Estate Planning and Administration

Section Links
The Importance of Estate Planning | The Traditional Will | Living Trusts | Control of the Trust
Advantages | Probate | Estate Taxes | Joint Tenancy With Right of Survivorship
Nursing Homes & Medicaid | Guardianship | Living Wills
Prenuptial/Ante nuptial/Community Property Agreements

The Importance of Estate Planning

Estate planning is important for everyone regardless of of age or financial status. An estate plan is a written expression of how you want your assets to be preserved when you are alive and where they will go after your death. In Florida, if you own property valued over $75,000 your children or family could be subject to probate. To protect your assets, estate planning should be considered before it is too late.

Individuals should arrange the distribution of their wealth through estate planning by creating documents instructing their wishes of distribution. In every state in America, if you do not have a will or trust the state will create your estate plan which will be drawn up according to their “interstate succession” statutes. This is why it is important that you have your own estate plan, so you can ensure your assets are being distributed according to your wishes and not according to your state’s laws.It is also important that you choose the guardian(s) for your minor children.

The Traditional Will

Traditionally, estate planning has involved creating a will which is a legally binding document setting forth how your assets will be distributed upon your death. It also names a personal representative who will aid with the administration of your estate. With a will settlement of your estate can go into probate court which can last as long as 2 years. This can lengthen the time it takes for your funds to be distributed.

Wills are documents that are easy to change as long as you are mentally competent. A will can set forth the distribution of the estate, assign a trust to be made for family members after assets go through probate, elect a guardian, and give directions as to how debts, taxes and expenses are to be paid.

Some of the advantages of a will are that arguments can be settled through the probate court, they are less expensive than a trust, probate can shorten the time given to creditors to make claims against your estate, and probate estates can choose to have a fiscal year rather than a calendar year for income tax purposes.

Wills are less expensive than trusts since only one document is needed. A living trust includes all documents necessary to effectively avoid probate, avoid or minimize tax, and to distribute assets to your chosen beneficiaries.

Some of the disadvantages of a will if probated are:(i) the lack of privacy since all matters are of public record; (ii) funds may not be distributed for up to two years; (iii) each state where property is held may require a separate probate proceeding; (iv) ten percent of the gross estate could be lost in probate fees; and (v) if you become incapacitated a Durable Power of Attorney may be required in addition to your will.

Section Links
The Importance of Estate Planning | The Traditional Will | Living Trusts | Control of the Trust
Advantages | Probate | Estate Taxes | Joint Tenancy With Right of Survivorship
Nursing Homes & Medicaid | Guardianship | Living Wills
Prenuptial/Ante nuptial/Community Property Agreements

Living Trusts

A living trust, also known as a Revocable Living Trust or a Family Trust is a legal document that possesses ownership to your real property and assets. When you formulate a Revocable Living Trust you transfer ownership of your assets to the trust. This transfer is known as “funding”. When you transfer the title you do not give up any control. You can still buy, sell, borrow or transfer your property.

A living trusts looks similar to a will. It comprises the details and directives for how you want your estate to be dealt with at the time of your death. But unlike a will a trust does not go through probate. It inhibits the courts from controlling your assets if you should become incapacitated, and it provides you with control over the assets you leave to your minor children or grandchildren.

You do not lose control over your assets in a living trust. As the trustee, you would have unlimited access to and full control of your assets during your lifetime. Your appointed successor trustee will make sure your assets will go to your loved ones at the time of your death.

You do not have to file a separate income tax form after creating the trust. You will pay taxes exactly the same way you did before the trust was created as long as the people who put their assets into the trust are managers of the trust.

A will alone is not sufficient to avoid probate. A will is an expression of your wishes and must go through some kind of court process before the assets can be distributed to heirs.

Probate is the process of taking the deceased’s name off the title of an asset and replacing it with another. A trust survives you, that is why it does not go through the probate process.

A trust owns the title to property or assets. When you “fund” your trust you transfer title to your assets from your name to the name of the trust. For example, accounts in the name of Jane and Joe Johnson, would now be held as "Jane and Joe Johnson, Trustees of the Johnson Family Trust etc.

Control of the Trust

A trustee always controls the trust so there is no need for probate. Both “Jane and Joe” can be primary trustees and in the event of one of their deaths the other will retain control over the trust. After both are deceased, the trust identifies the person who will act as successor trustee. The trust gives that person the right to direct all assets according to what is recited in the trust document. You will always be able to name who the trustee will be.

