Estate Planning

Estate planning Myths: Truth or Fiction

Like most people, you’ve worked hard to build a better life for you and your family.  We all want our children and grandchildren to be better off and have more opportunities than we did.  It also goes without saying that many people fear losing all they have worked for due to an unexpected, protracted illness, as a result of family discord, or to taxes.

A carefully constructed estate plan can help you and your family avoid or minimize the difficulties of guardianship, probate, and tax liabilities.  Estate planning is powerful tool which, depending on your priorities, can help you avoid probate, reduce both estate and income taxes, ensure your assets will be handled properly upon your disability or death, and provide for your care in the event of disability or extended illness.

As we enter a new tax year, we have new exemption and exclusion amounts which have been adjusted for inflation.

The Federal Unified Credit for Estate and Gift Tax is now $5,430,000

The Federal GST Exemption is now $5,430,000

The Federal Annual Gift Tax Exclusion remains at $14,000

The Federal Estate and Gift and GST Tax Rates remain at 40%

Florida continues to have no state gift or estate tax

As always, an estate planning attorney should be consulted on the best way to save on estate taxes. Please contact our office to schedule an appointment to discuss your specific situation.

"I don’t have that much. All I really need is just a simple will." Most estate planning attorneys often hear this phrase during their first meeting with a client. However, there are different kinds of simple. A good estate planning should address who is to receive the property, how to devise that property in the most efficient way, and address certain contingent possibilities. While the wish to keep things as simple as possible is understandable (especially if the legal budget is limited), it is not always possible to accomplish a "simple" estate plan with a short simple document. Many simple estates can create a nightmare for you and your heirs at some point in the future. Such complications may include:

Probate - Probate is the court process whereby property of the deceased person is transferred after death to individuals named in a will (or pursuant to the law if there is no will). Probate can be expensive, time consuming, overwhelming for the beneficiaries, and all information becomes public records. Probate is often viewed as something to be avoided in an estate plan. A "simple" will does not avoid the probate process. A revocable living trust, on the other hand, is a great alternative that allows your estate to be managed more efficiently, at a lower cost and with more privacy than probating a will. A revocable trust can be more expensive to establish, but will avoid a complex probate proceeding. Moreover, if the client owns real estate in several states, there is a possibility that separate probates may be necessary in each state. Real property transferred to a revocable trust avoids probate regardless of the location of the real property.

Minor Children or Grandchildren - If you have minor children, you may need to consider who should be in charge of the property passing to such minor child. If both parents pass away, and the minor child does not have a trust set up through either parent’s estate planning documents, the child’s inheritance will be subject to a court process known as guardianship until the child turns 18, at which time the entire inheritance may be given to the child. Once the money is distributed to the child, there are no "checks and balances" on how the money is spent, and the money may become subject to the claims of child’s creditors or ex-spouse, if applicable. By setting up a testamentary trust for a child (meaning that it does not come into existence until you and your spouse pass away), you can create guidelines and limits on what the money can be spent (such as education, assistance with the purchase of a home, starting a business). A trust also allows you to designate the age at which the child is to receive the benefits, and even create certain several different standards, which would change as your child is getting older. An additional benefit of setting up a trust for a child is the ability to structure an inheritance trust to protect the inheritance you leave your beneficiaries from a future divorce as well as creditors. Another situation where a testamentary trust may be warranted is when a gift is made to a grandchild or another young beneficiary (whether directly or a contingent gift if one of the children predeceases the testator).

Non-Citizen Spouse - Transfers between Citizen spouses can be accomplished freely without any immediate tax consequences. However, non-citizen spouses do not have the same level of freedom. Transfers during life or at death to a Non-Citizen spouse are immediately subject to estate and gift taxes and can result in a waste of the Gift and Estate Tax exemption. This issue is often overlooked if the spouses are long-time U.S. Residents and speak fluent English. A possible solution could be to set up a trust (which must meet certain strict IRS requirements) for the benefit of non-citizen spouse to avoid immediate tax consequences.

Second Marriages - A simple will may not be a proper document for "blended" families - where one or both of the spouses have children from a prior union. Often, spouses execute simple wills leaving everything to each other, in an attempt to provide for each other’s care, and then divide the property equitably among their respective children. However, the surviving spouse may get remarried, or change their will and leave everything his or her own children. Instead, it may be advisable to leave the property for the spouse in a special marital trust, which would not be subject to divorce or death claims of a new spouse and could not be changed by the survivor.

