Failure to Understand Florida Estate Planning Options.
Most individuals in the United States do not have any formal Estate Plan. Of those that do, most believe that their will controls how their property will be distributed upon their death. People do not realized that the vast majority of all assets will never be evaluated under a Will.
In Florida, our homes are protected by the Florida Constitution and will pass as the constitution provides, unless we get proper joinder of a spouse and make a valid conveyance in a Will. Many bank accounts, life insurance policies, retirement accounts, and brokerage accounts are jointly owned or have payable on death beneficiaries that are named within the styling of the account. These assets, even if specifically mentioned in the will, do not pass to the person named in the will, unless all of the other people on the account have pre-deceased you.
In Florida, only assets subject to probate will pass under an individual's Will.
Specific Devises often Fail & Unintended Consequences.
John's got a divorce just he was in a fatal car accident. His ex-wife's name is still on his bank account, retirement account and a life insurance policy. John changed his will to leave everything to his three children equally. Two of his children are adults and from another marriage. When John dies, his ex-spouse receives the funds in his bank account, retirement accounts, and life insurance policies and his 3 children do not receive the items, even his Will leaves his children everything.
Often we encounter families who have certain assets that they want to go to specific individuals. If the clauses are not drafted properly, they can create devastating results if the assets change or general market conditions cause one to appreciated more or less than the others. There may be some items where this is not an issues, but we often see plans where this is attempted with assets of significant values and there is no contingency for unforeseen circumstances.
Failure to Properly Consider Estate Taxes.
As of February 2010, there is no estate tax. Many individuals think they no longer need an estate plan. Most estate planning lawyers expect the Estate tax exemption to return to levels seen in the past. Whether we will see them at $1,000,000 or $3,500,000 or somewhere in between remains to be seen. We expect the estate tax exemption to change at least one in the next 12 months. Just because there is no estate tax, does not mean that there is not a need to plan. In fact because of the new rules on stepped up basis there is more of a need than ever for many individuals.
Not Properly Avoiding Probate
Probate is how the State of Florida and other states deal with finalizing your estate. The procedure is court supervised and begins with appointing an agent to collect your assets, determine who and how much you own creditors, pay your outstanding bills, and divide what is left per the terms of your Will or under the state's rules. In Florida the cost of probate can be 3% of your assets. If you have a 1,000,000 estate the cost can be $30,000. This is why it is so important to structure your assets to avoid probate. In addition, probate places your information in the public record and can take a year or more to complete.
Is Join Tenancy the Answer to Avoiding Probate?
In Florida when two married people take title to real estate as husband and wife or as Joint Tenants a situation is created that avoids probate when the first spouse dies but not the second. This means that who ever lives longest gets to determine to who and how the asset will be divided. With more than 50% of all marriages ending in divorce, the chance that your spouse's wishes are the same as yours is significantly reduced. In addition, a surviving spouse may remarry and predecease the future spouse. When this happens, the home or other assets will go to some other person's family and not that of your spouse or yourself.
In Florida a couple can deal with this contingency in several ways. The fist is to have one or more trusts own the property and the second is to use a deed to create a break of joint tenancy or a beneficiary upon death designation. Again each of these has its uses and should be discussed with a professional who can evaluate the risks and benefits of each.
Adding Someone Else's Name to the Title or Account.
hen you add someone to an account or deed you are making a gift of an interest in the property. This simple act can create a gift for gift tax purposes, inclusion in their estate, loss of marked up basis upon death, disqualification from Medicaid eligibility, and loss of control over the asset.
The most common occurrences of this happen with property when using life estate (not to be confused with an enhanced life estate) and a deed where someone is added as a joint tenant with rights of survivorship. While it is true that this can avoid probate, the downsides are often so great that it does not make sense.
MProblems with Uniform Transfer to Minors Accounts
The IRS allows you to make gifts to minor's and hold them in an account for their benefit. Unfortunately you cannot name someone else on he account in case the child dies. In addition if the child creates some liability the assets are subject to pay the claims of their creditors. If the child dies, the assets pass under the state's intestate statutes and 1/2 of the money would go to each parent. Often these accounts are setup by one parent after a divorce. Most divorced parents would not like to see money set aside for a child be given to their ex-spouse but it happens all of the time.
A trust can accomplish the same results without the risk of attachment by creditors and without the risks associated with the child's unfortunate death.
We often see deeds that are prepared by from forms or non-lawyers that are incomplete or inaccurately state the person's intentions. Some deeds have clauses that cannot be interpreted by the court and which are stricken from the deed. Often a deed is not executed properly and is invalid. These can be costly mistakes and cause a property to be subject to the claims of creditors as well as require a probate proceeding to transfer the property. If a property is incorrectly given to one child and as a result the other assets are given to different children unintended consequences including unintentional disinheritance can occur.
Not Planning for a Child's Future Divorce.
With divorce rates at a record high and no signs of a decline, there is a better than 50% chance that our children will have one or more divorces in their lives. Without a proper contingency plan, the money we leave to our children could be split between them and a future ex-spouse. Not only is it important to plan for this, but also it is important to discuss this with our children and teach them how to protect themselves from such a common problem. Even the use of a traditional trust will not protect against this unless the trust is properly drafted and the children are educated on how to protect themselves.
I hope you have enjoyed the first set of Common Estate Planning mistakes. We have another 20 mistakes that we will be publishing in the near future.
Additional resources provided by the author
Apple Law Firm PLLC
3733 University Blvd West, Suite 212B
Jacksonville, FL 32217
Tel (904) 685-1200 Fax (904) 212-0678