South Florida Estate Planning Law : Florida Estate Planning Lawyer & Attorney : David Shulman Law Firm : South FL Wills & Trusts

Tomorrow, I leave for the ABA Techshow in Chicago and will be there until Sunday.  The techshow is a conference on technology in the legal field.  I'm very excited.  I haven't been to Chicago since I was a Journalism Cherub at Northwestern when I was in High School.

A couple of things:

1. Blogging may be light (or nonexistent) until I get back.  My continuing series on my purchase of internet documents will resume next week.  However, I still follow the news, and if there is an interesting development regarding the estate tax, or probate , I will try to blog about it.
2. If you are at the show, come find me and say hi.  I'm always interested in meeting new people, especially if they are readers.

 

 

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There has been a lot of talk recently about "portability," that is the ability for one spouse to leave their unused lifetime exemption to their surviving spouse upon their death.  Portability is included in Senator Baucus's tax bill. For more on the subject see the link above at Greg Herman-Giddens's North Carolina Estate Planning Blog.

The question that I haven't really seen answered is "How will it work?"  Greg wrote in his blog that

A change that will require modifications to most large estate plans is the proposal to pass "marital deduction portability." If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the "aggregate deceased spousal unused exclusion amount."

In order to use a portion of the first decedent spouse's exclusion, his or her executor must make an election on that estate tax return. If the "Spousal Unused Exclusion" election is made, the surviving spouse may then use the remaining unused exemption.

If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million.

Does this mean that everyone will have to file a Form 706 Estate Tax Return? 

Let's say H and W each own $2 mil in assets and the exemption is $3.5.  H dies.  I understand that the concept of portability says that H can leave W the remaining $1.5 exemption.  But to use it, will H have to file a 706 to lock it in even though he doesn't have a taxable estate?  Will attorneys now be required to advise everyone, no matter how small their estate is to file an Estate Tax Return?   Will it be malpractice if they don't?  I can see all sorts of scenarios in which there was no return filed on the first death because the attorney did not think the surviving spouse would need the extra exemption, and then the attorney turned out to be wrong.   While it doesn't seem like it these days, assets can still appreciate it value. 

I can see portability being both an administrative nightmare and a huge revenue generator for estate planning attorneys.

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The Motley Fool just published a brief article entitled 3 Estate Must Dos.  They are:'

• Find an attorney who is thoroughly versed in estate planning. Your divorce lawyer or patent guy probably won't hack it. 
• Stay up to date on tax changes. They affect your planning documents.
• Make sure that the right people know where to find these documents. Remember, it's a question of when (not if) they'll be needed.

 

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I've never been a big fan of About.com. Everything about it screams "Web 1.0" to me in the way it is organized, marketed, and advertised. That being said, in the internet, "Content is King" no matter who is behind it.

I recently stumbled upon the About.com:Wills & Estate Planning area which is run by Key West Attorney Julie Garber, who geographically speaking at least is more of a South Florida Estate Planning attorney than I am. (Although truth be told, it's more like North Cuba). I think she does a great job of running the site, which is chock full of straightforward well written articles by her.

I wish that at the bottom of the front page there wasn't a Sponsored Link for "Easy Online Will $19.95," but that's about.com's doing and not hers. Check out Julie's Post on "Are Gifts to Your Spouse Taxable" for the type of posts that are over there.

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This is the third article in a continuing series in which I order estate planning documents from an internet document service to see their quality.  When we last left our hero, I had just clicked on the link from the main page that said "Wills and Living Trusts," which took me to a page that gave me the following options:

Oy.  I understand that there is some confusion in the term "Living Will" because it has the word Will in it.  But my main complaint is and will continue to be is that it lets customers choose for themselves, without any discussion, thought, or review, what they need.  I like to sit down with my clients and go through all of the options and explain to them what each document does, and then discuss each one in terms of the larger picture of their estate planning.

I decide to learn more about Living Trusts.

It's not a bad explanation. However, it doesn't talk about who needs and who doesn't need a Living Trust.  And, it doesn't talk about the most important thing that you have to do with a Living Trust to avoid probate.  You have to fund it properly.  All of your assets have to be transferred into the Trust.  Another thing I learned is that the Service is nowhere near as cheap as I thought it was.  Here is their pricing for customers who decide that they need a living trust:

 So I decide I'll order a Living Trust.  Stay tuned.  Same Bat Time, Same Bat Blog.

 

 

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Before going into private practice, I was an attorney with the Internal Revenue Service Office of Chief Counsel, in Washington, DC.  I worked in the Passthroughs and Special Industries division, and primarily drafted private letter rulings, revenue rulings, revenue procedures, and regulations. 

On my very first day there, I was told that my sole responsibility was as follows: FIND THE CORRECT ANSWER.  The means examine the facts, examine the law and reach a conclusion.  It did not matter if the correct answer favored the government or favored a taxpayer.  My job wasn't to raise revenue, but to do what is right.  And through my entire 7 years there, through the second half of Bill Clinton's second term, and all of Bush's first term, no matter who I was working for, that never changed.

I think that every single IRS employee, no matter what their position should follow that same credo.  And for a great great majority, they do.  As much as people hate to pay taxes, my experience with IRS employees has always been positive, and I have found them to be hard working honest professionals.  Sadly, that's not always the case. Please read this outrageous story from Peter Pappas, in which an IRS agent contacted and harassed his client directly event though the agent knew the client was represented by Counsel.  I won't describe what happened here, but will let you go see for yourself.

 

 

 

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This isn't an "official" entry in my ongoing series, but just a quick update.  Yesterday I emailed the internet document company asking about the status of my documents.  Today I received an email telling me that, "as a courtesy" they are sending my PDF copies of my documents.  So I have them.

Still, I want to wait until I receive the actual paper documents before going forward.  I"m not 100% sure that they won't be changed, or that they will still get to me.  Also, I want to post pictures of how pretty they are, because if they are going to be wrong, they might as well look good.

 

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In writing a blog, or in writing anything, the most important question is "Who is your audience?"  So far, my posts have been aimed towards what I call "the sophisticated layman."  I have been writing for the educated reader who is not an expert in matters regarding estate planning or tax, and is interested in learning more. 

But every now and then there is "breaking news" in the estate tax world, that most laymen, sophisticated or not, probably would not be interested in, but would be of interest to estate planning and tax experts. This is one of those times. 

Yesterday, the US Tax Court's issued its opinion in Estate of Jorgensen v. Commissioner, ruling that the entirety of assets transferred to a family limited partnership were included in the gross estate of a decedent under s. 2036(a)(1) of the Internal Revenue Code.

Like many other cases in which there is a complete victory for the Government, the most important lessons in this case for Estate Planning attorneys is "Don't do this." 

More after the jump

Continue Reading...

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For most people, taxes are relatively straightforward.  Not easy, not pleasant.  But straightforward.  If you have a bank account that earns interest during the year, then at the beginning of the following year your bank sends you a Form 1099-INT reporting the interest that you earned, and sends a copy of that same form to the IRS.

Now there are some people out there who aren't big fans of the whole "bank sends 1099 to the IRS" regime.  Or, in some circumstances they don't want the IRS to know about where the original money came from at all.  Many of these people place their money in banks located in other countries or "offshore" accounts.  Since these banks are in foreign countries, they generally do not report interest earned on their accounts to the IRS.

