Estate Planning In Florida
© 1993 Richard S. Amari and David M. Presnick, All Rights Reserved
© 1995 Richard S. Amari and David M. Presnick, All Rights Reserved
© 1996 Richard S. Amari, David M. Presnick and Carla Neeley Freitag,
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© 1997 Richard S. Amari, David M. Presnick and Carla Neeley Freitag,
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© 1998 Richard S. Amari, David M. Presnick and Carla Neeley Freitag,
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© 2002 Richard S. Amari, David M. Presnick and Carla Neeley Freitag,
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© 2012 Richard S. Amari, All Rights Reserved
© 2016 Richard S. Amari, All Rights Reserved
Compared to many states, Florida is a tax haven. There is no individual income tax and no state inheritance tax. While in other states, there are significant estate taxes payable upon death, Florida currently has no estate tax. Prior to January 1, 2005, Florida’s estate tax system was commonly referred to as a “pick up” tax. This was because Florida picked up all, or a portion of, the credit for state death taxes allowed on the federal estate tax return (Federal Form 706 or 706NA). Under this system, when the estate’s gross value was below the minimum Federal estate tax filing threshold, estate tax was not due to Florida.
Federal changes eliminated Florida’s estate tax after December 31, 2004. This happened because the federal credit for state death taxes on the federal estate tax return became a deduction for state estate taxes. Since Florida estate tax was based solely on the Federal credit, after December 31, 2004 estate tax was no longer due. However, the personal representative of an estate may still need to complete certain forms to remove the automatic Florida estate tax lien.
For estates of decedents who do not owe Florida tax and that are not required to file a Federal estate tax return (Federal Form 706 or 706NA), the personal representative may need to complete an Affidavit of No Florida Estate Tax Due (Florida form DR-312) to remove Florida’s automatic estate tax lien. By recording the Affidavit with the court in every Florida county where the decedent owned real property, the property may be disposed of with clear title concerning Florida’s automatic estate tax lien. For estates of decedents who do not owe Florida tax but that are required to file a Federal estate tax return (federal Form 706 or 706NA), and the decedent’s date of death is after December 31, 2004, the personal representative may need to complete an Affidavit of No Florida Estate Tax Due When Federal Return is Required (Florida form DR-313) to remove Florida’s automatic estate tax lien. By recording the Affidavit with the court in every Florida county where the decedent owned real property, the property may be disposed of with clear title concerning Florida’s estate tax.
In essence, estate planning is the lifetime planning for the transfer of assets according to the transferor’s desires at the least possible tax cost. Whether planned or not, everyone has an estate plan.
In most states, if you die without a will, you die “intestate.” Intestate means that your state government determines who will receive your assets upon your death. This may cause serious adverse results to occur, including, but not limited to, the following:
- Your local Probate Court may appoint a stranger to administer your estate.
- Even if a family member is appointed as your personal representative, the Court may require the personal representative to post a bond.
- The Government may receive a greater portion of your estate through the payment of taxes that could have been avoided with proper estate planning.
- Your estate may take longer to administer.
As is evident, the need for a will to avoid intestacy is imperative to proper estate planning.
II. Basic Planning Vehicles
A will is an instrument by which a person makes a disposition of his property to take effect upon his death. Upon death, the will is submitted to the Probate Court for the distribution of assets pursuant to the terms of the will which is governed by the Florida Probate Code.
The current Florida Probate Code was adopted in 1975 and is based on the Model Uniform Probate Code that has been adopted in many other states. Although Florida law was intended to allow the interested parties to settle estates without unnecessary supervision by the Court, as a practical matter, probate of a decedent’s estate can be an expensive and time-consuming process.
Florida law requires that wills be signed by the person making the will in the presence of at least two witnesses who must also sign the will in the presence of the person making the will and each other. A will that has been acknowledged by the testator or testatrix and witnessed before a notary is allowed to be admitted to probate without further proof by oaths of witnesses. This self-proving affidavit expedites settlement of estates.
Wills executed by nonresidents of Florida are valid in Florida if executed in accordance with the laws of the state or country where the will was executed. It is not necessary to revise out of state wills upon moving to Florida, but is advisable for a Florida attorney to review the will to assure that formalities have been observed, to assure that witnesses are available or a self-proving acknowledgment has been made, and to determine that the will is drafted to take best advantage of Florida law.
B. Living Trust
The living trust is a very useful estate planning vehicle. The living trust and the will are the two primary instruments used to plan for the disposition of one’s assets at death. A trust is a separate legal entity. Like a corporation, partnership or individual a trust has the power to own property, transacts business, make investments, sue and be sued. It is created by the written agreement between the person who makes the trust (“Settlor” or “Grantor”) and the person who holds legal title to the assets of the trust (“Trustee”). The Trustee has a fiduciary duty to act on behalf of the person for whose benefit the trust is created (“Beneficiary”).
A trust can be created by making a will. In this case, the will sets forth all terms of the trust. Known as a “testamentary trust,” this type of trust is not created until the death of the person making the will, and the trust does not take title to any assets until after the person dies.
The “living trust” is created by executing a trust agreement during life and transferring assets to the trust. It is typical for a person to create a trust for his or her own benefit (including his or her spouse) and to be the trustee during life. Because these instruments are usually revocable, no control is lost by creating and funding (i.e., transferring assets to) the living trust.
The living trust is a useful tool to avoid probate. If all assets are transferred to the trust during a person’s life, no probate will be required when that person dies. The probate process, a court administered proceeding whereby creditors are notified and assets are distributed according to a person’s will, is often criticized for being costly (court costs, advertising fees, accountant’s fees, attorneys’ fees, etc.) and lengthy. The living trust avoids unnecessary probate expenses and may greatly reduce the time required to distribute assets to intended beneficiaries. The living trust is especially useful to avoid unnecessary duplication of probates in situations involving real property located in states outside of Florida.
The living trust is a good vehicle for planning for incompetency. In the event the Settlor becomes incompetent, a successor trustee who is already named in the trust agreement takes over, avoiding an unnecessary guardianship procedure which is often a very costly and emotionally trying experience.
The living trust has many advantages as an estate planning tool. If properly drafted and funded with the assistance of a qualified estate planning attorney, the living trust can result in significant savings of probate expenses, estate taxes and other unnecessary costs and fees. Although it is not useful in every situation, the living trust should be explored by everyone as a possible estate planning alternative. Florida law requires all trust agreements to be executed in accordance with the formalities required for wills in Florida in order for the provisions in the trust instrument that dispose of the trust property on or after the death of the settlor to be valid.
