Estate Planning

Estate Planning

What is Estate Planning? And, what does it involve?

First, an “estate” is everything you own (your home, bank accounts, IRAs, personal belongings, etc.).  So, “estate planning” is the process of putting a plan into place that addresses where your assets go when you die.  But, estate planning is not just about what happens to you after you die.  There is a very important life-time component to estate planning which addresses what happens to you and your assets while you are alive.  A well-designed estate plan will allow you to decide who will control and receive your assets at your death for the least amount of cost.  And, it will protect you and your assets in the event of your incapacity during your lifetime.

So, who needs to do estate planning?  Really, EVERYONE should have some sort of plan in place that is best suited to their individual needs.  There is no “one size fits all”.  And, a failure to perform any estate planning most definitively leads to uncertainty and increased legal expenses.

Most often it is older adults thinking about leaving an inheritance to their children without too much hassle or too much expense.  Yet, families with young children, or especially children with disabilities, really need to consider an estate plan that uses delayed distribution trusts or special needs trusts.  Or, if you and your spouse are concerned about protecting your children’s inheritance if you or your spouse remarries a second (or third) time, then you may need to consider marital trusts.  Does your child have creditor problems or a marriage mate that you really do not like, or is simply no good with money?  Then, you may need to consider a discretionary trust as a part of your estate plan.  In addition, there are other considerations for which legal documents are drafted to meet your “special purpose” estate planning needs.  Once again, your estate plan should be a customized plan suited to your personal objectives and not a “one size fits all” form.

 

Core Legal Documents

What are the types of legal documents to consider?

There are four main documents that an individual or married couple may want to consider when designing their estate plan.  These four main documents can be called the “Core Four”:  A Will; a Revocable Living Trust; a Durable Power of Attorney; and Advance Directives.  No matter which legal documents you select to be a part of your estate plan, each of these should be tailored to meet your personal objectives.  And, don’t forget that in tailoring your estate plan, you may also need to include unique features of “special purpose” estate planning within your “Core Four”.

Last Will and Testament

A Will is a legal document in which you set forth in writing your specific intentions as to:  Who will inherit your assets; and 2) Who will be in charge of disbursing those assets.  Within your Will you will be able to name the individual you choose to be the administrator, or Personal Representative, of your estate’s administration.  You can also name a back-up person if the first person you select is unable to serve; but, we must abide by Florida’s rules on who can serve in these positions.

After determining who you want to inherit your assets (these persons are called beneficiaries), you should also consider the manner in which your beneficiaries will inherit those assets.  For example, if you want your beneficiary to reach a certain age before he/she receives the inheritance without any strings attached, then you can include a trust within your Will saying so.  Or, if your beneficiary is a person with disabilities, then you should have a special needs trust to hold and control these assets.  So, you can have trusts within your Will specifically designed to meet your personal objectives.

In addition to determining how your beneficiary will inherit his/her assets, you may also appoint a guardian to be responsible for your children if they are minors when your Will is probated.  A successor can also be named in case your initial guardian cannot serve.

Some people believe that a Will has its disadvantages.  For instance, the Will only takes effect after you die and serves no purpose if you become incapacitated while alive.  And, did you also know that your Will only controls the assets that are titled in your name alone?  Your Will does not have any control over assets that are titled in joint ownership; and it does not control those assets that have beneficiary designations, such as life insurance policies, annuities, or IRAs.

Most people know that dying without a Will guarantees probate.  What is surprising to many, however, is that dying with only a Will does not avoid the probate process.  If someone dies owning property in his or her name alone, there must be a court process, or probate, to “prove” the will, satisfy creditors’ claims and determine beneficiaries.  Probate can take as little as 4 months to several years to complete, depending on the complexity of the estate or disputes that may arise.

There are ways to avoid probate.  One of the common ways is to create a Revocable Living Trust.

Revocable Living Trust

A Revocable Living Trust is a legal document that, like a Will, specifies 1) Who will inherit your assets; and 2) Who will be in charge of disbursing those assets.  The revocable living trust simply replaces a Will as your core estate plan document.  Unlike a Will, however, a living trust can avoid probate at death, control all of your assets, and provide certain protections for your assets if you become incapacitated while you are alive.

The terms of your revocable living trust can be designed and tailored to meet your personal objectives.  If you want to delay a distribution to a beneficiary until a certain age, you can.  If you want to protect assets from a second (or third) marriage mate if your spouse survives you, you can.  If you want to keep that undesirable in-law from getting your child’s inheritance, you can.  If you want to minimize or potentially eliminate death taxes, you can.  If you want keep from disrupting your disabled child’s government benefits, you can.  These terms, and so much more, can be written into your revocable living trust.