Before going further I want to point out that there are plenty of legitimate reasons to open an offshore account and that most people who do open offshore accounts properly report and pay their tax obligations.  But there are some that don't.  UBS has been in the news lately for the 52,000 "secret" accounts that it holds for US taxpayers.  How many of them are owned by people who haven't been properly reporting their income?  No one knows.

The IRS and UBS have been wrangling over whether or not UBS will be required to turn over the information to the US government, or whether Swiss Banking laws prohibits it from doing so.  People who have these accounts and have not reported their income or paid their taxes are subject to massive civil and criminal penalties and possibly criminal prosecution.

Today, the IRS is offering the carrot instead of the stick.  Or maybe just a very sharp carrot.  IRS Commissioner Douglas Shulman [no relation] announced that for taxpayers who "voluntarily disclose" their accounts (before the IRS catches them first), the IRS is willing to reduce some of the penalties.

From the Wall Street Journal Article:

In its definition of "voluntary disclosure," the IRS says taxpayers must come forward before the IRS has been given their name by a third party. However, in a call with reporters, IRS spokesmen said that UBS customers whose names already have been divulged to the IRS may still qualify under the "voluntary disclosure" guidance issued Thursday.

 

Taxpayers who come forward voluntarily will face a 20% penalty on their foreign account assets in the year with the highest account value, down from the current 50% penalty levied on account assets in each year the taxpayer failed to disclose the account.

 

Other penalties continue to apply for people who come forward, including either a failure to file penalty of 25% or an accuracy penalty of 20%. Taxpayers will also be responsible for back taxes and interest going back six years, the IRS said.

These rules, in effect for six months, "make sure that those who hid money offshore pay a significant price, but also allow them to avoid criminal prosecution if they come in voluntarily," Shulman said.

Of course, for the average person who doesn't have millions in an offshore account, the IRS is just as friendly as ever with regards to penalties imposed.

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The 2009 Edition of Pub 559, which advises Personal Representatives and Executors how to prepare the income tax returns of decedents whose estate they are administering, has been published by the IRS.  It is to be used for the 2008 year.

The full PDF of the publication can be downloaded from the IRS's Website here.

Edit -- March 24, 2010. The above link now links to the 2010 Edition to be used for the 2009 year.  See here for more details.  

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I am waiting to see if my Internet ordered trust is sent to me before making any more posts on that topic.  While waiting, I want to write again about the estate tax.

In 2001, the Republicans finally "won" their 30 year battle to repeal the estate tax, in a way that only a Congressperson could have dreamed of.  The exemption, that is the amount a person could own at their death went up from $600,000 in 2000 to $3,500,000 in 2009. The rate, that is the amount the government taxed over the exemption went from a marginal rate of 55%+ to 45% in  2009.  Then in 2010, the Estate Tax would be finally repealed for once and for all!

That is until 2011, when the 2001 exemption of $1,000,000 and rate of 55% kicks back in.  This was done for various budgetary and political reasons.  In 2001 there was no one who thought that we'd be here in 2009 and not have a "fix."  In 2005 there was hardly anyone who thought that.

But here we are.  After 9/11 and the Iraq War and the run up in the economy and the economic collapse and the Democratic takeover of Congress and the White House, we are still scheduled to have no estate tax next year and then a lower exemption and a higher rate the year after that. (For an excellent read on the history of the battle against the Estate Tax, pick up a copy of Death By a Thousand Cuts: The Fight Over Taxing Inherited Wealth by Michael Graetz and Ian Shapiro).

As an Estate Planner, I hate the situation we're in.  My job is to plan, which can be very difficult if I have no idea what the rules are going to be less than a year from now.  I've long thought that Congress was just going to take the 2009 rules and extend them.

Now, according to the Wall Street Journal, Republican Senator Charles Grassley, a longtime opponent of the Estate Tax seems to think that things look pretty good for Estate Tax Opponents. 

"If Republicans stick together, we can do better than $3.5 million and a 45% tax rate," Grassley told reporters after his speech. "Maybe not a whole lot better, but we ought to be able to do a little bit better."

He said Republicans could press for an exemption closer to $5 million or $6 million, and a tax rate closer to 35%.

Grassley said Democrats will be eager to avoid having the tax go to zero on Jan. 1, 2010, only to have to reverse that by reinstituting it through legislation later. Republicans should be able to exploit that urgency to press for better terms, he said.

"This is where Republicans have got some leverage, it seems to me," said Grassley.

Democratic-written budget blueprints unveiled in the House and Senate on Wednesday include authority to freeze 2009 estate tax levels through 2014, at a cost of about $72 billion.

Rep. Richard Neal, D-Mass., told reporters after the same tax conference Wednesday that the House was likely to consider an estate tax fix this year that is shorter than five years, in order to reduce costs.

For more, see Sen. Grassley Says GOP Will Have Clout On Estate Tax Fix.

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I keep hearing from people what a great "deal" a certain internet website is. You just log on, type your information, and you can instantly get wills, trusts, corporations, trademarks, etc, just as good as one prepared by an Estate Planning or other Attorney for a lot less money. As I posted before, I believe that this is impossible. No computerized website can ever give you the personal and customized attention that an Estate Planning Attorney can. It does not know how to ask the right questions and come up with the right solutions based upon your individual circumstances.

"But", someone will say, "You've never ever seen a document from them. For all you know, they're perfect."

Fair enough.

So I decided to see for myself. I went to this site, signed up, and ordered a revocable living trust. I even paid for it. I answered the questions, went through the whole process and filled out the information as if I were a client (of course, I didn't use any real attorney client information). Over the coming days, I will write about my experience in using the site, signing up, answering the questions, and the documents that I receive.

When the document arrives in the mail, I will read it and post my thoughts about it. I'm going in with a skeptical mind and am biased, but I'm prepared to be swayed. I actually hope I'm wrong because it bothers me greatly that there are so many people out there who have "peace of mind" in the belief that they've done their estate planning, and have what may be faulty documents.

In my coming reviews, whenever I profoundly disapprove of something that the site is doing, I will indicate it to you by invoking something my Grandmother always says:

Oy.

Be prepared, there are a lot of Oys coming, regarding just using the site, and I don't even have the documents yet.

[Note: While I'm sure you can figure out who it is, I purposely didn't mention the site at this time. I don't want to influence the experiment.]

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I would like to welcome the Molder Legal Group to the South Florida Estate Planning blogging community.  Their Florida Parents Page blog recently launched.  It looks like their blog will be more tightly focused on planning for parents with young children.  Good luck, Jason and Nicole.

 

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I found this article from Newsday interesting.  They list six ways to save taxes, based mostly on depressed asset values, something that I've written about before.

1. Convert your traditional IRA to a Roth IRA.
2. "Undo" or recharacterize a Roth IRA conversion if your initial conversion was in 2008 when values were significantly higher.
3. If you have begun taking Required Minimum Distributions from your IRA, don't take one in 2009.
4. Take what the articles calls "inherited IRA deductions" which is an income tax deduction for the estate taxes paid on an inherited IRA for something that is known as income in respect of a decedent (IRD).
5. "Get ready" for higher taxes rates that are coming.
6. Transfer assets out of your estate while they are at a low value. 

Each of these may be a good idea depending upon your individual situation.  Before going through with any of them you should see an expert -- a tax attorney, CPA, or financial planner that specializes in this area.

