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Table of Contents
WILLS, TRUSTS AND PROBATE
- What is a will?
- What is a personal representative
or trustee?
- What is probate?
- What is a testate estate?
- What is an intestate estate?
- What is a revocable living trust
and how does it avoid probate?
- What are joint tenancies and how do
they avoid probate?
- What is a bank account held "in
trust for" and how does it avoid probate?
- Do life insurance proceeds avoid
probate?
- Do IRA, 401(k), Keough, Pension, Profit
Sharing and other retirement account proceeds avoid probate?
- What is elective share?
- How does homestead pass upon death?
- What is a pretermitted spouse or
child?
- What is exempt property of a
decedent?
GUARDIANSHIPS
- What is a guardianship?
- What is a durable general power of
attorney?
- What is a declaration of preneed
guardian?
ESTATE TAXES
- What are estate taxes?
PLANNING FOR HEALTH CARE
- What is health care planning?
- What is a health care surrogate or
proxy?
- What is a living will?
ASSET PROTECTION
- What is asset protection planning?
- How should motor vehicles be titled
in Florida?
- How should a married couple hold
assets?
- Should the homestead be held in a
living trust?
- What is a personal liability
umbrella insurance policy?
- How should life insurance be owned?
- How much is protected by the FDIC in
bank accounts?
- How much title insurance should I
have on my real estate?
- What is Medicaid planning?
- What is a prenuptial agreement?
- How can depletion of assets left to
a younger generation be avoided?
OTHER QUESTIONS
- If you have other questions of a general nature that you
would like to see added to this article, please email us at
jim@jamesmartinpa.com.
WILLS, TRUSTS AND PROBATE
1. What is a will?
A last will and testament is
a writing that specifies who is to receive the assets of a
deceased person (the decedent). Of all the legal documents
prepared by lawyers, wills still require the most formality in
signing. Wills not signed in accordance with the requirements of
Florida law are void. Florida residents must sign wills at the
end of the document in the presence of at least two witnesses
who are both present at the same time and place with the
testator (person making the
will). Wills are usually signed in the presence of a notary
public in addition to the witnesses so that the will is
self-proving in case of death. Self-proving wills can be
admitted to probate after the death of the testator without
having the witnesses come to the courthouse.
The testator should keep the original will in a safe place
because it must be presented to the court at the time of death.
A copy of the will may not be admitted to probate (except in
unusual circumstances). Florida has no provision for pre-filing
wills prior to death so the testator should keep the will in a
safe deposit box at a bank or another safe place.
2. What is a personal representative
or trustee?
The personal representative
is the person or company appointed to administer the affairs of
a decedent's estate. The antiquated terms
administrator and
executor are no longer used in
Florida; the court appoints a "personal representative" whether
the decedent died with a will or without one.
The trustee is the person
or company named to administer a trust. The will and trust
should name a close relative, bank, trust company, or Florida
resident as personal representative and trustee, and it should
list several alternates to serve in case any of those named
predeceases the testator. The will may name nonresidents only if
they are the testator's parent or lineal ascendant, child or
lineal descendant, spouse, brother, sister, uncle, aunt, nephew,
or niece, or the spouse, lineal ascendant or lineal descendant
of any of the foregoing.
While this list seems long, there are many relatives who
cannot serve as personal representatives in Florida unless they
are Florida residents. For example, if a married couple names
the husband's nonresident brother as personal representative of
both their wills, Florida law allows the brother to serve as
personal representative for the husband's estate but not for the
wife's. Very few states still have this restriction, so there
have been comments by lawyers suggesting that this law be
changed. This restriction does not apply to trusts: a
nonresident may serve as trustee of a trust in Florida.
3. What is probate?
Florida law requires a probate
proceeding upon the death of an individual if the individual
owns any assets. The probate proceeding is the law's way of
assembling the decedent's assets, paying debts and taxes, and
passing title to the decedent's beneficiaries. Many of the
disadvantages of probate have been eliminated in Florida. For
example, the inventory of assets owned by the decedent is now
sealed from public view, and probate proceedings for estates
under $2,000,000 ($3,500,000 in 2009) must generally be
completed within one year. Nevertheless, probate avoidance is
still desirable in many cases and can be accomplished in a
number of ways.
