Category Archives: Financial Advice

What role do relationships play in estate planning?

By Attorney Truman Scarborough

Estate planning evolves around two subjects: assets and relationships. Generally, it is the relationships that present the greatest challenges. While it is important to have our financial affairs in order, life presents demands beyond “balancing the checkbook”. An estate plan must respond to many complex relationships that may be in conflict with each other.

With most legal issues there is a logical analysis of factual information. But, the subjective nature of relationships makes estate planning more involved. Estate plans are developed from feelings and desires of the heart as well as rational thoughts of the mind. Other areas of law may focus on specific problems, but with estate planning, there is a holistic approach. A contract for the purchase of a home or a lawsuit addresses particular issues, but in estate planning, we are concerned with all the people, possessions, and values that define and bring meaning to our lives. Because each of us is unique in unseen ways, two apparently similar people may seek significantly different estate plans. Each plan is personal in its own special way.

In estate planning, the primary issue is: Who should inherit? When the first spouse dies, normally everything goes to the surviving spouse, unless there are children from prior marriages. When there are children the question will be: When both parents die, should the children be treated equally? What if the parents provided a less fortunate child with significant financial assistance over the years? Should that child receive a lesser share at the time of death to equalize the distributions? It may also seem appropriate that the less fortunate child be given a greater share at the time of death because his/her needs will continue in the future. What if one child is the parent’s primary care giver? Should the parent leave more to the child who has sacrificed to care for the parent? When should a child be completely excluded as a beneficiary? Perhaps the parents are estranged from a child or one child may not need the funds because he/she is extremely wealthy. When there are no children, there are a number of potential beneficiaries including organizations, friends, siblings, nieces and nephews.

When beneficiaries have problems like substance abuse or just cannot handle money responsibly, it may not be wise to directly distribute their inheritance to them. If a beneficiary has creditor or marital problems the inheritance could be lost in a lawsuit or divorce. For protection, should the gift be distributed to a special trust for the beneficiary? This trust can contain spendthrift provisions to prevent creditors from reaching the trust assets. Should the trustee be also given complete discretion on when and how much is distributed to the beneficiary for added protection?

The next major issue in estate planning is: Who should settle the estate? The child who has the time and is most capable would appear to be the logical choice. But, it can be more than a business matter. Could sibling conflicts make it difficult for a child to administer the estate? Is the solution to have a non-relative or a financial institution settle the estate? Alternatively, is there a need to name Co-Trustees or Co-Personal Representatives so a child would not feel excluded or so he/she can help the other child settle the estate?

 

For further information on estate planning, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.

 

 

 

 

 

 

 

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Why do some estates take longer to settle?

 

By Attorney Truman Scarborough

 

The length of time it takes to settle an estate depends on: 1] whether the decedent’s records are accessible and organized; 2] the competency and diligence of the administrator; 3] the overall complexity of the estate; 4] whether the estate has to be probated; 5] the type of assets (real estate having the potential of presenting more problems); 6] the nature and extent of creditor claims against the decedent; 7] any difficulties with the decedent’s taxes; 8] whether the heirs have their own financial, marital, or substance abuse problems; 9] whether there is underlying family hostility; and 10] whether someone decides to challenge the Will or Trust in the court.

There are many reasons to bring the administration of an estate to a conclusion as soon as possible. The obvious reasons are to let the beneficiaries enjoy their inheritances and limit expenses (which tend to go up proportionally with the time and work involved). An open estate also allows unforeseen events to complicate and delay settling the estate. Here are three examples:

1] An estate must remain open until all creditor claims are settled. If a car titled in the decedent’s name is in an accident, the estate cannot be closed before resolving the issue of liability.

2] Until the home is sold or transferred to the beneficiaries: it can be difficult to obtain homeowner’s insurance; it will lose the homestead tax exemption; and if unoccupied, it is more likely to be vandalized.

3] If a beneficiary dies before receiving his/her inheritance, a probate estate must be opened to receive the deceased beneficiary’s share. When a beneficiary survives the decedent, his/her interest is vested (locked in) and must be distributed to that individual. The problem is the law does not allow distribution to a deceased individual. Therefore, a probate estate must be opened for the deceased beneficiary to receive the gift. Having to probate the deceased beneficiary’s estate causes delays.