C. Durable Power of Attorney
A power of attorney is an instrument by which a principal authorizes another to act on his or her behalf as an agent, or attorney-in-fact. A durable power of attorney (“DPOA”) is one that continues to be effective even if the principal becomes incapacitated. A DPOA must contain the following words “this durable power of attorney is not terminated by subsequent incapacity of the principal except as provided in chapter 709, Florida Statutes,” or other similar language. A DPOA remains in effect until the principal dies, revokes the power, or is adjudicated incompetent.
If you become incapacitated and have not taken steps to anticipate the incapacity, nothing can be done with your property unless you are adjudicated incompetent and a guardian is appointed by the court. This result is undesirable because of the inflexibility and expenses of a guardianship and the stigma associated with being adjudged incompetent. A DPOA avoids the need for a guardianship by authorizing a spouse, adult child, or other trusted person to act on the principal’s behalf in the event that the principal becomes incapacitated through accident, illness, old age, or other infirmity. Using a DPOA, an attorney-in-fact can pay bills, sell property, make investments, and take other authorized actions for an incapacitated person without the necessity of a guardianship.
Disadvantages associated with the use of DPOAs include: (1) the risk that the attorney-in-fact may die or become incapacitated and therefore be unable to act for the principal; and (2) the potential for abuse by the attorney-in-fact, who may divert the property for his or her own use or otherwise act against the principal’s interests. You can avoid these possible pitfalls by creating a revocable living trust, which is the most effective planning technique to provide for the incapacity of a property owner. A DPOA can then be used to supplement the living trust by giving the attorney-in-fact power over assets that are not in the trust and authority to make decisions not involving trust assets.
Florida law regarding durable powers of attorney was greatly revised with the enactment of the Florida Power of Attorney Act, effective October 1, 2011. This law makes significant changes regarding the use and preparation of powers of attorneys. Though the law will not likely affect the legal authority of an agent under a DPOA signed before October 1, 2011, third parties, such as banks and financial institutions might be more reluctant to recognize an agent’s authority under those powers. There are rules designed to require third parties to honor powers signed after September 30, 2011 and to protect those parties for doing so.
Among the provisions now applicable to DPOAs are:
- The specific powers that you want to give your agent must be identified in the DPOA, general powers, such as “any power that I might lawfully exercise myself,” will not be recognized.
- Certain super powers, such as the power to create, amend or revoke trusts, make gifts, make or change beneficiary designations and disclaim property, must each be individually initialed to be valid.
- Springing powers (those that may only be used after the principal becomes incapacitated) no longer work. A springing power executed before October 1, 2011 is still valid, however, there are rules applicable to what the agent must do to utilize the springing power.
- DPOAs must now be witnessed (2 witnesses) and notarized (although DPOAs that were valid under prior law are still valid).
- There are provisions regarding compensation of agents.
- Some duties of the agent can be modified in the instrument, such as the duties to act with care, of loyalty, of impartiality and to act in cooperation with health care agents.
- Duties that may not be modified include the duties to act within the scope of authorities granted in the instrument, to act in good faith and not contrary to the principal’s reasonable expectations and best interests and to preserve the principal’s estate plan.
The changes made to DPOAs are numerous and detailed, and beyond the scope of this article. Suffice it to say that it is not safe to use a standard or preprinted form DPOA from the internet or office supply store. It is recommended that your review with your attorney any DPOA signed before October 1, 2011.
D. Living Will and Durable Health Care Power of Attorney
The living will and the durable health care power of attorney (“DHCPOA”), a designation of a health care surrogate, have become important estate planning documents for many individuals. As medical technology improves, it is becoming more prevalent that life¬ prolonging procedures which utilize mechanical or other artificial means to sustain, restore, or supplement vital functions are being utilized which serve only, or primarily, to postpone the moment of death. Many individuals desire not to be subject to such life prolonging measures if the primary purpose of such measures is to postpone death.
The living will is a declaration made at the time a person is in good health stating that if there is no reasonable expectation of recovery from an incurable physical condition caused by injury, disease, illness, or from a coma or end-stage condition, then it is the request of the person that he or she be allowed to die in the natural course of such condition. The living will directs that the person be removed from, or not connected to, any life-prolonging artificial or mechanical procedures which serve only to postpone death.
Florida allows individuals to choose in their living wills to have nutrition and hydration (food and water) withheld or withdrawn when the application of such procedures would serve only to prolong artificially the process of dying.
Since December 1, 1991, the Patient Self-Determination Act requires that all hospitals and nursing homes that accept Medicare or Medicaid payments advise patients of living wills prior to admission. Thus, the time to decide on your living will is before admission to these medical facilities.
The DHCPOA or designation of a health care surrogate can be utilized to give someone (usually a spouse or family member) the power to make medical decisions on your behalf in the event you become incapacitated. This grant of authority can include the decision to withhold surgery or certain medicines; the power to select, employ or discharge health care providers; and the ability to obtain and act upon any and all information from any source with respect to physical, mental and emotional conditions.
The living will and the DHCPOA should be considered as part of any estate plan. It is important to note, however, that these documents do not replace the need for a will or a living trust. They merely address the possibility that artificial or mechanical procedures may postpone death contrary to your desires or that one may lack the mental capabilities to make medical treatment decisions.
III. Transfer Tax Planning
A. Unified Estate and Gift Tax
The estate tax and the gift tax are transfer taxes on the privilege to transfer property to other persons. The gift tax applies to transfers made during life (i.e. gifts) and the estate tax is imposed on the death of an individual based on the value of assets owned at death.
Prior to 1976, the tax rates for lifetime transfers (gifts ) were less than the tax rates for testamentary gifts (estates ). In 1976, Congress realized that the gift tax and the estate tax should be treated the same and passed the Unified Estate and Gift Tax provisions of the Internal Revenue Code (“Code”). These provisions provide a uniform way to plan for the orderly transition of property because no longer are lifetime and testamentary gifts treated differently. However, Congress has made significant changes to the Uniform Estate and Gift Tax provisions, which treat lifetime and testamentary gifts differently.
The estate tax is imposed on the value of all assets that an individual owns at death. For purposes of computing the tax, assets are counted at their fair market value. Fair market value means the value at which a willing seller would sell to a willing buyer in an arms-length transaction. The Internal Revenue Service is entitled to, and often does, contest the value of assets reported on an estate tax return.
The Estate Tax involves an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests, assets in which you have a general power of appointment and other assets.
Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, and property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tentative tax is computed by multiplying the taxable estate by the applicable tax rates. The maximum tax rate was as high as 50% in 2002, but has been 35% for years after 2010 and 40% since 2014. The tentative tax is reduced by gift tax that would have been paid on the adjusted taxable gifts, based on the rates in effect on the date of death (which means that the reduction is not necessarily equal to the gift tax actually paid on those gifts). The tentative tax is then reduced by the available unified credit, which has the effect of taxing only that portion of the Gross Estate and lifetime gifts that exceeds the applicable lifetime exemption amount (see “Unified Credit” below).
Most relatively simple estates do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding the applicable lifetime exemption amount, which is $1,500,000 in 2004 – 2005; $2,000,000 in 2006 – 2008; $3,500,000 for decedents dying in 2009; and $5,000,000 (adjusted for inflation) for decedent’s dying after 2010.
What congress does with the estate tax in future years is anyone’s guess, and certainly up for grabs. Congress’ non-stop urge to monkey with the estate tax necessitates vigilance in reviewing estate plans. Planners have historically utilized formulas in their estate planning that were at the time designed to minimize the impact of the estate tax, but which might produce unintended results in light of subsequent legislation. A recent example of this phenomenon is the use of a formula to describe the amount of assets passing to children versus the amount passing to the spouse, with reference to the largest amount that can be passed to children (or smallest amount that can be passed to the spouse) without causing estate tax. With the tremendous rise in the amount that could pass tax-free in recent years (and the option to eliminate the estate tax in 2010), spouses and children have found themselves embroiled in litigation over the real intentions of the decedent, due to the unintended effect of the formula passing all or an unreasonably high amount of the estate to the children.
B. Marital Deduction
Other than administrative expenses of an estate, the marital deduction and the charitable deduction (discussed in Section H of this Article) are the two most significant deductions allowed in computing your estate tax liability. By far, the most utilized estate tax deduction is the marital deduction. In computing the estate tax, you can deduct from the gross estate property passing outright to your spouse. It is also possible to obtain a marital deduction for indirect transfers to your spouse (e.g. through a testamentary trust) provided the instrument meets certain criteria. Therefore, no matter how large your estate is, if everything goes to your spouse at the time of your death, there will be no estate tax liability. While it seems tempting to transfer all your assets to your spouse to avoid estate tax liability, as shown in the examples set forth in Section D of this Article, the overall adverse tax consequences of outright transfer to a spouse of all assets may be significant.
This discussion assumes that both spouses are United States citizens. If one or both of the spouses are not United States citizens, then in order to take advantage of the marital deduction a “Qualified Domestic Trust” must be used. A discussion of a Qualified Domestic Trust, or the Q-DOT as it is commonly called, is beyond the scope of this brochure. If either you or your spouse is not a United States citizen, then you should inform your attorney regarding your foreign citizenship so your attorney can structure a Q-DOT as part of your estate plan to fully utilize the marital deduction.
C. Unified Credit
As discussed previously, Congress enacted a unified estate and gift tax. In enacting the tax, Congress decided that individuals should be allowed to transfer a portion of their assets during their lifetime or upon death without incurring the tax. Thus, Congress provided for the Unified Credit to be applied against both the estate and gift tax. A credit must be distinguished from a deduction. A deduction is applied against the gross estate to determine the amount upon which the estate tax will be imposed. A credit, on the other hand, is a dollar for dollar reduction against the actual tax liability.
The effect of the Unified Credit against estate tax and gift tax is to allow a certain amount of assets, referred to as the “Applicable Exclusion Amount”, to pass free of estate or gift tax. For gifts made on or after and for decedents dying in or after 2001, the Unified Credit will effectively exclude a maximum amount in value of property from any gift or estate tax. Above this amount, however, the value of property “given” during life or at death will be taxed at rates starting at approximately 35% and going up to a maximum of 55% (See discussion in Section A of this Article regarding reduction of the maximum tax rates).
|Applicable Exclusion Amount||$675K||$1 mil||$1 mil||$1.5 M||$1.5 M||$2 M||$3.5 M||Repealed *||$5 M||$5.12 M||$5.25 M||$5.34 M||$5.43 M||$5.45 M|
|Max/Top tax rate||55%||50%||49%||48%||47%||46%||45%||—||35%||35%||35%||40%||40%||40%|
*The heirs of decedents who died in 2010 will have the choice to use the $5,000,000 estate exemption/35% estate tax rate or $0 estate tax exemption/0% estate tax rate coupled with use of the modified carryover basis rules.
D. Portability and Credit Shelter Planning
The use of the Applicable Exclusion Amount together with the marital deduction plays an important role in significantly reducing the potential estate tax liability for a married couple whose total gross estate exceeds the Applicable Exclusion Amount. Because the term “Unified Credit” is so recognized by both the general public and estate planners, for purposes of this article, the terms “Applicable Exclusion Amount” and “Unified Credit” will be used interchangeably.
While estate planning is important for every individual, the estate and gift tax consequences for families with less than the Applicable Exclusion Amount are not as significant as for those with assets in excess of the Applicable Exclusion Amount. The reason is that the Unified Credit is available to offset any amount of estate or gift tax payable up to the Applicable Exclusion Amount, which is the amount of estate tax payable on the Applicable Exclusion Amount of assets in an estate.
In planning for the estates of married couples with assets in excess of the Applicable Exclusion Amount, it is important to understand the formula for computing the estate tax and the functions that the marital deduction and the Unified Credit have in the formula.
The marital deduction is a deduction for all assets passing from the first spouse to die to the surviving spouse. This sum is deducted from the adjusted gross estate (which basically includes the value of all assets taxable in the respective estates with certain adjustments) to arrive at the “taxable estate.” The taxable estate is the base against which the rates are multiplied to produce the “tentative tax.” The tentative tax is reduced by the Unified Credit to arrive at the total death taxes payable.
Absent estate tax considerations, most married couples would prefer for all of their combined assets to pass to the surviving spouse after the death of the first spouse to die. Since the marital deduction will shelter all of those assets from estate tax, at first blush this seems to present no tax problem. The problem created by full utilization of the marital deduction (when all assets pass to the surviving spouse) is illustrated in the following example, which illustrates the total death taxes payable in the estate of a married couple owning $10,860,000 of assets jointly and assuming the Husband dies in 2016 survived by his Wife, who later dies in the same year.
|Adjusted Gross Estate||5,430,000||10,860,000|
|Estate Tax Due||0||2,172,,000|
Notice that on the death of the Husband, the taxable estate of the Husband was reduced to zero by the use of the marital deduction. None of the Husband’s Unified Credit was used because it was not needed. On the Wife’s death, the entire $10,860,000 estate was subject to tax. The Wife’s Unified Credit of $2,117,800 effectively sheltered only $5,430,000 of those assets from tax, thus subjecting the other $5,430,000 to tax of $2,172,000. The Husband’s Unified Credit was “wasted” because it was never used.