4. What is a testate estate?
If a Florida resident dies with a will, he or she has died
testate. The will names the
personal representative and beneficiaries of the estate. Making
a will is the means by which an individual determines the
beneficiaries who will inherit
his or her property at death and the
personal representative who will be responsible for
collecting the assets, paying claims and expenses, and
distributing the assets.
To be effective, a will must be filed with the court after
the individual dies and an order admitting the will to probate
must be entered by the court. Thus, the estates of persons who
die with wills must be probated just the same as the estates of
persons who die without wills. The only difference is that those
with a will have the ability to name the beneficiaries who will
receive their property at their death and to name who they
prefer to be the personal representative.
5. What is an intestate estate?
If a Florida resident dies without a will, he or she has died
intestate. Because there is no
will, the law specifies who will receive the decedent's assets,
instead of the decedent's will specifying this.
Generally speaking, the law of intestacy in Florida says that
the following persons are entitled to receive the residue (what
is left after payment of claims, debts, taxes and expenses) of
the probate assets of a Florida resident who dies without a
will:
- If the decedent leaves a surviving spouse but no
children, the surviving spouse is entitled to receive the
residue.
- If the decedent leaves children but no surviving spouse,
the children are entitled to receive the residue.
- If the decedent leaves a surviving spouse and children,
all of whom are the children of both spouses, then the
surviving spouse is entitled to the first $60,000 and
one-half of the remaining residue, and the children share
the other half.
- If the decedent leaves a surviving spouse and children,
one or more of whom are not children of both spouses, then
the spouse is entitled to one-half of the residue and the
children are entitled to the other half.
While the results in the first two cases described above are
probably what everyone would expect, the results in the last two
often are not. If a husband died intestate leaving a wife and
their three minor children, the wife would be required to share
the bulk of the estate with the minor children through a
court-appointed guardianship. This frequently unintended result
can be avoided by the husband and wife signing wills leaving
their assets to the surviving spouse, with a proviso that the
assets pass to the children only if the spouse predeceases.
Florida law provides that the surviving spouse is entitled to
preference in being appointed the personal representative of an
intestate estate. If there is no spouse, then a majority of the
heirs may select the person entitled to preference. In any case,
the court makes the final decision.
Florida intestate estates commence with the heirs or
creditors filing a petition for administration with the court
asking for appointment of a personal
representative.
6. What is a revocable living trust
and how does it avoid probate?
A revocable
living trust is a writing that creates a form of
ownership in which assets originally owned by the grantor of the
trust are legally re-titled in the name of a trustee (who can be
the grantor) who manages the assets for the benefit of the
trust's beneficiaries named in the writing. Creating a revocable
living trust, also called an "inter
vivos trust", is the most effective means of avoiding
probate and guardianship with respect to the trust's assets. It
is safer than using joint ownership to avoid probate because the
trustee named by the grantor
does not personally own the assets of the trust, as is the case
with joint property. The trustee holds title to the assets IN
TRUST for the benefit of the beneficiaries named in the trust so
creditors of the trustee cannot reach the trust assets.
Frequently the living trust names the grantor as the initial
trustee and initial beneficiary. This means that the grantor
both manages the trust assets as trustee and is entitled to the
benefit of the assets as beneficiary for life. However, instead
of naming the grantor as the initial trustee, a grantor may name
a bank, trust company or individual as the initial trustee.
The trust also lists the beneficiaries entitled to receive
the assets when the grantor dies. This part of the trust is
similar to a will's dispositive
provisions (the paragraphs of a will that say who
gets what). The trust also names who will be the successor
trustee after the initial trustee dies or becomes incapacitated.
A trust is created by signing a written trust agreement.
After the trust is created, assets of the grantor must be
transferred to the trust. The trust avoids probate as to the
assets placed in the trust because upon the grantor's death or
incapacity the assets of the trust are owned by the trust and
not by the grantor. Of course, assets which have not been
transferred to the trust and which remain titled in the
grantor's name at death (except for life insurance, retirement
accounts and other assets which avoid probate on their own
through valid death beneficiary designations) are subject to
probate after the grantor's death the same as they would be
without a trust. Therefore, most assets should be placed in
trust if probate avoidance is the primary goal.
