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Estate Planning

There are many legal strategies involved in Estate Planning, including Wills, Revocable Living Trusts, Irrevocable Trusts, Durable Powers of Attorney, and health care documents. New clients often say that they do not have an estate plan. Most people are surprised to learn that they actually do! In the absence of legal planning, their estate will be distributed after death according to Florida’s laws of intestacy. Of course, this may not be the plan they would have chosen. A properly drafted estate plan will replace the terms of the State’s estate plan with your own. It will also minimize taxes and other estate cost share and important consideration.

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Your Last Will and Testament

Your Last Will and Testament is just one part of a comprehensive estate plan. If a person dies without a will they are said to have died “intestate” and state laws will determine how and to whom assets will be distributed. Some things you should know about wills:

  • A will has no legal authority until after death. So, a will does not help manage a person’s affairs when they are incapacitated, whether by illness or injury.
  • A will does not help an estate avoid probate. Probate is the court-supervised process of transforming title from a decedent to their heirs. A will is a legal document submitted to the probate court, so it is basically an “admission ticket” to probate.
  • A will is a good place to nominate the guardians (or back-up parents) of your minor children if they are orphaned.  All parents of minor children should document their choice of guardians.  If you leave this to chance, you could be setting up a family battle, and your children could end up with the wrong guardians.
  • A will allows you to select your Executor (“Personal Representative”) who will carry out your wishes during the probate. Otherwise you leave this to chance.

Trusts: Revocable Living Trusts, Irrevocable Trusts, Testamentary Trusts, Special Needs Trusts

Trusts come in many “flavors”. They can be simple or complex, and serve a variety of legal, personal, investment or tax planning purposes. At the most basic level, a trust is a legal entity with at least three parties involved: the trust-maker, the Trustee (trust manager), and the trust beneficiary. Often, all three parties are represented by one person or a married couple. In the case of a Revocable Living Trust, a person may create a trust (the trust-maker) and name themselves the current Trustees (trust managers) who manage the trust assets for their benefit (trust beneficiary).

Depending on the situation, there may be many advantages to establishing a trust, including avoiding probate court. In most cases, assets owned in a Revocable Living Trust will pass to the trust beneficiaries (or heirs) immediately upon the death of the trust-maker(s) with no probate required. Certain trusts also may result in tax advantages both for the trust-maker and the beneficiary. Alternatively, they may be used to protect property from creditors, or to provide for someone else to manage and invest property for the trust-maker(s) and the named beneficiaries. If well drafted, another advantage of trusts is their continuing effectiveness even if the trust-maker dies or becomes incapacitated.

Powers of Attorney for Finances

A Power of Attorney is a legal document giving another person (the attorney-in-fact) the legal right (powers) to do certain financial things for you. Those powers depend on the terms of the document. A power of attorney may be very broad or very limited and specific. All Powers of Attorney terminate upon the death of the maker, and may terminate when the maker (principal) becomes incapacitated (unable to make or communicate decisions). A Durable Power of Attorney is a great planning tool that allows you to designate a back-up decision maker in the event of incapacity. In case a person becomes incapacitated, a power of attorney would become extremely important. A Power of Attorney can pay bills, sign nursing home admission contracts, access retirement money, and handle investment decisions. As you can see, a Power of Attorney can be a critical document to have.

Health Care Documents (or Advance Directives)

An Advance Directive is a document that specifies the medical and personal care you would want should you lose the ability to make and communicate your own decisions. Anyone over the age of 18 may execute an advance directive. Your Advance Directive can specify who will make and communicate decisions for you. It can set out the circumstances under which you would not like your life to be prolonged if, for example, you were in a coma with no reasonable chance of recovery.

A document that goes hand-in-hand with your advance directive is an authorization to your medical providers to allow specified individuals to access your medical information. Without this authorization, your doctor may refuse to communicate with your hand-picked decision maker.

Historically speaking, the federal estate tax is a tax levied on the transfer of a person’s assets after death. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal estate taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize federal estate taxes is both a prudent and important aspect of comprehensive estate planning. Of course, we can help you with this type of planning.

The most recent version of the federal estate tax was signed into law on January 2, 2013, as part of the American Taxpayer Relief Act of 2012 (ATRA 2012). There are a few things you ought to know about this law regarding your estate planning. Specifically, you should know the “numbers” governing transfers subject to estate, gift and generation-skipping transfer taxation.

Federal Estate Tax Exemption

The $5 million exemption signed into law on December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010), is now permanent under ATRA 2012. This adjusts for inflation so the federal estate tax exemption for 2013 was $5.25 million, 2014 was $5.34M, 2015 was $5.43M, 2016 was $5.45M, and 2017 is $5.49M, thanks to that inflation adjustment. That means for 2017, a married couple can shelter almost $11M with some very specific planning strategies. We can assist you with those strategies. Also, see the discussion below about “Portability.”

Annual Gift Tax Exclusion and Lifetime Gift Tax Exemption

The ATRA 2012 continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2019 is $11.4 million, as indexed for inflation. Likewise, the top tax rate is 40%. Note: Gifts made within your annual gift exclusion amount do not count against your unified lifetime gift and estate tax exemption.

The annual gift exclusion is currently $15,000 for 2019. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $30,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect “gift-splitting” for the tax year in which such gift was made.

Generation-Skipping Transfer Tax Exemption

The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT), is unified with the federal estate tax exemption and the lifetime gift tax exemption. The rate for 2019 is $11.4 million, as indexed for inflation. As with estate and gift taxes, the top tax rate is 40%.

So, what is this GSTT? It is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild or from an individual to another unrelated individual who is more than 37.5 years younger than the person transferring the funds would constitute a transfer tax.

Properly done, this can transfer significant wealth between generations.

“Portability”

The ATRA 2012, makes “permanent” a new concept in estate planning for married couples, ostensibly rendering traditional estate tax planning unnecessary. This concept, called “portability,” means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without the use of “A-B Trust” planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 709 Estate Tax Return and complies with other requirements, the portability may not be available. In our opinion, because of the frequent occurrences of the surviving spouse not making their election promptly, nor following other requirements, it is usually better to keep the old-style A-B Trusts in place, at least until after the first death.

Also, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use “portability” as the means to secure their respective estate tax exemptions. Furthermore, reliance on “portability” in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.

If you are concerned about how your current estate and gift planning may function in light of the changes under ATRA 2012, then we encourage you to schedule a consultation.

Florida Estate Taxes

Florida has neither an Estate Tax (a tax paid by the estate) nor an Inheritance Tax (a tax paid by a recipient of a gift from an estate). However, due to a wrinkle in the law repealing the prior Florida Estate Tax, the estate representative still needs to file an “Affidavit of No Florida Estate Tax Due,” whether or not Federal Estate Taxes are due. This is necessary to release the automatic Florida Estate Tax lien. Think of it like this: even though the Wicked Witch is dead, we still need to pay her our respects. Or else.

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