Incapacity Planning – A significant aspect of estate planning is making sure your family has the ability to take care of you and your affairs in the event of your temporary or permanent disability (whether physical or mental). You need to have proper documents to enable someone you trust to manage your affairs and address your day-to-day needs if you become incapacitated. The important thing is to established these documents while you have capacity. After the capacity is lost, which may be unexpected, the court guardianship or conservatorship proceedings (which tend to be burdensome and expensive) may be the only options for your relatives in order to allow your family to help you.

By failing to properly plan for these contingencies, a "simple" will can instead cause many problems of logistical and financial nature. Often, an effective estate plan will utilize techniques which may have nothing to do with a will or a trust, but will provide with necessary flexibility and efficiency. An experienced estate planning attorney can provide valuable insight and offer effective mechanisms that would fulfill your wishes while providing protection and comfort for you and your loved ones for years to come.

In an effort to shield their personal assets from liability for creditors and debts associated with their business, many business owners are advised to set up corporate entities. The type of corporate entity depends on the type of business, number of shareholders and other factors but the benefits are virtually the same. Creating a business entity protects the owners assets from being seized to pay any judgements or debts associated with the business.

However, many business owners who become clients of our firm are never properly advised that a failure to maintain certain formalities with regard to the corporate entity will defeat the liability protection afforded by the entity. Creditors have the ability to "pierce the corporate veil" to seek payment of judgements or debts directly from the personal assets of the owners. In order to maintain the corporate veil, the entity must be operated as a business with separate bank accounts, annual meetings and accurate records. Otherwise, the court will determine that the entity is merely an "alter ego" to the individual owners wherein the liability protections afforded by the entity are disregarded in favor of holding the individual owners personally liable.

Here are some examples of formalities that should be observed to maintain the liability protection afforded by a corporate entity:

a. Corporate Records Book. The corporate records book and financial records should be properly and consistently maintained. In Florida, the shareholders and board of directors of the company must have an annual meeting. A record of the annual meetings should be executed by the shareholders and directors and kept in the records book. The stock certificates evidencing the shareholders and their shares should be issued and a separate list of outstanding certificates should also be maintained in the event a certificate is lost or accidently destroyed.

The contents of the meeting minutes should include the date, time and location of the meeting, the names of all officers and directors at the meeting, approval of the prior meeting minutes, resolutions regarding issue discussed and voted on, a record of the voting, (for example, was the vote unanimous, if anyone abstained). Generally speaking, any major changes or decisions relative to the business’s structure or contracts should be voted on and ratified in the minutes. Some examples of dealings that should be reflected in the minutes include, but are not limited to: reorganizations and mergers, elections of officers and directors, loans, leases or any significant contracts.

b. Capitalize. The entity should be funded by purchasing shares of the corporate stock, which as indicated above, will result in stock certificates being issued to the shareholders.

c. Asset Separation. The business finances should be maintained totally separate from those of the individual shareholders. The corporate entity should have it’s own bank accounts and credit cards

d. Dividends. If the entity is required to pay dividends and fails to do so, the court may treat the entity as an alter ego.

The most important issue to understand when using a business entity for liability protection is that simply creating the entity is not enough and in order to maintain all the perks provided by the protection, the owners must make an annual or more frequent effort to maintain the records in order to prevent a creditor from "piercing the corporate veil."

Considering the accessibility and inundation of online services recently, many people have turned to the internet to prepare their estate planning documents. The cost and ease of using the service however does not mean a better value or a better plan. Usually, using this type of service will give you a false sense of security because your loved ones will only realize the failure of your planning after you have passed away.

Do your documents comply with local law?

Each State has it’s own set of laws regarding the process of executing legal documents and what is actually required within the document to make it valid. Generally the online service creating your estate planning documents does not take each individual jurisdiction’s requirements into consideration and a failure to properly execute the documents will result in their invalidity for administration purposes. This could mean that the money spent to procure these documents is wasted and instead the State laws where you live will determine who inherits under the intestacy (passing away without a Will) laws.

Does your planning minimize your taxes and expenses?

In addition to execution considerations, each State has specific laws regarding taxes including inheritance taxes and estate taxes and a failure to take these specific laws into consideration could cost your loved ones more in taxes than what you saved by preparing your own plan. Again, this type of misstep would only be discovered after you have passed away when it would be to late to change the documents and provide any kind of tax relief.

Do your documents accurately reflect your specific family circumstances?

Finally, the online process is "cookie cutter" and does not take into consideration your specific goals and needs with regard to your family. Meeting with an estate planning attorney will help to create a set of documents that are specific and tailored exactly to your needs and family situation. For example, do you have a child who is in the process of a divorce or bankruptcy or who is currently receiving state and/or federal benefits? Leaving money to that child without any further planning could result in that child’s inheritance ending up in the hands of an ex-spouse or creditor or could disqualify him from the state and/or federal benefits he is receiving. Without a consultation with an estate planning attorney, there is a much greater chance that your wishes for the inheritance left to your loved ones will not be carried out. There is no way an online service could contemplate your individual concerns and provide you with the necessary vehicles to protect your assets after you pass away.