 

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Like many people today, I love the Internet. It is a great business, social, and financial tool. I am member of a number of various discussion forums (legal, technological, social, and personal), have a Facebook Account, a twitter account, multiple email addresses for business and personal use, and  now have friends all over the world, many of whom I've never met

Additionally, in managing my personal finances, I try to live a paperless life as much as possible. I probably physically write less than 10 cheques a year, and sign up for paperless billing for every account that offers it. I wish that I could produce digital Wills and Trusts for my clients, but the law hasn't caught up with the technology yet, but that's a topic for another time.

I'm sure that many of you reading this are nodding your head in agreement because you are just like me. But have you ever thought about what will happen to your online life after you die?  The process of administering your estate or your trust upon your death involves gathering your assets, paying your creditors, and then distributing the assets to the beneficiaries. Generally when someone dies we file a form with the US Post Office so that the decedent's mail is forwarded to their personal representative, trustee, or to the attorney administering their estate. Most banks, credit card companies, brokerages, etc, send a monthly (or at the very worst quarterly) statement. Thus, it's not that hard to figure out what the decedent owned (and owed).

More after the Jump

UPDATE: Jeremy Toeman of Legacy Locker responded to this post and his comment and my response are in the comment section below.

Continue Reading...

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The New York Times published a good article yesterday laying out what I've been telling everyone lately -- that it's time for everyone to reevaluate their estate plan. In Smaller Though It May Be, It's Time to Look at the Estate NYT writer Paul Sullivan states:

But estate planning is not primarily about avoiding a tax that few have been subject to since it was instituted in 1916. The primary goal has always been how to bequeath what you have to the heirs you picked. And if handled wrongly, wills can become a vehicle that destroys families.

 The most important points that I hope people take from this article are that:

1. The Estate Tax is here to stay.  Virtually every Estate Planning attorney will tell you that repeal, fought so hard for by Republicans is dead.
2. The "exemption," that is the amount a person can die owning before being subject to the estate tax is currently $3.5 million, and probably will be at least that amount in the future.
3. Over the past two years, many people who are (or were) subject to the Estate Tax lost a substantial amount of their wealth.  Not only that, their successful adult children, who didn't necessarily need an inheritance from their parents have also lost a substantial amount of wealth.  I've heard anecdotal evidence that sales and rentals of this movie have skyrocketed (just kidding).

 Those three above factors result in many estate plans being very problematic.  They may have been perfect when drafted.  The problem is the attorney who drafted it did not anticipate the fundamental change in the economy.  No one did.

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Since I started my blog I have been asked on more than one occasion, "Who Provides Your Content?"  At first, I didn't understand the question.  I explained that a company called LexBlog worked on the design on the website (and I have to say they did a fantastic job) and provides hosting and other technical internet services.

"No" the questioner said, "Who provides your content?"

I have since learned that some attorneys pay companies to provide them with articles, which the attorney then puts in their newsletter or on their website without attribution.  I wasn't aware that was common, but it must be because I've been asked about it more than once.

So I would like to answer the question both for posts that I've already made, and with a promise for all future posts.

The person who provides  all of my content is and always will be me. 

If I ever decide to have a "guest poster" it will be more than clear that the post is by them.  If I see an article or blog post by someone else that I think would be useful for my readers, I will quote it with full attribution and a link back to where it came from.

Why would I do it this way, when it is so easy to take "professionally" written articles and post them as my own?

1. I love to write and I especially love to write about topics that interest me.  Estate planning and the related issues including tax and retirement planning and asset protection are interesting to me.  I enjoy writing about them and I'm certainly not going to pay someone else to do it for me.
2. Blogging makes me a better lawyer.  It forces me to sit and think and research and write about specific issues that I don't necessarily think about every day.  In researching a post (and I have a few in the hopper that I'll post over the coming days and weeks) I'll often learn something new, or reevaluate my position on an issue.
3. I wouldn't be able to sleep at night.  Even if you, my readers never knew that the words you were reading weren't mine, I would know, and it would bother me.

So for better or for worse, my blog is just that, my blog.  Written, typed, and edited entirely by me.  It's been a great experience for me so far, and I hope that you, my readers are enjoying it and continue to do so.

P.S.  Thanks to those of you who have privately pointed out all of my typos, allowing me to change them.  Typos are just more proof that the posts are coming from me.

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This post concerns what I see are the dangers of people buying fill in the blank Wills in stores, over the internet, or using consumer software.  And I am going to admit right up front that I have a personal and financial bias.  My job is to provide estate planning services, which may include wills, trusts, advanced directives and other documents, to clients.  Like anyone else who works for a living, I certainly prefer that people hire me and not someone else.  If instead of going to me, people buy software that purports to prepare Wills, or they buy a Will from a company that constantly advertises on the radio, then I am not benefiting financially.

But this post isn't about that at all.  If a client chooses to hire an attorney other than me then I'm not making money either, yet that does not bother me.  What bothers estate planning attorneys about store bought fill in the blanks wills and trusts, or software, or internet Wills, is that they often end in disaster.  Virtually every estate planning attorney has more than one story about a bereaved family finding out after their loved one's death that the do it yourself Will did not accomplish what it was supposed to, or wasn't properly executed and therefore was invalid.

My main concerns with do it yourself estate planning are as follows:

1. People are choosing what they need without professional advice.  Someone will get into their mind that they "need a trust" and will go onto the internet and order one.  It would be like if I woke up one morning with a stomachache and without going to the doctor decided that I needed an appendectomy.  A person needs to sit with an expert to decide whether they need a trust, and what kind, and what it should say.  And even if the person does need a trust, it still has to be properly funded, something a form can't do.
2. The "one size fits all" problem.  A fill in the blank form bought in a store or ordered over the internet is not going to be custom tailored to an individual client's needs.  Every person has their own special set of circumstances, whether it is the type of assets they own, or special provisions that might be necessary for their children.  Just one example, if you are in Florida and you own a home, the rules regarding how you may devise your Homestead are extremely complex. No preset form, or company in another state can possibly get it right, because there are too many variables, and every situation is different.
3. The Law is constantly changing.  How often are these forms updated to reflect changes in the law?  Can you have confidence that the document is valid for your state?
4. People who buy premade Wills often do not execute them properly causing the Will to be invalid.  The law regarding the execution of Wills is very strict and unforgiving.  In Florida, a testator must execute his Will in the presence of two witnesses who also must sign in the presence of each other.  There are numerous cases of Wills being declared invalid because the signing requirements were not adhered to.  If a Will is invalid then the estate passes through intestacy. An estate planning attorney is likely to have presided over the execution of hundreds, if not thousands, of Wills and will have a procedure to ensure that each and every Will is properly executed.

I understand why people buy store bought Wills or software instead of going to an attorney.  Money and time.  They see an attorney as far too expensive, and probably don't really understand what an estate planning attorney truly does.  They think the $39.95 form or $49.95 software will be "good enough." 

If time and money are the motivating factors, then you should know that it is much more expensive and it takes a lot longer to fix the mistakes after you are dead than it would have been to do it right the first time.  A Probate, especially one complicated by a Will with errors or that is invalid, will most likely cost at least 3 times as much as proper planning would have.

I'm not saying that the software, forms, or internet wills will always be invalid.  I'm just saying think of your family, and be careful.  Like anything else, there is no substitute for personalized one on one advice.

