King & Wood, P.A.

Do You have to Go through Probate when Someone Dies?

“At some point in your life, you may find yourself an administrator, a beneficiary or a creditor of a probate estate. You may even want this information for planning your own estate.”

Probate involves assets, debts and distribution. The administration of a probate estate involves gathering all assets owned by the decedent, all claims owed to the decedent and the payments of all liabilities owed by the decedent or the estate of the decedent and the distribution of remaining assets to beneficiaries. If this sounds complicated, that’s because it is, according to the article “The probate talk: Administrators, creditors and beneficiaries need to know” from The Dallas Morning News.

The admission of a decedent’s will to probate may be challenged for up to two years from the date it was admitted to probate. Many people dismiss this concern, because they believe they have done everything they could to avoid probate, from assigning beneficiary designations to creating trusts. Those are necessary steps in estate planning, but there are some possibilities that executors and beneficiaries need to know.

Any creditor can open a probate estate and sue to pull assets back into the estate. A disappointed heir can sue the executor/administrator and claim that designations and transfers were made when the decedent was incapacitated, unduly influenced or the victim of fraud.

It’s very important that the administrator handles estate matters with meticulous attention to detail, documenting every transaction, maintaining scrupulous records and steering clear of anything that might even appear to be self-dealing. The administrator has a fiduciary duty to keep the beneficiaries of the estate reasonably informed of the process, act promptly and diligently administer and settle the estate.

The administrator must also be in a position to account for all revenue received, money spent and assets sold. The estate’s property must not be mixed in any way with the administrator’s own property or funds or business interests.

The administrator may not engage in any self-dealing. No matter how easily it may be to justify making a transaction, buying any of the estate’s assets for their own benefit or using their own accounts to temporarily hold money, is not permitted.

The administrator must obtain a separate tax identification number from the IRS, known as an EIN, for the probate estate. This is the identification number used to open an estate bank account to hold the estate’s cash and any investment grade assets. The account has to be properly named, on behalf of the probate estate. Anything that is cash must pass through the estate account, and every single receipt and disbursement should be documented. There’s no room for fuzzy accounting in an estate administration, as any estate planning lawyer will advise.

Distributions don’t get made, until all creditors are paid. This may not win the administrator any popularity contests, but it is required. No creditors are paid until the taxes are paid—the last year’s taxes for the last year the decedent was alive, and the estate taxes. The administrator may be held personally liable, if money is paid out to creditors or beneficiaries and there’s not enough money in the estate to pay taxes.

If the estate contains multiple properties in different states, probate must be done in all of those different states. If it is a large complex estate, an estate planning attorney will be a valuable resource in helping to avoid pitfalls, minor or major.

Reference: The Dallas Morning News (May 16, 2021) “The probate talk: Administrators, creditors and beneficiaries need to know”

Are 529 Plans Part of Your Estate?

“People tend to think of ‘529’ education-savings plans as an excellent way to save and invest tax-free for college or schooling costs, and they are.”

Estate planning attorneys, accountants and CPAs say that 529s are more than good ways to save for college. They’re also highly flexible estate planning tools, useful far beyond education spending, that cost practically nothing to set up. In the very near future, the role of 529s could expand greatly, according to the article “A Loophole Makes ‘529’ Plans Good Wealth Transfer Tools. Here’s How to Use Them” from Barron’s.

Most tactics to reduce the size of an estate are irrevocable and cannot be undone, but the 529 allows you to change the beneficiaries of a 529 account. Even the owners can be changed multiple times. Here’s how they work, and why they deserve more attention.

The 529 is funded with after tax dollars, and all money taken out of the account, including investment gains, is tax fre,e as long as it is spent on qualified education expenses. That includes tuition, room and board and books. What about money used for non-qualified expenses? Income taxes are due, plus a 10% penalty. Only the original contribution is not taxed, if used for non-qualified expenses.

Most states have their own 529 plans, but you can use a plan from any state. Check to see if there are tax advantages from using your state’s plan and know the details before you open an account and start making contributions.

Each 529 account owner must designate a single beneficiary, but money can be moved between beneficiaries, as long as they are in the same family. You can move money that was in a child’s account into their own child’s account, with no taxes, as long as you don’t hit gift tax exclusion levels.

