Estate planning offers us the opportunity to reach beyond incapacity and death.
There is a normal and natural anxiety about death. Although death is a certainty we share with all living things, most people prefer not to think about it. When preparing an estate plan death can be viewed from multiple perspectives: 1] as the biological end of life, 2] as an emotional response to the end of our involvement in this physical world and the lives of those we love, and 3] as legal rights and responsibilities that continue after our demise. While contemplating our biological end may bring on feelings of emptiness, through estate planning we can project hopes and desires beyond our physical existence.
The law usually deals with facts and not feelings. However, in estate planning feelings and desires are the forces behind the primary decisions. The reasons for our estate plans come from the heart as well as the mind. While other areas of law may focus on a specific problem, estate planning has a holistic approach. A contract for purchase of a home or a lawsuit addresses a single issue, but in estate planning we are concerned with all the people, possessions, and values that define and bring meaning to our lives.
We are each unique with different assets, heirs, concerns, and desires. What is right for one person may not be right for another. Estate planning must be approached from the individual perspective. For answers we need to look to ourselves.
Deciding who should inherit
Inheritance issues usually begin at the passing of both spouses. When the first spouse dies, normally everything goes to the surviving spouse, unless there are children from a prior marriage. The question is: How will property be distributed when both spouses are gone? Should the children be treated equally? What if one of the children has struggled financially while the other children prospered? The parents may have provided the less fortunate child with significant financial assistance over the years. Should that child receive a lesser share at time of death to equalize the distributions? It may also seem appropriate that the less fortunate child be given a greater share at time of death because his/her needs will continue in the future. What if one child is the parent's primary care giver? Should the parent leave more to the child who has sacrificed to care for the parent? When should a child be completely excluded as a beneficiary? Perhaps the parents are estranged from a child or one child may not need the funds because he/she is very wealthy.
Determining whether to hold a beneficiary's share in trust
When children have problems like substance abuse or just cannot handle money responsibly, it may not be wise to directly distribute their inheritance to them. For their own protection, the gift can be distributed to a sub-trust within the revocable living trust or to a testamentary trust provided for in the will. These trusts normally come into being and are funded after the person who is making the gift has passed away.
If a child has creditor or marital problems his/her inheritance can be placed in trust to protect it in case there is a lawsuit or divorce. When the child can reach an asset, generally the child's creditors can as well. For protection, the trust can contain spendthrift provisions preventing creditors from reaching the trust assets. The best protection from creditors is to give the trustee complete discretion on when and how much is distributed to the beneficiary.
If a disabled child is receiving Supplemental Security Income (SSI) and inherits money, the government can claim a right to reimbursement and disqualify the child from future SSI and Medicaid benefits. That child's inheritance could be placed in a "Special Needs Trust" where the child can utilize trust funds without the loss of SSI. Care must be taken in selecting the trustee, for benefits can be lost if the trustee fails to properly administer the trust.
While a grandchild may not initially be named as a beneficiary, a grandchild may become the beneficiary if the grandchild's parent dies. With a younger beneficiary there are two reasons why a trust can be helpful. First, in Florida anyone under eighteen years of age cannot enter into contracts. If not in a trust, funds will need to be managed by a court appointed guardian or a custodian under the Uniform Transfer to Minors Act. Second, even after someone is over eighteen he/she may not have the maturity to handle the money.
Placing a grandchild's inheritance in a trust does not prevent the grandchild from using the funds; it gives the grandparent the ability to specify how the funds are used. Distributions may be restricted to certain expenses, like education and health. There can be a single trust for all grandchildren under a certain age or separate trusts for each grandchild. With a single trust, one grandchild would be able to receive more funds than the others from the trust based on need as determined by the trustee.
Deciding who should settle the estate
Another key issue is who should settle your estate either as Personal Representative (executor) in a will or as successor trustee of a trust. Death can place stresses on the family resulting in confusion and conflicts. Careful consideration should be given to family relationships in deciding who to name to settle the estate. How do the children and other heirs relate to each other, and how might that change once the parents are gone and one child is placed in charge of settling the estate? Should there be co-trustees to help and watch each other? Would it be better to have a non-relative or a financial institution settle the estate?
Planning for Incapacity
Estate planning is also concerned with the loss of capacity. However, there is a difference between aging and losing the ability to function in a normal manner. Initially we might actually improve with age. Psychologists tell us that as we age we increase in: wisdom, sense of humor, acceptance of reality, appreciation of the complexity of life, desire to help others, sense of fairness, and creativity. But sooner or later our physical and/or mental capacity declines either gradually over time or suddenly without warning. It can take different forms, impacting us socially, emotionally, and financially. Failure to plan can stress family relationships and leave us vulnerable to financial exploitation.
While able, trusted individuals should be selected to make medical and financial decisions. These documents can help preserve dignity and avoid the cost and complications of court intervention. Without a plan for the possible loss of capacity, we have no way of controlling what will happen. Ironically, those who put off making plans out of fear for the loss of control are the most at risk of losing control.
At some point the loss of mental capacity will make it impossible to do any estate planning. Even partial loss of mental capacity can open an estate plan to challenges for lack of capacity or undue influence from others.
Working with an attorney
We are more than material possessions and the visit with your attorney entails more than inventorying assets. An attorney is better able to discuss the advantages and risks of available options when he/she understands the client's unique personal perspective. Your attorney needs to appreciate how you feel about relationships and your hopes and fears for the future. If there is a concern about the sensitive nature of the conversation, you will appreciate that discussions with your attorney are confidential and cannot be shared with anyone else without your permission. The attorney's responsibility to protect the confidentiality of information continues even after the client has passed away.
