Estate Planning FAQ
What is probate?
Probate is the legal process of transferring assets from the name of a deceased person to the names of the living heirs/beneficiaries. This requires a formal Petition for Administration to be filed with the court. There are also procedures to provide creditors with notice and ensure that bills are paid, tax returns are filed and assets are distributed in an orderly fashion. Probate is supervised by the probate judge and can take as little as 60 days or as long as a year or more. There are many procedural rules to be followed to ensure that all parties receive notice and are afforded the due process necessary to protect property rights. The rules allow a presumptively reasonable Personal Representative’s fee of 3 percent of the estate assets and a minimum attorney fee of 3 percent of the estate assets, together with charges at the normal hourly rate for extraordinary services. Typical probate costs for formal administration run from $3,000.00 to $5,000.00; however, they can be much more in complicated matters or if there are disputes among heirs or creditor issues. It should be noted that probate only applies to assets titled in the name of the deceased party upon death. Jointly owned property and certain contractual obligations do not require probate.
Does jointly owned property require probate?
No. If property is owned by two persons as joint tenants with the right of survivorship, the death of one party terminates their interest. The surviving party will have the full remaining interest without probate. This also applies to accounts “payable upon death” or held “in trust for” another person. These are common devices used to avoid probate while allowing assets to be passed to a co-owner. In a similar fashion, IRA accounts, life insurance proceeds and annuities with a named beneficiary are all payable by contract, which is another common means to avoid probate. Depending upon the assets of the deceased persons, it may be that some assets pass by joint ownership, some assets (such as life insurance) pass by contract and some assets titled solely in the decedent’s name require probate administration. (Warning: All jointly owned property and other assets passing at death, in addition to the probate estate, are included in a decedent’s taxable estate as defined by complex IRS rules. Just because there is no probate, it does not mean there is no estate tax.)
What is a Will?
A Will is a formal document allowed under Florida law to identify beneficiaries who will receive the deceased party’s assets. The Will also names a Personal Representative; the individual responsible to the court, creditors and beneficiaries for carrying out the deceased’s instructions. In general, a Will must be in writing, signed in the presence of two witnesses and properly acknowledged to be valid. There are helpful provisions regarding bond and the authority to sell real property that should be included in a Will. Florida law allows a “self-proving will” to streamline the probate process. Just because a deceased party has a Will does not mean probate is required. As noted above, a function of the probate is to determine how assets are transferred to the living upon death. Wills are often supported by other documents, such as a Durable Power of Attorney, Health Care Surrogate or a Living Will. A Will is not effective until death and, as noted above, will require a probate administration to effectively transfer assets.
What does the Personal Representative do?
The Personal Representative is a fiduciary usually named in a Will. The Personal Representative has a responsibility to the court, the creditors and beneficiaries of an estate. The Personal Representative will file a Petition for Administration in order to obtain the court’s authority to access the decedent’s assets and records. As a practical matter, the Personal Representative is in charge of protecting all assets, including household furnishings, jewelry and tangible property, as well as real estate, stocks, bonds and money. The Personal Representative will review the decedent’s records and identify known creditors. The Personal Representative will resolve any creditors’ claims and pursue any claims on behalf of the deceased party (such as a wrongful death action or a suit to collect mortgages or other contractual obligations owed to the decedent at death). Once all assets are marshaled and gathered together, creditors’ claims will be determined. After creditors’ claims are determined (including an obligation for income tax and estate taxes, if applicable), the net assets will be distributed to the beneficiaries as set forth under a Will. If a decedent has no Will, a Personal Representative will receive instructions from the court to identify the beneficiaries and make distribution accordingly. The Personal Representative is entitled to receive reasonable compensation, including a presumptively reasonable fee of 3 percent of the assets being administered and reasonable compensation based on time involved in estate administration. The Personal Representative is required to file an inventory of all of the decedent’s assets and typically files a formal accounting at the conclusion of the estate administration unless this requirement is waived by all interested parties.
How is a Will distinguished from a Trust?
A Trust is a complex document that allows an individual to transfer assets out of their individual name into a formal Trust. A Trust is comprised of two components: first, a Trustee who will act to carry out the detailed instructions; and second, the beneficiaries who will receive assets under the Trust. A Trust allows an individual (referred to as the Grantor who creates the Trust) to manage assets after their death. A Trust also avoids concern caused by mental incapacity. In the event the Grantor becomes incapacitated, the Trust instrument identifies the successor Trustee. As a result, upon death or mental incapacity, a successor Trustee continues to manage the assets and there is no need for a formal probate. Since the assets are owned by the Trust and not the individual Trustee, probate can be avoided and asset transfers can be processed quickly. Trust assets remain liable for the decedent’s debts and certain expenses. Another benefit of the Trust is it allows an individual to name a successor Trustee to manage and hold assets until such time as children or other beneficiaries that need protection can mature or otherwise be fit to manage the assets. Typical Trust language will hold distribution from a child until they reach age 25. The Trustee has the discretion to make payments for health care, education and welfare until such time as the beneficiary receives distribution from the Trust. There are also estate tax advantages that, under certain circumstances, can be implemented by use of one or more Trusts.
