One of the most common mistakes that I as a Florida estate planning attorney see is incorrect beneficiary designation. This is at the root of many unintended consequences that often lead to legendary family disputes. I recently just saw an incorrect beneficiary designation on my spouse’s life insurance. Not from her own fault but due to the life insurance company’s fault.
An area where you need to be sure you get it right is for beneficiaries of qualified plans and life insurance. Qualified plans include IRAs, annuities, 401(k)s and any other plan that qualifies for income tax benefits. You need to be sure you have the proper beneficiary designations in place so these assets go where you intended.
For example, if you leave assets to your “living children” and one of your children pre-deceases you, their children will be cut out of any inheritance that may have eventually come to them through the deceased parent. Most people would want the grandchildren to benefit, so the language must be very specific. It should read to “my children, per stirpes”.
In addition, if you name your children as beneficiaries and they have not reached legal age to own those assets at the time you die and you have not named a guardian, the assets would then have to be administered by a court-appointed guardian, which is an expensive process and may not follow your wishes. The solution would be to set up a trust, naming a trustee to take over until the children are at the age you designate to receive their inheritance.
Finally, it is a good idea to review your beneficiary designations because the wrong person may be listed or the beneficiary designation you filed may have been lost. If you name the wrong person, that person will inherit the asset. If you do no list anyone, the asset will pass through your estate. By having the asset pass through your estate, it could subject the asset to the creditors of your estate whereas the creditors could not reach the asset if it were passed according to the beneficiary designation form.
Does your estate plan need a tune up? As an estate planning attorney in Jacksonville, Florida, I see a lot of old estate planning documents. Below are a series of questions to quickly ask yourself to make sure that your estate plan still does what you originally wanted it to do. If you answer “No” or “I don’t know” to any of the questions, please set up a consultation with us so that we may review your estate plan with you to either tell you what it says or update it so that you have an estate plan that works for you and your families needs.
1. I have a current Health Care Power of Attorney that has the required HIPAA authorizations to permit my spouse, children and/or family to make emergency health care decisions for me in the event I am unable to do so.
2. I have a current Durable Power of Attorney that is less than four years old to permit my spouse or children to handle my financial affairs in the event I become disabled.
3. I have a new Durable Power of Attorney that I have specifically included or excluded certain powers that I want or do not want my attorney in fact to have.
4. I am certain that my current estate plan will minimize possible federal estate taxes at my death, including taxes on my house, life insurance and IRAs.
5. I have taken steps to avoid possible will contests and disputes at my death.
6. I have taken steps to protect my children’s inheritance in the event my surviving spouse chooses to remarry.
7. I have recently checked the beneficiary designations of my retirement plans and life insurance policies, and I am confident that I have not listed my estate or any minor children as either primary or secondary beneficiaries.
8. I have a plan to provide creditor and lawsuit protection for assets passed to my surviving spouse.
9. My current plan provides creditor and lawsuit protection for my children’s’ inheritance.
10. My current plan addresses income tax planning.
11. I have a plan to protect my children’s inheritance from a divorcing spouse.
12. I am satisfied with the persons I named as guardians of my minor children in my current plan.
13. I am satisfied with the persons I named as executor or trustee in my current plan.
14. The persons I named as executor are either a Florida resident or a family member.
15. I am satisfied that my current plan sets up a contingent trust for my minor children.
16. I am aware of all future estate planning fees and expenses; including an understanding of those involved at the time of my death.
17. My children have met with my attorney and fully understand their roles and responsibilities upon my incapacity or death.
18. My Revocable Trust, if any, and Power of Attorneys specify an understandable test to determine my disability.
19. My Revocable Trust, if any, gives instructions for my care and the care of my loved ones if I become mentally disabled.
20. My Revocable Trust, if any, is fully funded so that my family can avoid the delays, publicity and expenses of probate.