In addition to organizing records and selecting a competent administrator, one way to shorten the time to settle an estate is to avoid probate. When a person dies, no one is empowered to sign the decedent’s name and property just in the decedent’s name without beneficiaries is frozen. A Power of Attorney does not help, since it is effective only while the creator is living. It is similar to an employer – employee relationship. If an employer goes out of business there are no employees. A Will by itself does not transfer property but works through the probate process. Beneficiaries generally do not receive their inheritance until the end of the formal probate process, approximately six months from the time pleadings are first filed with the court.

The Revocable Trust is frequently used to avoid probate. With a Trust, the successor trustee has immediate control of the decedent’s assets. It is like a corporation, where if the president dies his successor immediately takes control. No court authorization is required.

Perhaps, one of the kindest gifts we can leave our heirs is allowing them to have a prompt smooth transfer of assets so they can move on with their lives. With proper planning, the burden on those we ask to settle our affairs can be reduced and beneficiaries can enjoy their inheritance without unnecessary delays.

 

For further information on your estate planning options you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.

 

 

 

 

 

 

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Are there income tax issues in settling an estate?

By Attorney Truman Scarborough

When a person dies, the successor trustee of a trust and the personal representative (executor) of a probate estate have various responsibilities to the court, the beneficiaries, the creditors, and the Internal Revenue Service. What is required of a successor trustee and a personal representative can be substantially different. For example, a successor trustee should have no involvement with the courts, unlike the personal representative of a probate estate. The specific obligations to creditors and beneficiaries also vary depending on whether there is a trust or probate estate.

In an earlier article, we examined who is responsible for a decedent’s bills. With this discussion, we look at obligations to the Internal Revenue Service for income taxes. While a trustee’s and personal representative’s responsibilities to the courts, creditors, and beneficiaries vary considerably, their responsibilities for income tax are similar.

There is also a responsibility for estate taxes. However, since federal estate taxes only become an issue when an estate is over $5,450,000 in value, the following discussion is limited to income taxes, which apply to all estates regardless of value. There are other related tax topics that are beyond the scope of this article including: “stepped up basis” for appreciated assets; which type of beneficiaries bear the burden of paying the taxes; state estate/inheritance taxes; IRA distributions; and, income tax issues for the beneficiaries.

When someone passes away, a tax identification number (EIN) must be obtained from the IRS for the probate estate and/or trust. The EIN is like a social security number for artificial legal entities, such as corporations, irrevocable trusts, and probate estates. Financial institutions need this number to report income since they can no longer report income under the decedent’s social security number. With a revocable trust, while the creator is living, income is reported under the social security number. But when the creator of the trust dies, the trust becomes irrevocable and income must be reported using an EIN.

Annual income is reported on 1099s. For the portion of the year when the decedent was living, the 1099s will show the decedent’s social security number. Income earned after the decedent passed away is reported on 1099s using the EIN.

A 1041 fiduciary income tax return is filed for income received under the EIN. There is a substantially higher tax rate on a 1041 than on an individual 1040 return. To avoid the higher tax rate, income can be distributed to the beneficiaries. These distributions are shown on Schedule K-1s so the income tax can be paid by individual beneficiaries at the lower rate.

A personal representative and/or successor trustee is required to file these tax returns and can be personally liable to IRS for the decedent’s taxes. This may include taxes the decedent failed to pay in prior years. The accountant who is preparing the returns may suggest filing:

 

  • IRS Form 56 (Notice Concerning Fiduciary Relationship): This is filed when the duties are first assumed and then again when the duties are completed.

 

  • IRS Form 5495 (Request for Discharge from Personal Liability): IRS has three years to review returns to determine if additional taxes are due. When Form 5495 is filed, the review takes place in nine months at which time the personal representative and/or trustee will be released from further personal liability.

 

 

For further information, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.

