Selecting the Proper Estate Planning Device

Posted on 06-03-2016

By: Jeffrey A. Kern and Brian Goossen, Akerman.

An estate plan can be described as a process to protect and maximize a person’s wealth during their lifetime, arrange for financial management and health care decision-making in the event of disability, and transfer assets to, or ensure their continued preservation for, intended beneficiaries upon death, in an orderly and cost-efficient manner.

ESTATE PLANNING INVOLVES BOTH FINANCIAL PLANNING and the implementation of legal documents (such as wills and trusts) to accomplish the above objectives. While financial planning is equally as important as the legal documents, this article will address only the legal issues. To yield the best results, the estate planning practitioner should adopt a team approach with the client’s financial planner, accountant, insurance agent, and other relevant professionals to understand the client’s needs and ensure a coordinated effort (e.g., asset ownership and beneficiary designations, tax returns, etc.).

The planner must consider the effect of both state and federal laws. Federal laws primarily govern federal income and transfer tax consequences whereas state laws in the areas of trusts and wills, family law, real property, contracts, and business law control the legal effect of the documents. Each state has its own rules, and state-specific tax considerations may also be warranted. This article focuses on Florida laws, although planners must be familiar with the laws of other states and countries (or consult with planners in those jurisdictions) when working with clients who have assets outside this state.

The general objectives of the estate plan may include any or all of the following:

  • Maximizing wealth through prudent investing
  • Protecting and managing assets in case of disability
  • Protecting assets from the claims of potential creditors
  • Avoiding probate
  • Minimizing transfer tax, income tax, and expenses of administration
  • Encouraging desired actions by beneficiaries
  • Protecting beneficiaries from outside influences, including creditors, bad marriages, improvident spending, or inability to manage assets
  • Caring for family members with special needs
  • Maximizing a person’s ability to enjoy assets while receiving governmental assistance
  • Optimizing a charitable legacy
  • Preserving privacy

Estate Planning Devices

WILLS

Legal requirements. Many planners begin the estate planning discussion with a will. While the will is only one of many documents and considerations in an estate plan, it is a logical place to start. Wills dispose of their maker’s individually owned assets at death, often through a probate proceeding, and have no effect on assets or property owned in many other forms (e.g., property with a right of survivorship; retirement plans, insurance policies, or annuities; trust assets; life estates; all discussed below) which pass by operation of law or beneficiary designation. If the decedent leaves no valid will, Florida’s intestacy statute mandates the order in which relatives take the decedent’s estate. See Fla. Stat. §§ 732.101 et seq.

Valid wills require a competent testator or testatrix (i.e., the man or woman who makes the will; hereinafter referenced as testator). To be competent, the testator must be of sound mind, meaning that, when the will is made, he or she generally understands: (1) the nature and extent of his or her property; (2) the natural objects of his or her bounty; and (3) the practical effect of the will. See Fla. Stat. § 732.501; see also In re Wilmott’sEstate, 66 So.2d 465, 467 (Fla. 1953); Raimi v. Furlong, 702 So.2d 1273, 1286 (Fla. Dist. Ct. App. 1994).

Wills must be executed in compliance with strict statutory formalities. See Fla. Stat. § 732.502. A will must be signed by the testator or at the testator’s direction before at least two witnesses, and the witnesses must affix their signatures in the testator’s presence. See id. Self-proving provisions, whereby an additional statutory paragraph is separately witnessed and notarized, allow the will to be probated without requiring witnesses to appear to attest to the validity of the will. See Fla. Stat. § 732.503. Because of these formalities, it is unwise to execute a will without an attorney’s supervision.

A will may not be procured by fraud, duress, mistake, or undue influence. See Fla. Stat. § 732.5165. If the estate planner has any reason to suspect that the will may come under attack, additional steps may be taken to help secure evidence of the testator’s capacity and freedom from influence (e.g., a videotape of the signing, a report from a psychiatrist at or near the time of execution, or a more detailed question and answer procedure at the time of signing).

Generally, a will may be used to disinherit one or more heirs. However, in the absence of a valid marital agreement waiving such right, the testator’s spouse may elect against the will to receive 30% of the total estate (including assets passing outside of the will), in addition to homestead, exempt property, and allowances. See Fla. Stat. §§ 732.201 et seq.; see also Fla. Stat. § 732.702(1). Florida allows for creation of an elective share trust, which is funded with property that may be counted toward satisfying the elective share and is for the lifetime benefit of the surviving spouse but provides for the deceased spouse’s intended beneficiaries to receive the remainder following the second spouse’s death. See Fla. Stat. §§ 732.2025(2), 732.2095(2).