In most states, you can contribute up to $15,000 per beneficiary to a 529 plan. However, each account owner can also pay up to five years’ worth of contributions without triggering gift taxes. A couple together may contribute up to $150,000 per beneficiary, and they can do it for multiple people.

There are no limits to the number of 529s a person may own. If you’re blessed with ten grandchildren, you can open a 529 account for each one of them.

For one family with eight grandchildren, plus one child in graduate school, contributions were made of $1.35 million to various 529 plans. By doing this, their estate, valued at $13 million, was reduced below the federal tax exclusion limit of $11.7 million per person.

Think of the money as a family education endowment. If it’s needed for a crisis, it can be accessed, even though taxes will need to be paid.

To create a 529 that will last for multiple generations, provisions need to be made to transfer ownership. Funding 529 plans for grandchildren’s education must be accompanied by designating their parents—the adult children—as successor owners, when the grandparents die or become incapacitated.

The use of 529s has changed over the years. Originally only for college tuition, room and board, today they can be used for private elementary school or high school. They can also be used to take cooking classes, language classes or career training at accredited institutions. Be mindful that some expenses will not qualify—including transportation costs, healthcare and personal expenses.

Reference: Barron’s (May 29, 2021) “A Loophole Makes ‘529’ Plans Good Wealth Transfer Tools. Here’s How to Use Them”

Do Unrecorded Deeds Help or Hurt Estate Planning?

“While discussing estate planning with my parents, they told me that an attorney prepared a deed for them but told them not to record it yet.”

Using an unrecorded deed to transfer property without probate sounds like an easy way to transfer ownership of the family home, but is it asking for trouble? That’s the topic of an article from NWI Times entitled, “Estate Planning: Are unrecorded deeds a good idea?” The fact that the idea came from a family’s attorney makes the question even more important. The attorney told the parents the children could record the deed after their deaths and transfer the property without probate.

Most estate planning attorneys haven’t seen this technique used in a long time, and some may never have heard of it. There’s probably a good reason for this—it’s an estate mess waiting to happen.

First of all, what if the deed itself goes missing? One of the most common questions estate planning attorneys hear is “What do I do because Mom lost the_____?” Fill in the blanks—the deed, the title to the car, the bank statement, etc. Important documents often get lost. If a deed is missing and can’t be recorded, title can’t be transferred. Hoping an important piece of paper doesn’t get lost is not an estate plan.

Until the deed is recorded, and title transferred, the holders of the title still own the property. They can mortgage the property or sell it. The plan for the children to receive and record the deed may not have legal authority.

Laws about how deeds must be created change. Indiana made a change to the law in 2020 that required signatures on deeds to be witnessed. Without the witness, the deeds can’t be recorded. If the adult child is holding a deed for the recording and it’s not witnessed because the parents have died, it can’t be recorded.

There are better ways to transfer ownership of the family home that adhere to the general principles of estate planning.

There are also different types of deeds that are more commonly used in estate planning to transfer home ownership without going through probate. One is a Transfer on Death Deed (TOD Deeds). A TOD deed allows a person to name beneficiaries on their real estate property without giving up any rights of ownership. The TOD deed is recorded, so there’s no worry about mom or pop losing the paperwork.  The TOD deed can also be changed by recording another deed or using an affidavit.

Trusts can also be used to transfer home ownership and keep the transaction out of probate. An estate planning attorney will be able to explain the different types of trusts used to transfer a home. State laws vary, and allowable trusts vary, so talking with a local estate planning attorney is the best option.

Reference: NWI Times (May23, 2021) “Estate Planning: Are unrecorded deeds a good idea?”

Can Your Pandemic Pet Be in Your Estate Plan?

“Many people already had pets before COVID-19, but a recent University of Michigan National Poll on Healthy Aging found as many as 10% of those individuals between ages 50 to 80 acquired a new pet between March 2020 and January 2021.”

America’s love affair with pets grew during the pandemic, a heartfelt solution for individuals who are older and living without the comfort of seeing family on a regular basis. However, adopting a puppy when you are in your sixties or seventies must include some thought about the pet’s future. The Pittsburgh Post-Gazette’s article “So, you’ve got a pandemic support pet. Now what?” provides answers.