Are there steps necessary beyond creating your documents?

Another issue to consider is what happens with your documents after you have signed them. Often, the creation of a revocable trust is just the beginning of the estate planning process, a trust must be "funded" by re-titling assets in the name of the trust in order to provide any benefit. An online service cannot properly advise you as to funding matters since it is necessary to know exactly where your assets are and how they are titled to complete this process.

There is a varying level of uncertainty that your planning will save time and money for your loved ones after you pass away when you use an online service. An estate planning attorney can assist with documents that are customized to your family’s specific situation while saving taxes and the expense and time associated with the probate process.

A Limited Liability Company ("LLC") is a hybrid entity which for tax purposes, is considered "pass-through." This means that a LLC offers a less complicated tax structure like that of a partnership or sole proprietorship. However, from the asset protection perspective, the LLC has the liability protection afforded by a corporation. A LLC has "Members" instead of "Shareholders" and "Managers" instead of "Directors." The Members of a LLC own interest in the company and may provide the managerial functions necessary for the LLC to operate. Or, the Members may elect a separate individual Manager to perform the managerial functions. A LLC has a relatively low set up cost with the State of Florida and the annual filing fees are minimal as well.

Now that you know the LLC structure, should you have an LLC?

The right kind of business entity will depend on several elements that may be applied to your specific situation and objectives.

Let’s start with what an LLC can do for you:

1. A Member of a LLC is limited in personal liability for the business assets and operations. Basically, your liability is limited to your contribution to the LLC. For example, we often recommend a LLC for a client who owns a piece of rental property. The LLC creates a balloon around the rental property so that if the LLC is sued, the Member’s liability is limited to the value of the property itself, and all of the Member’s other assets are protected.

2. As we already pointed out, a LLC is a "pass through" entity for federal tax purposes. This means that Members report profits and losses for the entity on their individual tax returns. Members may also share in the tax deductions available to the LLC. However, depending on your income tax bracket, this tax structure may not be beneficial to you.

3. Another advantage of a LLC is the operational structure. There does not have to be a separation of power among those owning interest in the company and those running the company. In fact, the default assumption of Florida Revised Limited Liability Company Act is that all LLCs are managed by their Members unless otherwise indicated to be Manager managed. This provides an ideal structure for small business owners and even sole proprietors who can limit their liability while still running the Company.

4. In addition, a LLC provides a great vehicle to transfer wealth in estate planning. Real Property may be transferred into a LLC and then interests in the LLC may be gifted on an annual basis while still qualifying for the federal annual gift tax exclusion. In addition, the LLC provides the foundation of a Family Limited Partnership which is a useful tool for transferring family owned business interests to the next generation at a discounted value.

Now, what are the drawbacks of an LLC?

1. Although we do not have income tax in Florida, the paperwork required to maintain an LLC is a concern for some of our clients. There are IRS filing requirements for informational returns even though no tax is reported under the LLC entity. Additionally, the Florida Department of State requirements for annual filings are more cumbersome than simply operating without the LLC.

2. Also, if you are a professional, providing services that have licensing requirements or some sort or certification or registration requirement overseen by the State, like an attorney, a doctor or an accountant, to name just a few, then a simple LLC is not the proper entity to run your business. You must have a "Professional Association" designation, and this type of entity does not limit your liability for professional malpractice.

As with any estate planning vehicle, there is no "one size fits all" that will provide the best plan for everyone. Please give our office a call to schedule an appointment to discuss whether a LLC would suit your specific needs.

So, you have been to see an attorney, you create a comprehensive estate plan, you are done, right?  Just like many aspects of your life, your estate planning is subject to change for a variety of reasons.  Our firm recommends that you sit down and review your entire estate plan on an annual basis, but the time of year is up to you.  Whether it is April (tax season) or December, sitting down to review decision-makers and beneficiaries you have named in your documents is a good habit to fall in to.  Below are some examples that may result in the need to update your documents.  Some events would require your decision to make a change and others would be something that an attorney would determine whether changes are required.

There are numerous life-changing situations that may result in the need to update your documents.  Many of these involve your ever-changing family: did you get married or divorced; did one of your children get married or divorced; did you become a parent or grandparent for the first time or the third time; or did you lose a parent, child or spouse? 