The only other form of forced heirship in Florida occurs when the decedent owns a residential homestead (discussed below) and is survived by a spouse or minor child(ren). See Fla. Stat. § 732.4015. In the absence of special planning, the spouse and children receive the homestead. See Fla. Stat. § 732.401.

Disclaimer will. A disclaimer will plan should be considered if a married couple’s estate may in the future exceed the estate tax exemption amount. In the most basic scenario, each spouse provides in his or her will that assets pass outright to the surviving spouse; however, the surviving spouse has the option to disclaim some or all of his or her interest, with any disclaimed assets funding a trust that benefits the surviving spouse without causing inclusion in the surviving spouse’s estate for federal estate tax purposes. While this plan provides a much desired, flexible wait and see approach, complications may arise if the surviving spouse fails to make a qualified disclaimer after the first spouse passes.

Pour over will. A decedent seldom leaves no assets in his or her individual name. Thus, a revocable trust (discussed below) should always be accompanied by a will that distributes individually owned assets to the revocable trust, where all assets may be distributed under one document. Since this will “pours” any individually owned assets into the revocable trust, it is commonly known as a pour over will

TRUSTS

A trust is an agreement between a creator (referred to as the settlor or grantor) and a trustee, where the trustee agrees to hold legal title for (and has fiduciary responsibilities to) the beneficiaries. It is not uncommon that two or more of these roles are filled by the same person (i.e., in a revocable living trust, the settlor is often the trustee and beneficiary). In general, trusts are classified as follows:

Living vs. testamentary. A living trust, also known as an inter vivos trust, is created during the settlor’s life, while a testamentary trust comes into existence after death through the maker’s will or revocable trust. By their very nature, testamentary trusts are always irrevocable since the creator is no longer alive to revoke the trust. In contrast, living trusts may be revocable or irrevocable. Revocable living trusts are created during life, may be revoked or amended, and are commonly used to avoid probate and guardianship proceedings. Irrevocable living trusts cannot be revoked or amended, usually involve gift tax considerations, and are commonly used for estate tax reduction or asset protection against future creditors. In Florida, if a living trust does not provide whether it is revocable or irrevocable, the default rule is that the trust is revocable. See Fla. Stat. § 736.0602(1).

Grantor vs. non-grantor. Income is taxed to the grantor of a grantor trust and to the trust or beneficiaries of a non-grantor trust. Grantor trusts have achieved significant popularity in the last decade as income taxes paid by the grantor reduce the grantor’s estate that may later be subject to transfer tax, essentially allowing a “tax-free gift” of the income taxes paid, while also allowing tax-free sales or exchanges between the grantor and the grantor trust. See Rev. Rul. 2004-64, 2004-27I.R.B.7; Rev. Rul. 85-13, 1985-1 C.B. 184. Whereas revocable trusts are always grantor trusts, irrevocable trusts may be either grantor trusts or non-grantor trusts depending on the particular provisions contained in the trust.

Revocable vs. irrevocable. Revocable trusts may be amended, revoked, or terminated by the grantor, while irrevocable trusts lack these features.

Revocable trusts

Because the Florida probate process tends to be lengthy, costly, and time-consuming, the revocable living trust has emerged as a popular vehicle that substitutes for a will, avoids probate proceedings, and allows for a more efficient and less costly transfer of assets to the decedent’s beneficiaries.

In order for the revocable trust to achieve its purpose of probate avoidance, it must be funded. In other words, the grantor’s assets must be transferred to the trustee of the trust. Many (actually most) grantors of revocable trusts initially serve as sole trustee or co-trustees; in this situation, the grantor transfers assets to himself or herself as trustee. Revocable trusts require the same formalities discussed on the previous page for wills. See Fla. Stat. §§ 736.0403(2)(b), 736.0601.

While probate avoidance is usually a meritorious objective in estate planning, there are situations where court proceedings are desirable (e.g., to bar creditors’ claims after a three-month statutory period instead of the longer two-year period from date of death). See Fla. Stat. §§ 733.2121, 733.710.

Revocable trusts also serve as a vehicle for disability protection in the event of the grantor’s incapacity. Without the proper estate planning documents, an incapacitated person’s assets must be administered in a guardianship where the assets of the incapacitated person (ward) are subject to court supervision. See Fla. Stat. § 744.101 et seq. Like probate, guardianship proceedings are costly and time consuming. However, guardianship can be avoided if the grantor creates a revocable trust that allows a standby trustee to take over if the grantortrustee is determined to be incapacitated under standards set forth in the trust document. Most often, the trust will require affidavits from two examining physicians certifying that the grantor-trustee is no longer capable of managing his or her financial affairs. To avoid this potential hassle, or if the grantor needs immediate assistance managing trust assets, the grantor might instead designate a third party to serve as sole trustee or co-trustee with the grantor. As the term suggests, the trustee should be a person who is trusted implicitly.