Let’s say you become ill or disabled and can’t care for your pet. Neither your family nor friends want the pet. A starting point is to have a general power of attorney created that is limited to the care of your pet. Make sure the person (or persons) you have selected to care for your pet are willing and able, of course. Tell them how and what you would like them to do with your pet. Should they try to find another home? Is there a no-kill shelter you would want your pet to go to? Write out your wishes, so they know exactly what you want.

However, what happens if you die?

All states now accept the use of a pet trust, which can be in your will or in a separate document. A pet trust is created to provide for the care of an animal that is living during your lifetime. The trust ends when the pet dies, or, if your trust is for more than one pet, then the trust lasts until the last pet dies.

Selecting the trustee for a pet trust is just as important as naming a trustee for any kind of trust. You might decide to designate more than one trustee if the original trustee is unable to fulfill their role.

The trustee is legally responsible for following your directions as expressed in the trust. That also means the assets in the trust are for the pet’s benefit. Therefore, you want to be specific about what kind of care you want your pet to have.

In some states, you can name another person who will monitor the care of your pets and require annual veterinary checkups. If this role is appointed in the trust, they may be able to remove the trustee if they deem that the person is not taking good care of the pet.

Deciding how to fund the trust is an important decision. How old is your pet, and how long do you expect them to live? A large dog won’t likely live for as long as a large bird, for instance. How much money will be needed for the care of a pet that might live several decades after you pass?

Consider a fee to be paid to the guardian from the trust. Caring for some pets is a long-term commitment, and they will appreciate an acknowledgment of their dedication to your beloved animal companion.

Reference: Pittsburgh Post-Gazette (May 20, 2021) “So, you’ve got a pandemic support pet. Now what?”

Do QTIP Trusts Help avoid Estate Taxes?

“Right now, gifts to trusts can take advantage of high tax exemptions and remove future appreciation of assets from taxable estates. One example available to spouses is making a gift to a trust that allows for a qualified terminable interest property (QTIP) election.”

Using a QTIP trust allows one spouse to create a trust to benefit the surviving spouse, while providing the surviving spouse with up to nine months to decide how to treat the gift for tax purposes, explains a recent article “How Certain Trusts Soften The Blow Of Estate Tax Increases” from Financial Advisor. This flexibility is just one reason for this trust’s popularity. However, while the QTIP election can be made on the 2021 gift tax return, which is filed in 2022, the choice as to how much of the transfer will be subject to tax can be made in 2022.

The current estate and gift tax exemption of $11.7 per individual is slated to sunset in 2025, but the current legislative mood may curtail that legislation sooner. Right now, flexibility is paramount.

The surviving spouse is named as the primary beneficiary of the trust and must be the only beneficiary of the trust during the lifetime of the surviving spouse, in terms of both receiving income or principal from the trust.

If the decision is made to treat the trust as a QTIP trust, a gift to the trust is eligible for the marital deduction and is not taxable. It does not use up any of the donor’s gift tax exclusion. That flexibility to make a transfer today and decide later whether it uses any lifetime exemption is something most people don’t know about. A QTIP can also protect the recipient spouse and the principal from any creditors.

There are conditions and limitations to this strategy. If the QTIP election is not made, all net trust income must be distributed to the beneficiary spouse. There’s also no flexibility for the trust income to be accumulated or distributed directly to descendants.

The property over which the QTIP election is made is included in the estate of the surviving spouse.

The election can be made over the entire asset or only a portion of the asset transferred to the trust. The option to apply only a portion of the transfer makes it more tax efficient. For generation skipping-trust purposes, an election can be made to use the transferor spouse’s GST exemption when the decision about the QTIP election is made.

QTIPs are not the solution for everyone, but they may be the best option for many people while the people in Washington, D.C. determine the immediate future of the estate tax.

There are many Americans who are moving forward with making gifts using the current gift tax exclusion, using spousal lifetime access trusts (SLATs). However, the QTIP elections remain a way to hedge against the risk of being on the hook for a substantial gift tax, if there is a reduction in the federal estate tax exemptions.

Speak with an estate planning attorney to learn if a QTIP or another type of trust is appropriate for you. Note that these are complex planning strategies, and they must work in tandem with the rest of your estate plan.

