Archive for June, 2009
ESTATE PLANNING HORROR STORIES FROM THE REAL WORLD (#1)
“The Last Minute Will”
A 91 year old gentleman passed away from cancer after having spent his last weeks in hospice. Although not wealthy, he did leave a $400,000.00 estate to his 3 sons and daughter, all of whom were adults at the time of his death. He prepared a Will many years ago which provided that his estate should be divided equally among the 4 children and advised the children of his intentions. However, 10 days before his death, while he was so seriously ill that he was only conscious for a few minutes each day, his daughter had him sign a new Will which left her 70% of the assets, with the remaining 30% being divided 10% to each brother. Needless to say, when the brothers found out about this turn of events, after their father’s death, they were furious.
After the brothers received checks for their 10% share, they hired attorneys to contest the Will, which had been signed in extremely weak handwriting. During investigation into the facts of the Will contest, however, it was learned that the daughter several months previously had convinced her father to change the title on all of his holdings from being owned in his individual name to being owned jointly with his daughter, with the right of survivorship. This meant that all of the father’s possessions and holdings passed legally to the daughter regardless of the terms of the Will. Because the assets were jointly owned, rather than individually owned, the terms of the Will simply did not control them. The brothers gave up the will contest at that point.
In this scenario, no one was happy. The daughter created irreconcilable differences with her brothers while voluntarily providing them with 30% of the assets, when she legally could have kept the entire estate to herself because of the joint ownership. The sons were upset with their diminished inheritance and never will speak to their sister again because of her uncaring, selfish attitude convincing their father to change his Will in her favor at the end of his life.
How could this situation been avoided? If the father had prepared a revocable living trust, naming some combination of the children as trustees, so that no one child could make decisions alone, and had spelled out his intentions for the distribution of his assets in that trust document, he not only could have made sure that his wealth was distributed according to his intentions, but he also could have prevented the complete split between his sons and his daughter. Additionally, if that trust had been regularly updated, the father’s intent would continue to have been made clear to all of the siblings right up until the very end. Planning ahead and maintaining an ongoing relationship with an estate planning attorney at the Cramer Law Center can make it extremely difficult for such last minute influences to occur and can prevent this horror story from happening to your family.
HOW TITLING OF ASSETS AFFECTS ESTATE PLANNING
How you own your property helps determine its distribution when you die or its use if you become disabled. Planning with property you don’t actually own (and this does happen) is no planning at all. This article will discuss the three primary forms of property ownership and how each form of ownership can affect estate planning.
The three primary forms of property ownership include fee simple, tenancy in common, and joint tenancy with right of survivorship. Each form of ownership has its own inherent features.
1. Fee simple is simple. You and only you own the property. Property in fee simple means you own all of it. You can
(1) give it away,
(2) sell it, or
(3) leave it on death.
Is there any pitfall with fee simple property? Yes. Property owned in your own name is subject to both a living probate in case of disability, and a death probate upon death. In short, what may appear to be maximum control, may actually result in a total loss of control. Remember, assets owned in your individual name means probate.
2. Tenancy in common means that you and others own part of an asset. Each “tenant” has less control of the whole property than would one person who owned it in fee simple. With tenancy in common you can
(1) give your part of it away,
(2) sell your part, or
(3) leave your part on death.
Tenancy in common requires that you own the property with one or more other people. Each tenant owns a percentage of the whole asset. For example, if there are two tenants, each owns 50 percent of the asset. If there are three, each owns 33 1/3 percent. The number of possible tenants in tenancy in common has no limit.
For example, if you and a friend own a beach house as tenants in common, you each own 50 percent of that beach house. But who owns which half? It really doesn’t matter while both of you are alive, healthy, and getting along. You accommodate each other: each paying half of the expenses and receiving half of any income from rentals. You have an agreement about when each of you gets to use the house. If you should quarrel, however, problems can arise. You can’t demand your half of the house. Very likely, you and your ex-friend will have to sell the house – if you can both agree on the price and manner of sale.