Traditionally, planners have relied on a technique, known as credit shelter trust planning, to avoid the wasting of the unified credit that would normally occur at the death of the first spouse to die if that spouse leaves all of his assets to the surviving spouse. The credit shelter trust is designed to ensure that the entire credits of both spouses are fully utilized. If instead of leaving his entire estate to his Wife, the Husband had left $5,430,000 in a properly drafted credit shelter trust (which his wife could control and receive benefit from) with the balance going to his Wife, the total death taxes would be as follows:
|Adjusted Gross Estate||5,430,000||5,430,000|
|Estate Tax Due||0||0|
Because the assets in the credit shelter trust are effectively taxed in the Husband’s estate rather than the Wife’s estate, both estates fully utilize the Unified Credit, resulting in a total tax savings of $2,172,000.
The credit shelter trust, if properly drafted, can appoint the Wife as the trustee and give her access to as much of the trust assets as she needs for her health, support and maintenance. Thus, she can retain effective control over these assets while achieving significant tax savings. When credit shelter trust planning is utilized, the estate tax savings illustrated in the foregoing example can be achieved regardless of which spouse dies first.
Relying on credit shelter trust planning to insure that the estates of married couples were taxed only on the amounts in excess of both Applicable Exclusion Amounts has proven difficult. First, it depended upon spouses using the services of highly trained estate planning attorneys. Well meaning, but poorly drafted, estate plans often failed to achieve the desired result. Other problems that precluded maximizing the utilization of both Unified Credit amounts include:
- Often, only one of the spouses owns significant wealth and the Unified Credit of the spouse without adequate resources gets wasted at the death of that spouse.
- Many high value estates include assets such as homesteads and retirement assets that are not ideal assets that can be transferred from one spouse to another to cover the risk that the other spouse may die first with insufficient assets to fund the credit shelter trust.
In 2010, legislation was enacted that significantly changed planning to avoid wasting of the Applicable Exclusion Amount. This legislation introduced new rules, called “portability,” that adopted a concept to allow a surviving spouse to use the unused applicable exclusion amount of his or her previously deceased spouse. Section 303 of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed by President Obama on Dec. 17, amends the definition of “applicable exclusion amount” in the Internal Revenue Code. It now equals the sum of “the basic exclusion amount” and for surviving spouses, the “deceased spousal unused exclusion amount,” 303(a)(2). These are both new terms, and are defined as follows:
- Basic exclusion: $5 million, adjusted for inflation after 2011 ($5,450,000 in 2016).
- Deceased spousal unused exclusion amount: the basic exclusion amount or “the excess of . . . the basic exclusion amount of the last such deceased spouse” over that spouse’s taxable estate, whichever is less.
The portability law allows the surviving spouse’s estate to utilize the unused estate tax exemption amount of the previously deceased estate, which decreases the likelihood of wasting that credit through failure to properly plan at the death of the first spouse, or which might otherwise result from the existence of high value assets that are difficult to use with traditional credit shelter planning. Though this law as originally enacted was set to sunset after 2012, it has been extended to later years and is now a permanent part of the Code. Still, reasons continue to use credit shelter trusts over portability, including:
- Credit shelter trusts can protect assets from creditors, subsequent spouses, spendthrift habits and subsequent dispositions by the surviving spouse.
- Credit shelter trusts protect the appreciation in the value of the assets that occurs after the death of the first spouse to die.
- The credit shelter trust can be used to exempt its assets from generation skipping tax using the unused exemption from that tax of the first spouse to die. Portability does not preserve the generation skipping tax exemption of the first spouse to die.
- For states, unlike Florida, that still have an estate tax, many do not have portability provisions, making bypass trust planning the only option.
- For portability to work, the personal representative of the first spouse to die must elect to port the exemption to the surviving spouse by timely filing an estate tax return (9 months from the date of death, plus an additional 6 months if timely extended). This presents potential challenges. What if the spouse is not the personal representative and the personal representative chooses to not make the election? If the estate of the first spouse to die is not required to file an estate tax return, it is possible that the election will be overlooked. Even if not overlooked, filing the return will necessitate appraisals and significant expenses in order to make the election.
- Congress may subsequently discontinue portability.
- Because the surviving spouse is ported only the unused exemption amount of the last to die of her predeceased spouses, it is possible that the spouse could subsequently marry a wealthy person who also predeceases the surviving spouse, leaving no unused exemption to port. The first spouse to die could have avoided the wasting of his exemption through the credit shelter trust.
There are, however, considerations that could make portability the preferable option. Those considerations include the following:
- Assets passing into the credit shelter trust at the death of the first spouse to die do not get a step up in basis for income tax purposes at the death of the second spouse. Assets passing to the surviving spouse but protected from estate tax due to portability do receive a step up in basis on the death of the surviving spouse. Thus, portability might have better income tax consequences.
- Portability is an easier plan to implement during the spouses’ lives and avoids the pitfalls of trying to separate assets to cover the risk of which spouse dies first,
- Portability avoids the problems of an underfunded credit shelter trust that occurs when the first spouse to die has insufficient assets to fully consume his Applicable Exclusion Amount.
E. Irrevocable Life Insurance Trusts
Many people are surprised to learn that life insurance proceeds may be included in the computation of an individual’s gross estate. The full face value of a life insurance policy will be taxed in a decedent’s estate if the decedent owned or transferred within three years from the date of decedent’s death “incidents of ownership” of the policy. Incidents of ownership include the right to change beneficiaries, borrow from the policy or withdraw the cash surrender value. Life insurance is often a significant portion of an individual’s gross estate; however, with proper use of an irrevocable life insurance trust, it is possible to remove life insurance and the proceeds therefrom from an individual’s gross estate.
