The Duffey Law Firm Blog

Thursday, February 15, 2018

Top Five Non-Tax Reasons Why You Need an Estate Plan

At the end of last year, President Trump signed into law The Tax Cuts and Jobs Act, which is one of the most significant pieces of tax legislation that we have seen in our county over the past few decades. The new law doubles the basic exclusion amount for estate and generation skipping transfer tax, which will be a staggering $11,180,000 (approximately) per person in 2018. Of course, what Congress can giveth, Congress can taketh, and the exclusion amount will revert to $6,000,000 (approximately) after the end of 2025.

So, with the increasing applicable exclusion amount, some people may be tempted to forgo having an estate plan in place. However, this could ultimately be a very pricey mistake for you and your beneficiaries for both tax and non-tax reasons.

This article addresses five critical non-tax reasons why just about every person should have estate planning in place.

  1. To Ensure That Your Intentions are Met

    Estate planning, regardless of the size of the estate, is necessary to establish the beneficiaries and proper division of an estate based on your intent. In Florida, if you die without proper estate planning, the Florida statutes provide for default beneficiaries based upon what the state believes your intentions would be.  In some cases, a client’s testamentary intent is aligned with Florida law. However, in other cases, relying on Florida law can create a disastrous situation, which could lead to a client’s estate being consumed by litigation costs. This is especially true where there are second marriages, family discord, or closely held businesses (see below).  For example, assume a married man passes away leaving his wife and his three children from a prior marriage as heirs. If there is no pre-nuptial or post-nuptial agreement in place, Florida law provides that one-half of the estate will pass to the wife and one-half of the estate will pass equally to the surviving children of the decedent.  This may or may not have been the decedent’s wish. What if the husband intended to leave his wife a smaller percentage of his estate because she was financially comfortable in her own right? What if the decedent planned to devise certain income producing assets to his wife to provide her with sufficient funds to live off, and planned to give other long-term growth assets to his children?  

    Further, a properly drafted estate plan can allow you to appoint those individuals who will have control over your assets after your death. Florida law provides a default without proper planning. Assuming the facts in the above example, if a probate administration is required, Florida law provides that the wife shall have first priority of appointment as Personal Representative. If she declines to act, then the three children shall have priority to act. Depending on the family dynamics, these situations can often present problems. For example, even if the children and the wife have a good relationship, sometimes the spouse is not the best person to fulfill the many responsibilities of being a Personal Representative. Too many times, we have seen this exact situation lead to dissatisfied beneficiaries resulting in litigation against the Personal Representative.  

    An estate plan prepared by a qualified Florida attorney can help to prevent the estate from becoming mired in litigation costs.

  2. Avoidance of Probate with a Revocable Trust

    Many Florida residents have heard horror stories regarding the probate administration process in Florida. Although having to open a probate estate is not necessarily the worst-case scenario, it can be costly and burdensome depending on the facts and circumstances of each case. Probate administrations are overseen by a court, which means that the administration can become tied up in the court system. The person responsible for administering the estate, known as the “Personal Representative,” must file certain documents with the court which may include an estate inventory, estate accounting, and various other pleadings.  Further, if an estate is opened, it is the Personal Representative’s responsibility to send notice of a decedent’s death to each of the decedent’s creditors. Having to go through these processes and file the required documents with the court often delays making the distributions to the beneficiaries. Further, it is generally required (with a few narrow exceptions) that the Personal Representative be represented by a Florida attorney, who is allowed by law to receive reasonable compensation from the estate funds. 

    Certain assets are exempt from probate, such as retirement assets and life insurance policies with properly designated beneficiaries, transfer-on-death (TOD) and payable-on-death (POD) assets, and assets held jointly with rights of survivorship. Assets held in trust at the time of an individual’s death are also exempt from probate.

    Creating and properly funding a revocable trust (sometimes referred to as a “living trust”) can help an individual to avoid probate upon death. A revocable trust is created and funded by a “Settlor” during his or her lifetime and distributed to the trust beneficiaries in accordance with the trust terms after the Settlor’s death without requiring a probate administration to be opened with the court. The person responsible for managing and investing the trust assets is known as the “Trustee.” The Settlor can act as Trustee, and will have the absolute authority to invest, manage, and spend those assets as he or she wishes. Further, the trust can be amended or revoked at any time by the Settlor, as long as the Settlor has mental capacity.

    A qualified Florida attorney should be consulted to prepare and properly fund the revocable trust to ensure that probate is avoided.

  3. Avoidance of Guardianship

    A properly drafted estate plan can help to avoid the appointment of a guardian in the event of long-term or short-term incapacity. Guardianship is a court supervised process in which a court and a panel of experts determine if an individual lacks capacity. If it is determined that the individual is incapacitated, a guardian is selected by the court and is required to file certain financial and other reports until capacity of the individual is restored by the court. As people are living longer than ever, there has been an exponential increase in the need for guardianships in the past decade.

    The creation and proper funding of a revocable trust can help to avoid the guardianship process. Generally, the Settlor of the trust will appoint himself or herself as the trustee of his or her trust during life. If the Settlor becomes incapacitated, the successor Trustee can step seamlessly into the shoes of the Settlor and can invest and manage the trust assets on behalf of the settlor without needing to involve a court.

    Many clients ask if a Durable Power of Attorney can replace the need for a revocable trust in the event of incapacity. In short, while a Durable Power of Attorney will allow an agent to control the client’s finances, it is not nearly as effective as having a living trust. In practice, financial institutions are often reluctant to grant an agent under a Durable Power of Attorney access and authorization over a client’s finances. The use of a revocable Trust is a much more robust and flexible tool for issues arising from long term disability.

  4. Asset Protection for Beneficiaries

    In Florida, the assets transferred to a revocable trust are not protected from the Settlor’s creditors. The assets transferred to a revocable trust are treated as being owned by the Settlor and are subject to the claims of creditors as if the Settlor owned the assets individually. However, if the trust assets remain in further trust after the death of the Settlor, those trust funds may be protected from the beneficiary’s creditors depending on the terms of the trust. For example, lets assume a Settlor creates and funds a trust for his benefit during his lifetime. Upon his death, the trust provides that separate sub-trusts will be created for each of his children. Assuming the trust contains certain provisions, the children’s creditors will not be able to access the sub-trust funds. This protection applies to all creditors including divorcing spouses.    

  5. Planning for Closely Held Businesses

    Over the years in our practice, we have seen an exponential increase in clients with small businesses. Although in many of these cases the client’s largest asset and greatest source of income comes from their business, most clients do not have a buy-sell agreement in place. This is not surprising, as business owners are often too busy focusing on the day-to-day tasks that keep the business growing and thriving. However, every business owner who owns part or all of a business should have, at a minimum, basic estate planning, basic organizational documents, and a buy-sell agreement in place. A buy-sell agreement can establish how a small business will operate in the event of the death, incapacity, bankruptcy, or divorce of one of the business owners. Business owners without a properly drafted buy-sell agreement could face unintended and possibly disastrous consequences as a result of one of these events.  For example, it is possible that a spouse or an heir of a business owner could be given a seat at the table to make decisions regarding how the business should be run. In many cases, the spouse or heir does not have any experience in the business, and it is possible that their goals may not be aligned with the remaining partners. A properly drafted buy-sell agreement can resolve these issues, which will allow the business to continue to grow and prosper even after one of these challenging life events. Further, a properly drafted buy-sell agreement can provide for a succession plan for the business owners, which provides a mechanism for the eventual sale of the business to key employee(s) or to a third party. 

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