Reference: Financial Advisor (May 24, 2021) “How Certain Trusts Soften The Blow Of Estate Tax Increases”

Can Family Members Contest a Will?

“The death of a loved one results in an emotional grief that, when combined with large sums of money on the line, can cause the beneficiaries of the will or trust or the heirs of the deceased to challenge the validity, interpretation, or administration of the will or trust.”

Estate planning documents, like wills and trusts, are enforceable legal documents, but when the grantor who created them passes, they can’t speak for themselves. When a loved one dies is often when the family first learns what the estate plans contain. That is a terrible time for everyone. It can lead to people contesting a will. However, not everyone can contest a will, explains the article “Challenges to wills and trusts” from The Record Courier.

A person must have what is called “standing,” or the legal right to challenge an estate planning document. A person who receives property from the decedent, and was designated in their will as a beneficiary, may file a written opposition to the probate of the will at any time before the hearing of the petition for probate. An “interested person” may also challenge the will, including an heir, child, spouse, creditor, settlor, beneficiary, or any person who has a legal property right in or a claim against the estate of the decedent.

Wills and trusts can be challenged by making a claim that the person lacked mental capacity to make the document. If they were sick or so impaired that they did not know what they were signing, or they did not fully understand the contents of the documents, they may be considered incapacitated, and the will or trust may be successfully challenged.

Fraud is also used as a reason to challenge a will or trust. Fraud occurs when the person signs a document that didn’t express their wishes, or if they were fooled into signing a document and were deceived as to what the document was. Fraud is also when the document is destroyed by someone other than the decedent once it has been created, or if someone other than the creator adds pages to the document or forges the person’s signature.

Alleging undue influence is another reason to challenge a will. This is considered to have occurred if one person overpowers the free will of the document creator, so the document creator does what the other person wants, instead of what the document creator wants. Putting a gun to the head of a person to demand that they sign a will is a dramatic example. Coercion, threats to other family members and threats of physical harm to the person are more common occurrences.

It is also possible for the personal representative or trustee’s administration of a will or trust to be challenged. If the personal representative or trustee fails to follow the instructions in the will or the trust, or does not report their actions as required, the court may invalidate some of the actions. In extreme cases, a personal representative or a trustee can be removed from their position by the court.

An estate plan created by an experienced estate planning lawyer should be prepared with an eye to the family situation. If there are individuals who are likely to challenge the will, a “no-contest” clause may be necessary. Open and candid conversations with family members about the estate plan may head off any surprises that could lead to the estate plan being challenged.

One last note: just because a family member is dissatisfied with their inheritance does not give them the right to bring a frivolous claim, and the court may not look kindly on such a case.

Reference: The Record-Courier (May 16, 2021) “Challenges to wills and trusts”

Short-Cuts to Estate Planning can Lead to Costly Consequences

“Over the years I get all kinds of questions from people. And boy, have I heard some doozies. But one common one I get is called the ‘lazy (or poor) man's (or woman's’) estate planning.’ This type of estate planning has some very negative tax consequences.”

It seems like a simple way for the children to manage mom’s finances: add the grown children as owners to a bank account, brokerage account or make them joint owners of the home. However, these short-cut methods create all kinds of problems for the parent’s estate and the children themselves, says the article entitled “Estate planning: When you take the lazy way out, someone will pay the price” from Florida Today.

By adding an adult child as owner to the account, the child is being given 50% ownership. The same is true if the child is added to the title for the home as joint owner. If there is more than $30,000 in the account or if the asset is valued at more than $30,000, then the mother needs to file a gift tax return—even if no gift tax is due. If the gift tax return is not filed in a timely manner, there might be a gift tax due in the future.

There is also a carryover basis in the account or property when the adult child is added as an owner. If it’s a bank account, the primary issue is the gift tax return. However, if the asset is a brokerage account or the parent’s primary residence, then the child steps into the parent’s shoes for 50% of the amount they bought the property for originally.