Irrevocable trusts

Notably, revocable trusts enjoy no protection from claims by the grantor’s creditors. See Fla. Stat. § 736.0501.

As previously discussed, testamentary trusts are irrevocable, while living trusts may be either revocable or irrevocable and are made irrevocable by so providing in the trust document. See Fla. Stat. § 736.0602(1).

Irrevocable trust assets pass to beneficiaries pursuant to the terms of the trust. Some trusts grant powers of appointment, allowing one or more trust beneficiaries (power holders) to direct appointive property to other beneficiaries of the power holder’s choosing, usually by direction in the power holder’s will. If the power holder does not exercise the power of appointment, then the appointive property passes to the takers in default under the terms of the trust.

Irrevocable trusts have multiple uses in estate planning. Most often, they are created to make lifetime gifts to third parties such as the grantor’s spouse and descendants, thereby removing assets and their future appreciation from the grantor’s estate. To the extent that a transfer to an irrevocable trust for the benefit of a third party exceeds the annual gift tax exclusion, it constitutes a taxable gift. While the grantor could retain certain powers to avoid gift tax consequences, doing so would cause inclusion of the assets in the grantor’s estate for estate tax purposes. See Treas. Reg. § 25.2511-2(b). One negative aspect of excluding assets from the grantor’s estate, however, is that the basis of those assets will not be entitled to a step-up to their fair market value at the grantor’s death. See I.R.C. §§ 1014(a), 1015. Rather, gifted assets generally retain their original cost basis. See I.R.C. § 1015. Thus, if assets have appreciated during the grantor’s life, it would generally be desirable to secure the stepped-up basis to reduce capital gains on a later sale by the beneficiaries. See I.R.C. § 1014(a).

Less often, for asset protection purposes, a grantor will establish an irrevocable self-settled trust for his or her own benefit with an independent trustee. Self-settled trusts are rare in Florida because it has not adopted legislation protecting these trusts from the grantor’s creditors. However, a number of other jurisdictions, including Nevada, Delaware, and Alaska, have adopted legislation that allows grantors to retain discretionary benefits without being subject to future creditors. Indeed, it is likely (though not certain) that these trusts will also avoid inclusion in the grantor’s estate. See I.R.S. Priv.Ltr. Rul. 200944002 (July 15, 2009) (holding that assets of a self-settled trust were not includible in the grantor’s estate under I.R.C. § 2036 even though the grantor was a discretionary beneficiary of the trust). It is unsettled, though, whether a resident of a jurisdiction that has not adopted these laws may take advantage of another state’s favorable legislation simply by creating a trust in that state.

It is well established, however, that irrevocable trusts created in Florida (and most other jurisdictions) for the benefit of third parties can provide maximum protection against the creditors of the grantor and the trust beneficiaries. These so-called spendthrift trusts assist beneficiaries who are poor stewards of wealth, shield beneficiaries from divorcing spouses, and allow beneficiaries with special needs to preserve their eligibility for government benefits. To help ensure asset protection, the trust should provide for an independent trustee, who can make discretionary distributions, in addition to spendthrift provisions, which prevent alienation of a beneficiary’s trust interest. Spendthrift trusts are extremely flexible; for example, they may authorize accumulation (i.e., where the trustee has unlimited discretion to accumulate income or distribute it to or for the benefit of the beneficiary) or set forth staged distributions to the beneficiary at stated ages or life events selected by the grantor. If the beneficiary dies prior to full distribution, the trust may grant a power of appointment or designate alternate beneficiaries to receive the trust assets without the need for probate and, in many cases, free of transfer tax. In Florida, trusts can be dynastic, lasting up to 360 years.

Although irrevocable trusts generally cannot be changed, Florida law does provide certain instances where irrevocable trusts can be modified or reformed, usually with the consent of the trustee and beneficiaries or by court order. See Fla. Stat. §§ 736.0410, 736.04113 (authorizing modification of an irrevocable trust if its purposes “have been fulfilled or have become illegal, impossible, wasteful, or impracticable,” if compliance “would defeat or substantially impair the accomplishment of a material purpose of the trust” due to “circumstances not anticipated by the settlor” or if a “material purpose of the trust no longer exists”), § 736.04115 (permitting modification without regard to the reasons provided in Fla. Stat. § 736.04113 “if compliance with the terms of a trust is not in the best interests of the beneficiaries”), and § 736.0414 (providing for modification or termination of an uneconomic trust). In certain circumstances, Florida law also allows for decanting, which involves the transfer of the existing trust assets to a new trust with similar or different terms. See Fla. Stat. § 736.04117.