Some thought the repeal of the estate tax after 2010 would eliminate the need to create an Irrevocable Life Insurance Trust. With the estate tax issues still in flux, however, it may be advisable to maintain an Irrevocable Life Insurance Trust to protect your estate from future changes in the estate tax laws. By its terms, an irrevocable life insurance trust cannot be amended. It is created to hold legal title to life insurance policies and is structured so that the owner of the policy gives up all “incidents of ownership” in the policy. This incident of ownership concept is significant. If an individual’s life insurance policy which is transferred to the irrevocable life insurance trust is structured so the owner of the policy has given up all incidents of ownership and if the insured lives three years beyond the date that the policy was transferred to the Irrevocable life insurance trust, then upon the death of the insured the proceeds will not be included in the prior owner’s gross estate.
The transfer of the life insurance policy and funds to pay premiums to the irrevocable life insurance trust can constitute a taxable gift. With proper drafting and the use of “Crummey Powers” it may be possible to have all or part of the value of the policy transferred to the trust gift tax free through the use of the annual gift tax exclusion.
The result of a properly drafted and funded irrevocable life insurance trust is that upon the death of the insured, the insurance proceeds are paid to the trustee of the Trust and such proceeds will not be included in the prior owner’s estate, but will pass estate and income tax free to the designated beneficiaries. In the case of married couples, the irrevocable life insurance trust can allow the policy proceeds to escape taxation in both estates while allowing the surviving spouse to have access to the funds.
As noted in Section D of this Article, for couples with estates exceeding the Applicable Exclusion Amount, use of the marital deduction will defer payment of any estate tax until the death of the surviving spouse. If the estate assets are not sufficiently liquid to generate ready funds for payment of the estate tax, the beneficiaries may be forced to sell assets at inadequate prices to pay the estate tax. This liquidity problem may be alleviated by the purchase of “last to die” life insurance, which insures the lives of both spouses and pays the proceeds upon the death of the survivor when the funds are required for payment of estate taxes. Moreover, if the life insurance is owned by an irrevocable life insurance trust, the proceeds will not be subjected to estate tax in either spouse’s estate.
F. Lifetime Gifts
As of the date of publication of this article, with the use of the Unified Credit, it is now possible to transfer up to $5,450,000.00 by lifetime gifts to your children or others without incurring any gift tax or generation skipping tax liability.
With life time giving, in order to accomplish the desired goal of removing the assets from your estate, you must give up custody and control of the assets. While many people are reluctant to give up control of their assets to their children, there are circumstances in which it can be beneficial to transfer assets to children. You may want to establish and fund an Educational Trust for your children. In some circumstances you may want to Transfer property you expect to appreciate significantly in value to your children so that neither the property itself nor the future appreciation would be included in your estate. The owner of a closely held business may wish to transfer interests in the business to children, particularly if the children are involved in the business. Rather than gifting directly to the children, you can gift to a trust designed to benefit your spouse and descendants, effectively avoiding any transfer taxes as the enjoyment of those assets eventually pass after the spouse’s death to many generations of descendants to come (See discussion of Dynasty Trusts in section I below).
In addition, or as an alternative, to lifetime gifts using the Unified Credit, an individual may make lifetime gifts that are eligible for the annual gift tax exclusion. As of the time of publication of this article, it is permissible to give annually $14,000 (indexed for inflation), or with your spouse’s consent $28,000, per donee without the gift being taxable. Gifts that qualify for this present gift exclusion do not use the Unified Credit and will not reduce the ability to shelter the Applicable Exclusion Amount from estate tax. Thus, a gift program can be effective to shelter more than the Applicable Exclusion Amount from estate and gift tax.
G. Leveraged Gifts
While lifetime gifts can be effective to reduce estate taxes, there are different forms of making lifetime gifts that provide additional benefits over making direct gifts.
Family Limited Partnerships are often formed as a vehicle to receive real estate, business assets, marketable securities and other valuable assets. Interests in these partnerships are then gifted to family members. This structure allows an individual to shift value to family members (thus reducing estate taxes), while retaining control over these assets. Because the family members have no control and because there is no market for the partnership interest, the Internal Revenue Service recognizes that in valuing the gifts to family members discounts should be applied to consider the lack of control and marketability. Thus, an asset transferred in this manner may only be worth (for gift tax purposes) thirty five percent (35%) to seventy five percent (75%) percent of the fair market value of the underlying partnership assets.
Often, gifts are made to a specially designed trust, called an intentionally defective grantor trust (“IDGT”). Transfers to an IDGT, for gift tax purposes, are treated as completed gifts, thus insuring that the assets given to the trust will not be taxed in the grantor’s estate at his death. There is a disconnect, however, in that for income tax purposes the grantor is treated as owning the assets in the trust, and thus he is responsible to pay income taxes generated by those assets. Since the grantor is viewed as paying his own taxes, payment by the grantor of those taxes effectively are additional gifts to the trusts’ beneficiaries The grantor’s assets (rather than the trust’s assets) are used to pay those taxes. These vehicles are also very popular with the wealthy who desire to make gifts of assets the values of which greatly exceed the donor’s Applicable Exclusion Amount without paying gift tax. Since the trust is treated as owned by the grantor for income tax purposes, the grantor can sell assets to the trust without triggering income tax on the sale. Often the sale is in exchange for a promissory note, which can be self-cancelling at the death of the grantor. In this way, the appreciation on the value of the assets sold to the trust is effectively given to the trust’s beneficiaries free of gift tax. The Obama administration has targeted these trusts as vehicles that unfairly advantage the wealthy at the expense of middle-class America. Proposals have surfaced to discontinue the benefits of the IDGT by causing its assets to be includable in the gross estate and subject to estate tax at the death of the grantor.
There are other forms of leveraged gifts, such as Qualified Personal ResidenceTrusts and Grantor Retained Annuity Trusts. The general concept is to allow an individual to make gifts to save estate taxes on a leveraged basis while providing some form of continued control by and benefit to the individual.
H. Gifts to Charity
Persons who are motivated to give to charitable institutions, such as churches, synagogues, and universities, may wish to structure or time their gifts to maximize various income, gift, or estate tax advantages. The most common form of charitable giving is an outright gift of cash or property to charity either during lifetime or at death. An individual who makes a lifetime charitable gift may be eligible for an income and gift tax deduction. In addition, the gift property will not be included in the donor’s estate at death. For testamentary gifts to charity, the gift property is included in the donor’s estate, but an estate tax deduction may be available.
For income tax purposes, the charitable contributions deduction is limited to an amount ranging from twenty percent (20%) to fifty percent (50%) of the donor’s contribution base. The applicable percentage depends on the identity of the charitable recipient, the form of the gift, and the type of property given. Any portion of the gift that cannot be deducted currently may be carried over and utilized in the five succeeding years. The charitable gift and estate tax deductions are unlimited.