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What Happens if a Beneficiary Dies?

senior couple

By Attorney Truman Scarborough

 

All of our beneficiaries (those who inherit our estates) will someday die. Not planning for what will happen if a beneficiary dies can have unexpected and costly consequences. Complications can arise with life insurance policies, payment on death (POD) accounts, transfer on death (TOD) accounts, wills, and trusts. In this article we will look at some of the problems that may be encountered when a beneficiary dies 1] before the person who is making the gift dies, 2] after the person making the gift dies but before receiving the gift, and 3] after receiving the gift.

 

1] If the beneficiary dies before the person making the gift: The law prohibits us from leaving property to a deceased person. When there are no named living beneficiaries, TOD and POD accounts as well as life insurance policies are paid to the decedent’s estate, requiring probate. While beneficiary designations can be updated if the beneficiary dies, we might forget. Therefore, it is best to plan for the possible death of the primary beneficiary by naming contingent beneficiaries.

 

With a will or trust a gift to a deceased beneficiary will lapse (go away) unless protected under Florida’s anti-lapse statutes (discussed below). When a specific gift (e.g. $10,000 or the home) lapses it becomes part of the residual estate (what is left after distributing specific bequests). If the lapsed gift is part of the residual estate, it goes back into the pot to be divided among the remaining residual beneficiaries. If there are no living beneficiaries, it goes to the decedent’s heirs at law. (These are the persons who would inherit under Florida Statutes when there is no will)

 

The Florida’s Probate and Trust Codes have anti-lapse provisions which provide that a gift will not lapse if the deceased beneficiary is a descendant of a grandparent. In that case, the gift goes to the deceased beneficiary’s lineal descendants: first to children and if a child has died to his/her children. However, rather than relying on Florida Law,   it is always best to specify who will receive a gift if the primary beneficiary dies.

 

 

2] If the beneficiary dies after the person making the gift but before distribution: If the beneficiary survives the person creating the will or trust but dies before receiving the gift, the gift is distributed to the deceased beneficiary’s probate estate. This will delay closing the primary estate until a probate estate is opened for the deceased beneficiary to receive the distribution. A way to avoid this is by having beneficiaries direct who will receive their inheritance should they die before distribution.

3] If the beneficiary dies after receiving distribution: Once a beneficiary has received the property it is his/her’s and will be part of his/her estate when he/she dies. But what if you do not want a child’s spouse to receive the money if your child dies first? A way to prevent this is to hold the child’s inheritance in trust for him/her and specify who will receive the balance upon the child’s demise. The problem is finding a trustee who will be there to distribute the funds to the beneficiary over his/her life time and then at the beneficiary’s demise distribute remaining funds to the final beneficiaries. A contingent trustee must be named in case the initial trustee dies before the beneficiary.

 

For further information you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.

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What are the successor trustee’s responsibilities to beneficiaries?

By Attorney Truman Scarborough

 

In last month’s article we looked at how a trust can avoid the cost and delays of probate. When

someone dies, assets held just in the decedent’s name without beneficiaries are frozen. A

Will by itself cannot transfer property to the heirs. The person named in the Will to administer

the estate needs “Letters of Administration” from the Probate Court to access accounts.

Before distribution can be made to beneficiaries the Probate Court must be shown that all the

requirements of the Florida Statutes and Probate Rules have been met. By creating a trust and

transferring assets to the trust, probate can be avoided. When the creator of the trust dies, the

successor trustee has immediate control of the assets without going through the probate court.

In this article I would like to review some of the legal responsibilities the successor trustee

has to the beneficiaries of the trust. When someone must rely on the honesty and diligence of

someone else to protect his/her interest it creates a fiduciary relationship. Fiduciaries are held

to the very highest legal standards. Under the law, there are different levels of proof to show

misconduct. At one end of the spectrum is the proof needed to show “beyond a reasonable

doubt” that someone is guilty of a crime. At the other is the responsibility of a fiduciary to

affirmatively show he is protecting the beneficiaries’ interests.

 

If a fiduciary intentionally misused the property for personal gain, it could result in criminal

penalties. But even an unintended breach of fiduciary responsibilities may result in personal

liability for damages. A fiduciary can innocently breach his duty by not understanding the full

extent of these responsibilities.