Life insurance trusts. A good measure of estate planning with life insurance involves the implementation of an irrevocable life insurance trust (ILIT), which owns one or more policies insuring the grantor so that the proceeds will be excluded from his or her estate. However, as the transfer tax exemption has increased, the need for life insurance trusts to provide liquidity for the payment of estate tax has significantly diminished. Now ILITs are reserved for families in the highest bracket of wealth.

Special needs and Medicaid planning. Planning for a beneficiary with special needs involves protecting the beneficiary through management of his or her available resources, judiciously distributing assets to the beneficiary or applying them for his or her benefit, and ensuring that government benefits are not jeopardized. Because many governmental benefit programs (most notably Supplemental Security Income and Medicaid) are needs based (i.e., in order to qualify and retain eligibility, recipients must fall below certain income and/or asset levels), special needs trusts must be carefully drafted and administered so as to restrict the trustee to making only discretionary distributions that supplement, not replace, government benefits. In addition, trust distributions should be paid directly to vendors and service providers, not to the impoverished beneficiary.

A special needs trust may be established for the beneficiary with his or her own assets, often received through a lawsuit or settlement. The requirements of this so-called first party special needs trust are more stringent and generally include payback provisions (i.e., after the beneficiary dies, the government is reimbursed for benefits paid). Reimbursement will not be required from a third party special needs trust, which is typically established by one or more family members during their lives or at their deaths for the benefit of the special needs person.

In order to qualify for Medicaid benefits based upon a minimum of countable assets, a Florida resident must make transfers at least five years in advance of filing his or her application. A person desiring to establish Medicaid eligibility, whose income exceeds the permissible limit, may establish a Miller trust to receive the excess income, and the government will be entitled to reimbursement after the Medicaid recipient dies.

When it comes to special needs trust and Medicaid planning, it is wise to consult with a specialist, as most traditional estate planners lack any significant knowledge and hands-on experience in this arena.

OTHER FORMS OF ASSET OWNERSHIP

Beyond individual ownership and trusts, there are numerous other ways in which assets may be held that affect the estate plan.

Co-ownership arrangements. Property co-owned by two or more unmarried persons with right of survivorship will pass by survivorship automatically to the surviving joint tenant(s) without the need for probate. If, on the other hand, the asset’s title does not indicate a right of survivorship, then the coowners are tenants in common, meaning that each owner has an undivided percentage share that will pass under his or her will or by intestacy. While survivorship property may offer the advantage of avoiding probate upon the first coowner’s death, the following negative considerations should be carefully weighed: (1) the deceased co-owner cannot control the disposition of his or her interest; (2) the assets are subject to attachment by creditors of the other joint tenants and may be subject to guardianship proceedings in the event of their incapacity; (3) probate will not be avoided in the event of a simultaneous death of all joint tenants; (4) taxable gifts may result from the creation of the joint tenancy if the grantor provides more consideration or owns a larger share; (5) the convenience of this arrangement may be overshadowed by other concerns, for example, where the surviving tenant is legally presumed to inherit the asset but was intended to share proceeds with other beneficiaries, or where the step-up in basis is limited to the decedent’s share of the asset; and (6) the permission of other owners may be required to manage assets during the grantor’s life (e.g., taking out or refinancing a mortgage on real property).

Joint property owned by married persons involves most of the same issues discussed above; however, unless the recipient spouse is a nonresident alien, the marital deduction avoids any gift tax concerns. In addition, absent evidence to the contrary, joint ownership by spouses is usually classified as tenancy by the entireties. See First Nat’l Bank of Leesburg v. Hector Supply Co., 254 So. 2d 777, 779-781 (Fla. 1971); Beal Bank v. Almand and Assoc., 780 So. 2d 45 (Fla. 2001). This classification, which is unique to married couples, provides asset protection for future claims against either spouse (but not both) during the marriage. See id. Accordingly, for clients desiring asset protection, it is best to designate accounts as tenants by the entireties, although (1) such titling will not shield against a joint debt, and (2) asset protection for the debtor spouse ends upon the parties’ divorce or the death of the non-debtor spouse. Historically, one negative feature of entireties ownership between spouses has been the inability of the spouses to engage in conventional marital estate planning where a bypass trust is created on the first spouse’s death in order to take advantage of each spouse’s separate unified estate tax exemption. However, this concern has been largely absolved by the recent enactment of portability, which generally allows the surviving spouse to preserve the deceased spouse’s unused exemption amount. See I.R.C. § 2010(c)(2)(B).