After you have established the living trust, you re-title your assets into the trust’s name so that you no longer own those assets in your individual name.  Regardless of changing the ownership on your assets, you retain full authority to manage, use and direct the control over those assets as trustee of your trust.  This allows probate avoidance for any assets held by your trust; affords ease of transfer or distribution of the trust assets without court involvement; and retains privacy.  While you are alive, since this is your trust holding your assets, you are the beneficiary of those assets until your death. 

The term “revocable” means any instructions you design in the trust, including the ultimate distribution of your assets or the management of the trust assets, can be changed during your lifetime at anytime you wish.  In other words, any and all provisions of your trust, including the trust itself, may be changed or done away with so long as you have the mental capacity to make these changes.

Revocable Living Trusts, like probate, requires an administration of the assets within the trust.  Each process, both probate and trust administration, requires three (3) distinct steps:
1. Gathering, identifying and valuing estate assets
2. Satisfying creditor claims and paying final taxes where applicable
3. Distributing the balance of the estate assets to the beneficiaries or trusts for the beneficiaries’ benefit.
The primary difference between probate and trust administration is that the administration of a trust is a private matter, not open to public court process.

A specialized Will known as a pour-over Will should accompany a Revocable Living Trust in almost all estate plans.  The pour-over Will acts as a safety net.  So, if you fail to have an asset within your living trust when you die, the asset will go through probate under your pour-over Will.  After probate, the asset will be “poured over” into the living trust for its final distribution.

Durable Power of Attorney

A Power of Attorney is a legal document delegating authority from one person to another.  The authorities that are delegated can be broad and general in nature, or the powers may be limited.  The person creating the Power of Attorney is known as the “Principal”.  The person whom the Principal selects as his or her agent is known as the “Attorney in Fact”.  If the person appointed as the agent cannot serve on behalf the Principal, the Principal has the ability to name successors or multiple agents. 

In total contrast to your Will which only takes effect upon your death, a Power of Attorney is in effect only while you are alive and not incapacitated.  Most Powers of Attorney are Durable Powers of Attorney.  The durable nature of the instrument means that the authorities delegated can continue to be exercised during any period the principal suffers incapacity.  This flexibility of allowing another person to act to handle all your personal and financial affairs during temporary or long term incapacity helps avoid the necessity of guardianship.  Again, no Power of Attorney allows your agent to act beyond your death.  When you die, your Durable Power of Attorney dies with you.

Although Florida law recognizes two types of Durable Powers of Attorney, most are called “executory” which authorizes the agent to act immediately, with or without the mental incapacity of the principal being determined. 

The Durable Power of Attorney is probably the most important estate planning document to have.  Single persons as well as married couples alike should have a Durable Power of Attorney.  It helps avoid the expensive process of a court ordered guardianship proceeding, which can cost thousands of dollars and take several months if family members are fighting for control.  In the event of a disability and incompetency of an individual to act concerning his or her own assets, the legal authority already rests with the Attorney in Fact to handle financial matters such as paying bills, changing mailing addresses, selling property, and even applying for government assistance benefits.  As an Elder Law firm, the inclusion of specialized authorities for government assistance planning is critical.  The specific grant of these authorities is lacking in 9 out of 10 forms that can be gotten from the internet or legal software programs.

Powers of Attorney are not only for middle age or older adults.  Let’s not forget about college students!  If your college student is away at university and there’s a situation where you need to communicate with the college or pay a bill for your child over the age of 18, you have no authority to do these things just because you are the parent.  You should have a Power of Attorney from your child also.

Advance Directives

There are two primary advance directives everyone should have known as a Designation of Health Care Surrogate and a Living Will.  The Designation of Health Care Surrogate is a legal document which relates specifically to medical decision making authority.  The person you select will be able to make medical decisions on you behalf during any period of time you are incapacitated or unable to provide informed consent.  Successor surrogates can also be named in the event the first-named surrogate is unable to act.  Such medical decision making authority can include consenting to emergency procedures, filing claims for insurance benefits or public assistance benefits, obtaining medical records, or admitting or transferring an individual from a medical facility.  The surrogate in the Health Care Surrogate Designation may also be the individual to carry out any declaration for end of life decisions.