In case you and your friend cannot reach any agreement, you can go to court and have the judge sell the beach house. This method is expensive, and odds are you won’t get the best price for the house. But when tenants in common can’t agree, courts are virtually the only recourse available.
If you can’t reach an agreement on who owns the beach house, and what one co-tenant is going to pay the other for their half, you are likely to end up in court with a judge ordering a sale. Other challenges can arise even if you and your co-owner get along fine. Issues arise if one of you wants to sell your half to a third party, or if one of you becomes mentally disabled.
You can sell your 50 percent interest in the beach house anytime you want, or you can give it away. Your other tenant cannot prevent either action. Even if you sell the house to your friend’s worst enemy, your friend cannot do anything about it! The real problem is getting someone to buy your part of the house. This new tenant will have to deal with your friend, and they, too, will have to agree on what to do with the beach house.
Disability can be a problem for both you and your co-tenant. If you are disabled to such an extent that you cannot manage your own affairs, and you have not done proper revocable trust planning, a probate court will likely control your part of the property. The probate court may demand that the property should be sold – and your other tenant will have little or no control over the whole process.
At your death, you can leave your share of the property to whomever you want. Without proper estate planning, it will go through probate, leaving your other tenant once again under the control of the probate court. You may leave your share to several heirs, making life that much more difficult for the other tenant.
3. Joint tenancy with right of survivorship is very common and very misunderstood. It is routinely used by spouses, but people who are not married use it too. Although similar to tenancy in common, joint tenancy has totally different results. If you own property in joint tenancy with right of survivorship:
1. You own all of it with someone else.
2. You can (a) give your interest away or (b) sell your interest.
3. You cannot leave your interest on death.
Joint property, also known as joint tenancy, is nothing but a planning pitfall. Although joint tenancy has been assailed for years by many estate planning experts, it remains – unfortunately – a very popular form of property ownership. Joint tenancy is a pitfall because you cannot control where such property passes after your death.
In joint tenancy, each person owns the entire asset, not a part of the asset. This legal fiction of two or more people owning 100 percent of the same asset is derived from the full name given to joint tenancy: joint tenancy with right of survivorship. “Right of survivorship” means that whoever dies last owns the property. The previous joint tenants merely had the use of the property while they were alive.
Joint tenancy property is “uncontrollable”. Even if a joint tenant intends to have his or her share pass to loved ones, the property is not controlled by the instruction in the joint tenant’s will or trust. Joint tenancy automatically passes to its surviving owners by operation of law.
Property that is owned in joint tenancy can be a trap, because the term itself has nice connotations. It implies “the two of us”, a partnership, a marriage of title as well as love. On the surface, at least, it appears to be the right way for people who care for each other to own property. It’s psychologically pleasing, which for many people is the real advantage of owning their property jointly.
As in many other latent problems, joint tenancy is easy and convenient. Odds are that when you were married (if you are), one of the first financial actions you and your spouse took was to open a checking or savings account. The clerk who helped set up your account put it in your joint names when you answered yes to, “Both names on the account?” The same is true of your first house or your first car. It seems that all of those involved (primarily clerks and salespeople), whether or not they knew what they were doing, took control of your estate planning and titled your property in joint tenancy.
For most people, the disadvantages of joint tenancy far exceed any advantages. Some of the more devastating pitfalls of joint tenancy are:
a. There is no control, and property may pass to unintended heirs.
b. There are no estate planning opportunities.
c. For married couples, probate is at best delayed, not totally avoided.
d. For non-spousal owners, unintentional gift taxes and death taxes can be generated.
(a) There is no control, and property may pass to unintended heirs.
Joint tenancy property passes to the surviving joint tenant and no one else, no matter what you do. If it is your intent to leave your property to your spouse and then to your children, joint tenancy is not for you. Joint tenancy provides no means of ensuring that your property will pass to whom you want. For example, if your spouse remarries, your children may inadvertently be disinherited. Or, against your wishes, your spouse may choose to disinherit some or all of your children after your death. If you and your spouse die together in an accident, significant questions may arise as to who is going to inherit your joint property.
