you with some relief. All assets passing to a surviving spouse generally pass free from estate tax regardless of value. This is the result of the unlimited marital deduction. As the term indicates, this deduction is unlimited. Additionally, we are each given an exemption against federal estate taxes for assets passing to a non-spouse beneficiary. At the time of this writing, that exemption is just under $13 million. This simply means that if the value of your total estate, net of bills and expenses is $12.9 million or less, there will be no federal estate tax. The state of Florida has no inheritance or other additional “death tax” for an individual for $25.84 million for a married couple.
The primary objective of any estate plan should be the disposition of assets to the beneficiaries you intend, in a manner consistent with your wishes, taking into consideration the age and aptitude of those beneficiaries, and the protection of minors and those not able to manage their assets themselves.
There are a number of things that can be done, within the planning process, to minimize, or even eliminate, in some cases, the estate tax. Since the size of your estate determines the amount of tax that will be owed, the extent to which you can reduce the size of your estate will correspondingly reduce the amount of tax that will be owed at your death.
There are generally two ways that this can be accomplished: (i) making gifts that remove assets from your estate, or (ii) discounting the assets which remain in your estate so that they are worth less for estate tax purposes. Gifts fall within a number of different categories. Charitable gifts give you a dollar-for-dollar credit against estate taxes. Gifts to Charitable Trusts can provide you with an ongoing stream of income and provide you with an income tax deduction, and reduce your estate at the same time. Gifts to individuals can be present interest gifts, or future interest gifts, such as gifts to trusts for the benefit of a child, where the child benefits down the road. An effective use of gifting is to give away something that has little value during life, but a substantially higher value at death, such as a life insurance policy. Imagine being able to reduce your taxable estate by several hundred thousand dollars simply by transferring a life insurance policy to a trust, rather than owning it yourself. You can also leverage your gifting, by using vehicles such as Grantor Retained Annuity Trusts or Family Limited Partnerships. A discussion of such methods of estate tax reduction is beyond the scope of this brief explanation.
It is very important to distinguish between income taxes and estate taxes. Most people have the understanding that life insurance proceeds are not “taxable.” In most cases life insurance proceeds are not subject to income taxes. However, the proceeds of a life insurance policy over which the decedent had any incidents of ownership are subject to estate taxes. Income taxes and estate taxes are two entirely different forms of taxation, and should not be confused.
Estate taxation of a life insurance policy depends on who owns the policy at death and who has control over the various aspects of the insurance contract, such as the right to change beneficiaries, and to borrow against the policy. If you own the policy or have any incidents of ownership, the policy proceeds will be includable in your taxable estate, and subject to estate tax. If you do not have any incidents of ownership (for example, if the policy is owned by an irrevocable trust), the proceeds will generally not be includable in your estate for estate tax purposes. The single exception is a life insurance policy that was transferred to an irrevocable trust by its owner. In that event, the policy will continue to be included in your taxable estate until 3 years have passed from the date of transfer. This 3-year rule does not apply to policies on your life initially purchased by the irrevocable trust.
Making gifts is often a very effective way to reduce the size of your estate. Although all gifts are taxable, there are several gift tax exclusions of which you can take advantage.
The first is the annual exclusion (also called the annual per donee exclusion), which exempts annual gifts of $17,000 (indexed for inflation) per “donee” at the time of this writing. Simply put, each individual can make gifts of $17,000 per year to an unlimited number of people. Thus, if you have 3 children, you can make a gift of $17,000 to each of them this year and then again each year thereafter. Each of those gifts qualifies for the annual exclusion. If you are married, each spouse can make such gifts, resulting in total gifts of $102,000, without gift tax consequences.
You also have a lifetime gift tax exemption of over almost $13 million as of this writing. So, in addition to the annual exclusion gifts mentioned above, you may make gifts totaling the gift tax exemption amount during your lifetime. If the exemption is used during life, it will not then be available for transfers at death. From a tax perspective, however, lifetime gifts are almost always more advantageous than gifts at death, because (i) gifts are tax exclusive while bequests are tax inclusive, (ii) as the money you give away grows in value, that value is also outside your taxable estate, and (iii) any income earned by the gifted funds is income to the recipient, rather than being income to you.
An effective use of your annual gift tax exclusions and your lifetime exemption is to give away assets that have a low value while you are alive and a much higher value at death. The prototypical asset that falls within this category is a policy of life insurance. During your life, a life insurance policy has a relatively low value, but at your death, the full death benefit will be subject to the estate tax. Making gifts to irrevocable trusts, such as a Grantor Retained Annuity Trust, can also effectively leverage your gift tax exemption by allowing you to give away more than the actual value of the gift.
A Durable Power of Attorney is a written document giving authority to an individual (an agent or “attorney-in-fact”) to handle your financial affairs.
This is a very powerful document and should be created with great care. It is also a very essential document for everyone over the age of 18. The importance of creating a Durable Power of Attorney is to insure that if, for any reason, you are incapable of handling your own financial affairs due to accident, illness, or unavailability, the person you name (your agent) can step in and handle these matters for you.
The Power of Attorney will allow your agent to deal with those assets which have your name on the title. A Durable power is one that will still be effective even if you are disabled or incompetent. This is important because it is at these times that the power is most needed.
A properly drafted Durable Power of Attorney can avoid court proceedings called Guardianship in the event of your incompetence.
A durable power of attorney compliments a properly drafted living revocable trust and is an essential part of a comprehensive estate plan.
A Designation of a Health Care Surrogate is one of the two advance medical directives that are part of a comprehensive estate plan (the other is a Living Will).
By signing this document you entrust the surrogate named with the legal authority to make medical decisions for you if you are unable to do so. The person selected as agent is often a spouse or other family member.
If the principal (you) becomes incompetent, the Designation of a Health Care Surrogate continues to be valid. You may revoke your Designation of a Health Care Surrogate at any time.
The second of the two commonly used advance medical directives, often referred to as a living will, and applies only if you have an incurable and irreversible injury, disease or illness which is judged to be a terminal condition which there is no probability that you will recover as determined by your treating physicians. It directs your doctors and health care providers to use no artificial, life-preserving procedures to prolong the dying process in that event. Obviously, this document applies only under a very narrow set of circumstances, unlike a Designation of a Health Care Surrogate, which has much broader applicability.
The creation of your estate plan should be viewed as a process not an event. Because there are ever changing circumstances in our lives, the process is continuous. Just as you maintain your car or have regular physical checkups, it is important to maintain your estate plan to insure it is keeping up with the changes going on in your life. The following are circumstances that would necessitate a plan review:
- Changing your primary home to a new State;
- A birth or death in the family;
- A divorce;
- A change in your desire for the distribution of assets;
- A change in your financial circumstances;
- A desire to change one of your fiduciaries, such as your personal representative, successor trustee, or agent under a Durable Power of Attorney; or
- A change in the tax laws.
A review should be initiated under any of the above circumstances. If none of these circumstances are present, it is advisable to review your plan with your estate planning attorney and other advisors at least every 2 years. Larger estates should be reviewed at least annually. In a review, we insure that your assets are properly titled (and balanced between husband and wife, if you are married and you have a taxable estate). Ownership of assets and balancing of asset values are critical to an effective estate plan. Periodic reviews insure that these aspects of your estate are addressed on an ongoing basis.
Finally, over time new and innovative ways to help you provide for your loved ones and save taxes come to our attention. These new techniques can be discussed at your review to affect the best plan for you and those you wish to benefit at your death.