The first option you consider is to simply add beneficiaries to your financial accounts and other assets. You talk to your stockbroker. He tells you to create an account which is payable on death. Your banker explains you can set up a payable on death account or joint ownership while you are alive. When you carefully review those options, you realize their shortcomings.
Joint ownership means the other owner could clean out the account. Creditors of the other owner might try to do the same. Payable on death accounts might work if the death beneficiary is still alive when you die; but, what if that fails? The account can end up in probate and, if you do not have a Will, who gets it? There might be other problems. You have three children and you might put each of them on a separate asset, all of which are worth about the same. But, those assets might differ in value over time and you might even sell one. Who gets what if any of your children die?
What about a Will? A Will is based on common law we inherited from England. In England, the sovereign owned everything. Land was leased from the king and went back to the king when the tenant died. Over time, the tenants got rights to leave their lease to their oldest son. The “people” gradually got more and more rights to distribute their assets when they died. But, that distribution always had to be with grace of the sovereign.
In Florida, grace of the sovereign means the government. That requires a Will be executed with statutory formalities and go through probate. The testator must sign the Will in the presence of two witnesses and all of them sign in the presence of each other. The Will generally appoints someone to administer the estate, known as a personal representative (or executor in some other states) and goes on to direct how assets are to be distributed. The Will can direct distribution of specific assets to named individuals and should contain what is known as a residuary clause that distributes all remaining assets to one or more beneficiaries.
A Will might accomplish your goal, but you really want to avoid probate to save time, money and even maintain some privacy. That leads you to the living trust, also known as revocable living trust or revocable trust.
A traditional trust is established by placing legal title in one person or entity for the benefit of another. That would not be very attractive to someone who wants to keep and manage their own money. But, in 1965, something of a revolution was started when Norman F. Dacey wrote “How to Avoid Probate.” That book became a nationwide best seller and promoted use of the revocable trust as a way to avoid probate. Dacey proposed a person create a trust under which that person is trustee and beneficiary during that person’s lifetime, with directions that the successor trustee distribute assets to beneficiaries after death. The person retains full power to deal with trust assets, change the trust at any time and even to revoke. The problem with Mr. Dacey’s approach in most states was state law did not allow the same person to be trustee and beneficiary of a trust, because when that happens, the trust ended and there was nothing more than regular ownership. Probate was still needed and if there was no Will, the trust could not be used as a substitute. That changed, as statutes were adopted allowing creation of living trusts and use of those trusts as a Will substitute without probate. Florida has such statutes.
What are the drawbacks to a living trust? You should hire an attorney to draft it and a living trust usually costs more than a Will. But, if you want to make sure your assets are properly distributed, it might be penny wise and pound foolish. The other “drawback” is that you have to transfer assets into the trust so that they are in trust when you die. If you don’t, your assets still go through probate.
Transferring assets is relatively easy, as stockbrokers and banks understand how to transfer assets into a living trust and can easily help. Real property is transferred with a deed, which you should also get an attorney to draft. If you put your homestead in the trust, you still get your homestead tax benefit as long as your trust provides you retain the right to occupy the home.
The biggest mistake most people make when setting up a living trust is not following through on transferring assets into the trust. For that reason, most attorneys also draft a simple Will known as a pourover Will that directs any assets not in the trust be placed in the trust after death. Those assets have to go through probate, but the safety net of the pourover Will helps ensure assets are ultimately distributed in accordance with the trust directions.
What about a power of attorney, you might ask. Can’t I just give one of my children a power of attorney and let them deal with everything? Powers of attorney end with the death of the principal. So, a power of attorney cannot be a Will substitute. Unless the power of attorney is drafted to specifically extend beyond incapacity of the principal (a “durable” power), it also ends if the principal becomes incapacitated.
The primary goal in estate planning is to arrange for distribution of assets after death. Do-it- yourself plans and piecemeal approaches pose problems that are usually not anticipated. The do-it-yourself plans are almost always premised on a presumed order of death and set asset values. That means, do-it-yourself plans are based on a best case scenario. I frequently tell my clients it is my job to worry about it raining on their sunny day. Since the best laid plans often go awry, professional assistance in the estate planning area is highly recommended.
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.