There are different roles a person can have regarding a trust.

Grantor: This is the person who creates the trust. The grantor can also be referred to as the creator, settlor or trustor. The grantor has full control to manage or change the trust at any time.

Trustee: Usually, the trustee would be you while you are alive unless you do not feel you are able to handle or do not want the responsibilities of the position. If this is the case you can name whomever you want or even an institution to handle your affairs. You can also have co-trustees. The trustee is in charge of the assets of the trust. A Trustee can spend money, mortgage, sell or give away assets or anything that you could do if you were the owner of the property and a trust didn’t exist.

Successor Trustee: The successor trustee will administer your assets for you when you die or if you should become incapacitated. This person or persons will have the right to manage your affairs so you do not need probate court. The successor trustee will immediately have the same powers that you as grantor/trustee. The successor trustee has the right to distribute the trust's assets according to the instructions in the trust. This allows the assets to be distributed immediately without the delay of probate court. The successor trustee cannot change the trust after the death of the grantor. Thus this solidifies your wishes recited in the trust. The successor trustee does have the right to manage the assets and property of the estate but it has to benefit all beneficiaries.

Beneficiaries: Beneficiaries are those who will receive the benefit of the trust's assets. Usually, the estate will go to the surviving spouse, but if there is no surviving spouse, assets will pass to the people you named in your trust. Any institution or charity can be named as a beneficiary. After the grantor dies the successor trustee or co-trustee will have the same responsibilities an executor would have if the trust were a will. Unlike a will, everything can be handled quickly and privately since nothing must be reported to probate court.

Section Links
The Importance of Estate Planning | The Traditional Will | Living Trusts | Control of the Trust
Advantages | Probate | Estate Taxes | Joint Tenancy With Right of Survivorship
Nursing Homes & Medicaid | Guardianship | Living Wills
Prenuptial/Ante nuptial/Community Property Agreements

Advantages

There are many advantages to using a Revocable Living Trust. If an illness or accident leaves you incapacitated, your successor trustee can manage your finances with no need for a court appointed guardian.

If the benefactors are minors or others you might not think would use their inheritance as intended, you can hold their inheritance in the trust until they reach a more mature age.

Provisions can be added to your trust that if the beneficiary does not live 60 days after the grantor that the beneficiary will have been deemed to not have survived. This will avoid probate over the funds granted to a deceased beneficiary.

This survivorship clause will come in handy if both spouses are in an accident and one survives a week longer than the other. Under the law of intestacy only the family of the spouse who survived a week or longer would receive all of the assets because they were legally owned by only one spouse.

Unlike a will, you can avoid multiple probate proceedings if you own property in numerous states.

With a trust there are no requirements to put public notices in the newspaper.

By using a trust, a husband and wife can maximize both the spouses’ federal estate tax exemptions.

Trusts work well for both married and single people. If a couple wants their assets to be kept separate, as in the case where spouses have children from previous marriages, two trusts can be drawn up. In each of the spouses’ trusts they will have their wishes outlined.

Trusts are more difficult to contest than wills. With a will you must prove that the will was signed under duress or the signer was incompetent on the single day it was signed. With a living trust it must be proved that the signer was incompetent or under duress the day it was signed and every day it existed afterwards.

It is more difficult to contest a Living Trust. When a will is contested all the assets are frozen, but when a living trust is contested the matter must be brought against each of the benefactors, as the assets will still be distributed.

A will should also be drawn up in conjunction with the living trust just in case an asset is left out of the trust. It would state that all assets left out of the trust should be transferred to the trust. This form of a will is called a “pour-over will” since it pours assets over into the trust.

It is important to remember that there are some restrictions on what will and trust provisions will be accepted. For example, a spouse cannot be totally disinherited unless specific steps are taken such as signing an anti-nuptial agreement where the spouse agrees to total disinheritance.

Probate

Probate must establish clear ownership of all your assets before they are distributed. Probate determines and settles all debts and establishes a clear title to all your belongings. Then your assets are distributed according to your will or, in the event of not having a will, the "Succession” statues in your state.

Even though you have a will your estate may go through probate because it is the legal way to take one name off and put another on your assets.

The size of the estate determines whether it will be probated. In Florida, if the value of your assets exceeds $75,000 the estate will go through probate. If your estate value is under a Summary Administration procedure may be substituted for the lengthy and costly full administration probate proceeding.