As an alternative to outright gifts to charity, some donors establish trusts that benefit both charitable and non-charitable beneficiaries. An example of such a split interest trust is a charitable remainder trust, in which the donor or other beneficiary has an interest for life or a term of years and a charity has the remainder interest. There are two categories of charitable remainder trusts: (1) Charitable Remainder Annuity Trust (“CRAT”) and (2) Charitable Remainder Unitrust (“CRUT”). A CRAT allows the donor or other beneficiary to receive a specified dollar amount from the trust during life and gives the remainder to charity. A CRUT is similar to a CRAT except that, instead of receiving a specified dollar amount annually, the donor or other beneficiary is entitled to receive a specified percentage of the value of the trust each year. A donor who established a CRAT or a CRUT during life is entitled to a current income tax deduction equal to the value of the charity’s remainder interest, subject to the percentage limitations described above. Thus, if you are the non-charitable beneficiary, the older you are when you establish a charitable remainder trust, the greater the value of the charity’s remainder interest and the corresponding charitable deduction. Moreover, the charitable remainder interest passes free of gift or estate taxation. Potential donors should be cautioned, however, that no deduction is allowable for gifts to a split interest trust unless the trust agreement is properly drafted to satisfy numerous technical qualifications.
A CRUT can be structured so that the donor or other non-charitable beneficiary is entitled to receive the lesser of the specified percentage of the value of the trust assets or the net income of the trust for the year. The trust may also provide that the donor or other beneficiary can receive income in excess of the specified percentage in later years to the extent necessary to make up any deficiencies. For the charitably inclined, such a trust is a useful vehicle for converting nonproductive property to income producing property. For example, if you transfer unimproved property worth $300,000 which you purchased for $50,000 to this type of CRUT, no annual distributions are required until the property is sold. The CRUT, which is exempt from income tax, can sell the property and reinvest the entire $300,000 sales proceeds in an income producing investment. If the trust produces more income than the specified percentage of the trust assets, the excess can be used to make up deficiencies from the earlier years. If the sale of the property is timed to coincide with the donor’s retirement, the CRUT not only avoids income tax liability, but also serves as a retirement planning vehicle. Congress, in an attempt to stop abusive charitable trusts, now requires that at the time the charitable trust is created, the non-charitable income beneficiary’s income interest cannot exceed fifty percent (50%) and the charitable remainder’s beneficial interest must be at least ten (10%) percent of the value of the gifted asset.
I. Generation Skipping Transfer Tax
A generation skipping transfer (“GST”) tax is imposed when there occurs an outright transfer (“direct skip”), a distribution from trust (“taxable distribution”) or a termination of an interest in trust (“taxable termination”) for the benefit of a person at least two generations younger than the transferor. As an example, a transfer from a grandparent to a grandchild whether outright or to a trust will be subject to the GST tax.
There are some important exemptions from the GST tax. An exemption is provided for transfers to grandchildren when the grandparent’s child, who is the parent of the grandchild, is predeceased. More important, each individual has an exemption amount (indexed for inflation), similar to the applicable exclusion amount for the estate and gift tax, that can be used for any generation skipping transfer. At the time of publication of this article, that exclusion amount is $5,540,000.
Because of changes made to Florida law, it is now possible to create trusts that may last for up to 360 years in order to benefit children, grandchildren, and later generations. These trusts, known as Dynasty Trusts or Perpetual Trusts, take advantage of the exemption from GST tax to transfer assets to a trust that will never thereafter be subject to any gift tax, estate tax or GST tax. Without being subjected to these transfer taxes, the initial fund of $5,540,000 (indexed for inflation)may grow significantly over the years to a huge amount, available to provide support for many future generations. As a practical matter, the GST tax is of little importance to most estates; however, for larger estates, GST tax planning should be considered.
J. Qualified Plans
A qualified pension, profit-sharing or stock bonus plan is a retirement plan to which an employer or employee or both make tax-deductible contributions on behalf of the employee. In addition to the benefits of tax-deductible contributions, income of a qualified plan is not currently taxable. Amounts distributed from a qualified plan are taxed to the recipient at the time of the distribution. Qualified plans are attractive investment vehicles because of the opportunities for tax deferral.
Qualified plans are subject to numerous restrictions. You may make withdrawals from your qualified plan commencing at age 59 1/2, without penalty. Annual withdrawals are required after you reach age 70 ½. When timing withdrawals from a qualified plan, you must take care to avoid the 10% penalty on withdrawals before age 59 1/2; and a 50% penalty to the extent the required annual withdrawals fall short of the minimum required distributions.
An individual must designate a beneficiary to receive the benefits of a qualified plan if the individual dies before the entire account is distributed. The selection of the beneficiary is critical if income tax deferral is desired after the participant’s death. Married persons typically designate the spouse as beneficiary, because a surviving spouse has options for deferral that are not available to other beneficiaries. Other potential beneficiaries include adult children, irrevocable trusts, charitable remainder trusts, or charities. For estate tax purposes, the entire balance in a qualified plan is included in the participant’s gross estate. Qualified plan assets are exempt from the claims of the participant’s creditors and from the beneficiary’s creditors.
K. Individual Retirement Accounts
Generally speaking, there are now two basic types of IRAs: (i) Traditional IRAs and (ii) Roth-IRAs. Traditional IRAs are similar to those of prior years, in that, any worker can contribute the following to an IRA annually: $5,500 for 2016 or $6500 if you are age 50 or over. The contribution limit is adjusted annually for inflation in $500 increments. A contribution to a Traditional IRA can be deductible to a worker if the worker is not an active participant in a qualified plan or if their adjusted gross income is below a certain amount. For tax purposes, Traditional IRAs are treated the same as qualified plans referenced in Section J of this Article.
Beginning in 1998, Congress permitted Roth IRAs. These Roth IRAs have similar annual contribution limits as Traditional IRAs, but contributions to them are not tax deductible. Unlike Traditional IRAs where earnings are merely postponed and are eventually taxed, under most circumstances; the earnings from a Roth IRA escape income tax completely. The maximum yearly contribution that can be made to a Roth IRA is phased out above a certain amount of modified adjusted gross income. In certain circumstances individuals can convert their Traditional IRA into a Roth IRA. If you are interested in converting to a Roth IRA you should speak with your financial advisor who should be able to assist you in determining whether this conversion is best for you.