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In the past, I have discussed the importance of everyone, single or married, gay or straight, to have either their Will or Revocable Trust properly drafted and executed.  The reason for this, of course, is so that you can decide how your property is distributed upon your death and the state doesn't decide for you through the rules of intestacy.

Today, I want to tell you that for certain of your assets, this might not be enough  There are certain assets that pass outside of probate, meaning their disposition is not governed by your will or your trust.  Although this list is not complete, the most common assets are as follows:

1. Section 401(k) plans
2. IRAs including both traditional and Roth IRAs
3. Other Retirement Plans
4. Annuities with a pay on death feature
5. Life Insurance Policies.

This is not a complete list, and you can see that there are some common features in the above items.  In each of these, the "owner" does not necessarily own the underlying asset directly.  Instead, the asset is held by a third party, for example an IRA custodian or a 401(k) plan sponsor for the benefit of the owner.  These assets are not "probate" assets and are not disposed of by your Will or Trust.

Instead, they are distributed pursuant to the Beneficiary Designation.  If you have a life insurance policy, and an IRA and a 401(k), you need to properly complete the Beneficiary Designation form for each and every one of them to make sure that those assets are properly distributed upon your death.  The individual beneficiary designation controls what happens to each of these assets, and not your will.  Also note that if you are married, there are restrictions as to who you may designate on your 401(k) only.  

The reason that it is so important to have a properly executed beneficiary designation is that because if these assets pass outside of probate, they should be outside the claims of your creditors.  If done properly, your heirs can generally inherit your retirement plans and life insurance policies without having to first pay that creditors of your estate (but you need to check with an attorney in your state to be sure).

A few more items you should know:

1. You do not have list an individual on your Beneficiary Designation.  You can list multiple people, or even a trust.  The more money there is, the better idea a trust is.
2. You can (and should) designate alternate Beneficiaries, in case the person you listed first is no longer living
3. If you do not properly designate a beneficiary, then the asset will be distributed to the "default" beneficiary.  Who this is is generally based on the contract with the company holding the asset (life insurance company, IRA custodian, etc.).  The default beneficiary is often your estate (which then subjects your assets to creditors), or sometimes your surviving spouse.

A well crafted estate plan includes not only properly drafted and executed wills, trusts, and advanced directives, but also properly drafted beneficiary designations.  If you have these type of assets, it is important that you discuss with your estate planning attorney the best way to complete the beneficiary designation forms, so that they are disposed of as part of your overall estate plan.

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Over the past few years, one of the most active and contentious political issues in this country has been that of gay, or same sex marriage.  Proponents of same sex marriage have argued that a married couple automatically has "1400" rights just by virtue of being married.  They argue that since same sex couples are unable to get married, that there is no method for them to obtain these same rights with regard to their partners.

As this is a legal blog and not a political blog, I do not want to discuss the political issue of gay marriage here.  Professionally though, as an estate planning attorney located in Broward County, it is my job to best serve my clients.  There is a large gay community living in South Florida -- whether it is Miami Beach, Fort Lauderdale, Wilton Manors, or just in the community at large.  It is important for same sex couples to know that through proper estate planning, they can obtain many (but not all) of the abilities (not necessarily "rights") that a married couple has with regards to inheritance, hospital visitation, and the power to make medical decisions for their partners. 

What's even more important for same sex couples to know is that if they have not engaged in proper estate planning, because they are not considered related to their partner, they will have virtually none of the rights that a legally married couple has with regards to these issues.

Before moving on, I do want to state that for Federal estate and gift tax purposes, there is no equality.  There is nothing that can be done to match the incredible power of the marital deduction  in which an individual may give an unlimited amount of property to their spouse tax free, either during life or at death.  However, a good estate planning attorney should be able to suggest some alternative tax reduction strategies for same sex couples including using up your lifetime gift exemption, paying for your partner's education and medical bills directly, or a GRAT.  But unless a person has at least $3.5 million, the estate tax is not necessarily something that they should be worrying about right now.

But what does concern same sex couples is the same thing that concerns all couples -- the right to visit their partner in the hospital when sick, to make decisions for their partner when their partner is unable to due to incapacity, and to inherit property from their partner upon their partner's death.

PROPERLY DRAFTED ADVANCED DIRECTIVES, INCLUDING A DURABLE POWER OF ATTORNEY AND HEALTH CARE SURROGATE ARE ESSENTIAL

As I've blogged about previously, Estate Planning is about Planning for disability as well as death.  With a properly drafted and executed durable power of attorney and designation of health care surrogate, an adult can choose any person they want to make financial and/or medical and health care decisions for them, in the case the person is unable to make them for themselves.  If a person does not have these documents in place, then a hospital will look to that person's "spouse" (to which that person is legally married) or in the event of no spouse, blood relatives.  It is essential that same sex couples have properly executed Advanced Directives, in which they designate their partner as their "attorney in fact" for health care and other decisions.

Note: I am aware of the Langbehn/Pond case, where a hospital in Miami allegedly denied visitation to the Lesbian partner of a tourist who had a heart attack on a cruise and then later died, even though she had a properly executed health care surrogate, but I believe (hope) that instance was an aberration.  If anything, this case is evidence of what can happen without the proper documents (and an educated hospital staff that understands them).

A PROPERLY DRAFTED AND EXECUTED WILL OR A REVOCABLE LIVING TRUST, (AND/OR PROPERLY STRUCTURED JOINT OWNERSHIP OF PROPERTY OR BENEFICIARY DESIGNATIONS) IS ESSENTIAL FOR SAME SEX PARTNERS TO INHERIT EACH OTHERS PROPERTY UPON DEATH

In a previous blog post I discussed that if a person dies without a will, it is known as intestacy, and the State determines how their property is distributed per a predetermined set of rules.  While intestacy is not an ideal situation, the order in which people inherit from an intestate decedent is set up to give the decedent's surviving spouse priority over everyone else.   In Florida, when a person dies survived by a partner to whom they were not legally married (either gay or straight), then the partner has no intestate inheritance rights at all, and the Decedent's property that is subject to probate may be inherited by blood relatives that the person hasn't seen or spoken to in years, instead of by the loved one they spent their life with.

But this can be solved with proper planning.  If a decedent (gay or straight) engaged in estate planning before their death and executed a Will or a Trust leaving their property to their partner, then the problem of the "wrong" person inheriting through intestacy disappears.  Part of the problem may also be solved by owning property as joint tenants with rights of survivorship, using Pay On Death Accounts, and making sure that the beneficiary designations on life insurance and retirement accounts are properly completed.  But these steps should be done as part of an entire plan, in conjunction with a Will or Trust, as it might miss assets, which would then be subject to intestacy.

While I'm sure that the fight over gay marriage will linger on for years, same sex couples can and should take the steps necessary today to engage in proper estate planning to protect both themselevs and their loved ones.

 

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In testimony before Congress this morning, IRS Commissioner Douglas Shulman [No Relation] testified that the Service will be issuing guidance as to how victims of Ponzi schemes can treat their losses for tax purposes.  According to the New York Times:

The plan, which applies to victims of all Ponzi schemes, is likely to provide major relief to the victims of Mr. Madoff, who pleaded guilty last week to orchestrating what prosecutors say is the largest Ponzi scheme ever — one that could reach $65 billion and cover 13,000 investors.

The plan would ease existing rules governing what are known as theft-loss deductions, which are losses claimed by investors who are cheated by their investment advisers and others in Ponzi schemes and other frauds.

