Estate Planning 101

What is your estate?

It is everything you own. Your house, stocks, bonds, house, bank accounts, annuities, IRAs, rental property and all the things you own.

Who is in control?

Control can mean the ability y to have access to money or assets and how those assets are used. Control can also mean control over your medical decisions. Control can change at different parts of your life span. Estate planning is all about who is in control at different stages of your life. You want to make sure you put the right people in place, with proper instructions so that you stay in control. Without the proper instructions, you lose control because of the laws governing taxes, asset protection, and distribution of your assets upon death.

First Stage :

Control while you are alive and well

Second Stage :

Control when you become incapacitated (physically or mentally)

Third Stage :

Control after you pass away

Who gets what and when do they get it?

Without proper estate planning in place, the people and predators who ultimately receive your money might not be the same people who you intend

3 Crucial building Blocks of estate planing

#1 Estate Building Block - You must know about Titling Assets.

Estate planning (control, who gets what) depends on how your assets are titled or who owns your assets. There are 5 ways to title assets and I will explain how estate planning law determines who controls, who gets what and when they get it:

Asset Titling Type #1 – Individual. Owning an asset individually is the most common way to own an asset. You own an asset individually when there is one name on your deed or bank account: your name.

  • Control while you are alive and well. You control the asset.  It is your account.  You spend it as you please on whom you please.  If you want to sell your house or mortgage it, you can do it without answering to anyone (except if you are married).
  • Control when you become incapacitated (physically or mentally). You lose control over the account because you are not able to access the account due to your incapacity.  If you have a Durable Power of Attorney, then the person you nominate in that legal document now has control over the individually held asset.  If you don’t have a Durable Power of Attorney, then a court supervised guardianship will need to be set up and the judge will decide who is in control over your assets.  I will discuss more about guardianships below.
  • Control after you pass away. Individual assets must go through a court supervised probate proceeding. If you don’t have a will, then the majority of your children and spouse will need to agree who will be in control.  If you have a will, then it must be filed as public record and then the person you name as personal representative (executor) will be in control.
  • Who gets what and when do they get it? Your heirs, as determined by the State of Florida’s intestate law or your last will and testament will determine who receives your individual asset. The heirs receive the assets after probate ends.  I will discuss probate more below.

Asset Titling Type #2 – Joint ownership. Owning an asset jointly occurs when you have more than one name on the account or deed.

  • Control while you are alive and well. Everyone on the account will have control.  For example, if your son is on the account.  Your son can take all the money out of the account and not share it with you or your other family members.  Also, your joint co-owner’s potential creditors (car accident plaintiffs, bankruptcy, ex-spouse) will have a potential claim on the account.
  • Control when you become incapacitated (physically or mentally). You will lose control over the account because of your incapacity.  Your joint owners will also have full access over the account.  Control in this instance is problematic when the person you give authority as your Durable Power of Attorney is not the same person as your joint account owner.
  • Control after you pass away. You lose control of a joint account after you pass away.  The joint owner of the asset that survives you can keep the asset to himself and has full control.   He does not have to share it with other people in the family or anyone you put in your will or trust.  No probate is needed. Joint ownership names trump the terms of your will or trust. Dishonest joint owners will ignore the will and this is not a preferred way to hold assets.
  • Who gets what and when do they get it? Again, your joint owner of the asset gets to keep the entire asset and does not have to share with anyone.

Asset Titling Type #3 - Beneficiary Designation. You are able to put a name as beneficiary under your life insurance, annuity, or retirement plan (IRA, Roth, 401k, etc.)

  • Control while you are alive and well. You control the asset.  It is your account.  You spend it, cash it in, or take a loan on it as you please.
  • Control when you become incapacitated (physically or mentally). You lose control over the account because you are not able to access the account due to your incapacity.  Again, this is where a durable power of the attorney or guardianship is required for someone besides yourself to access the account.
  • Control after you pass away. You lose control over the asset after you pass away.  The person named as beneficiary that survives you can keep the asset to himself and has full control.   He does not have to share it with other people in the family or anyone you put in your will or trust.   No probate is needed. The beneficiary designation trumps the terms of your will or trust. Beneficiary designations are preferred over joint account ownership.
  • Who gets what and when do they get it? Then the person you name as beneficiary will get the asset when you die.