Life insurance. Life insurance proceeds pass to the insured’s beneficiary under the designation on file with the insurance company and are generally not controlled by the insured’s will, unless the insured designated his or her estate as beneficiary or no named beneficiary survives. In most cases, the beneficiary receives the insurance proceeds free of income tax. See I.R.C.§ 101(a)(1). The proceeds will be included in the insured’s estate for estate tax purposes though, unless the policy was owned by a person or trust other than the insured and the insured retained no incidents of ownership. See I.R.C. § 2042.

As noted above, estate planning with life insurance has traditionally involved the implementation of an irrevocable life insurance trust to own the life insurance policy so that the proceeds would be excluded from the insured’s estate. However, with recent increases in the transfer tax exemption, only the wealthiest families will need a life insurance trust to provide liquidity for the payment of estate tax (e.g., avoiding a fire sale of real estate or business). It will be up to the client whether he or she is willing to pay the annual premiums so that assets may pass to future generations free of any transfer tax burden. Generally speaking, lower premiums may be available for married couples who purchase a second-to-die policy.

For more modest estates, life insurance offers a wealth replacement vehicle to support the family in the absence of its breadwinner.

Life insurance can be an excellent tool for those desiring asset protection because both the cash value and death proceeds are exempt from claims of the insured’s creditors, unless the insured designates his or her estate as beneficiary, takes out the policy for the benefit of the creditor, or makes a valid assignment to the creditor. See Fla. Stat. §§ 222.13(1), 222.14. If the proceeds are payable to a trust, careful consideration of the trust terms and selection of trustee will protect the spendthrift beneficiary.

A common technique for couples seeking asset protection is for the couple to own their assets as tenancy by entireties, with the low-risk spouse owning a policy payable on his or her death to a spendthrift trust for the high-risk spouse so that if the low-risk spouse dies first and the entireties protection is lost, it will be replaced by a protected trust for the high-risk spouse.

Long-term care insurance. Unlike health insurance, longterm care insurance is designed to help individuals with chronic illnesses, disabilities, or other conditions involving daily suffering over an extended period of time. Long-term care insurance policies typically reimburse the policyholder up to a predetermined amount to assist with daily activities ranging from eating and dressing to providing skilled care by therapists or nurses. Many factors go into determining the best policy, including the client’s age, health, and income; policy premiums; policy reimbursement maximums; and the duration over which the policy will continue to reimburse the policyholder.

Annuities. Annuities are contracts (usually with insurance companies, but in rare cases, with private individuals or trusts) to pay funds to current and future beneficiaries either on specified dates or in a lump sum. They may be deferred or payable immediately. As with life insurance, annuity proceeds pass to the beneficiary (assuming the annuity does not terminate on death) under the contract and is not controlled by the owner’s will, unless the owner designates his or her estate as beneficiary or no named beneficiary survives. Commercial annuities are generally tax deferred, meaning that they accumulate income but income tax is not due until the proceeds are distributed to the owner or beneficiary. However, this taxfree buildup is not allowed if the annuity is owned by someone other than a natural person (e.g., an irrevocable non-grantor trust. See I.R.C. § 72(u)). Annuities that terminate on death are not includible in the decedent’s taxable estate, as there is nothing to pass to beneficiaries.

Like life insurance, annuities enjoy creditor protection and are often purchased for this reason. See Fla. Stat. § 222.14. Private annuities (i.e., annuities paid by individuals or trusts) are also protected. See In re Mart, 88 B.R. 436, 438 (Bankr. S.D.Fla. 1988). For this reason, estate planners may use private annuities to solve the dual objectives of asset protection and transfer tax reduction.

Qualified plans and retirement accounts. Many clients have substantial assets in qualified accounts, including retirement plans such as 401(k)s and IRAs. These assets pass to a designated beneficiary and are not controlled by the owner’s will unless the owner designates his or her estate as beneficiary or no named beneficiary survives.