Planning becomes particularly important when you have recently gotten divorced or married, especially in a second marriage situation where you want to provide for your new spouse and children from your previous marriage.  Reviewing your documents may also remind you to take a look at the beneficiary designations you have on your life insurance, annuities or retirement accounts.  If a beneficiary is not changed before you pass away, your ex-spouse may end up receiving funds from your life insurance simply because you neglected to update the beneficiary. 

As a new parent, one item on your checklist should be putting a Will in place to create a trust for your child in the event that both parents pass away.  In addition, you will want to nominate guardians for your minor children in the event that both parents pass away. 

An individual who has just lost a loved one should review his or her documents to determine if the loved one is a decision-maker and/or beneficiary.  In the event that such deceased person is a decision maker, who is his or her alternate and is that alternate person able and willing to serve?  Also, are the alternate beneficiaries who you want them to be?  Again, it is also important to review and update your beneficiary designations when a loved one passes away.  Often times, if there is no back-up beneficiary named on your life insurance, annuities or retirement accounts then that asset must go through the probate process to be distributed to the beneficiaries of your Will.

Did you win the lottery or inherit a substantial amount?  Another trigger for an estate plan review involves a change in your assets.  In the event that your net worth has dramatically increased or decreased, your plan should be reviewed by an attorney to determine whether you need more planning to avoid paying estate taxes or whether your plan can be simplified if the tax planning you have is unnecessary.

Did you move?  Even if you relocated to another state from Florida, your Florida Will may be "probated" as a valid document as long as it was executed in conformity with the laws of the State of Florida.  However, the tax laws in your new state of residence may be different from Florida, so it is important that you see an attorney licensed in the new state to make sure your documents are appropriate.  Have you moved to Florida from another state?  We recommend that you sit down with a Florida attorney to have your documents reviewed.

Another major event that happens every few years are changes in the tax laws.  Again, this is something that your attorney should inform you about if changes will adversely effect your existing plan.  However, if you haven’t looked at your documents in over ten years, it is a good idea to sit down with an attorney because there have been significant changes in the tax laws, namely the federal estate tax exemption in the last five years, that may affect you.

If one of the above events has recently happened to you and your family and you want to make a change to your existing plan or if you have questions about documents from another state or your tax liability, please give our office a call to schedule a consultation.

As developmental issues like autism, down syndrome and attention deficit disorder become more frequently diagnosed in their children, parents and guardians should be concerned about care for their children after they have passed away. In addition, many public benefits plans, which such children may be eligible for, are asset based. Many common estate planning vehicles, if used for these children, will result in the child’s disqualification from programs like Supplemental Security Income (SSI) , Medicaid and Social Security Disability Income (SSDI). The purpose of special needs planning is to create a fund of money to care for a child for his or her lifetime without the concern of disqualification.

There two types of estate planning vehicles, in the form of irrevocable trusts, that provide the proper format for special needs planning. One type of special needs trust is called a "third party" special needs trust because it is created by a person other than the special needs individual with a special set of instructions for use of the trust for the benefit of a special needs individual. The trust provisions state that a Trustee holds any assets inherited by the special needs individual in a separate trust and that those assets are only to be used to supplement the lifestyle of the special needs individual, but that such assets cannot be used to replace benefits which would otherwise be provided through public benefits. This basic structure and language is how the trust prevents the special needs individual from being disqualified from any state or federal disability benefits he or she is receiving. In addition, the trust sets forth the distribution of any remaining assets upon the death of the special needs individual.

The second type of special needs trust is a "first party" or "self-settled" special needs trust. This trust is funded by the special needs individual using his own assets. The most common situation where a self-settled special needs trust is needed is where the individual is receiving a settlement from a lawsuit usually stemming from the cause of his disability. A major difference between the third party and self-settled trusts is that when the disabled person passes away, any funds remaining in the self-settled trust must be used to "pay back" the state for any medicaid benefits provided to the individual during his or her lifetime. Another difference is that a self-settled trust beneficiary must be disabled whereas with a third party trust, the beneficiary does not necessarily have to be receiving benefits or considered disabled at the time the trust is created.

As with any estate plan, every family situation with a special needs child is unique and requires customized planning. Please contact our office to schedule an appointment to discuss your specific situation.

Spendthrift Trusts

Unfortunately, not everyone in the world is responsible with money. Even those who are moneywise can run into bad luck in life which could cause them financial hardship. So when planning your estate, you should think twice about leaving a large sum of money to someone who can’t handle it. For those beneficiaries for whom you have concerns, a spendthrift trust may be an ideal solution.