 

A fiduciary duty exists in many relationships, including powers of attorney, probate estates, and

trusts. While the underlying fiduciary principles are similar, the dynamics can vary. In this article,

our discussion will be limited to several basic fiduciary responsibilities the successor trustee has

after the creator of the trust has died.

 

The Florida Trust Code has rules to prevent a successor trustee from neglecting his/her

responsibilities to the beneficiaries which include following the terms of the trust and protecting

trust assets. Without information beneficiaries have no way of knowing if the trustee is properly

administering the trust. Therefore, the Trust Code provides that beneficiaries have a right to

information about the trust administration. The Trustee must keep accurate records and provide

the beneficiaries with annual and final accountings. Merely failing to provide complete and

accurate information is a violation of the Trust Code.

 

The Florida Trust Code states that “a trustee shall administer the trust solely in the interests

of the beneficiaries”. The trustee must avoid conflicts of interest. He must not comingle trust

funds with his own funds. Nor should a trustee acquire assets from the trust (even at full value)

without court approval or consent of all the beneficiaries.

 

The Trustee cannot favor one beneficiary over other beneficiaries. This can be a particular

problem when the Trustee is also one of the beneficiaries. If the Trustee places his interests as

a beneficiary above the other beneficiaries, he breaches this fiduciary responsibility.

In next month’s article, we will look at what recourse beneficiaries have if the successor trustee

fails to properly administer the trust.

 

For further information on estate planning you may be interested in Attorney Truman

Scarborough’s Booklet on Estate Planning in Florida. It is available without charge

or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street,

Titusville, Florida.

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How does a trust avoid probate?

By Attorney Truman Scarborough

 

When someone dies, assets held just in the decedent’s name without beneficiaries are frozen.

A Power of Attorney ends at death. Like an employer – employee relationship, when an

employer goes out of business there are no longer employees. A Will by itself cannot transfer

property to the heirs. The person named in the Will to administer the estate needs “Letters of

Administration” from the Probate Court to access accounts. Before distribution can be made to

beneficiaries the Probate Court must be shown that all the requirements of the Florida Statutes

and Probate Rules have been met. When everything runs smoothly, this process takes around

nine months.

 

In last month’s article we looked at how trusts evolved as means to avoid probate. The trust

used to avoid probate is a Living Trust or an Inter Vivos Revocable Trust. Inter Vivos means

during life as opposed to a Testamentary Trust in a will, which comes into being in probate.

Revocable means the trust can be amended or abolished.

A trust is a separate legal entity. At eighteen (18) years of age in Florida, individuals acquire

certain rights as natural legal entities, including the right to hold title to property, enter into

contracts, and bring law suits. As artificial legal entities, corporations and trusts enjoy these

same rights.

 

Although a separate legal entity, the IRS defines most Living Trusts as Grantor Trusts as long

as the creator of the Trust is still living. This means the creator of the trust continues to use

his/her social security number for income received by the trust and reports the income on a

regular 1040 tax return. After the creator dies, the Trust becomes a Non-Grantor Trust and a

tax identification number (EIN) will be required, for income can no longer be reported under the

decedent’s social security number. Instead of the 1040 Tax Return, a 1041 Fiduciary Return is

used. A Probate Estate must also have its own tax identification number and is required to file a

1041 Fiduciary Tax Return.

 

Like a corporation, a trust has a division of rights and responsibilities. Both have a creator(s);

with the corporation it is the incorporator(s), with the trust it is the Settlor(s), or Grantor(s). Each

has a person(s) with legal authority to act on behalf of the entity; with a corporation it is the

officers and directors, with a trust it is the trustee. Lastly there are those who have the beneficial

rights; with a corporation it is the shareholder(s), with a trust it is the beneficiaries. However,

the same person could be the incorporator, sole shareholder and president of a corporation.

With the Living Trust, the same person could be: (1) Settlor – creator of the Trust with the

right to cancel and change; (2) Beneficiary – person with the right to enjoy and use; and (3)

Trustee – business manager. Generally a trust provides for a special trustee to take over in

the event that the creator(s) no longer have the capacity to manage their affairs, avoiding the

need for guardianship. At the demise of the settlor(s), the successor trustee takes over and has

immediate control of the trust assets. Without seeking court approval, he/she has the authority

to pay bills and make distribution to the beneficiaries as set forth in the trust.