However, in the early 1990's, Florida law governing trusts
changed so that after the grantor dies the trustee named in the
trust must notify creditors and others of the existence of the
trust (but not the terms of the trust). For that reason, it is
advisable to establish a probate proceeding for the purpose of
administering the claims process upon the grantor's death.
7. What are joint tenancies and how do
they avoid probate?
Joint tenancies are any form
of ownership involving more than one owner, such as joint
tenancy with full rights of survivorship, tenancy in common, and
tenants by the entirety. Joint tenancies may be held in many
types of assets, including real estate, bank accounts, stocks,
etc.
Assets held jointly with full rights
of survivorship pass automatically by operation of
law to the surviving joint owners and do not require probate.
Bank accounts, stocks, and mutual funds are frequently held as
joint tenants with full rights of survivorship.
It should be noted that joint assets held as
tenants in common do not avoid
probate. Assets in which an individual's name appears as a
tenant in common must be probated.
Assets held by a husband and wife as
tenants by the entirety pass
automatically by operation of law to the surviving spouse and do
not require probate. In addition to probate avoidance, separate
creditors of just one spouse cannot seize tenancy by the
entirety property in Florida (Florida is one of the few states
that recognize this concept, which has added to its reputation
as a debtors' haven.)
One disadvantage of jointly-held property is that probate is
not avoided when the last joint owner dies. Probate will be
required upon the death of the last surviving joint owner.
Another disadvantage of joint ownership is that it
constitutes true ownership. This means that any joint owner can
withdraw, sell or convey his or her interest in the asset
without approval of the original owner (except for tenancies by
the entirety in real property). Adding a child's name to a bank
account as joint owner can constitute a gift to the child and
can be dangerous since the child's creditors could reach those
assets. Similarly, the child's spouse could claim an interest in
the parent's assets jointly held with a child if the child
divorces.
Another disadvantage of joint ownership is that it does not
avoid a guardianship. For example, if a married couple owns a
home and one of them becomes incapacitated, necessitating the
sale of the home to pay medical bills, a guardianship may be
required since one spouse alone cannot sign a deed conveying the
home.
These disadvantages of joint ownership have led Florida
residents to create living trusts to
avoid probate and to avoid the disadvantages of joint ownership.
8. What is a bank account held "in
trust for" and how does it avoid probate?
Bank accounts that are set up "in trust
for" named beneficiaries to whom the balance in the
account shall be paid at death are called Totten trusts and do
not require probate. A Totten trust account owner is allowed to
make withdrawals from the account during his or her lifetime,
which makes this trust different from other types of trusts. One
disadvantage of a Totten trust
is that if the beneficiary dies before the account owner dies,
then probate will be required. Another disadvantage is that a
Totten trust may avoid probate, but it will not avoid a
guardianship and it is not a substitute for a power of attorney.
The beneficiary cannot have any access to the account while the
account owner is alive, even if the account owner is
incapacitated and needs the beneficiary's assistance in
withdrawing funds to pay medical bills. A guardianship or power
of attorney would be required in that case.
9. Do life insurance proceeds avoid
probate?
Life insurance proceeds payable by valid death beneficiary
designation to somone other than the insured's estate need not
be probated. This does not mean that the proceeds avoid estate
taxation. It just means that the proceeds are paid directly by
the insurance company to the beneficiary without going through
probate.
10. Do IRA, 401(k), Keough, Pension,
Profit Sharing and other retirement account proceeds avoid
probate?
The owner of an individual retirement arrangement (IRA), 401(k),
Keough, pension, profit sharing and other retirement account may
designate the beneficiary entitled to receive the account at his
or her death by signing a written beneficiary designation. The
proceeds of the retirement account would then be paid directly
to the beneficiary without going through probate. They are
usually still subject to estate tax, and often income tax as
well, so taxes greatly dilute the value of these assets upon the
owner's death.
11. What is elective share?
Florida law does not require an individual to leave any property
to anyone other than the surviving spouse. Thus, an individual
can cause children and other relatives not to inherit anything
by making a will that omits them. But, there are a few
exceptions to this.
Florida law provides that the surviving spouse is entitled to
take an elective share in an
amount equal to 30% of the elective estate. The determination of
what is meant by "elective estate" is a legal question best left
to an attorney.