While joint tenants are living, they can sell their interest in the joint property and they can give their interest away. In this respect, joint tenancy is similar to other forms of ownership. It is only on the death of a joint tenant that its unique features come into play. In Florida, joint tenancy between a husband and wife is called tenancy by the entirety. It works exactly like joint tenancy with right of survivorship, except that it is more restrictive. While both spouses are alive, the approval of both is necessary before the property can be transferred.
A joint tenant has the authority to take all the money from a bank account and has significant control over other types of property. This “control” can be dangerous, especially since a deceased tenant would have had no opportunity to leave any instructions restricting the use of the joint property. Even though property is titled in joint tenancy, the joint tenant who dies is presumed to own 100 percent of the property. As a result, the deceased tenant’s family not only loses the property (which passes to the surviving joint tenant), but also must pay all of the death taxes. Joint tenancy between non-spouses can create the worst possible tax scenario: full taxation on property one doesn’t even own.
(b) There are no planning opportunities.
What if your spouse or your children need assistance in managing the property you left them? Joint tenancy cannot help. What if you want to leave instructions for your loved ones as to how, when, and why your property is to be used? Joint tenancy offers no opportunity for instructions of any kind.
If you become disabled, your joint tenancy property may be tied up in a living probate while you desperately need it for your own or your loved ones’ care. If your spouse is disabled when you die, the probate court will “inherit” the joint tenancy property and determine how and when it is to be used for your spouse’s benefit.
(c) Probate is at best delayed, not totally avoided.
Despite the concerns already discussed, some advisors continue to recommend joint tenancy! Why? The major reason given is because joint tenancy property bypasses the entire probate process. But this is not entirely true.
With married couples, joint tenancy does not avoid probate – it only delays it. Because joint tenancy passes outside all will or trust planning, it does avoid probate – on the death of the first spouse. When the second spouse dies, however, there will be a probate. In situations where both spouses die together, there will be at least one probate and perhaps two.
(d) For non-spousal owners, unintentional gift taxes and death taxes can be generated.
When non-spouses create joint tenancy, they often create a gift tax as well. Frequently, an older parent designates a son or daughter as a joint tenant on bank accounts and/or other property. The moment this is done, the transfer of property is often considered by the IRS to be a gift, and if valued above $13,000 (in 2009) it will have to be reported to the IRS. In some cases, a gift tax may be immediately due.
When a non-spouse joint tenant dies, the surviving tenant gets the property. If a parent with three children makes one child a joint tenant (on the house, for example), then that child inherits the property, no matter what the parent’s will or trust says. The result is that (1) if the child is selfish, he or she may legally keep the entire property or (2) if the child is generous and shares the inheritance, he or she may have to pay a gift tax. Joint tenancy makes estate tax planning extremely difficult and may rob clients of the ability to reduce the estate tax burden imposed on their loved ones.
For many clients, the solution to all of these concerns is the creation of a revocable living trust, and the transfer of title to trust ownership rather than joint tenancy.
ESTATE PLANNING IN FLORIDA TO PROTECT CHILDREN
Many parents purchase life insurance, sign a will, or prepare a trust to ensure the well-being of their children. Unfortunately, most life insurance proceeds are left outright to children and other beneficiaries without a single word of instruction.
ESTATE PLANNING IN FLORIDA TO PROTECT THE SURVIVING SPOUSE
Leaving property outright to a spouse seems like a loving act. It is easy, natural, and comfortable. It is also a mistake. When assets are left outright to a spouse, the survivors may face the uncertainties of guardianship or probate, unforeseen expenses, and delays. Such problems can be overcome through revocable living trust planning – when a marital trust is established. This is a special sub-trust created on the death of the first spouse within that deceased spouse’s living trust.