What does a Trustee do?
The Trustee is a fiduciary named in a Trust instrument. Florida law allows the Grantor (person who creates the Trust) to serve as his own Trustee. A Trustee has a fiduciary duty to the beneficiaries of a Trust to faithfully carry out the instructions as set forth in the Trust instrument. Often, a Trustee is responsible for gathering together the assets, determining creditors’ claims and paying taxes for a decedent where all assets are held in the Trust just as a Personal Representative would do in a formal probate administration. If the Trust instrument requires assets to be held until a beneficiary reaches a certain age, the Trustee is required to invest them in a prudent manner and properly manage the assets. Often Trustees are given discretion to make distributions for such purposes as education. The Trustee would then have the discretion to determine whether education is fulfilled by a beneficiary attending community college or going to Harvard Medical School.
When selecting a Trustee, the Grantor seeks someone who is astute in business practices, trustworthy and able to carry out future decisions in a manner the Grantor would approve. Obviously, if the Grantor has passed away or become incompetent, the Trust instrument provides the overall direction but the Trustee’s discretion is implemented to carry out the Grantor’s intentions. In short, you should find a trustworthy individual who thinks like you and name them as Trustee. Many banks, brokerage houses and trust companies have professional Trustees. While they may carry out the job in an efficient manner, they often charge a fee based on a percentage of the assets or other fee schedule. Many Grantors choose to name family members as Trustee. Typically, they do not charge formal fees; however, care must be taken to be certain they are able to make mature decisions and competently manage complex business transactions.
What about taxes?
In general, estate planning is concerned with two types of taxes: income taxes and estate taxes. Prior law allowed up to $3.5 million (in 2009) (“Exemption Amount”) to be passed upon death without imposing an estate tax. In 2010, there was no estate tax imposed. Presently, the estate tax laws are uncertain but appear to provide up to $5 million as the Exemption Amount. If assets exceed the Exemption Amount, the estate is taxed upon death at an effective rate exceeding 40 percent of the assets over the Exemption Amount. Another exemption is allowed to a surviving spouse such that all assets that pass to a surviving spouse are exempt from taxation. One key element of estate planning is to maximize the potential $5 million dollar exemption amount for the husband and the wife, which will allow a total of $10 million dollars to pass estate tax free. There are a host of other means to minimize or eliminate estate taxes that are beyond the scope of this brief outline.
Income taxes must be paid by the estate or trust after an individual dies. The IRS rules allow certain property to receive a “step up” in basis equal to the fair market value on date of death. In this manner, if real property is purchased for $10,000.00 many years ago and has appreciated to one million dollars, and if the property is sold during the individual’s lifetime, taxes must be paid on $990,000.00 of gain. If the same property is held by the individual through death, the beneficiaries will receive a tax basis equal to one million dollars (fair market value on date of death) and thus substantial income taxes can be avoided. There are rules that apply to lifetime transfers such that typically, if a lifetime gift occurs, the donee receives the donor’s basis in the property.
In administering a taxable estate (or a Trust) an estate tax return must be filed within nine months from the date of death unless this period is extended. The estate must also file a 1041 fiduciary income tax return on income received after the decedent’s death and prior to distribution to beneficiaries. (Warning: The tax laws change and there are detailed regulations. You should consult your tax adviser and not rely upon this brief summary.)
What if a beneficiary is underage?
In Florida, children under the age of 18 are considered minors and incompetent to enter into contracts. Florida Statutes acknowledge the parents as natural guardians of minor children. For any transaction in excess of $15,000.00, a formal guardianship is required even if the child resides with both natural parents.
Complex situations can arise with blended families since a married couple may have stepchildren. A Will can name guardians for minor children. This will not eliminate the natural parent as a natural guardian of a child in the event of divorce. If the named guardian is otherwise qualified, typically the court will follow the deceased party’s instructions. It is not legally necessary for the guardian to be the same individual as the Trustee. Often a Trustee will be named to manage assets until a child reaches age 25 in excess of the age of 18, the age of majority. A compassionate individual who would be a good guardian determining how the child is fed and clothed, what school the child attends and where the child will reside may not be skilled or suited to manage an investment portfolio.
The foregoing is a brief outline of many commonly asked questions. In order to minimize expense of your estate planning, you should prepare a list of all assets, including current fair market value. Typically, this would include assets owned in individual name, assets owned jointly and assets that pass by contract such as, IRAs and life insurance, annuities and other investments. If you have questions, you should bring the original Deed or Contract so the attorney can review this matter and confirm how the asset will pass upon death. If there are special concerns relating to family members or other beneficiaries, you should bring them to the attention of the attorney. By working closely with your attorney, you can craft an estate plan that will give you peace of mind and allow a smooth transition of assets to your loved ones as beneficiaries. Contact our firm to schedule a consultation today.