12. How does homestead pass upon death?
Florida law also provides that the decedent's
homestead cannot be passed by
will to anyone if the decedent is survived by a spouse or minor
child, except that it can be passed to the spouse if there is no
minor child. If the decedent leaves no will and is survived by a
spouse and lineal descendants, the spouse receives a life estate
and the lineal descendants own the remainder.
13. What is a pretermitted spouse or
child?
If a Florida resident marries after making a will and the will
does not provide for the spouse, the spouse is generally
entitled to a share of the estate as a
pretermitted spouse. This share is equal in value to
the share the spouse would have received if the resident had
died without a will. Thus, it is important to make a new will
after getting married.
Similarly, if a child is born to or adopted by a Florida
resident after making a will and the will does not provide for
the child, the child may be entitled to a share of the estate as
a pretermitted child. This
share is equal in value to the share that the child would have
received if the resident had died without a will. Thus, it is
important to make a new will after a child is born.
14. What is exempt property of a
decedent?
The following exempt property
of a deceased Florida resident is exempt from the claims of his
or her creditors (except for persons having liens on these
items): household furniture, furnishings and appliances in his
or her usual place of abode up to a net value of $10,000, and
all automobiles held in the decedent's name and regularly used
by the decedent or his or her immediate family as their personal
autos. Unless the decedent's will leaves the exempt property to
others, the surviving spouse is entitled to the exempt property.
If there is no surviving spouse, the decedent's children are
entitled to it.
GUARDIANSHIPS
15. What is a guardianship?
Guardianship is to the
living what probate is to the deceased -- a court proceeding to
oversee the rights and property of an individual who is unable
to manage on his or her own. The court may appoint a guardian
for a minor (someone under
the age of 18 years). The minor's parents are often appointed
guardians. The court will also appoint a guardian for a person
who has been found to be incapacitated.
Florida no longer uses the term
incompetent to describe those who are unable, through
mental or physical disability, to care for themselves or their
property.
Guardians must file many papers with the court and must
follow many rules. The court's files are open to public
inspection. The guardian must file annual accountings with the
court, and the court must audit the accountings. These
requirements are intended to protect the
ward (minor or incapacitated
person), but the expense and public nature of a guardianship can
be counter-productive to the ward. For this reason, guardianship
avoidance through the use of more effective estate planning
techniques, such as the living trust,
have become popular.
16. What is a durable general power of
attorney?
One person (the principal)
may give another person (the agent
or attorney in fact) the
power to sign documents, write checks and do other acts for him
or her by signing a written power of attorney. Most powers of
attorney cease to be effective when the principal becomes
incapacitated. However, a durable power
of attorney remains effective when the principal is
incapacitated so the agent can continue to sign documents, write
checks and do other acts for the principal. Thus, a durable
power of attorney may avoid a guardianship. However, all powers
of attorney cease when the principal dies, so a power of
attorney will not avoid probate.
17. What is a declaration of preneed
guardian?
Florida law allows an individual to sign a declaration naming
the persons, banks or trust companies the individual would
prefer to act as guardian of the person and property in case the
individual is determined to be incapacitated. Such a
declaration of preneed guardian
must be signed and filed with the Clerk of Court before becoming
incapacitated. The law also allows a parent to name a guardian
for his or her minor children by filing a
declaration of preneed guardian for minor.
ESTATE TAXES
18. What are estate taxes?
It is important to remember that probate avoidance does not mean
estate tax avoidance. A federal estate
tax return must generally be filed for anyone who
dies owning a total of more than $2,000,000 ($3,500,000 in 2009)
in assets, including such things as joint accounts, IRA's,
401(k)'s, pension and profit sharing plans, real estate, bank
accounts, stocks, bonds, mutual funds, and life insurance. The
first $2,000,000 is generally not taxable because the
unified credit for estate taxes
offsets the tax on about $2,000,000 in assets. (This
exclusion increases to
$3,500,000 in 2009, but in the year 2010 the federal estate tax
is abolished for one year andwhat happens after that is yet to
be seen because the law provides that the estate tax will return
in 2011 to what the estate tax was in 2001.)
Florida has no state estate tax
and no inheritance tax so only the federal estate tax is
applicable to Florida residents. (Florida has no state income
tax for individuals, either.) Of course, if a Florida resident
owns property in other states or countries, then the estate or
inheritance taxes of that jurisdiction may apply.