Here is an example: let’s say a parent is in her 80s and you are seeing that she is starting to slow down. You decide to take an easy route and have her add you to her bank account, brokerage account and the deed (or title) to the family home. If she becomes incapacitated or dies, you’ll own everything and you can make all the necessary decisions, including selling the house and using the funds for funeral expenses. It sounds easy and inexpensive, doesn’t it? It may be easy, but it’s not inexpensive.

Sadly, your mom dies. You need some cash to pay her final medical bills, cover the house expenses and maybe a few of your own bills. You sell some stock. After all, you own the account. It’s then time to file a tax return for the year when you sold the stock. When reporting the stock sale, your basis in the stock is 50% step-up in value based on the value of the stock the day that your mom died, plus 50% of what she originally paid for the stock.

If your mom bought the stock for $100 twenty years ago, and the stock is now worth $10,500, when you were added to the account, you now step into her shoes for 50% of the stock—$50. You sold the stock after she died, so your basis in that stock is now $5,050—that’s $5,000 value of stock when she died plus $50: 50% of the original purchase. Your taxable gain is $5,450.

How do you avoid this? If the ownership of the brokerage account remained solely with your mother, but you were a Payable on Death (POD) or Transfer on Death (TOD) beneficiary, you would not have access to the account if your mom became incapacitated and had appointed you as her “attorney in fact” on her general durable power of attorney. What would be the result? You would get a step-up in basis on the asset after she died. The inherited stock would have a basis of $10,000 and the taxable gain would be $500, not $5,450.

A better alternative—talk with an estate planning attorney to create a will, a revocable trust, a general durable power of attorney and the other legal documents used to transfer assets and minimize taxes. The estate planning attorney will be able to create a way for you to get access or transfer the property without negative tax consequences.

Reference: Florida Today (May 20, 2021) , “Estate planning: When you take the lazy way out, someone will pay the price”

Do Estate Planning before Golden Age Ends

“Americans have been living through a ‘golden age’ of estate planning, but it’s coming to an end, says one consultant to ultra-high-net-worth families and family offices.”

Unfortunately, the changes that may be coming to estate planning are likely to be felt by not just ultra-high-net-worth families, but by upper middle-class families whose net worth is comfortable, but not in the stratosphere. Estate planning lawyers are talking with their clients now about how to plan for transferring assets to families without overly aggressive tax avoidance strategies, according to the article “Are We Leaving a ‘Golden Age’ For Estate Planning?” from Financial Advisor Magazine.

The lifetime gift and estate tax exemption is $11.7 million per person and $23.4 million for couples for 2021, which touched only the extremely wealthiest Americans. However, new tax policies are being debated in Congress, including the possible rollback of those estate tax exemptions. Tax-aware estate planning has already gotten underway for many Americans who are not in the top 1%.

There are two proposed changes that may push more families into using trusts and other planning strategies. The first is a proposed increase in the capital gains tax rate for high earners to bring it more in line with their income tax bracket. That would mean they might lose the advantage of deriving income from investments versus a salary.

The second is the possible elimination of step-up in cost basis for assets upon death. Other changes under discussion have been the elimination or decrease of valuation discounting within an estate.

The rush to change estate plans has begun. Estate plans are being revised, trusts are being created and giving strategies are being planned to remove assets from the grantor generations’ estates and take advantage of the current high tax exemption.

Congress is still figuring out what changes will be made. In addition, no one knows if these changes will be retroactive to 2021 if they are made in the third quarter of 2021, or if they will be enacted on January 1, 2022.

Without knowing what the final changes will be, any planning now should be made with a long-term framework for the family.

Estate planning can be considered in three steps:

The grantor generation needs to consider the purpose of their wealth. Do they want to continue a family business, give the majority of their wealth to a charitable organization, or pass it all to their children and grandchildren?

What does it mean to treat beneficiaries fairly? If one child is teacher, while the other has built and grown a highly successful business, do both children inherit the same amount? What if one of the children has a child with Special Needs?

The grantor generation needs to communicate with their heirs. Heirs often don’t learn about their parent’s intentions, tax planning or charitable giving, until after they have passed. It’s far better to talk about the parent’s wishes and their reasoning while they are living. Without these conversations, families suffering from loss must add sibling quarrels and sometimes, estate litigation, to an already difficult time.

Reference: Financial Advisor Magazine (May 20, 2021) “Are We Leaving a ‘Golden Age’ For Estate Planning”

When can Family Members Make Medical Decisions?