Under the plan, which has been reviewed by the congressional offices, the I.R.S. will allow investors who are not suing Mr. Madoff to claim a theft-loss deduction equal to 95 percent of their investments, minus any withdrawals, reinvested gains and payouts from Securities Investor Protection Corporation, the government-chartered fund set up to help protect investors of failed brokerage firms.

Investors who are suing Mr. Madoff, and who thus may have some prospect of recovery, can claim a deduction equal to 75 percent of their investments.

The I.R.S. is also relaxing the rules on how far back the losses can be carried. Current theft loss rules typically allow loss to be carried back 2 years and forward 20 years, but under the plan, the I.R.S. will allow losses to be carried back 5 years as well as forward 20 years.

Under the plan, investors must claim the loss as having happened in 2008.

 I will post any original sources when I find them.

UPDATE: The IRS has issued a Revenue Ruling (Rev. Rul. 2009-09) and a Revenue Procedure (Rev. Proc. 2009-20) (Thanks to Joe Kristan of Roth CPA for the links). Joe did his own reading and analysis of the releases.  My quick read is as follows:

First, the Service issued both a Revenue Ruling and a Revenue Procedure.  A Revenue Ruling generally states what the Service's posistion is on a specific area of law.  A Revenue Procedure sets forth methods for Taxpayers to comply.

Rev. Rul. 2009-09 answers the following questions:

1. Is a loss from criminal fraud or embezzlement in a transaction entered into for profit, a theft loss or a capital loss under s. 165 of the Internal Revenue Code? (The Service ruled it was a theft loss and not a capital loss)
2. Is such a loss subject to either the personal loss limits in 165(h) of the Code or the limits on itemized deductions in 67 and 68? (The Service ruled that the deduction that can be taken pursuant to the answer to 1 above is not subject to the limits of 67 and 68.
3. In what year is the loss deductible? (The Service ruled that a theft loss is deductible in the year in which the taxpayer discovers the loss, which is 2008 and should be deducted on 2008 returns filed in 2009.)
4. How is the amount of the loss determined. (The Service ruled that the amount of the deduction is the initial amount invested plus any additional amounts invested, reduced by any amounts withdrawn, and reduced by claims as to which there is a reasonable basis for recovery.  Therefore, for a Madoff investor, their loss is the initial investment, plus any additional investment, plus any amount that they reported on their income tax returns as gross income over the time of the investment, reduced by any money that was distributed to them. Also, if the Taxpayer has a reasonable chance of recovery of any property, they can not deduct that amount either.)

The Revenue Ruling also discussed Net Operating Losses, the Claim of Right doctrine, and the Statute of Limitations.  It provides that a taxpayer can treat these losses as a NOL, that there is NOT a benefit under s 1341 (the Claim of Right Doctrine), and that a Taxpayer can take a decution in 2008 for amounts taken into income for past years, even if the statute of limitations has expired.

The Revenue Procedure provides a "safe harbor" for Taxpayers -- meaning that if Madoff victims follow it, their returns will not be challenged by the IRS.  It provides for a deduction of 95% of the "qualified investment" a term defined in the Rev. Proc, if the taxpayer is not going to sue Madoff, and 75% if they are going to sue Madoff (or other Ponzi promoters).

 

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I was at a networking event today, and I was talking with a guy in his twenties -- healthy, unmarried, no children, minimal assets and minimal debt.  He said he wanted to talk to me about me doing a "revocable living trust" for him.  When I asked him why he thought he needed one, he didn't know.  He had heard about them on the radio or read an advertisement for a seminar on revocable living trusts, and he decided that he needed one.

He doesn't.

First, "What is a Trust?"  A trust is an entity created by a "Grantor" or "Settlor" (the words are synonymous), to hold property for the benefit of beneficiaries.  The laws of Trusts are based both upon each individual state's statutes, and the Common Law.  In this blog post, I will be writing based on my experience primarily as a Florida Estate Planning attorney that drafts Wills and Trusts, and the laws may be different in your State.  Generally, there are two types of Trusts -- Revocable Trusts and Irrevocable Trusts.  The term "living" merely indicates that it was created by the Grantor when he was alive, as opposed to a Testamentary Trust, which is created from the Grantor's Will, upon their death.

The two types of trusts are self-descriptive.  When a grantor creates an Irrevocable Trust, he is irrevocably transferring whatever property he is choosing to transfer to the Trust.  He has given the property away, and has not retained any rights to revoke the trust or to take back the property.  Irrevocable Trusts are often used for gift and estate tax planning, medicaid planning, and asset protection planning.  They are also useful in situations in which the Beneficiaries are not ready to receive the property outright, or in which the Grantor might want to protect the assets from a Beneficiary's creditors.  Depending on what the goal is, it is possible for the Grantor to also be Trustee of the Trust, but often he is not.  But the key is that it is a permanent transfer of the property to the Trust by the Grantor which can not be revoked.

A Revocable Trust (or Revocable Living Trust) is a Trust that can be revoked or amended by the Grantor at any time for any reason.  The Grantor can cancel the Trust entirely, change its terms, and add or remove property to the trust.  In most cases, as long as they are healthy and mentally competent, the Grantor is also the Trustee of their own Trust.  A Revocable Trust becomes Irrevocable upon the Grantor's death.  Like a Will, it provides how property is disposed of upon the Grantor's death, and how property should be managed if the Grantor is still alive, but becomes incapacitated. 

The sole purpose of a Revocable Trust is to avoid probate upon the Grantor's death, and to avoid a Guardianship if they are alive and incapacitated.  However, in order to successfully avoid probate, all of a Grantor's assets must be retitled in the name of the Trust.  Any asset subject to probate not owned by the Trust would require to be probated.  In addition, a Guardianship can be avoided by having a properly drafted and executed Durable Power of Attorney and Health Care Surrogate.

A Revocable Trust will often add complexity and cost to a client's estate plan, and if they are not properly funded, they do not accomplish probate avoidance anyway.  For older clients, a Revocable Living Trust, is a good idea and is worth the extra cost and effort to properly fund and administer it.  But for a younger person, a Will, along with properly executed Advanced Directives work just fine.

A final note:  There are people out there providing "seminars" on Revocable Trusts, in which their basic theory is that everyone on earth needs one right away, and needs to buy one from the person giving the seminar.  Be wary.  These presenters are often not attorneys, and are providing fill in the blank documents that are not custom tailored for you, the client.  Anyone who claims to know what you need before talking to you as an individual, and wants to sell you the same fill in the blank document that they are selling to a room full of fifty people should be treated with extreme skepticism.

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Although I'm sure that it is of little comfort to his victims who had their lives ruined (and there are quite a few of them here in South Florida), the United States Government has filed a notice of intent to seek the forfeiture of not only Bernard Madoff's assets, but also the assets of his wife, Ruth.  This comes on the heels of his guilty plea least week.

The list of assets to be seized includes:

1. Their Co-op located at 133 East 64th Street, Manhattan;
2. Their home located at 410 North Lake Way, Palm Beach, Florida;
3. One Leopard 23M Sport Yacht known as Bull;
4. One 2007 BMW 530i;
5. One 1999 Mercedes Benz CLK Class;
6. Silverware set owned in the name of Ruth Madoff valued at approximately $65,000;
7. Approximately $17,010,000 located at Wachovia Bank in Ruth Madoff's name; and
8. Approximately $45,000,000 in municipal bonds in Ruth Madoff's name. 