The Living Will expresses certain procedures to be withheld or withdrawn in the event a person has been diagnosed as suffering from an end-stage irreversible condition, a terminal condition, or a persistent vegetative state.  This diagnosis must be made by the attending or treating physician of the individual and confirmed by another consulting physician before any life prolonging measures will be withheld or withdrawn.  An individual signing this document will be acknowledging that if two doctors diagnose him or her as suffering from a condition where there is no hope of recovery within a reasonable degree of certainty, then life prolonging measures may be withheld or withdrawn.  A surrogate can be named to enforce the provisions of the document itself. 

When you sign a Living Will, you are making these decisions in advance.  You should speak to the surrogate you are appointing and confirm that he or she is willing to following your decisions regarding the withholding or withdrawing of these life prolonging procedures.  Your surrogate’s responsibility is to follow your wishes.

On both the Designation of Health Care Surrogate and Living Will, it is important you put your decisions in writing.  If you lack either of these documents, the authority may fall to someone else by default under Florida’s health care proxy law.  This may lead to negative consequences which can easily be avoided by having these documents in place. 

It is especially important for same sex couples and domestic partners to have advance directives.  It is also important for parents to grant health care decision-making authorities to other responsible individuals for their minor children.  And college students should make out advance directives so that health care professionals will be willing to communicate with parents when there’s a medical emergency.

 

“Special Purpose” Estate Planning Documents

Your estate plan should be a customized plan suited to your personal objectives and not a “one size fits all” form.  This is never more true than when you have matters that are very important to you – unique desires or needs for yourself, your spouse, or your beneficiaries.

So, what are some of these special purpose estate planning documents?  They may include:  enhanced life estate deeds; irrevocable trusts; pet care trusts; special needs trusts; qualifying special needs trusts; creditor protection trusts; estate tax shelter trusts; and marital trusts.

Enhanced Life Estate Deeds (aka Ladybird Deeds)

An Enhanced Life Estate Deed is also known as a “ladybird deed.”  Some people characterize this deed as if you are attaching a beneficiary designation to a piece of real estate for specified persons.  It is similar in nature to a typical life estate deed, but allows for increased flexibility because the remainder beneficiaries do not control any portion of your property until your death.  Upon your demise, the deed allows the property’s ownership to transfer to your remainder beneficiaries without a Florida probate process.  The use of this deed does not affect your constitutional homestead protection from creditors or property tax exemptions either during your lifetime or at your demise. 

Irrevocable Trusts

Irrevocable trusts come in many different “flavors”.  These trusts may be written to accomplish a wide variety of objectives and purposes.  Such objectives and purposes range from asset protection to estate tax shelters to protection of government assistance benefits for an ill spouse or a person with disabilities. 

One of the significant uses for an irrevocable trust is asset protection.  Often these trusts are established in advance as a part of a long term care asset protection plan.  The goal is to place assets into a properly drafted irrevocable trust, which minimizes loss of control while maximizing future eligibility for Medicaid and Veterans benefits.  In this way, you are limiting the erosion of your estate’s assets and ensuring an inheritance to your beneficiaries.

Pet Care Trusts

Although we would like to believe we will always be around to care for our pets, it is important to develop a written action plan, such as a pet care trust, for your pet in the event of your death or incapacity.  Your pet care trust can be a part of your Will or your revocable living trust, or it can be a trust all on its own.  The pet care trust identifies the persons you select to be your pet’s caregivers, as well as holds and distributes a portion of your assets to meet your pet’s future needs during any period you are incapacitated or after you die.

Special Needs Trusts for Persons with Disabilities

A special needs trust is one important element in special needs planning if you have a loved one with disabilities.  If you have a loved one who has a developmental disability or some other disability, then you can use a special needs trust to ensure that the inheritance you desire to leave him or her will used for his or her benefit.   These trusts are frequently called “supplemental needs trusts” as well. 

There are two primary purposes for a special needs trust.  The first purpose is to keep assets for the benefit of your disabled loved one from counting as his or her own assets which could disqualify them for programs of government assistance, such as SSI, Medicaid, as well as subsidized housing and vocational rehabilitation benefits.  The second purpose -- and the one that brings peace of mind to the family – is that the person with disabilities will be able to have extra care (supplemental care) over and above what the government provides.  Not only will your disabled loved one live an enhanced life, but he will never have to be alone because the special needs trust can pay for caregivers for a life-time.