“Ensuring that your wishes on your medical care are followed, is up to you. Take action now while you’re well, or you could later lose a say in the matter during a crucial time.”

Before the pandemic, it was not easy for people to get serious about the healthcare decision making portion of their estate plan. Today, there is greater awareness that incapacity from disease or injury is not a hypothetical. It’s reality, and there are tasks that must be done, as explained in a recent article entitled “Now Is the Time to Protect Your Health Care Decision-Making Rights” from Kiplinger.

You may have a fundamental right to make your own decisions regarding healthcare, but without planning and documenting your wishes, your right may evaporate in a heartbeat. Failing to have your healthcare wishes documented properly also leaves your family in the terrible position of having to guess what you want, and even go to court to settle a dispute between family members.

An estate planning attorney works with clients to plan how their assets will be distributed after they die (using a will and trusts, among other tools). However, they also help clients prepare for incapacity. Both are equally important. There are three basic solutions used in most states, although each state has its own specific rules, so you will want to work with an estate planning attorney from your geographic area.

A Living Will addresses what you want to happen, if you are in an end-stage medical condition or permanently unconscious with no hope of becoming conscious. The living will can serve as an advance written directive for the type of treatment you want to have, or what treatments you do not want to have. If you are unable to communicate your wishes, this document conveys them in a clear and enforceable manner.

A Health Care Durable Power of Attorney works differently than a Living Will. This covers health care decision making in all situations, when you cannot convey your own wishes. You appoint one or more agents to make health care decisions for you. They use their personal knowledge of you and what you would want to occur, if you were able to speak for yourself. They act on your behalf.

If you have not signed a Health Care Durable Power of Attorney or a Living Will before becoming incapacitated, there are Health Care Representative Laws that authorize certain family members to step forward to act as your health care representative and make health care decisions for you. This is the last and worst option. It is much better for you and your family to have a plan and the proper documents. First, the state decides who will make healthcare decisions on your behalf, based on the law. If more than one person is named and the family cannot come to an agreement as to what your care should be, they may end up in court. If you have an even number of children, they could come to a tie. If you have an odd number of children, they could end up estranged because of different opinions for your care, or withdrawal of care.

Create a plan for your healthcare when you are creating or updating your estate plan. It will give you the peace of mind that, even in the worst of situations, your loved ones will know what you wanted to occur clearly and be able to go forward in following your wishes.

Reference: Kiplinger (April 29, 2021) “Now Is the Time to Protect Your Health Care Decision-Making Rights”

Mary Kathryn King Joins the Firm

Mary Kathryn King has joined King & Wood, P.A. as an Associate Attorney, resident in Jacksonville, Florida.  She will practice in the areas of business law, real property, probate, wills & trusts, guardianship, and fiduciary litigation.

Ms. King is a graduate of the Florida State University College of Law (J.D., magna cum laude, May 2020), where she was elected to the Order of the Coif and served on both the Florida State University Law Review and the Journal of Land Use and Environmental Law.  At FSU, she also served as a research assistant to Professor Nat Stern and received four book awards. 

Ms. King is admitted to the practice of law in all the courts of the State of Florida.

Ms. King graduated from the University of Florida (B.A., summa cum laude) in 2016 with majors in English and Political Science, and minors in Russian and Spanish.  At UF, she was a National Merit Scholar and was elected to Phi Beta Kappa and Florida Blue Key.  She also was named a UF Outstanding Four-Year Scholar and was active in Phi Mu Sorority.

For academic year 2016-17, Ms. King served as a Fulbright English Teaching Assistant at Samtskhe-Javakheti State University in Akhaltsikhe, Republic of Georgia, under a scholarship from the U.S. Department of State’s Fulbright U.S. Student Program. 

Ms. King is a native of Tallahassee, Florida, where she graduated as Salutatorian of Maclay School’s Class of 2012.  While at Maclay, she served as State President of the Florida Junior Classical League and was elected to the National Certamen Hall of Fame.

Ms. King is a former Assistant State Attorney in Florida’s Fourth Judicial Circuit (Jacksonville), where she prosecuted misdemeanor cases and gained considerable courtroom experience.