Estate planning is something many put off for years, and in some cases, their entire life. Thinking of one’s mortality is not necessarily appealing, and taking time with an attorney to prepare documents is less than exciting for most. Hence, many defer preparing an estate plan as long as possible.
When someone decides to prepare an estate plan, they are usually driven by the goals of giving to others and making it easy on those others to deal with their estate. Estate planning is an exercise in kindness wherein a person seeks to ensure their wishes to benefit others are carried out as easily and cheaply as possible.
It is often a bump in the road of life that motivates someone to prepare an estate plan. The bump can be illness or loss of a loved one, but just as easily can be good news such as an upcoming vacation or long-distance travel. That often results in a call to the attorney and appointment to draft a Will.
A Will is the tried and true method for disposition of assets after a person is no longer with us. The concept of a Will comes to us from a long lineage in England. Centuries ago, the sovereign King owned everything. Nobleman leased land from the King. At death, the land reverted to the King. Over time, noblemen were given the right to pass their leasehold on to their oldest son. Property rights grew into modern-day ownership, but the concept that one can only give assets after death through grace of the sovereign continues in the background of a Will.
Florida statutes require Wills be in writing, signed at the end by the testator and signed by 2 signing witnesses. Everyone must sign in the presence of each other. When it comes time for probate, a witness to the Will has confirmed he or she witnessed will but that can be avoided if the Will is self-proving. Self-proving means the Will is executed with notary acknowledgment in accordance with statutory requirements.
A Will does not provide for property to pass automatically at death. The Will must be submitted to court and the court appoints a personal representative—known as an executor in most states—to administer the estate. The testator can designate a person or entity in the Will to serve as the personal representative and the court will generally follow that designation. A personal representative in Florida must either be a Florida resident or related by blood or marriage to the testator.
Florida probate must follow statutory requirements and comply with a special set of rules promulgated by Florida’s Supreme Court. Those requirements often delay administration and distribution of assets. One of the requirements is providing notice to all known creditors and publication in the newspaper to reach unknown creditors, all of whom have 3 months to file claims in the probate case. The personal representative must either object to a claim or it is deemed accepted and becomes an obligation of the estate. If the creditor does not file a claim in probate, claims against the decedent are barred. All claims against the decedent are ultimately barred 2 years after death, however, there is an exception, and that is for any debt that is secured by a lien—such as a mortgage. Those liens continue and are enforceable against the encumbered property.
The personal representative is entitled to a fee. For statutes set the presumptively reasonable fee of a personal representative is 3% of the first $1 million of estate assets, 2.5% of the next $4 million, 2%next $5 million and 1.5% thereafter. Statutes set reasonable attorney’s fees based on estate assets with specific fees for small estates that generates about 3% for the first $1 million, 2.5% of the next $2 million, 2% of the next $2 million, 1.5% for all above $5 million up to $10 million, and 1% for all above $10 million. There are also filing fees, publication of notice and other expenses of probate.
There are not only fees involved with probate. There are delays and the process itself requires preparation of documents, court filings and notices. Many want to make it easy on those they want to benefit by avoiding probate. Some try to do this by setting up accounts and joint title in survivorship manner. That can create a lot more problems than it solves.
If children are added as owners to real property, their cooperation will be needed in the sale or mortgage of the property. A person adding their children to the title is sure all will work out because the children are trustworthy and will do the right thing. What if one becomes incapacitated? If a guardian is appointed, the guardian’s role will be to protect the child and the child’s interest in the property as an asset of the child. So, even if the children do the right thing, circumstances may create real problems beyond their control.
Placing children on title may also be a real disservice from a tax standpoint. Placing children on title is a present gift. Recipient of a gift gets the asset as if they bought it for the lesser of gifter’s basis (what the gifter paid for it) or what it was worth at the time of the gift. When the recipient sells the property after the death of the gifter, he or she will pay taxes on the difference between the tax value at the time of the gift and what it sells for. If the property has increased in value substantially since it was initially purchased by the gifter, that tax can be huge. In contrast, property that is inherited at death is treated as if the recipient bought it for what it was worth at the time of the owner’s death. If it is sold shortly thereafter, there will be no gain for tax purposes and no taxes due.
The foregoing problems can arise with do-it-yourself probate avoidance and can happen even when children cooperate fully with their parent(s). Unfortunately, children do not always cooperate and can even be influenced by their spouses or compatriots and some even fall into the abyss of drugs, alcohol or gambling. For those reasons, we recommend use of a living trust, also known as a revocable trust and revocable living trust, to avoid probate and potential for problems with do-it-yourself probate avoidance.
A living trust is essentially a vehicle to avoid probate approved by statutes and the IRS. Assets are transferred to a trust under which the person creating the trust is the trustee. The trust provides that the person creating the trust retains complete control and ability to use the trust assets in any way he or she wants. The IRS calls those trusts grantor trusts and ignores them for tax purposes. The individual or individuals continue to file income tax returns using their social security numbers just like they did before creating the trust. The big difference is at death, the assets in the trust are considered owned by the trust and do not have to go through probate. Death certificate of the person creating the trust authorizes the person appointed to be the trustee after he or she is gone to take office and administer the trust, without having to proceed with probate or court filings. It is as simple as that.
Living trusts can be established by an individual or jointly by a married couple. Choice of separate or joint trusts by a married couple is influenced by a number of factors. If the couple has separate assets and wants to keep the assets separate, separate trusts are preferred. There may be tax reasons to establish separate trusts. The tax reasons have been significantly reduced since the federal estate tax exemption is currently $11.58 million per person, but that sunsets with December 31, 2026, and the tax laws are always subject to change. There are always possible future tax issues that would make separate trusts a better and more flexible plan even if combined assets of the couple fall under the current federal estate tax exemption. That makes discussion with an experienced attorney valuable.
The do-it-yourselfers are unlikely to understand the drawbacks of avoiding probate without good legal advice and generally assume their plan will work. They often fail to consider such important questions as what happens if one of their intended beneficiaries dies before they do? What happens if an intended beneficiary is incapacitated and on government assistance? Do any of their beneficiaries suffer from a problem that would make giving that beneficiary a large gift a bad idea? The effort to avoid probate without additional assistance often proceeds on assumptions that will later prove harmful to the very people the do-it-yourselfer wants to benefit.
Estate planning is an effort by an individual to benefit those he or she cares about. That benefit should include making sure a plan for distribution will carry out one’s intent even if everything does not go as planned. Avoiding probate is part of the plan to benefit the beneficiaries by reducing expense and making asset distribution easy, however, avoiding good legal advice in this area can cause more harm than good for the very people the person wants to benefit.
William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.