21. I and my spouse, if applicable, own everything jointly.
22. I have put my personal property into my Revocable Trust, if applicable.
23. I own property in another state which has already been dealt with in my estate plan.
Again, if you answered “no” or “I don’t know” to any of the above questions, please set up a consultation to discuss your current estate plan and see what can be done to improve it.
Steve Oshins, an attorney out in Las Vegas, recently issued his “3rd Annual Domestic Asset Protection Trust State Rankings Chart”. I get asked often as to where someone should go offshore for asset protection. However, more and more states are coming out with asset protection trusts here in the U.S. Steve annually comes out with his chart of the best asset protection trusts in the U.S. To see the chart, click here.
The top 10, according to Steve, in reverse order are:
7. New Hampshire
6. Rhode Island
2. South Dakota
Some of the factors that go into the chart are whether or not the state has a state income tax; if there is a statute of limitations for future creditors; is there a statute of limitations for preexisting creditors; is there a spouse/child support exception; is there a preexisting tort, creditor or other exception; and is there a fraudulent transfer standard. Each of the above factors are weighted by importance.
The state income tax factor is self explanatory – does the state have a state income tax? The statute of limitations for future creditors and preexisting creditors exemptions have to deal with how long, once the trust is created, must a grantor wait until the assets are fully asset protected. This prevents someone from transferring assets into an asset-protected trust on day 1 and claiming that their assets are exempt from creditors on day 2. This gives creditors 2 years to come forward to make a claim against the assets of the trust, which is fair.
The spouse/child support/preexisting tort exception has to deal with whether a spouse may go into a trust for back spousal support and child support or whether a creditor may go after the principal of the trust. The fraudulent transfer standard determines whether or not the state has a fraudulent transfer statute and whether there is a standard of proof that must be met by someone claiming that a transfer is fraudulent.
Florida, like many other states, has a slayer statute. The statute states that a murderer is not able to receive property or any other benefits by reason of killing someone. So if you kill your parents and you are a beneficiary of their will, you are not able to take your share of their estate under the will. Florida treats you as if you had died before your parents.
The IRS has released a private letter ruling (PLR 201008049) which came to a different result. While Florida law may prohibit an individual who kills an IRA owner from benefiting under the IRA, the letter ruling states that a murder conviction in and of itself does not have the effect of retroactively removing the individual as the designated beneficiary of the decedent’s IRA as of the measuring date. Therefore, an individual convicted of and imprisoned for the murder of the decedent will still be treated as the designated beneficiary of the decedent’s IRAs despite the state law slayer statute treating him as predeceased for purposes of inheriting property from the decedent. The decedent’s life expectancy will be used to calculate required minimum distributions.
An S corporation is a type of tax structure used in many businesses today. To be clear, an S corporation is not a type of business entity. It is purely a taxation election with the IRS. It allows a corporation to be taxed, in most aspects, as a partnership. However, there are certain rules that must be followed in order to qualify as an S corporation. One of the primary rules is who may be an owner of an S corporation.
The S corporation may have no more than 100 shareholders. (A husband and wife and their estates are treated as one shareholder for this test. A member of a family can choose to treat all members of the family as one shareholder for this test. All other persons are treated as separate shareholders.) Further, estates, certain exempt organizations, or certain trusts may also be a shareholder in an S corporation. Only US citizens and resident aliens may be shareholders of an S corporation.
One important type of entity is missing from the list of who may be a shareholder. A traditional IRA is not permitted to be a shareholder of an S corporation under Revenue Ruling 92-73. The rationale is that the beneficiary of a traditional IRA is not currently taxed on the income allocated to the IRA from an S corporation.
Recently, the court came out and said that a Roth IRA also is not allowed to be a shareholder of an S corporation. The court case is the Taproot case and you can read it here.
No, it is not because the Mayan calendar ends in December this year or because of any other catastrophic event. Actually, it is because the current tax laws expire at the end of this year (I guess that could be a catastrophic event for some) and will revert back to their pre-2001 exemptions – $1 million with everything above taxed at a 55% tax rate.