For some reason the government's document listed the tchotchkes first and the tens of millions of dollars last.

The full text of the Government's Notice of Intent to Seek Forfeiture of Certain Assets is located here.

 

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There was a short article yesterday in the Bristol (CT) Press by Connecticut Attorney Daniel O. Tully pointing out that "If your finances have changed markedly since you wrote your will, you should check your estate plan to see if you need to make any changes."  This is especially true if your plan includes "specific bequests" which are gifts of specific property upon your death.

For example, your Will might currently state, "I give, devise, and bequeath my 10,000 shares of my Citibank stock to my son Barack, and the rest, residue, and remainder of my estate to my daughter Michelle" 

Assume you executed your Will on March 16, 2004.  On that date, 10,000 shares of Citibank was worth close to $500,000. Today, after the perceptions decline in the stock market,10,000 shares of Citibank is worth about $17,000.  If you died today with those provisions in place, this could create an inequity that you hadn't intended.  Therefore, it is a good idea to review your documents to see if you made any specific bequests, and contact your estate planning attorney to discuss whether or not a change is necessary.

Also, as I have written about before, I believe that this decline in the world economy provides the greatest opportunity for gift and estate tax planning in years, possibly ever.  Note that I am not talking about Citibank, or any specific stock or asset in particular, but just assets in general.

Currently -- and I am simplifying this -- the US imposes a gift tax on the value of assets that you give away during life, and on the value of assets that you own upon your death.  One of the benefits of giving away assets now is that you are only subject to tax on the current value of the asset, and all of the future appreciation is removed from your estate and not subject to the gift or estate tax.  If you are relatively young and healthy, and you believe that in the long term that the value of the assets you own will appreciate, you should evaluate whether it makes sense to give some property to your children or even grandchildren now, so if the value of that property comes back up, it will be out of your estate and not subject to the estate and gift tax.  Even after the current stock market decline, $10,000 invested in Microsoft in early 1990 would be worth $282,200 today.  A gift of Microsoft stock in 1990 would have removed all of that appreciation from your estate.

I realize that many people are concerned about giving away assets now -- either because they do not believe that their children are ready to handle large amounts of money or they are afraid that they themselves will need the money to live later in life.  Depending on your individual circumstance, there may be solutions to each of these problems, which your estate planning attorney can discuss with you.

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 In my previous post, I discussed why a Will is essential for almost everybody, so that a person can decide how his property is disposed of upon his death, instead of having the State decide for him, per a preset list of rules.  And while planning for what happens after death is a large part of what Estate Planning Attorneys do, it's not the only thing.  Another essential element of my job is to plan for who will make decisions for my client -- concerning their health care and their finances, in the event that they are incapacitated and unable to make these decisions for themselves.  The key is that I want to avoid having a Guardianship established for my client, because Guardianships are timely and expensive, involve tremendous judicial oversight, and should only be used if there is no other less restrictive alternative. 

While a Will is about what happens after my client dies, there are three documents that I use to prepare for what should happen if my client is alive, but incapacitated -- they are a Durable Power of Attorney, a Designation of Health Care Surrogate, and a Living Will.

• A Durable Power of Attorney is a document in which the client, often known as the Principal, designates who will make decisions for them with regards to their finances and other related issues, such as opening their mail and representing them in court.  There are two types of Powers of Attorney.  The first becomes effective immediately.  The instant it is signed, the person appointed, often known as the Agent or the Attorney-in-Fact (as opposed to an Attorney-at-Law) can go to the bank and make transactions upon the Principal's behalf.  A springing Durable Power of Attorney on the other hand, does not become effective until the Principal is incapacitated, for example in a coma, or suffering from senile dementia.  Whether I recommend a springing or a non-springing Durable Power of Attorney to my client often depends on a number of factors.  These include their age, who they are choosing as their agent, and their relationship with that person.  I prefer non-springing Powers of Attorney because they are easier to get banks to accept, but that's not always the best choice for the client.
   
• A Designation of Health Care Surrogate is similar to a Durable Power of Attorney except that the Principal designates who they want to make health care decisions for them in the case that the Principal is unable to make them for themselves. For this designation, there is no "springing" vs. "non-springing" as they only come into effect upon incapacity.  Note that a Designation of Health Care Surrogate can cover any type of medical situation.  One attorney I used to work for gave the example of "Suppose you were in a coma and had gangrene in your finger.  Someone needs to make the decision whether or not to operate."
   
• A Living Will is the third document that I prepare for clients. This document expresses the client's wishes if they are in a persistent vegetative state, or an end-stage condition.  Think Terri Schiavo. The client can designate whether or not they wish to be kept on life support as long as possible, or if life support should be discontinued.  In addition, the client can state whether nutrition and hydration (i.e. food and water) should be provided or withheld.    

It is important for you to have a Durable Power of Attorney and Health Care Surrogate, so that in the case of your incapacity, there is a less restrictive alternative to a Guardianship.  A Living Will is important so that your wishes are in writing and your loved ones can be able to follow them.

 

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I meet people all the time -- single people, married people, with and without children who have none of their estate planning documents in place.  There are a number of reasons as to why people don't get their documents in order -- worry about the cost is often a reason given (although it does not have to be expensive to do).  For some, it's just general procrastination.  It's on their list of things to do along with lose 30 lbs or clean out the garage.  Yet for others, it is the fear of thinking about their own mortality or the misguided belief that a tragic and sudden death could never happen to them.  But if you have your own property, and you want to decide for yourself how your property is distributed after your death instead of having the state decide for you then you generally need a Will.

Dying with out a Will is known as being intestate.  Each state has its own laws of intestacy, determining how an intestate decedent's property is disposed of upon their death.  In Florida, the intestacy provisions are set forth in Chapter 732 of the Florida Statutes.  Under the rules:

1. If you are married and have no descendants (children, grandchildren, etc.), your spouse receives your entire intestate estate.  It doesn't matter if you were married for 3 days or 30 years.
    
2. If you are married and have descendants and all of your descendants are also children of your spouse (meaning that you have no living children or grandchildren from another relationship), then your spouse receives the first $60,000 of your intestate estate, plus 1/2 of the value of the remaining intestate estate, with the balance being distributed among your descendants "per stirpes".  If your intestate estate is $60,000 or less, then your surviving spouse receives it all.
    
3. If you are married and have any descendants who are not descended from your surviving spouse (e.g. you have children from a previous marriage), then your intestate estate is split 1/2 between your surviving spouse and 1/2 among your descendants, "per stirpes".  Your spouse does not receive the first $60,000 off of the top.
    
4. If you are not married, and have descendants, your intestate estate is distributed to your descendants, "per stirpes".
    
5. Then, if you do not have descendants, there are a series of "alternate takers" depending on who in your family is surviving.  It will go first to your parents, then your siblings, then to your paternal and maternal grandparents equally, then to your aunts and uncles, and on down the line.
    
6. Then, Section 732.107(1) provides the worst possible scenario, "When a person dies leaving an estate without being survived by any person entitled to a part of it, that part shall escheat to the state,"
    

The term "escheat" means that your property become the property of the state.  Remember, under the law "friends" have no rights to your property after you die.  If you have property and no family and lots of friends, unless you have a Will (or have made some other provision for the dispostion of your property such as a Pay on Death Account), your property will go to the state upon your death.  And if you do have family, you need a Will so that you can decide how your property is divided instead of having the law and a judge make that choice for you.