Although qualified accounts are tax-deferred, meaning that they are not taxed until they are distributed to the owner or beneficiary, taxes are paid on deposits or conversions to Roth IRAs and Roth 401(k)s. Unless dealing with a Roth, special attention is required when naming beneficiaries since most individuals will prefer to stretch out payments as long as possible to allow income to grow tax-free inside the account. When qualified accounts are payable to trusts, certain rules must be followed to maintain eligibility for the stretchout. See I.R.C. § 401(a)(9); see also Treas. Reg. 1.401(a)(9)-0 through 1.401(a)(9)-9.

For a client who is charitably inclined, designating a charity as beneficiary of a qualified account is often the best strategy, because qualifying charities are exempt from income tax and will enjoy the full account value. After a charity, from a tax perspective, the account owner’s spouse is often the next best choice since a spouse may transfer the account to his or her own IRA in a tax-free rollover, delaying distributions until he or she reaches 70.5 years of age. Ultimately, required minimum distributions are based on the beneficiary’s life expectancy, which all other things being equal, may lead the account owner to designate younger beneficiaries. Finally, the account owner may develop a strategy to leave taxable assets to beneficiaries in lower brackets and non-taxable assets to beneficiaries in higher brackets.

As with life insurance and annuities, qualified plans enjoy favorable creditor protection. See Natalie Choate, Life and Death Planning for Retirement Benefits, ch. 3.2.01 (2011); see also Fla.Stat. § 222.21(2)(a). Significantly, while state laws vary on this issue, the Florida legislature recently updated the statute to explicitly provide that inherited IRAs are exempt from claims of creditors of the owner, beneficiary, or participant of the inherited IRA. See id.; cf. Robertson v. Deeb, 16 So. 3d 936(Fla. Dist. Ct. App. 2009) (holding that inherited IRAs are not entitled to exempt status or creditor protection).

Beneficiary designations. Beneficiary designations determine who will receive an account or policy benefits after the death of the owner or insured. Care must be taken in order to ensure that a client’s beneficiary designation is compatible with the rest of his or her estate plan. For example, if a client wants assets to pass to a child in trust, naming the child as beneficiary will not achieve the client’s goals because the asset will pass outright to the child and may require guardianship if the child is a minor.

Multiple-party accounts. A multiple-party account is an account registered at a financial institution in the name of more than one person. See Fla. Stat. § 655.82(1)(e). Typically, these include Totten trusts, pay-on-death accounts, and joint accounts. Multiple-party accounts usually avoid probate since the assets pass to the surviving account holder for Totten trusts and joint accounts or the named beneficiary for pay-on-death accounts. Nevertheless, these accounts are included in the decedent’s gross estate. See I.R.C. §§ 2036(a), 2038(a)(1).

Gifts to children under the Florida Uniform Transfers to Minors Act. A custodial account is a common method to transfer assets to a minor child who cannot enter into contracts or otherwise effectively manage an inheritance. The Florida Uniform Transfers to Minors Act (FUTMA) outlines the methods of establishing and administering such an account. See Fla.Stat. § 710.101 et seq. A transfer made to a custodial account is irrevocable; the custodian has all the rights, powers, duties, and authority to deal with the property for the benefit of the minor in whom the property is indefeasibly vested. See Fla. Stat. §710.113(2). The accounts are usually titled as “[custodian’s name] as custodian for [minor child’s name] under the Florida Uniform Transfers to Minors Act.” Fla. Stat. § 710.104(1). Under the FUTMA, a minor is defined as an individual who has not attained the age of 21 years. See Fla. Stat. § 710.102(12).

Pay-on-death accounts. Pay-on-death bank and brokerage accounts enjoy similar treatment to joint accounts with right of survivorship, discussed above, since they pass outside of probate to the named beneficiary. See Fla. Stat. § 655.82(3)(a). The major difference is that the beneficiary has no rights in the account until the grantor’s death, and until such time, the account is completely controlled (and revocable) by the grantor. For this reason, pay-on-death accounts are often referred to as Totten trusts or poor man’s trusts. They provide an easy method of passing accounts on the grantor’s death if the grantor is comfortable with the assets passing outright to the named beneficiary, if he or she survives, and is not concerned with the assets being in the grantor’s probate estate should the beneficiary predecease the grantor. See Fla. Stat. § 655.82(3)(b).

Life estates. Life estates are relatively rare in estate planning. They involve ownership of an asset for life (usually the life of the beneficiary), followed by an automatic transfer to one or more remaindermen upon the death of the life tenant (or third party, in a life estate per autre vie).

If a grantor transfers an asset but retains a life interest, he or she has made a gift equal to the actuarial value of the interest transferred to the remaindermen, which is influenced by the grantor’s remaining life. See Treas. Reg. §§ 25.2512-5(d)(2)(ii), 25.7520-1(c)(2).

