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Common Estate Planning Misconceptions

COMMON ESTATE PLANNING MISCONCEPTIONS

Some of these misconceptions can have serious consequences. Others, while not as serious, can contribute to estate complications and confusion.

"I Just Need A Simple Will"

There is no such thing as a "simple will." Your will is the single most important legal document you will leave behind when you die. Don't take the process of preparing your will lightly. Don't take the approach that you want to "get it over with," as quickly as possible or that, somehow, because you are doing a will, some calamity will befall you. Instead, if you approach the will as strictly a business matter, you will help your lawyer draft it (thereby reducing legal cost) and leave a better document behind to govern the administration of your estate. Don't assume that your lawyer has a form to fit your needs; after all it is your will not your lawyer's.

As we have previously discussed, a will has many uses which are personal to you:

  • Your will can name the person or persons to receive your property at your death.
  • Your will can establish trusts for the benefit of family members unable to manage their own assets. Without a will, property passes by intestacy directly to beneficiaries, some of whom may be too infirm or too young to properly handle those assets. Trusts under your will can be much less expensive and less complicated than establishing guardianships through the courts. Your will can name the person, bank or trust company in charge of the administration of your estate. The duties of this fiduciary, called a personal representative, include locating your property, paying your taxes, your bills and the expenses of your estate, protecting the interests of your beneficiaries and, ultimately, distributing your estate to your beneficiaries. Few jobs are more important than that of a personal representative. If you don't name your own personal representative under your will, a court will name one for you.
  • Your will can direct from which assets taxes, expenses, claims and other charges against your estate will be paid.
  • Your will can take advantage of very significant tax deductions and exclusions, the benefits of which flow directly to your beneficiaries.

"I'll Give It All To My Wife (Husband)"

In taxable estates (over $5,000,000), there is no limit on what one spouse can give the other as a "marital deduction," which can reduce the estate tax to zero at the first death. Consequently, it is the second death where most estate taxes are collected. In planning estates of married persons, taking advantage of the "unified credit" is critical. While bequests to spouses are deducted from the taxable estate, the unified credit is subtracted from the tax itself. The unified credit is currently $1,730,800, an amount which eliminates estate taxes on $5,000,000 worth of property.

Proper utilization of the unified credit creates substantial benefits. For example, if you have an estate of $6,000,000 and leave it entirely to your spouse (who has no other separate assets), at your spouse's subsequent death, his or her estate tax will be $350,000. If, instead, you had placed $5,000,000 in a trust which paid the income (and principal if needed) to your spouse, then, upon your spouse's subsequent death, his or her estate would only be comprised of the $1,000,000 received directly from your estate (since your $5,000,000 unified credit equivalent is in trust and not owned by your spouse). Therefore, since your spouse also receives a $5,000,000 unified credit, the second spouse's estate tax would be zero. By using just this one estate planning technique, of not giving all the estate directly to the surviving spouse, $350,000 of estate tax has been eliminated.

"My Lawyer Is Dragging Out The Estate To Increase His Fees"

This belief is misplaced for two reasons:

  • Attorneys' fees in estates are subject to court review and must be "reasonable", and
  • Florida has a new statute covering attorneys' fees which discourages dragging out an estate.

Lawyers don't have blank checks to pay themselves fees during the course of an administration of an estate. In Florida, attorneys' fees are subject to review by the probate court if objected to by any interested party. This court review can be invoked by filing an objection to the estate's final accounting. When a court reviews attorneys' fees, it looks to be sure that the attorney is paid a reasonable compensation for services rendered. In determining what is "reasonable," courts look at several factors, including the lawyer's promptness, efficiency and skill, the responsibilities assumed by the lawyer, the nature and value of assets of the estate, the benefits or detriments resulting to the estate from the lawyer's services, the complexity of the estate, whether the lawyer assisted in tax planning for the estate, the nature of the assets of the estate, any delay in payment of the lawyer's compensation after services were furnished and other relevant factors. With these guidelines, a lawyer won't deliberately keep an estate open to pay fees, faced with the prospect of explaining to a court why that is "reasonable."

Florida's new statute outlines what is considered reasonable compensation for lawyers in estates. This compensation is made up of two parts. One part compensates the lawyer for time spent. The other compensates the lawyer's responsibility. It is an amount equal to 2% of the inventory value of the probate estate, plus an additional 1% of the balance of the gross estate, not included on the inventory. The percentage portion of this new statute runs counter to the notion that a lawyer would leave an estate open in order to create more fees; indeed, a lawyer would want to conclude an estate as quickly as possible and move on to the next estate to collect the next percentage fee.