It does not matter if your estate is large or small. A study done by Barbara Stock, author of It’s Easy to Avoid Probate, found that on very small estates probate costs on average of 22% of the value of the estate.

Not all your assets go through probate. If an asset is jointly owned it will not go through probate until the second owner passes away. Assets with named beneficiaries such as insurance policies, IRA's and annuities, will evade probate as long as the beneficiary is alive.

The family of the deceased will not be notified of probate. When they go to change the asset left to their name they will find that they cannot, and will be instructed to hire an attorney. The probate procedure will vary slightly from state to state but the traditional probate proceedings will include the following steps:

Hiring of an attorney to:

a. Petition the Court
b. Publish Notice to Creditors
c. Prepare & File an Inventory
d. Liquidate Assets
e. File Tax Returns (if necessary)
f. Pay Creditors
g. Make Distributions

An average of 4-10% of a gross estate is lost due to probate, and this is before any debts have been paid.

Pursuant to Florida Statute, presumed reasonable fees for the administration of an estate are as follows:

Personal Representatives:

3% of the first $1,000,000 in assets
Plus 2.5% of the next $1,000,000 to $5,000,000 in assets
Plus 2% of the next $5,000,000 to $10,000,000 in assets
Plus 1.5% of anything over $10,000,000 in assets

Attorneys:

$1,500 of the first $40,000 or less in assets
Plus $750 for the next $40,000 to $70,000 in assets
Plus $750 for the next $70,000 to $100,000 in assets
Plus 3% of the next $100,000 to $1,000,000 in assets
Plus 2.5% of the next $1,000,000 to $3,000,000 in assets
Plus 2% of the next $3,000,000 to $5,000,000 in assets
Plus 1.5% of anything over $5,000,000 in assets

Additional fees for the Personal Representative and/or Attorney can be incurred for extraordinary services.

Probate can be a long process . It also takes away privacy of the estate by ma king public its worth and who the beneficiaries are. Also, the family has a loss of control having to wait for the courts to decide when they shall receive their assets. Traveling might also be required if probate is held in more than one state, if the property is held in more than one state. The only way probate is not necessary is if assets are too low or a living trust is established. If not, the heirs will be unable to receive or clear accounts without probate approval.

Section Links
The Importance of Estate Planning | The Traditional Will | Living Trusts | Control of the Trust
Advantages | Probate | Estate Taxes | Joint Tenancy With Right of Survivorship
Nursing Homes & Medicaid | Guardianship | Living Wills
Prenuptial/Ante nuptial/Community Property Agreements

Estate Taxes

Living trusts can help minimize estate taxes. The U.S. government puts a tax called the Unified Gift and Estate Tax, on the transfer of your property to others both during your lifetime and after your death

Death tax payments are assessed only on the wealthy and the moderately wealthy. With these laws, the majority of the population benefited since smaller estates did not have to pay estate taxes. As a result, not everyone has to worry about paying federal estate taxes. If your estate is under the government exemption your trustee does not have to file an estate tax return (Form 706) and pay the required tax within 9 months of your death.

You may think that your estate will not have to pay estate taxes, but after careful calculations it is frequently found that estates do not meet the exemption rate. The estate includes all property owned by the decedent at the time of death: investments, cash, real estate, vehicles, personal property, life insurance proceeds from policies owned by the decedent within three years of death, life insurance paid to the estate, retirement assets and business interests. The gross estate also includes assets passing through probate, as well as assets inherited directly by joint owners or beneficiaries. This includes part interests, intangible property, property placed in a revocable living trust and other interests transferred by a decedent who retained control or an interest in the property.

If your net assets (assets minus debts) are more than the exemption amount, you will have to pay estate taxes. Under the tax law signed June 7, 2001 the estate tax will be gradually decreased until it falls to zero in 2010. Then on January 1, 2011, the estate tax law will revert to current tax laws unless Congress revisits the issue. Look at table ET-1 for the exemption equivalent. The old law is compared to the new law.

The new law increases the exemption amount and reduces the top tax rates over the next several years, but if Congress does not extend the law before January 1, 2011, it will go back to the existing tax law.

The 2001 law created a one million dollar lifetime gift tax exclusion starting in 2002. The gift tax will also decline until 2010 when it will be a maximum of 35%, which is the top income tax rate.

This one million dollar lifetime gift tax exclusion will cover the majority of people from federal estate tax. Keep in mind that all your belongings and assets including insurance death benefits, retirement assets, and real estate are included when calculating federal estate tax. If you reach over the 1 million allowance and you don’t prepare you could have many unnecessary taxes.