Asset Titling Type #4 - Pay-on-death (“P.O.D.”) / Transfer-on-death (“T.O.D.”). These are terms used in the banking or investment industries that are similar to a beneficiary designation. If you want to avoid probate on a bank account, you can go to your bank and ask for a form to name someone as pay-on-death beneficiary. The name designated P.O.D. or T.O.D. trumps the terms of your will and trust.

Asset Titling Type #5 - In Trust. A living trust is a legal creation that can protect and control assets, and controls the timing and payment of assets according to what you want to occur.

  • Control while you are alive and well. The trustee controls the trust asset when you are alive and well. The trustee can be you in most cases.
  • Control when you become incapacitated (physically or mentally). You can name a successor or new trustee if you become incapacitated.   You remain in control because the successor trustee must follow your directions that you put in the trust document.
  • Control after you pass away. The trust document will determine what happens to your asset when you pass away.  The asset goes to whomever you directed to go to without probate.

#2 Estate Building Block- You must know the difference between a will and a trust?

First, let’s talk about the basics of each...

What is a Will?  A will is a set of written instructions that directs where your assets go when you die and who is in control.   In order for the will to have any effect, a will must be presented to a probate judge and go through the probate process. Your will is your family’s ticket to probate court.

What is a Trust?A trust is like a red wagon.  When you were a kid you would put your stuff into the red wagon.  Similarly, you would now put your assets in the red wagon.  The red wagon would go wherever you pulled it too.  You can do whatever you want when you are controlling your wagon.  If something happens to you, then the wagon handle drops and somebody else (the successor trustee you have named) now can control and pull the wagon.  When that person takes control of the wagon, they must follow the directions that you leave attached to the wagon.

To illustrate, let’s say that you own an account at a bank.  You want money out of it, so you go get it.  Now let’s say that your trust owns an account at the bank and you control the trust.  In that case, if you want money out of the account, you can still go get it.  Now, if you pass away, your successor trustee goes to the bank.  Your successor trustee would give the bank a copy of his or her identification and the relevant provisions of your trust, and now the successor trustee will have access to your account subject to your rules without needing any court involvement.

When can a trust be created?There are two ways to create a trust. First, a trust can be created in a last will. This is called a testamentary trust. In order for the trust to be created the will must go through probate.  Second, a trust can be created while you are alive.  This is called a living trust. You create the trust document and then you put your assets into the wagon (trust).

When would I create a Revocable trust versus Irrevocable trust?  An irrevocable trust is sometimes not as you would think it to be. There are some irrevocable trusts that cannot be changed and that are permanent, but these trusts are typically used to protect assets from general creditors and in estate tax planning.  An irrevocable trust simply means that the trust is irrevocable as to at least one certain thing.  Of course, a revocable trust can be changed, terminated, and you can do anything you want with it.

So, now what is the difference between a will and a trust?  The difference between the two is probate. A will must go through probate, but a trust does not have to go through probate.  Consequently, a will is less expensive for you to set up versus a trust, however, a will is more expensive for your heirs to handle during estate administration because probate is required. Probate is a public proceeding, trust administration is private.

#3 Estate Building Block- You must know the State of Florida’s rules.

If you do not create the rules with estate planning, then you are set with the State of Florida’s rules regarding death (probate) and incapacity (guardianship).

What is Probate?Probate is a court supervised proceeding to determine where your assets go, who is in charge, and who gets paid and when.  When the family gets along, probate generally takes between 5 and 8 months to complete before anyone get inherit money from you and it typically costs between $3,000 and $6,000. 

Now, I want to provide you with a quick overview about how probate works.  The person who it is most responsible or the person you name in the will as the personal representative will have to let the probate court know that you have passed away and that they would like to be appointed in charge.  Your other heirs and beneficiaries will generally need to approve of the person in charge.   If not, then you have a probate fight in your hands.  If you do not have a will, then the State of Florida has one for you and the state’s law will direct who will get your assets and how much each person will get. 