While life estates avoid probate on the grantor’s death, they are inflexible arrangements, whereby the relative rights and obligations between the life tenant and remaindermen are governed by state common law. Once a life estate is created, disposition of the asset generally requires the consent of both the life tenant and the remaindermen. However, Ladybird deeds (named after Lyndon Johnson, the former president, who reportedly implemented this arrangement for his wife, Ladybird) allow for the sale or disposition by the life tenant without joinder of the remaindermen.

The circumstances under which a life estate might appeal to a client will almost always indicate the desirability of creating a trust. A trust will satisfy the purposes of a life estate while providing greater flexibility in the use of the subject property. A trust can provide for contingencies, such as the life tenant’s illness, the circumstances under which a family residence can be sold, what use can be made of the sale proceeds, and whether the proceeds can be reinvested in another residence. Even if the trust does not provide for a particular contingency, it will be easier to invoke the court’s aid in fashioning an appropriate response when the property is held in trust rather than in a life estate.

Family entities. There are many reasons why families often use limited partnerships, corporations, and/or LLCs to hold and manage their assets.

First, the segregation of a business or commercial real estate in a family entity should shield the family members’ personal assets from the claims of creditors who are allegedly harmed by the family asset, provided that the family complies with legal formalities and the entity is respected in its dealings with the public. This is known as firewall protection because it insulates creditor claims from spilling over to other family assets. In addition, partnerships and LLCs with more than one member limit creditors of the entity to a charging order, which protects the entity owners from foreclosure of business assets and restricts the creditor to receiving distributions as they may otherwise be made by the general partner or the manager. See Fla. Stat. §§ 620.8504, 605.0503.

Second, family entities have historically been utilized to reduce transfer taxes on the theory that ownership of the entity cannot be readily traded on an established market, nor can a minority owner control the entity; therefore, the owner is entitled to valuation discounts. See Rev. Rul. 93-12, 1993-1C.B. 202. The IRS has challenged these discounts in the past and is now reportedly formulating rules to limit this advantage to taxpayers.

Other advantages of family entities include (1) allowing the grantor to transfer benefits to other family members while retaining control over business decisions, investments, and distributions; (2) pooling multiple family members’ investments to obtain the investment advantages available to larger households; (3) involving all family members in the decision-making process for family investments; (4) safeguarding beneficiaries from improvident use of the family assets; and (5) consolidating assets into one entity for ease of transfer.

Lifetime gifts. Gifts to family members have historically served an important role in estate planning. Aside from transfer tax considerations, clients may wish to give gifts for one or more of the following reasons:

  • To shift income tax to family members in lower tax brackets
  • To permanently set aside funds for family members for important events, including college education, marriage, birth of a child, or starting a business
  • To shield the gifted amounts from creditors
  • To assist a family member in financial need
  • To avoid challenges to a will or trust
  • To currently satisfy charitable goals

When counseling a client about lifetime gifts, the estate planner must caution him or her that gifts of appreciated assets will be denied the step-up in basis that would otherwise be available if assets were inherited, rather than gifted.

Durable powers of attorney for property management. The Florida durable power of attorney is an alternative to the revocable trust for dealing with incapacity and avoiding guardianship. These powers, which must be immediately exercisable if executed on or after October 1, 2011, survive the incapacity of the person giving the power (the principal) and allow the named agent to deal with the assets of the principal. See Fla. Stat. §709.2101 et seq. Even when a client has a revocable trust, this will not obviate the need for a power of attorney since the revocable trust applies only to assets titled in the name of the trust. Trustees have no authority over ministerial acts like signing tax returns, applying for government benefits, or representing the principal in litigation.

Since durable powers of attorney that appoint an agent other than the principal’s parent, spouse, child, or grandchild are ineffective once incapacity proceedings have been commenced by a court (see Fla. Stat. § 709.2109(3)), some practitioners recommend executing a declaration of preneed guardian to guide the court in appointing a guardian. See Fla. Stat.§ 744.3045(1). Unless the preneed guardian is found to be disqualified under the law, a rebuttable presumption arises that the preneed guardian is entitled to serve as guardian, and he or she will assume the duties of guardian immediately upon an adjudication of incapacity. See Fla. Stat. §§ 744.3045(4), 744.3045(5).

Living wills / designations of health care surrogate. A complete estate plan should contain a health care advanced directive, including designation of a health care surrogate who is authorized to make medical decisions if the principal loses capacity, thus avoiding the need for a guardianship of the person. See Fla. Stat. §§ 765.101(1), 765.201 et seq. Additionally, a living will should be prepared to express the principal’s instructions concerning life-prolonging procedures. See Fla. Stat. §§ 765.101(13), 765.301 et seq.