Gifts may still be made in the amount of $11,000 per person per year without being subjected to gift taxes as along as the necessary rules are met.

Joint Tenancy With The Right of Survivorship

Joint Tenancy is when you put another name, usually your child’s, on your assets to avoid probate. There are several risks concerning this method. If the child is involved in a lawsuit your assets are liable in any judgments.

Some disadvantages of joint tenancy are that the property will lose half of its stepped- up valuation. This means that no matter what the property is worth now it is passed down with the cost basis of its original worth. This means the child will might have to pay a big capital gains tax bill. If you hold your estate in joint tenancy you will forfeit one of the person’s estate tax exemption. Also, if you give one of your children joint tenancy he/she does not have to follow your will because they are the legal owners of your assets.

If the joint tenant does not live in the home or is not the age of 55 the one-time exemption from income tax on the sale of a personal residence may be lost.

Many people do not like to add another joint tenant after their spouse dies to their assets, because it is giving up part of ownership of the property. Any decisions made about mortgaging, selling or anything else dealing with the asset will have to be discussed and agreed between both joint tenants. This is because legally the property is held jointly between both parties.

Nursing Homes & Medicaid

A living trust will not protect your assets if you go into a nursing home. Just because the assets are no longer titled under your name you still have complete control over them thus they are still in danger of being lost to costly nursing home care. Medicaid will not step in to pay for these costs.

The Medicaid program usually only covers short stays after a hospital stay. Only after your assets are eaten away by nursing home care will Medicaid step in to help. The program is designed only to help those whose incomes are low. It will pay for an unlimited amount of days in a nursing home, but only for those whose assets and incomes are low.

To qualify and not lose your life savings you will have to either give away your assets or spend them. If you give away your assets you have to wait 36 months to apply for Medicaid. If you transfer from a trust the look-back period is 60 months and 1 day. If you do not wait until after these times are over to apply you could be charged with a felony or misdemeanor according to the 1996 Health Insurance Portability and Accountability Act.

Rather than relying on Medicaid, a long-term care insurance is another option available to you.

Section Links
The Importance of Estate Planning | The Traditional Will | Living Trusts | Control of the Trust
Advantages | Probate | Estate Taxes | Joint Tenancy With Right of Survivorship
Nursing Homes & Medicaid | Guardianship | Living Wills
Prenuptial/Ante nuptial/Community Property Agreements

Guardianship

If you become incapacitated a Will does not keep the courts from out of intervening in your affairs.

Guardianship is the process where the court gets involved in the management of your estate in case you are incapacitated. The court does this to protect your assets.The court will appoint someone to be the Guardian of your assets, such as a spouse or child. The court will decide who this will be, and since you are incapacitated you will have no voice in this decision.

When the guardian of the estate must file annual accountings with the court.

You may avoid the need of a guardianship by signing a Durable Power of Attorney for someone to conduct business on your behalf. Power of attorneys allow someone you name to handle such affairs as paying bills, cashing checks, and selling assets. Some financial institutions may have their own form of power of attorney, so at times institutional forms are needed in addition to a power of attorney.

It is important that the person to whom you assign power of attorney is a trustworthy individual because of the access they have to your assets.

Power of attorneys always terminates upon the death of the incapacitated person.

With a living trust you can also assign someone to manage your assets, but unlike power of attorney they have the legal right to manage your assets. Banks and financial institutions may work easier with a trustee than someone with a power of attorney.

If you should create a living trust you should also sign Durable Power of Attorney to someone to manage your assets that aren’t included in the trust and to make health care decisions for you.

Living Wills

Living Wills are another estate planning document that should be addressed. Living Wills are directions regarding prolonging life by artificial means if your condition is terminal. These documents allow your family members to make these decisions for you, but, if you are unsure about your wishes regarding life support, do not sign a living will.

Prenuptial/Ante nuptial/Community Property Agreements

Florida is a common law state, which means the name on the title of property affects ownership rights completely. In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) you share ownership of property with your spouse regardless of whose name is on an asset. If your state law does not agree with your situation you and your spouse can draw up documents that work best for you, but these documents only have power if both spouses agree and sign.

Whatever legal documents you find are best for you always meet with an experienced estate-planning attorney to draft the documents.

It is also important that the firm drafting your trust is a reliable firm that will be available if any problems arise.