Once the person in charge is named, that person has to collect and inventory all your assets and the inventory must be filed with the court and shown to all beneficiaries and creditors.  A notice in the newspaper must be published regarding your death so that potential creditors can receive money from your estate.  After creditors are determined and paid, then everyone has the option to make your personal representative come up with an accounting of the estate.  Once the accounting and distribution is settled, then the personal representative can finally distribute money out of the estate to the desired beneficiaries.

What is Guardianship?A guardianship is another court supervised proceeding to determine how your assets are managed when you are incapacitated and what medical treatment can be done to or for you during your incapacity.  The guardianship can last the rest of your life or until you regain your capacity.  The guardianship usually cost between $5000 and $15,000 to set up, and it could cost around $2,000 per year to maintain.  In guardianship, there are typically more fights than in probate and thus the costs for a guardianship could be much higher than I have written.

Here is a quick overview about how guardianship works.  A person in your family typically will request the guardianship over you.  Three medical professionals will need to examine you to determine if you are incapacitated.  All of your other family members must receive notice of the guardianship proceeding and this can cause a fight over who will be your guardian.  The guardianship judge will decide if you are indeed incapacitated and the person who will be your guardian.

Once it is determined who will be your guardian, then your guardian must come up with a written inventory of all of your assets in a written plan regarding your care.  Need a guardian must deliver the same reports annually to the judge and all of your family members. 

If your guardian needs to buy or sell any of your major assets, then the Guardian needs approval from the judge.  The guardianship will end when you either pass away or regain your capacity, at that time, the Guardian will need to get a final report in accounting of your assets.

5 Costly predators of your estate

Costly Predator #1- Government. The government process and rules are your predator if you get stuck with their rules such as probate or guardianship. Your family will have to deal with a lot more costs and deterrents with your estate.

Costly Predator #2- IRS. The IRS is your predator because you could be exposed to unnecessary gift, income, or estate taxation if you do not protect your state from the IRS. These are taxes owed on top of the income taxes you paid all your life. The estate tax laws change every year, but generally if you have over $1 million in assets, then you need to have your estate reviewed for IRS protection.

Costly Predator #3- Lawsuits. We have 300 million people in the United States. In 2007, there were 103 million lawsuits filed. Lawsuits are not only filed based on failing to pay a debt, but a lawsuit can be filed against you if you get in a car accident, somebody slips on your property, or someone wants to come after your business. If insurance does not fully cover the claim against you, then your assets are at risk.

Costly Predator #4- Family Members. Three common scenarios make your family a predator to your estate.

First, with families in a second marriage, the adult children sometimes fight with their stepparent if you become incapacitated or die. For example, the adult children could want to inherit your house that they grew up in versus your second spouse that did not raise your adult children there. You must work out how your spouse is provided for, versus the timing and amount of your children’s inheritance.

Next, your own spouse could be a predator if they remarry someone else after you pass away. If you leave everything to your spouse with no strings attached, your spouse can leave everything to their new spouse if they remarry after you die. Your children may get nothing while someone else that you do not know will get your hard-earned life’s savings.

Last, your family could be a predator. Your children’s spouse could receive half of your child’s inheritance from you if they got a divorce. If your child is a spendthrift, your gift to them could be spent before you are laid to rest. If your child has addiction issues, your gift to them could be spent on their addictive substances. If your child has financial issues, your gift to them could be spent or wasted in bankruptcy.

Costly Predator #5- Nursing Homes. Nursing homes in the Jacksonville area typically cost between $10,000 and $14,000 per month. The nursing home will get paid in one of three ways, you’re going to pay for it, long-term care insurance is going to pay for it, and or the government is going to pay for it. The government will pay for it only if the first two choices are exhausted unless you do asset protection estate planning 5 years ahead of time or emergency Medicaid planning.

Proper estate planning can protect against these five costly predators.

Questions? Concerns? Contact Kellen Bryant, Attorney by calling (904) 398-6100.