Currently, the gift tax exemption is set at $5 million dollars with anything above to be taxed at a 35% tax rate. As stated above, if Congress and the President cannot agree on any tax plan after the election, the gift tax exemption goes down to $1 million with everything above taxed at a 55% tax rate. President Obama has proposed several times to make the gift tax exemption go to either $3.5 million or decouple the gift exemption from the estate tax exemption and have it go down to $1 million per person. Both scenarios at a 45% tax rate for every dollar above the exemption.
Now is a great time to use that gifting exemption since it is at a $5 million limit. This is the highest that it has ever been and, depending on the outcome of November’s election, it is most certainly going to go lower. You can get a bigger bang for your buck now by making the transfer of assets. Below are more reasons why you should think about transferring assets this year rather than waiting until the future:
1. You are not married but have a long-time partner. If you are not married, you do not have an unlimited amount you can transfer to your partner. However, you can use some of your $5 million credit to transfer assets to them.
2. You may use your $5 million to transfer assets into a trust for your children and grandchildren. These trusts, depending on how they are structured, can provide asset protection for your children.
3. You may use your $5 million to transfer a family business down to the next generation.
It is also important to remember that each person has a $5 million gift tax exemption. So a husband and wife have a total of $10 million they can give now. This sounds much better than a total of $2 million which could very easily be the amount allowed beginning January 1, 2012.
A few other things to remember about gifting:
1. If you gift, the assets transferred have a transferred basis. So if the person receiving the asset then goes and sells it, they will have to pay a larger capital gain (assuming the asset has increased in value).
2. It is unclear as to what will happen to those who use their $5 million exemption once the number goes back down. Will they be grandfathered in?
3. Every dollar you use of your gifting exemption comes off the amount you can leave at death. So if you use all your gifting exemption, you may or may not have any tax-free money to leave at death depending on where the estate tax exemption is at that point.
If you are interested in transferring assets while you are alive now for a larger bang for your buck, now is the best time to do it! Don’t wait because it could cost you a lot in the end.
WARNING WARNING WARNING….life insurance does not (and should not) go through your estate….usually. The reason I say this is based upon an experience I had just yesterday with the surviving children of a decedent.
The decedent passed away in February with a will and a memorial letter attached to the front of it which stated what she would like to have happen with her assets, including the proceeds from a life insurance policy. The will was typical in which it left everything equally to the surviving children. Seems simple right?
The memorial letter stated that the mother wishes to have the home sold and the proceeds split among the 4 daughters. (Important fact: the will was a do it yourself will. These instructions would have been put into the will by a qualified attorney to make sure they were followed.) The letter also stated that she wished to have some of her insurance go to the education of 1 of her grandchildren. The life insurance, however, only went to 2 of the 4 daughters.
After the probate petitions were signed by everyone, one daughter, who did not receive any of the life insurance, asked me if the letter had to be followed and, if so, then she wanted her sisters to deal with her in getting her son’s education taken care of. Her son is 19 and already in college. What I told her was not what she wanted to hear and caused the meeting to go from friendly to horrible and she walked out.
Why? Because the letter and even the will itself, has no legal significance as to how the life insurance proceeds are used. The life insurance never went through the estate so the will has no power. It is not a legal issue. It is a moral issue with the two daughters.
The only time life insurance goes through the estate is if (i) the estate is a named beneficiary, (ii) all the named beneficiaries have passed away, or (iii) there is no beneficiary named. Otherwise, life insurance passes to the named beneficiaries allowing them to use the death benefit anyway they deem fit. Again, this could have easily been avoided by either naming the grandson as a beneficiary to part of it or setting up a trust for the grandson. The good news here is that the 2 daughters are in fact using part of the money according to their mother’s wishes and are dealing directly with the grandson since he is in college to take care of some of his expenses.