"Don't Use A Bank As A Fiduciary Because Banks Are Too Conservative"

Testators and settlors frequently see a bank's prudent investing as over-conservatism. In fact, banks, trust companies and other professional fiduciaries are subject to the same investment rules as individual fiduciaries.

In 1993, the Florida legislature passed the "prudent investor rule." Under this rule, a fiduciary has a duty to invest and manage assets as a prudent investor would, considering the purposes, terms, distribution requirements and other circumstances of a trust or estate. This means that the fiduciary must use reasonable care and caution in the context of the overall investment portfolio, incorporating risk and return objectives which are suitable to the trust or estate. A fiduciary's investment decisions and actions are judged in terms of reasonable business judgment under the facts and circumstances existing at the time of the decision. All fiduciaries have duties to diversify investment assets unless, under the circumstances, it is not in the best interest of the trust or estate. Fiduciaries are required to review investment portfolios and make and implement decisions concerning whether to retain assets or not. Fiduciaries have a duty to invest assets in a way which produces income and also keeps the principal safe. Finally, fiduciaries can consider various circumstances in making investment decisions, including general economic conditions, possible effects of inflation, tax consequences of decisions, expected total return and the cost of investment decisions.

Since the prudent investment rule governs all fiduciaries, banks are no more or less conservative than individual fiduciaries. Indeed, due to their particular expertise in investment decision-making, they are more adept at implementing the rule than most individuals.

"I Have A Small Estate"

You may think your estate is smaller than it really is, especially for estate tax purposes. It is easy to reach the $5,000,000 minimum for estate taxes. When IRS taxes an estate, it considers every type of property the decedent had any interest in. This includes, for example, powers of appointment, joint property, retirement benefits, revocable trust property and the face amount of all life insurance. If you consider these assets, you may be surprised how much your estate is worth for estate tax purposes. That is why wills and trusts can be so important for planning to pay those taxes and take advantage of deductions and exemptions.

"We Just Won't Tell IRS About ..."

Individual personal representatives, particularly relatives of a decedent, frequently feel that certain property, especially tangible personal property, shouldn't be reported to Internal Revenue Service for estate tax purposes. After all, the argument goes, a wedding ring or other personal item shouldn't be subject to tax. However, all property a decedent owns is subject to tax. The personal representative must file an estate tax return with Internal Revenue Service which lists all property. When the personal representative signs the return, he or she signs under the following statement: "Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct and complete." The Internal Revenue Code states that any person who willfully signs a return he or she does not believe to be true shall be guilty of a felony, punishable by a fine of not more than $100,000 or imprisonment of up to three years, or both.

"I'll Fund My Trust Later"

Trusts are only useful to the extent they are funded. Even though trusts involve extra bookkeeping like setting up separate trust bank accounts and transferring assets, it's well worth the effort once a trust is needed for incapacity purposes or upon death.

If you become incapacitated, one of the ways a costly guardianship can be avoided is to have sufficient assets in your trust to allow the trustee to pay your bills. At death, since your trust does not form part of your probate estate, when your estate's attorney charges fees based on the current Florida attorneys' fees statute, the fee chargeable to your trust assets is one-half of the fee chargeable to your individual assets.

Don't wait until it's too late to fund your trust. Fund it now with as many assets as possible, establish the trust as your central asset management system and know that you have saved expense in the long run.

"I'll Just Note The Change On My Will"

Wills are formal legal documents. In Florida, every will and codicil (an amendment to a will) must be in writing and signed by the testator at the end in the presence of at least two attesting witnesses. Since the will and all codicils must be formally signed, you cannot change a will without those formalities. Any changes made on the face of a previously executed will or codicil are ignored for the purpose of distributing your estate. Also, by marking up your will, you might unintentionally revoke your entire will.

"I Can't Afford To Give To Charities"

Every estate plan can include charitable giving. There are numerous ways to help charities during your life or at death. Almost all of these ways involve some tax deductions. These deductions can benefit you and your heirs.

Charitable deductions take many forms. Property can be given directly to a charity or in trust. A trust can be part for the benefit of a charity and part for the benefit of other beneficiaries. This type of trust is called a "split interest gift." Split interest gifts take two forms. One is called a charitable remainder trust. In a charitable remainder trust one or more beneficiaries receive income for a certain number of years or for life and, at the end of the term, the balance of the trust is paid to the designated charity. The second form of split interest gift is the charitable lead trust. In this type of trust, the charity receives income for a certain number of years and, at the end of the term, the balance of the trust is paid to individuals named in the trust. In the cases of both the charitable remainder trust and charitable lead trust, a partial estate tax deduction is allowed for the interest left to charity, thereby reducing estate taxes. Charitable giving should be considered in any estate plan.

 
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