Disclaimers. A disclaimer is a beneficiary’s “refusal to accept an interest in or power over property.” Fla. Stat. § 739.102(5). Disclaimers can provide an effective means of sidestepping an inheritance in favor of an alternate beneficiary with a greater need, a smaller estate, a lower tax bracket, or an estate that is less prone to creditor claims. To ensure that this strategy is effective, care must be taken to execute a qualified disclaimer in the manner required by federal and state law. See I.R.C.§ 2518; Fla. Stat. §§ 739.101 et seq.

Homestead. Florida makes special provisions for homestead (i.e., the owner’s principal residence). These provisions limit the right to dispose of the residence by will or lifetime transfer under certain conditions, allow certain exemptions from real estate taxes, and provide asset protection against claims. See Fla. Const. Art. X, § 4(c); Fla. Stat. §§ 196.031, 193.155, 732.226.

In general, the homestead is not subject to disposition in the owner’s will if he or she is survived by a spouse or minor child(ren), absent a valid spousal waiver if there is no minor child. See Fla. Stat. § 732.4015. Rather, the principal residence passes to the spouse outright if there are no descendants; to the spouse for life, with a vested remainder in the descendants per stirpes, unless the spouse elects to take a 50% undivided interest in the residence; or to the children per stirpes if there is no spouse. See Fla. Stat. § 732.401. Notwithstanding the foregoing, this statute does not apply to property owned by the entireties or as joint tenants with right of survivorship. See Fla. Stat. § 732.401(5).

A lifetime transfer of the homestead requires the spouse’s signature on the deed. See Fla. Const. Art. X, § 4(c).

Real estate tax exemptions available to the homestead include an exemption from a small portion of real estate tax and a limitation on increases in real estate taxes in any given year. See Fla. Stat. §§ 196.031(1), 193.155.

Significantly, the homestead is not subject to attachment during the lifetime of the owner or the owner’s qualified heirs (based on closeness of family relationship) who inherit the homestead. See Fla. Const. Art. X, § 4(a)-(b).

Failure to understand these rules presents a trap for the unwary.

Considerations Regarding Assets in Other Jurisdictions

As a general rule, the estate planner should confine his or her practice to residents of the jurisdiction in which he or she is licensed. State laws governing the disposition of a person’s assets are in large part based on residency. Accordingly, Florida laws governing wills and probate, as well as trusts and other entities, apply to Florida residents. For Florida residents who own assets in other jurisdictions, Florida laws generally apply to intangible assets (i.e., stocks, bonds, and closely held business interests), whereas the laws of those other jurisdictions will generally govern real property and tangible personal property situated therein. Similarly, in a probate proceeding, jurisdiction is based upon the decedent’s residence (domiciliary probate), but the disposition of property located in other jurisdictions is granted based upon an ancillary probate that incorporates and is governed by the terms of the decedent’s will or intestacy statutes. Since residency is not always clear, the estate planner should gather the necessary facts to make this determination at the beginning of the engagement.

The practitioner should be certain to review assets located in other jurisdictions and ensure that they are integrated with the client’s overall estate plan. Whereas the majority of states, including Florida, have adopted a common law property regime, a significant minority of other jurisdictions are community property states where spouses share equally in all assets acquired during their marriage. Community property assets generally do not change their character simply because the clients now reside in Florida. In some cases, it may be beneficial for the property to retain its character as community property. In other cases, it may be best to transmute the community property to non-community property.

Assets owned outside of the United States also warrant consideration. As each foreign jurisdiction has different rules, it is recommended that the client consult with local counsel in the jurisdiction where the assets are located.

Conclusion

Estate planning requires a broad knowledge of wills, trusts, probate, taxes, property laws, marital laws, and laws relating to family-held businesses. No good estate plan is complete unless and until it is properly implemented. This will require careful coordination of the client’s assets and solid communication with the client’s team of professional advisors to ensure that the client’s wishes will be carried out.

For additional coverage of Florida estate planning, please review the complete topic in the new Lexis Practice Advisor Florida Business & Commercial module, available later in June.


Jeffrey A. Kern is Of Counsel in Akerman’s Miami office. His practice includes estate planning, asset protection planning, and all aspects of administration of estates and trusts. Brian J. Goossen is an associate in Akerman’s Tax Practice Group. He has experience with all facets of estate planning and estate administration, as well as business succession planning for family-owned entities.