There are two types of taxes that must be taken into account when exercising one’s decanting power in a Florida irrevocable trust. The two taxes are gift and estate taxes and also income taxes.
As far as income taxes go, if both the original trust and the new trust are both grantor trusts, then there really is no income tax ramifications to the transfer. IRS Code 643(e) states that a trust distributions generally do not trigger gain unless the trustee of the trust elects to trigger gain.
If the new trust is foreign trust, then the transfer will be deemed to be a sale or exchange of property and trigger all gains as if the property were sold to the new trust. This prevents a trustee from transferring assets to a foreign jurisdiction to avoid having to pay taxes. However, if the new trust is domestic trust and the original trust is foreign, then the trustee must report the transfer of the assets so that the IRS knows the built-in gains coming into the trust for when the assets are eventually sold.
From and estate and gift tax standpoint, if the trustee exercising the decanting power is not a beneficiary, then there should not be any gift or estate tax inclusion issues. If the Trustee must obtain the beneficiaries’ consent prior to exercising the decanting power, the IRS could argue that the beneficiaries retained an incident of ownership over the assets and therefore, the assets should be included in the beneficiaries’ estate. This can be quite tricky!
I’ve been discussing the use of decanting clauses through a Florida irrevocable trust. It allows you to transfer assets from one irrevocable trust into a new irrevocable trust. In essence, allowing you to change your irrevocable trust.
But under Florida law, what exactly do you have to do in order to decant? The process itself is pretty easy.
First, the Trustee must give notice to all the beneficiaries in the first trust that he/she intends on transferring all the assets of the trust into the new irrevocable trust. The notice must be in writing and be given at least 60 days before the actual transfer of the assets. The beneficiaries may also waive this notice requirement in writing.
The next requirement is that the Trustee must file a written statement to be kept with the records of the original trust that he/she is moving all the assets into a new trust. Finally, the Trustee must then transfer all the assets into the new trust. It is as simple as that!
Although decanting is simple to do from a mechanics standpoint, there may be other aspects which make it a more risky aspect of advanced trust planning. The first and foremost is the tax consequences to decanting. That will be the topic of Wednesday’s blog.
My last blog discussed the reasons for having a decanting clause added to your Florida trust. As a Jacksonville estate planning attorney, I am inserting more and more decanting clauses into the Florida irrevocable trusts that I create for clients. However, there are some requirements required under the Florida statute in order for a trustee to pour the assets from one irrevocable trust (“original trust”) into another irrevocable trust (“new trust”).
In the original trust, the Trustee must have the absolute power to invade the original trust’s principal. An absolute power consists of the Trustee’s ability to pay for the beneficiaries’ best interests, welfare, comfort or happiness. If the Trustee can only invade principal for the beneficiaries’ health, education, maintenance and/or support, the trust does not give the Trustee the absolute power to invade trust principal.
The next requirement is that the decanting power cannot be used to defeat a fixed income provision, annuity or unitrust interest set up for a marital or charitable trust. In English, this means that you cannot take the assets from a trust set up for a marital trust and pour them into a non-marital trust. As an example, say the original trust is a marital trust giving the surviving spouse an annual payment of 10% from the trust. You cannot use the decanting power to pour the assets into a new trust that does not provide for a 10% annual payment to the surviving spouse.
The last requirement has to do with the beneficiaries of each trust. The beneficiaries of the new trust must have been a beneficiary of the original trust. So if X, Y and Z are beneficiaries of the original trust and the Trustee has the absolute power to make distributions to X, Y, and Z, then the Trustee may decant to a new trust has provides for the distribution of assets for the benefit of X, Y and/or Z but cannot add a beneficiary A to the new trust. The new trust may also only have X and Y as a beneficiary and leave out Z. You just cannot add a new beneficiary to the new trust, but you can take them out or change the type of distribution from a “shall” distribution to a “may” distribution.
My next blog will discuss the mechanics of how to actually use the decanting clause.