L. Coverdell Educational Savings Account
A Coverdell Education Savings Account (ESA) is an account created as an incentive to help parents and students save for education expenses. The Coverdale ESA used to be called an Educational IRA, but the name was changed in recognition that these accounts really have nothing to do with retirement purposes.
The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.
Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.
Here are some things to remember about distributions from Coverdell Accounts:
- Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
- There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Eligible institutions also include any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions are eligible.
- The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
- If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.
There are contribution limits for taxpayers based on the contributor’s Modified Adjusted Gross Income. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.
If there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member.
Planning for your qualified plan or IRA is essential. Significant tax advantages can be achieved by making timely beneficiary designations, elections, and life time withdrawals, but important tax advantages can be lost if you wait too long.
IV. Asset Protection Vehicles
While it is advisable for every person to have a will or a living trust, these estate planning vehicles do not offer protection from the claims of creditors. Many individuals, especially professionals, face spiraling malpractice insurance costs as we become more of a litigious society. Often a lifetime of earnings can be put at risk. In order to protect a portion of your assets from creditor claims, consideration should be given to asset protection vehicles. Asset Protection Trusts and Family Limited Partnerships are among the vehicles that are employed in asset protection planning.
A. Asset Protection Trusts
Asset protection trusts (APTs) are trusts that are designed to be protected from the reach of creditors, including divorced spouses, of the settlor of the trust and the beneficiaries of the trust. APTs were initially conceived of to shelter assets of high net worth individuals whose businesses or professions exposed them to considerable risks, such as doctors, lawyers, engineers, and public company founders.
APTs were initially created in foreign jurisdictions, such as the Bahamas, the Cayman Islands, the Turks and Caicos Islands and the Cook Islands. The foreign jurisdiction must be carefully selected to ensure that the one chosen has laws which are designed to provide secrecy and protection from future creditors.
A properly drafted APT will often, but not necessarily, be tax transparent, which means that for United States tax purposes, a transfer of assets to the trust will not cause taxation and the APT will not be treated as a separate tax entity. Selection of the proper foreign jurisdiction is also important to ensure that the assets transferred to the APT will not be taxed in that jurisdiction. Although the APT is usually located in a foreign jurisdiction, assets need not be transferred to that jurisdiction and it is possible that the assets will never leave the United States.
Although the APT is usually located in a foreign jurisdiction, assets need not be transferred to that jurisdiction and it is possible that the assets will never leave the United States.
Caution must be exercised by persons who desire to utilize an APT to shelter his or her assets from potential creditors’ claims. These trusts should only be drafted by highly qualified lawyers who are experienced in the intricacies of the myriad of laws that affect these trusts. Though these trusts can be very secure, confidence in the foreign trustee is of the utmost importance. There are many well qualified companies available to act as trustee. Care must.be taken not to utilize these trusts to perpetrate a fraud on existing creditor and to avoid the argument that transfers to the APT were made with the intent to defraud cred1tors.
The historical problem with settling trusts in the United States for asset protection purposes is rooted in the common law concept that assets in a self-settled trust are available to creditors of the settlor. In order to attract the growing interest in APTs, several states have enacted legislation that protects self-settled trusts. Among these states are Alaska, Delaware, Colorado, Nevada, South Dakota, Virginia and Texas. Just like with their foreign counterparts, there are many variations in the treatment of domestic APTs. Much has been written about the advantages and disadvantages of using domestic APTs; however, there are significant risks posed by these relatively new vehicles. Regardless of jurisdiction, an APT should not be considered unless you have consulted with an estate planning attorney with considerable experience in this area and have been adequately advised about these risks.
APTs are being used by many people with “deep pockets” to provide asset protection against risks of large judgments. As a result of our litigious society, more and more outrageous judgments are being entered against persons who unwillingly find themselves in litigation. The APT can be an effective tool to protect a nest egg from these judgments and to level the playing field.
B. Limited Liability Partnerships
Limited partnerships enjoy many features under Florida law that are useful for asset protection planning purposes. Unlike a general partnership, in which all partners are generally liable for debts of the partnership, limited partners are not liable for the debts of the limited partnership.
A limited partner’s liability is limited to what he or she contributed to the Limited Partnership. The general partner maintains control over the Limited Partnership. The Limited Partnership is required to file its Certificate of Limited Partnership with Florida’s Secretary of State. Florida law provides protection from creditors with the Limited Partnership. If a creditor obtains a judgment against you, the creditor may attempt to go after your partnership interest by obtaining a “charging order” against your partnership interest. A “charging order” under Florida law means that the creditor receives whatever economic benefit that you would have received from the partnership; however, the charging order does not grant the creditor the right to manage the partnership nor does a creditor have the ability to reach partnership assets to satisfy his or her claim. This inability to take over management of the partnership or reach partnership assets has a significant impact on creditors of an individual partner.
C. Limited Liability Companies
A limited liability company has become an entity of choice for many businesses in Florida. It “looks like” a corporation in that none of its owners (called “members”) have any liability for its debts or obligations. A limited liability company operates with less formality than a corporation, making it a more user-friendly vehicle for the less formal. For tax purposes, if there are two or more members, it may be taxed like a partnership or a corporation, which offers significant tax flexibility. A single member limited liability company is ignored for tax purposes and is treated as a sole proprietorship of its member, unless it elects to be taxed as a corporation.
Florida law provides the “charging order” (similar to that used for partnerships) remedy for a creditor of a member to collect a debt from that member. Thus, theoretically the limited liability company offers the same liability protection offered by limited partnerships. This theory has recently been put to the test. In June of 2010, the Florida Supreme Court in Olmstead v. Federal Trade Commission held that the statutory charging order protection in Florida under § 608.433(4), Florida Statutes, is not available to the sole member of a Florida single-member LLC. The Court concluded that a court may order a judgment debtor to surrender all right, title and interest in that debtor’s single-member Florida LLC to the judgment creditor to satisfy that judgment creditor’s claims against the debtor. The logic employed by the Court’s order led many to fear that the Court might extend its reasoning to find that the charging order is not the sole remedy for multi member companies, exposing any member in an LLC to the risk of having his interest in the LLC attached by a creditor.
The Florida legislature responded to emphatically answer the question by enacting a legislative fix. Now, it is clear that the charging order for LLCs with more than one member is the exclusive remedy for a creditor of any member. A member in a single member LLC continues to be exposed to the ability of his creditor seizing his membership interest to satisfy a debt owed by that member to the creditor.