 

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Just a quick update to my earlier post on Anna Nicole Smith's attorneys petitioning the Supreme Court to intervene in their case.  According to Howard Bashman's How Appealing Blog, the AP is reporting that ""Supreme Court Justice Anthony Kennedy has turned down a plea for help from the estate of Anna Nicole Smith in a fight over a Texas oil tycoon's fortune.""

So I guess my hope to see Justice Scalia crying over the dispostion of her body will have to wait.

 

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The year 2009 is shaping up to be interesting when it comes to making decisions regarding your IRA.  First, despite the mini-rally of the past four days, the market is still at a longtime low.  But second, there are two unique and temporary laws that have never coincided before.

First, Congress enacted a law late last year lifting the obligation to take Required Minimum Distributions (RMDs) for 2009.  That means that if you had already started taking RMDs from your IRA (which are generally subject to income tax), you can keep your distribution amount in the IRA for one year only.  (Note, most people reading this probably have not reached the age where they are required to take, or have started taking RMDs).

Second, Congress has extend the rules regarding "IRA Charitable Rollovers" through 2009 also.  This allows individuals who are 70 1/2 or older to contribute up to $100,000 directly from their IRA to a charity.  Normally, a person would have to take a distribution from the IRA (subject to tax) and then turn around and make a charitable contribution and take a corresponding charitable deduction.  However, because of the various limitations on deductions in the Internal Revenue Code, the individual might not be able to deduct the entire amount.

These two different rules don't necessarily overlap -- one allows people to keep their money in their IRAs and one gives them a way to take it out (without paying tax), and they are both temporary.  But it's interesting to see which one will be more important in this economy.

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One of the greatest issues facing estate planners today is the vast decline in so many of our clients' wealth.  This is especially true in South Florida where the real estate market has collapsed, and Bernie Madoff's clients abound.  The list of people whose "fault" this is is too long to post here.  But certainly the financial press has some culpability in building up the bubble.

Last night's interview of CNBC's Jim Cramer by Jon Stewart should be essential watching for everyone.  Also, while I don't do litigation, it's certainly a masterful cross examination.

 

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Time magazine published an article today discussing what many tax attorneys and CPAs had already been discussing amongst themselves on internet listservs and at wild and crazy tax attorney/CPA parties for the past few months -- the massive amount of tax refunds that are going to be filed for by victims of Bernard Madoff and other Ponzi crooks.  Per the article:

"I think we're going to see the IRS come out with guidelines very shortly," said Neil Tipograph, tax partner at New York-based, Imowitz Koenig & Co, LLP, an accounting firm specializing in private equity and feeder hedge funds. According to Tipograph and other tax experts, victims involved in Ponzis have four ways to reclaim taxes paid on fraudulent income, the first being a good old-fashioned "Theft Loss" deduction, which allows a person to go back three years and reclaim taxes paid. Currently, no deduction can be made on the original investment, especially if a SIPC claim has been made.

The second is a "Phantom Income Deduction," which allows you to remove the Ponzi income going back three years, but if you still have a loss you can carry it forward [i.e., apply it as a deduction against future gains] until the full loss is made up.

The third option, "Claim of Rights Credit," is most beneficial, he says. It allows victims to claim a credit for all taxes paid on Ponzi income going back to the first investment year on their 2008 tax return. The catch, according to Tipograph: "It's never been tested in regard to Ponzis." This option is typically used in insider trading cases, when tax monies need to be returned.

The last option is "Mitigation," which requires the taxpayer to go back and reopen each year's tax filing, back to the year of the first investment. There are some technical requirements related to this option.

"It's likely the IRS will just allow for the theft loss," said Tipograph. "It's not the best option for taxpayers, but is a reasonable way to handle this." But if you don't file by April 15, you can lose out on filing for 2005, Tipograph says, since there's a rolling three-year time limit.

I was really hoping that the IRS itself would issue guidance on the subject well before April 15, but as the clock ticks, that's looking more and more unlikely.

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As I Iook out the window of my office, I can see the Broward County Courthouse.  As an estate planning  attorney who also practices probate administration, having an office across the street from the courthouse makes attending hearings very convenient.  But today, as I look out at the Courthouse I am reminded of what triggered the building's 15 minutes of international fame, the Anna Nicole Smith Hearings. 

Anna Nicole Smith was a train wreck, both in life, and sadly in death.  If there ever was a case to come out of South Florida that showed how essential proper estate planning was, it was hers.  To briefly refresh your recollection, Anna Nicole Smith (nee' Vickie Lynn Marshall) died on February 8, 2007 at the Seminole Hard Rock Hotel and Casino (now with Blackjack!) in Hollywood, Florida.  Her son, Daniel Smith predeceased her by six months.  After her death the fight over the disposition of her body occupied a bored nation's attention.

There are two recent updates in the case.

First, Howard K. Stern, Smith's attorney, business manager, boyfriend, whatever, and her doctor were arrested on Thursday and charged with conspiring to furnish her with drugs.

Second, the battle over her octogenarian husband, J. Howard Marshall's estate continues.  The main combatants over Marshall's estate were Smith and Marshall's son, and they are both dead. On Monday, her estate's attorney filed a writ with the U.S. Supreme Court asking that they be allowed to start collecting on her $88 million judgment, which is still tied up in litigation.

I just hope Justice Scalia doesn't cry when issuing his ruling like Judge Seidlin did.

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This is the second of three (actually four) posts regarding the different "types" of Homestead in Florida. In my previous post on the subject, I discussed "descent and "distribution," in which the state sets forth the rules governing the situations in which your Homestead may, and may not be disposed of upon your death.

Today, and in a future post, I will be writing about an incredibly important, and complicated aspect to Homestead protection, which is the protection of your Homestead (subject to certain limitations discussed below) from the claims of creditors. This rule has made Florida a haven for people who owe others large sums of money (it's not just the Golf that brought O.J. Simpson to Miami).

The reason it is so complicated, is that determining whether your Homestead is protected depends on a mixture of state and federal law.

As in the previous post, I would like to start with the Florida Constitution. I have highlighted the important provisions.

Article X, Section 4 of the Florida Constitution provides:

(a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person:
(1) a homestead, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner's consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner's family; (b) These exemptions shall inure to the surviving spouse or heirs of the owner.

In general terms, your Homestead is protected from your creditors. That means if you are sued and there is a judgment against you, you can't lose your house.

However, there is a twist that I will discuss in part II(b), and this is the Federal law of Bankruptcy can trump the state Homestead law.