Special needs trusts can be written into your Will or your revocable living trust.  Or, you can establish a special needs trust, now, as a stand alone trust outside of your Will or revocable living trust.  These stand alone trusts allows grandparents or siblings to contribute directly to the trust or specifically name the trust in their own estate plans to provide more funds for the person with disabilities.

Not only persons with disabilities can benefit from having the protection of a special needs trust.  Older adults can also benefit from a special needs trust.  If you are either leaving an inheritance to an aging parent because you have no descendants of your own, placing a special needs trust into your estate plan documents will prevent any possibility of jeopardizing an aging parent’s eligibility for government assistance.

Qualifying Special Needs Trusts

A qualifying special needs trust is a trust established under the Will of a well spouse for the benefit of an ill spouse.  This type of trust must be testamentary (that is, it must be established through a probate) in order to achieve its benefits of asset protection for your surviving spouse.  Assets that flow into a testamentary special needs trust will not be considered resources for government programs of financial assistance, such as Medicaid.

If you have a spouse that is suffering from a physically-disabling illness (Parkinsons, stroke) or mental impairment (dementia, Alzheimers), then you are given this special opportunity under federal and Florida law.  If you predecease your ill spouse, you will be able to protect an unlimited amount of assets for the benefit of your spouse while allowing your spouse immediate Medicaid eligibility.

Discretionary "Spendthrift” Trusts

If you are planning on leaving assets to a beneficiary who is not good with money, has or may have creditor issues, or has a marriage mate you really don’t care for, you may want to consider a discretionary trust that provides protection for spendthrifts, from inheritance-eroding creditors, and from potential divorce by an undesirable in-law.  Distributions are made only at the discretion of the trustee and the beneficiary has little to no rights to demand the assets.  By having these terms in the trust, the beneficiary does not own the trust’s assets; and thus, the assets usually are not subject to creditor’s claims or divorce.

Discretionary trusts are particularly useful to parents of mentally ill persons.  Persons with mental illness may fluctuate between periods of capacity and incapacity their entire lives.  During periods of capacity, government benefits may not be necessary; and a special needs trust may be too restrictive.  The answer is leaving assets in a trust where it is at the discretion of the trusted person you select as trustee to make distributions as may be in the best interest of the mentally ill loved one.

Estate Tax Shelter Trusts

If you have a sizeable estate, you may want to utilize estate tax shelter trusts in your estate planning.  An estate tax shelter trust enables each individual to utilize his or her exemption amount so that less (or none) of the estate’s value is subject to federal estate taxes.  Florida has no separate estate tax.  It merely receives a portion of the federal estate tax. There are basically three ways to reduce estate taxes.

Estate tax shelter trusts can be written into your Will or your revocable living trust.  If in your revocable living trust, then you may achieve the added benefit of avoiding the unnecessary expense of probate.

If you are married, planning is more involved in order to ensure you and your spouse use your estate tax exemptions.  A failure to plan to use the first-spouse-to-die’s estate tax exemption may mean estate taxes are paid upon the second spouse’s death.

We have some brief period of certainty for estate tax exemptions through the end of 2012.  Each individual has a $5 million exemption.  After 2012, we simply do not know.

Marital Trusts: Protection from Future Spouses

Married couples that desire a certain degree of certainty in their estate plan often opt for marital trusts.  Marital trusts allow for the first-spouse-to-die to set aside assets in a trust – a protective bubble, so to speak -- for the sole benefit of the surviving spouse during his or her lifetime.  But, upon the death of the surviving spouse, the marital trust’s beneficiaries have already been designated by the first-spouse-to-die for any assets that have not been used by the surviving spouse.

During the lifetime of the surviving spouse, distributions from the trust can range from being very liberal, or standard -- health, education, maintenance and support of the surviving spouse. 

When a couple’s home is one of the largest assets of the estate, it may be placed in the marital trust.  The surviving spouse may sell the home, opting to downsize; but the excess home’s sale proceeds and the new home are always within the protective bubble of the marital trust. 

With the assets held within the protective bubble of the marital trust, the surviving spouse does not own these assets directly.  In this regard, we limit the access of “Debonair Don” or “Frilly Lilly” (the potential future marriage mate of the surviving spouse).

When There’s No Legal Documents

Failing to accomplish any estate planning most definitively leads to uncertainty and increased legal expenses.  Often, bitter disputes arise among family members when one fails to designate or specify certain persons to handle the administration of the estate.  Even in the absence of disputes, medical or financial decisions during mental incapacity cannot be handled without proper legal documents.  These events lead to probate litigation after you die or guardianship while you are alive.Incapacity and Guardianship