D. Prenuptial or Postnuptial Agreements
Agreements made in contemplation of marriage (“Prenuptial Agreements”) and those made after marriage (“Postnuptial Agreements”) are valid and binding in the State of Florida. Although the Florida Probate Code provides that adequate financial disclosure is not required for Prenuptial Agreements, Florida case law holds that in a divorce scenario, if the Prenuptial Agreement does not fairly provide for the spouse, adequate financial disclosure must have been made in advance in order for the Prenuptial Agreement to be binding. Through the use of a properly drafted Prenuptial Agreement, it is possible to limit or avoid the spouse’s rights to alimony or property division in the event of divorce. Also, under Florida law the spouse has several rights regarding the estate of a decedent. If a decedent is survived by a spouse, he or she may not will a Florida homestead to anyone other than his or her spouse. Perhaps most important of these rights, however, is the right for a surviving spouse to receive an “elective share” of the decedent’s “elective estate.” The elective share is 30%. Although this previously could easily be avoided through the use of a revocable living trust, legislation now includes assets in the living trust, as well as such things as the value of gifts given by the decedent to third parties, property or accounts held in survivorship estates (such as a joint bank account, the proceeds of which would pass to the survivor among the account holders), the value of life insurance policies over which the decedent had the power to name the beneficiary, as well as gifts to the surviving spouse, and property held jointly with the surviving spouse. Particularly for second marriages, where children from a prior marriage need to be protected, it is now more important than ever to consider a prenuptial agreement to protect homestead and other valuable rights. The existence of a Prenuptial Agreement will not preclude a person from leaving assets to his or her spouse, but it will preclude him or her from being forced to do so.
V. Establishing a Florida Domicile
A domicile is a person’s permanent residence. It is the place to which you intend to return whenever you are absent. You only have one domicile. A domicile should not be confused with a residence as one can have different residences in different states. Domicile is important because it determines which state has jurisdiction to impose its laws regarding wills, trusts, estate planning and income and estate tax considerations.
Florida is attractive as your domicile for the following reasons:
- Permanent residents of Florida receive a $50,000 homestead exemption of value for real estate tax purposes, and even more for the blind, disabled, widowed, veteran and those age 65 and older.
- Florida has no personal income tax.
- Florida has no estate tax.
- Florida has no property tax on boats or automobiles.
- Florida has no intangible tax on bank accounts and certificates of deposits.
It is often difficult to determine when a person moving from another state into Florida becomes domiciled in Florida. Obviously, if an individual maintains significant property in another state, that jurisdiction may attempt to claim that person as a ‘domiciliary of the jurisdiction, which could lead to the possibility that the same property may be subject to death taxes from several jurisdictions. Therefore, it is important to demonstrate clearly your intent to make Florida your domicile. Unfortunately, the determination in one state is not necessarily binding on another jurisdiction; however, in attempting to establish a domicile in Florida, you should consider the following acts:
- Register to vote in Florida.
- Register your automobile and boats in Florida.
- Obtain a Florida Driver’s License. Under present law, a driver’s test is not required for most individuals.
- File Federal Income Tax Forms in Atlanta, Georgia showing your Florida address.
- File a Declaration of Domicile.
- Declare Florida as your legal residence in will and / or trust documents.
- File for homestead exemption on your principal residence in Florida.
- Locate bank accounts in Florida.
- Obtain a safe deposit box in Florida for important articles.
- Use Florida as primary mailing address.
- Maintain church membership in Florida.
- Open brokerage account in Florida.
- Notify insurance companies of address change.
- Notify administrator of pension plan of address change.
- Notify Postal officials of address change.
- Use Florida address on all legal documents such as deeds, affidavits or state tax returns.
- Transact business in Florida.
- Notify officials from your previous residence that your intention is to become a Florida resident.
- Change passports to indicate Florida residence.
VI. Trust administration versus probate
Estate planners often counsel clients regarding whether they and their beneficiaries are better served through trust administration rather than probate administration. Trust administration is the legal process of transferring assets which had been transferred to a trust during the settlor’s life after a “triggering event,” such as the death of the settlor or the subsequent death of the settlor’s spouse. Probate administration occurs when a decedent leaves assets in his or her individual name and a probate is necessary.
Although it is true that a properly funded living trust will avoid probate, many mistakenly believe that a living trust avoids the necessity to take any formal action at death. This belief is far from true. In fact, most of the work required in a probate at death must also be done even if the decedent has a properly funded living trust. Some estate planners argue that because of the work involved in trust administration and in light of the many certainties the probate code offers for estate administration, that living trusts really do not offer much advantage. While there is merit to this argument in some circumstances, my experience in administering trusts and estates over the last three decades has lead me to the conclusion that in most instances trust administration will be significantly less costly and time consuming than will estate administration (i.e. probate of a will).
Few qualified practitioners would disagree with the proposition that the creation of a living trust and trust administration is beneficial over probate in three circumstances. First, if an individual or couple owns real property in more than one state, a living trust should be considered. If one dies owning real estate in several states, the heirs would have to file a probate proceeding in each state in which such real property was located. This costly and time consuming probate could be avoided if the properties were owned by a living trust at the time of the settlor’s death.
Another benefit to a trust is in circumstances in which an individual desires for a trust company or bank to handle currently their financial affairs.
Finally, the living trust is a superior vehicle for planning in advance for a possible incapacity. Without a living trust, a durable power of attorney may be relied upon to avoid a costly guardianship in the event of incapacity. If, however, the person to whom a power of attorney is given dies or becomes incapacitated, a guardianship may still be required. The living trust, through appointment of successor trustees, can name several individuals or a trust company to act as successor trustee in the event the initial trustee dies or becomes incapacitated, thus avoiding a costly and emotionally draining guardianship.
There are many factors to consider when developing your estate plan. You should talk with an attorney experienced in estate planning matters to assist you in determining whether the creation of a 1iving trust would be beneficial not only to you but your heirs as well.
VII. Necessity of Reviewing Estate Plans
If you do not have a will, living trust or other estate planning vehicle, you should consult your attorney to determine which estate planning vehicle best suits you and your family. You can assist your attorney with preparing a suitable estate plan by making an inventory of your assets. It is often helpful to supply your attorney with copies of deeds, stock certificates, insurance policies and other similar documents to assist in determining which estate planning vehicle suits your needs.
The laws concerning estate planning are among the most volatile, changing significantly and often. This fact requires that you remain diligent in having your estate plan reviewed by an estate planning attorney who remains knowledgeable and on the cutting edge of this rapidly changing profession.