 

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One of the issues in drafting estate planning documents is that if there is a mistake in the will or the trust, it is often not discovered until many years later after the testator or grantor has passed away. Sometimes these errors are glaring, such as naming the wrong person in the will. But ofttimes, the mistake is subtle and ambiguous, and might not even be a mistake at all. However, due to the massive amount of estate and generation skipping transfer tax that could be imposed if there is a mistake, it's best to get it correct the first time. Luckily, mistakes can often be corrected, both under state law and through the Internal Revenue Service (IRS) through a process known as reformation. In Florida, the Florida Trust Code provides for Trust modification. This can be done with our without judicial approval depending upon when the Trust was executed, whether the Grantor is still living, whether the Qualified Beneficiaries consent and other factors. See Florida Trust Code Section 736.0410 - 736.04113 for more information. Even though a mistake can be modified for state law purposes, there is often the concern as to what the Federal Estate and Generation Skipping Transfer Tax consequences will be. In many estates, the tax consequences are irrelevant because the amount of money is too small. But Private Letter Ruling (PLR) 200910003 (text not yet available online), which was issued by the IRS on November 17, 2008, and per their records policy released approximately four months later is a good example of the interplay between state law modification and the tax results thereof. In PLR 200910003, the Grantor established a Trust that provided upon her death, the trust assets would be split into a Trust that was exempt from the Generation Skipping Transfer Tax or GST (Exempt Trust) and Trust that was not exempt from the GST (Non-Exempt Trust). The Exempt Trust was for the benefit of the Grantor's Daughter's descendants. The Non-Exempt Trust was for the benefit of the Grantor's Son and Daughter if living, and if not then their issue per stirpes. The Non-Exempt Trust allowed the Grantor's children to withdraw all of the Trust property at any time, which both of them did (in a future post, I'll talk about why that was a horrible decision by the Grantor's children). According to the PLR, the Exempt Trust provided that upon the death of a Primary Beneficiary (which was initially a child of the Grantor's Daughter):

The Trustee shall distribute the principal. . . of any Exempt Trust and any part of the principal of the Non-Exempt trust not otherwise subject to appointment to or in trust for the benefit of such of my descendants as the Primary Beneficiary may appoint under Will bey specific reference to this power. (Emphasis Added)

The "mistake" if there even is one is subtle. Because the Primary Beneficiary is one of the Grantor's descendants, then this paragraph may be interpreted as giving the Beneficiary a General Power of Appointment (which would cause estate tax inclusion) as opposed to a Limited Power of Appointment. The PLR stated that the Trustee would petition a local court to modify the Trust to clear up this ambiguity. The Trustee also asked the IRS for a ruling stating that as a result of the reformation, the Primary Beneficiaries will not possess nor will have ever possessed a general power of appointment with respect to the Exempt Trusts, and that as a result of the judicial reformation the exempt status of the Exempt Trusts for GST purposes will not be affected. The IRS ruled favorably. While that is all well and good, note that the user fee for a private letter ruling is $10,000; plus the costs involved paying the attorneys to prepare the PLR and petition the court for modification. The lesson is that it is important to make sure the documents are correct the first time; and to be careful, because even innocent "mistakes" could result in serious consequences.

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 On February 25th, the New York Times published an article entitled Study Estate Plans Before Laws Shift.  The author Deborah L. Jacobs, points out what most estate planners have been saying for a while -- that there is going to be a new law (hopefully) by the end of 2009.  With the lifetime exemption most likely staying at $3.5 million and with people being worth a lot less than they used to be due to the market collapse, the article states that estate planning documents should be reviewed now, to make sure that they still do what they are supposed to do.

It's important that you contact an attorney that specializes in estate planning to review your documents, to ensure they still "work."  The article discusses concepts that your estate planning attorney should be familiar with, including credit shelter trusts, family limited partnerships, and grantor retained annuity trusts (GRATs).

It also points out that it is essential that your beneficiary designations, on your life insurance and 401(k)s and IRAs are properly completed.  Your estate planning attorney should be able to assist you with that also.

 

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 Taxgirl, the nom de blog of Kelly Phillips Erb, an attorney and tax blogger and among my daily tax must reads, is twittering tax tips between now and April 15.  Tip #1, Sign your Return. 

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 If you live in Florida and own your own home, you have probably heard of the term "Homestead."  Most people in Florida think of Homestead in terms of their real property taxes -- both in the exemption from taxes that they receive, and the amount by which their taxes can be raised each year.  In fact, there are three different uses of the term Homestead in Florida.  One is the familiar property tax exemption; one is the protection of your Homestead from creditors, and one is what is known among attorneys as "devise and descent," that is rules strictly governing the disposition of your Homestead property upon your death.

In this, the first of three blog posts introducing the three types of Homestead, I will discuss the rules concerning who you may, and who you may not, leave your Homestead to in the event of your death.

First though, what, in Florida, is a "Homestead?"  A recent court case stated that "It has been said by those who labor in the area, that 'the leading cause of cerebral herniation among probate lawyers, real estate lawyers, circuit court judges sitting in probate, and appellate judges reviewing their work is the study of the legal chameleon also known as homestead." Cutler v. Cutler, 2007 WL 601866.  In other words, there is no clear answer.

Article X, Section 4 of the Florida Constitution states, in relevant part:

SECTION 4.  Homestead; exemptions.--

1. There shall be exempt from forced sale. . . the following property owned by a natural person:

1. a homestead, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner's consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner's family. . . 

1. The homestead shall not be subject to devise if the owner is survived by spouse or minor child, except the homestead may be devised to the owner's spouse if there be no minor child. The owner of homestead real estate, joined by the spouse if married, may alienate the homestead by mortgage, sale or gift and, if married, may by deed transfer the title to an estate by the entirety with the spouse. If the owner or spouse is incompetent, the method of alienation or encumbrance shall be as provided by law.

Other than the fact that your Homestead can be up to 160 acres if it is located outside a municipality and up to one half an acre inside a municipality, there is no real Constitutional or Statutory definition of Homestead.  But if you are a full time Florida resident who owns and lives full time in their own house, condominium, and in some cases, mobile home, you have a Homestead.  (I’ll leave the discussion of part time Florida residents a/k/a Snowbirds and Houseboats for another day).

In simplified terms, Florida law involving the disposition of your Homestead upon your death is as follows:

1. If you are not married, and have no minor children, then you are free to devise your Homestead to whomever you want.
2. If you are married and have no minor children, meaning you only have children that have reached the age of majority, or you have no children at all, you may only devise your Homestead to your spouse (and it must be a devise of the entire Homestead.  A life estate is not permissible).
3. If you have minor children, whether or not you are married, your Homestead is not subject to devise.  That means you have no say in the matter as to what happens to it after your death.

(For a far more detailed explanation, see Florida Attorney Rohan Kelley’s chart, which is posted at Juan C. Antunez’s Florida Probate and Trust Litigation Blog). 

In each case above in which the Homestead was not properly devised, or not subject to devise, the law provides that the following happens:  Your surviving spouse (if you have one) receives a life estate in the Homestead, with the remainder going to your “lineal descendants in being,” both minor children and adult children.  Your spouse gets to live in the home for the rest of their lives, and has to pay most of the costs involved in maintaining the Homestead  (as set forth in the Florida Principal and Income Act).  Your “lineal descendants” have a vested remainder interest in the Homestead, meaning they inherit the home upon your spouse’s death. 

If this is not what you wanted, there is usually nothing that can be done after your death.  However, there are ways to plan around this while you are still alive, including a properly drafted pre (or post) nuptial agreement or owning the property with your jointly with your spouse.

Far too often people from other states move to Florida and are told by their prior attorneys that their wills are “still valid,” and thus, are never updated.  While it is generally true that a will drafted in New York is valid when you move to Florida, an out of state will likely does not properly deal with the unique issue of the disposition of Florida Homestead upon your death.

The key here is to emphasize that Florida Homeowners must engage in proper planning with an attorney licensed to practice in Florida who understands the intricacies of Florida Homestead.  Otherwise, they risk having the ownership of their most important asset, their home being decided by the law, and possibly causing untold discord amongst their loved ones after their death.

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