If a person who is “bad with money”, or who is going through a rough time, gets a large inheritance, odds are that the inheritance will be gone in a matter of a few months or a year or two, with very little to show for it. A spendthrift trust is a trust that is designed to limit a beneficiary’s ability to waste the principal of a trust. The beneficiary of a spendthrift trust is a person who can’t handle money, or is addicted to drugs, alcohol, or another negative behavior. A spendthrift trust could even be used for someone in a destructive relationship.

In a spendthrift trust, a sum of money is set aside in a trust account. The beneficiary is never the trustee of a spendthrift trust. Instead, the trustee can be another family member, a family friend, or even a corporate trustee like a bank. The trustee will spend the money for the beneficiary’s needs or could make payments directly to the beneficiary, as the trust document allows. However, the beneficiary has no right to spend the principal of the trust. The beneficiary also doesn’t have the legal right to pledge the trust as security for a loan.

In some spendthrift trusts, the trustee could have the power to cut off benefits to a beneficiary who becomes self-destructive, such as with the use of drugs or alcohol. The money could then be accumulated for the beneficiary’s use later, or it could be paid to another beneficiary. Another option would be to give the trustee the option to only make payments on behalf of a beneficiary who has become self-destructive, but to withhold cash from that beneficiary.

Spendthrift trusts are a great tool to help potential beneficiaries who cannot handle money for various reasons. However, they aren’t perfect. They may be too strict in situations where the beneficiary may have a legitimate need for more money. If the spendthrift trust isn’t strict enough about what money is allowed to be spent on, that leaves a lot of control in the trustee’s hands, and he may find himself in the difficult position of standing between an erratic beneficiary and his or her money.

If you’re concerned about a particular beneficiary and his or her ability to manage money, be sure to consult with a qualified trust attorney to evaluate whether a spendthrift trust would be an effective tool for your estate plan.

Gun Trusts: Targeted Estate Planning

If you have a gun collection, your estate plan may be missing the mark if it fails to include a specially drafted gun trust. The typical estate plan provides for tax saving strategies, probate avoidance and beneficiary designation of various assets. However, some assets pose additional issues that must be carefully addressed to avoid unintended consequences in the future. Firearms, in particular, are regulated under federal and state laws and demand careful attention from your estate planning attorney.

Your gun collection may include weapons used for sport, self-defense or investment purposes. America’s long history with firearms means your collection may include family heirlooms that have been passed down from generation to generation.

Unlike simple bank account, real property or vehicle ownership changes, transfers of many firearms and accessories are restricted and subject to very specific requirements. For example, under Title II of the National Firearms Act (NFA), the transfer of short-barreled shotguns and rifles, silencers, automatic weapons and certain other “destructive devices” require the approval of your local Chief Law Enforcement Officer (CLEO) and a federal tax stamp. To keep your gun collection in your family, you must ensure that all transfers comply with the National Firearms Act, as well as state laws where you and your beneficiaries reside.

So how do you ensure your firearms seamlessly transfer to your loved ones after you pass on?

By establishing a revocable living “gun trust,” which holds only your firearm collection, you can retain ownership and control of your collection during your lifetime while providing for the disposition of your guns to your intended beneficiaries. During your lifetime, you remain the trustee and beneficiary of the gun trust, and appoint a successor trustee and lifetime and remainder beneficiaries. Because the trust is revocable, you are free to make changes or revoke it at any time.

As with most living trusts, a gun trust enables you to provide detailed instructions regarding the disposition of your assets upon your death. But given the unique challenges associated with transferring firearm ownership, your gun trust is most valuable in helping expedite the transfer of a firearm that is restricted under the National Firearms Act. If you use a gun trust to own and transfer Title II firearms, you are not required to obtain the approval of your local CLEO; the transfer application may be sent directly to the Bureau of Alcohol, Tobacco and Firearms.

NFA-restricted firearms are not permitted to be transported or handled by any other individual unless the registered owner is present – which can present a problem if the registered owner is deceased. However, when owned by a properly drafted gun trust, these weapons may be legally possessed by the trustee, and any beneficiary may use the firearm under the authority of, or in the presence of, the trustee. This greatly simplifies and expedites the transfer, and saves your beneficiaries from any unintended violations of the National Firearms Act – which can result in steep fines, prison, and forfeiture of all rights to possess or own firearms in the future.

Gun dealers often make trust forms available, but these boilerplate documents typically fail to specifically address the ownership of firearms. A properly drafted gun trust will include guidance or limitations for the successor trustee, to ensure he or she does not inadvertently commit a felony when owning, using or transferring the weapons.
 

Family Business: Preserving Your Legacy for Generations to Come

Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.

More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.

• Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
• Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
• Make sure your succession plan includes:  preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
• Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
• Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
• Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
• Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
• Add independent professionals to your board of directors.

You’ve worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.