It is best if no one else is in the meeting with the attorney. If a child is at the meeting with the attorney, it raises questions. Does the child want to help because the parent lacks the necessary mental capacity? Is the child unduly influencing the parent? Under Florida Law a will or trust is void if obtained by "undue influence". There is a presumption of undue influence anytime the person exercising the influence: 1] substantially gains as a beneficiary 2] occupies a confidential relationship, and 3] was "active in procuring" the gift, which includes involvement with the attorney.
Estate Planning Documents
As important as it is for your attorney to understand your desires, it is just as important that you appreciate the underlying purposes of the documents used in creating your estate plan. If we want to hammer a nail, we pick up the hammer, not the screw driver. In a similar manner, different estate planning documents accomplish different tasks. Together the documents work to make matters run smoothly with the least amount of cost and inconvenience. With a trust they may include:
For Your Health Needs:
- Health Care Surrogate - Designating someone to make health care decisions
- HIPAA Form – Authorizing release of medical information
- Living Will - Instructions not to be kept alive by artificial life support
For Your Property:
- Naming a Special Trustee in your Living Trust - To manage your property if you become incapacitated.
- Durable Power of Attorney – For those matters that cannot be managed in the Trust, like social security, Medicare, pensions, tax returns, insurance, etc.
For Avoiding Probate:
- The Trust – Described in detail in a separate section on this web site.
- Memorandum of Trust - For banks and stockbrokers, etc.
- The Schedule of Property - List of property transferred to your Trust.
For Funding the Trust:
- Deeds - Transferring real property into the Trust.
- Various transfer forms - For government bonds, accounts with financial institutions, etc.
- Bill of Sale - To transfer tangible personal property to the Trust.
- Pour-Over Will – In case there is property that is just in the decedent's name without any beneficiaries.
Developing an estate plan can be challenging
Human dynamics and the complexity of the law sometimes can make the development of an estate plan a difficult task. Challenges can emerge in diverse ways:
First: Estate planning touches many different issues such as probate, trusts, incapacity, advance health care directives, Medicare/Medicaid, creditors, and taxes. The laws we draw upon were not created by the same people, at the same time, for the same purposes. This can lead to multiple and sometimes conflicting legal options.
Second: The law itself can interfere with our intended plan. For example, a new marriage automatically changes any existing estate plan. Regardless of what the existing estate plan says, the new spouse will receive as a minimum the amount provided for a spouse under Florida Statutes when there is no estate plan. This is called "Intestate Succession". If there are children from a prior marriage, intestate succession provides that the surviving spouse receives one-half of the probate estate.
Even if the estate plan is created after the marriage (unless there is a nuptial agreement) the surviving spouse has the legal right to:
1. a life estate or one-half interest in the home (if just titled in the deceased spouse's name);
2. up to $20,000 in household furniture, appliances and furnishings, plus two vehicles; and,
3. 30% of the rest of the estate, including probate assets, joint accounts with survivorship, payment on death (POD) accounts, transfer on death (TOD) accounts, property in Revocable Trusts, retirement plans, and transfers within one year of death.
Third: Problems can build on each other. When something goes wrong, it may cause a series of other problems. Loss of a spouse can bring isolation and loneliness. This can bring on depression with other health issues. Loss of competency increases the risk of financial exploitation.
Fourth: Life is uncertain. In estate planning we must deal with the unknown. While we know some day we will pass away, unless death is imminent, we don't know how or when. We don't know the sequence of death, which spouse will die first, or if our heirs (children) will survive us. Those individuals we hope will be there to help us and carry out our plans, including our children, may encounter their own unexpected health, family, or financial difficulties.
Fifth: Family relationships can be complex. A prime example is a second marriage with children from a prior marriage.
Sixth: The individuals we would like to rely on may not be honest or responsible.
Ways Property is transfered at Death
There are three basic ways property passes from a decedent to the heirs: 1] through the probate court process 2] with a trust and 3] by the ownership documents (either as a joint owner with rights of survivorship or as a named beneficiary) Before looking at probate and trusts in the next two discussions, we will first consider how property can be transferred directly to a beneficiary. When someone is a joint owner of property with rights of survivorship he/she becomes the sole owner of the property when the other owner dies. However, this arrangement presents some risks:
1] LOSS OF CONTROL:
FIRST, If you can withdraw from a joint account without the other person's signature, he/she likewise can withdraw without yours.
SECOND, With real estate the problem is reversed. The other person must sign a deed or a mortgage with you and therefore has control over what you do with your property.
Generally if a person has rights to your account so do his/her creditors.
3] LOSS OF STEPPED UP BASIS
For capital gains taxes, the profit from a sale of appreciated property is calculated by subtracting the purchase price and other costs (called basis) from the sales price. When you give a portion of your property to someone while you are living they also take your basis in that portion of the property. However, when property is received at your demise it gets a new stepped up basis at the date of death value, reducing capital gains taxes.
4] DISQUALIFY FOR MEDICAID:
If you give away property without receiving full payment, it may disqualify you for Medicaid unless the gift occurred more than five (5) years before seeking assistance.
Some of the problems with joint ownership can be avoided by naming beneficiaries, as with TOD and POD accounts. However, most beneficiary designation forms do not provide for many options. When there are specific bequests; the desire is to have a beneficiary's inheritance held in trust; or complex distribution formulas a Will or Trust may be required.
In our next discussion, we look at the probate process and ask why probate may be required to settle an estate.