No estate tax is payable upon assets left to the surviving
spouse outright or in a trust qualifying for the
marital deduction. Therefore,
no matter what the value of the estate, it is possible to leave
the entire estate to the surviving spouse without incurring
estate taxes on the first spouse's death. However, the estate
taxes upon the death of the surviving spouse could be very high:
about one-half of the value of the assets over $2,000,000. (This
assumes the decedent and spouse are U.S. citizens.)
Estate taxes can be reduced in a number of ways. One way is
for each spouse to take advantage of the
exclusion ($2,000,000 for each
spouse dying in 2008 and $3,500,000 for each spouse dying in
2009) by leaving that amount of assets to someone other than the
spouse or to a unified credit trust
for the surviving spouse that would not be included in the
surviving spouse's estate.
Another way is for each spouse to make
lifetime gifts of up to $12,000
per year to one or more persons. Other estate tax reduction
methods include the use of irrevocable life insurance trusts,
charitable trusts, and other types of trusts. These techniques
may be complicated, but they can result in savings many times
greater than their initial cost. However, legal or tax advice
should be obtained prior to entering into any of these
arrangements because their advantages may not offset their
detriments for everyone.
PLANNING FOR HEALTH CARE
19. What is health care planning?
Planning for health care provides a means of dealing with the
possibility of disability. Until relatively recently,
individuals did not have the legal right to name a guardian or
health care surrogate to make decisions about their personal
care. They could create a living trust and name someone to
manage their assets, but they could not name someone to make
their health care decisions. Today, however, Florida residents
have the legal right to make a number of decisions about their
health care, and these rights are constantly increasing by new
laws and court decisions.
20. What is a health care surrogate or
proxy?
Florida allows an individual to name a
health care surrogate to make health care decisions
for the individual in case the individual is unable to make or
communicate a choice regarding a particular health care
decision. The law also allows a health
care proxy to do this if no health care surrogate is
named.
21. What is a living will?
Florida recognizes a statutory form of
living will which can be signed by a person to state
whether or not his or her life should be artificially prolonged
if he or she is incapacitated and has a terminal condition or
end-stage condition or is in a persistent vegetative state and
his or her physicians determine there is no reasonable medical
probability of recovery. Many individuals state that they would
not want life sustained in this situation, but some individuals
prefer to sign a living will specifying maximum treatment as
their preference. Either way, it is the choice of each person to
state in writing his or her preference.
Sometimes a living will is confused with a living trust. They
are quite different legal documents. A
living trust has to do with property; a living will
has to do with health care.
ASSET PROTECTION
22. What is asset protection planning?
A primary financial goal is to earn and retain sufficient assets
to pay for living expenses and medical care for one's lifetime.
Asset protection planning
tries to prevent the loss of family capital through unexpected
events. Dissipation of principal is a concern for many families
today.
23. How should motor vehicles be titled
in Florida?
Motor vehicles should be titled in the name of the principal
driver only. In Florida, everyone whose name appears on a
vehicle title is legally responsible for the negligent acts of
the driver. This is called the
dangerous instrumentality doctrine. A husband should
own his car, and a wife should own hers. Children should own the
cars they drive if they are over the age of eighteen (18) years.
24. How should a married couple hold
assets?
A husband and wife should own their joint property as tenants by
the entirety and not as joint tenants with full rights of
survivorship if their primary goal is to protect their assets
during their lifetime. In Florida the creditors of just one
spouse cannot reach property held as tenants by the entirety,
but they can reach assets held in other forms of joint
ownership. Florida recognizes tenancy by the entirety for both
real property and personal property, but the married couple must
intend that ownership be a tenancy by the entirety. It is wise
for married couples owning property jointly to sign
tenancy by the entirety agreements
as evidence of this intent. This form of ownership also avoids
probate on the death of the first spouse.
25. Should the homestead be held in a
living trust?
Homestead property titled in a living trust might lose the
homestead exemption. In Florida,
homestead property is exempt from the claims of
creditors and also qualifies for a $25,000 tax exemption and a
Save Our Homes cap. If homestead property is placed into a
living trust to avoid probate and guardianship, it might lose
its status as homestead property.
26. What is a personal liability
umbrella insurance policy?
Most auto insurance and homeowner liability policies limit their
coverage to less than a million dollars, but claims exceeding
that amount are not unusual today. Liability claims in excess of
the policy amount must be paid by the insured. A
personal liability umbrella insurance
policy can be obtained from one's insurance agent to
raise the coverage to a higher limit. In addition, one should
ask his or her agent to include
uninsured motorist coverage as part of the umbrella
policy to increase the insured's own protection from uninsured
drivers, of which there are many in Florida.
27. How should life insurance be owned?
The person whose life is insured should be the owner of the
life insurance policy, and the
policy should name a beneficiary other than the estate of the
insured, in order to avoid creditors claiming life insurance
cash value and proceeds for payment of the insured decedent's
bills. In Florida, cash value of life insurance owned by the
insured is exempt from the claims of the insured's creditors. In
addition, creditors of an insured cannot reach the proceeds of
life insurance on the insured if someone other than the
insured's estate is named as beneficiary. However, cash value of
life insurance owned by an individual's spouse or anyone other
than the insured is not exempt from claims of that owner's
creditors and, therefore, can be reached by creditors of the
spouse or other owner of the life insurance. In addition, the
proceeds of life insurance that are paid to an individual's
estate may be reached by the creditors of the individual.
28. How much is protected by the FDIC in
bank accounts?
To maintain Federal Deposit Insurance Corporation
FDIC coverage, one should not
maintain accounts totaling more than $100,000 in any bank. The
FDIC only insures up to $100,000 per person at any bank.
29. How much title insurance should I
have on my real estate?
Title insurance should be
maintained equal to the fair market value of the real estate.
Most people remember to increase
homeowner's insurance coverage when they receive
their annual premium statements, but title insurance premiums
are paid only when the policy is issued (usually when the real
estate is purchased) so most people forget to increase title
insurance coverage. This means that the coverage on their home
for defects in title is limited to the amount stated on the
policy when they bought their home.
30. What is Medicaid planning?
Even if one's assets are substantial, it is possible that future
medical needs or other bills will deplete assets. By using
certain techniques, the individual's assets may remain for the
family's future while the individual's nursing care is paid for
by Medicaid. There are complicated rules that must be followed,
so the earlier planning starts the better. This type of planning
is complicated and time-consuming, but it can result in
substantial savings to the family. Medicaid planning requires
expert legal guidance and should not be tried without advice
from a lawyer since every case is different.
31. What is a prenuptial agreement?
A prenuptial agreement is a
contract entered into by a couple before marriage that sets
forth their financial agreement in case of separation,
dissolution or death. Florida recognizes prenuptial agreements
if a number of conditions, such as full financial disclosure,
are met. Prenuptial agreements are frequently entered into when
either person has children from a prior marriage. Prenuptial
agreements frequently provide that the assets owned by each
person at the time of marriage remain separate assets and that
each person waives any interest in the other's estate or that
each agrees to leave certain assets to the other. Prenuptial
agreements are sometimes modified or even terminated several
years after marriage by mutual agreement of the spouses.
32. How can depletion of assets left
to a younger generation be avoided?
The share of an estate that passes to a person under the age of
18 years in Florida will be held in a
guardianship for minor until the minor reaches the
age of 18, at which time the minor will be paid the entire share
in full. Since some 18 year olds are not financially wise, this
result can be avoided by providing in a will or a living trust
that the share of anyone under a certain age shall be held in
trust until that person attains the desired age.
A typical trust for minors provides that a named trustee
shall hold the minor's share until the minor reaches the age of
30 years. Income on the share is used by the trustee for the
minor's benefit until the minor reaches the age of 21 years;
unused income is accumulated. When the minor reaches 21, the
income is paid to the minor at least quarterly. One-half of the
principal is paid to the minor at the age of 25 years, and the
balance is paid to the minor at the age of 30 years. The trust
provides that the trustee may pay the minor any or all of the
trust principal at any time before the age of 30 if the trustee,
in its discretion, so determines. This gives the trustee much
the same control as the person creating the will or trust would
have had if still alive.
OTHER QUESTIONS
If you have other questions of a general nature that you would
like to see added to this article, please email us at
jim@jamesmartinpa.com.
Updated 1/26/08
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