 

For further information on estate planning you may be interested in Attorney Truman

Scarborough’s Booklet on Estate Planning in Florida. It is available without charge

or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street,

Titusville, Florida.

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To avoid probate should you have a trust?

By Attorney Truman Scarborough

 

In last month’s Senior Scene we looked at some of the problems that can be encountered when

a child’s name is added to property to avoid probate. Another way to avoid probate is with a

revocable living trust.

 

Why do we need probate? When someone dies, assets just in the decedent’s name are frozen.

No one is empowered to sign the deceased person’s name on checks, deeds, etc. Nor does a

Will by itself transfer property to the heirs. The person named in the Will to administer the estate

(Personal Representative) will need “Letters of Administration” from the Probate Court to access

accounts. A Power of Attorney does not help. It is effective only while the creator is living. It

is similar to the employer – employee relationship where if the employer goes out of business

there are no employees.

 

In probate the court creates a legal entity (like a corporation) called the “Probate Estate” to

take control of the decedent’s assets. Through the probate process the decedent’s assets are

collected, the decedent’s bills are paid, and finally the assets are transferred to the rightful

beneficiaries. Step-by-step the Probate Court must be shown that everything is proceeding

as required by Florida Statutes and the rules of probate procedure. The word ‘Probate’

essentially means “to prove.” Is the Will valid? Is the Personal Representative qualified? Who

are the rightful heirs? Have debts, taxes, and estate expenses been paid? Has the Personal

Representative accounted for the property correctly? Finally, have the heirs received their

rightful share of the estate? You may know that there are not any problems with contesting

heirs, bills, or taxes to be paid, but the court does not.

 

Probate process takes time (eight to nine months if all runs well) and does incur expenses.

There are court filing fees, cost of publishing notice in the newspaper, and attorney’s fees.

Florida Probate Rules require that every Personal Representative be represented by an

attorney unless he/she is the sole interested person. Fee schedules are set forth in the Florida

Statutes. With an estate between $100,000 and $1 million, the suggested fees for the attorney

as well as the Personal Representative are 3% of the gross assets.

 

Trusts go back to the Middle Ages, but their widespread use to avoid probate for the average

person is a fairly recent development. Approximately fifty (50) years ago, Norman F. Dacey (a

non-lawyer) in his book, How to Avoid Probate, argued that probate could be avoided with a

revocable trust. There are various kinds of trusts that are used for different purposes. The one

suggested by Mr. Dacey is called an Inter Vivos Revocable Trust. “Inter Vivos” means that you

create and place your assets in it while you are living, unlike a “testamentary trust” which come

into being after you are gone through the probate process. It is ‘revocable’ meaning that you can

revoke and amend the trust if and when you please.

 

With a trust the successor trustee you name has immediate control of your assets after you are

gone. It is like a corporation. If the president dies, his successor immediately takes control. No

court authorization is required. In next month’s Senior Scene we will look at how the Revocable

Living Trust works in more detail.

 

For further information on estate planning you may be interested in Attorney Truman

Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation

by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.

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Can adding children’s names to property create problems?

By Attorney Truman Scarborough

 

Last month we looked at issues that should be considered before making outright gifts to

children. Problems can also be encountered when adding children’s names to property, which

will be the subject of this article.

 

One of the primary reasons children’s names are placed on accounts or deeds is to avoid

probate. Property just in the decedent’s name has to be probated for no one can sign the

decedent’s name on a check, deed, etc. A Power of Attorney does not help. It is effective only

while the creator is living. It is similar to the employer – employee relationship where if the

employer goes out of business there will be no employees.

 

Assets titled just in the decedent’s name will sit there until probated. Money in a bank account

just in the decedent’s name cannot be touched by the Personal Representative (executor)

until he/she is appointed by the court. A legal entity (the probate estate) is created by the

probate court to control the decedent’s property. Once probate is opened, the estate must be

administered according to law under court supervision.

 

If everything runs smoothly, probate generally takes eight to nine months from the time

pleadings are first filed with the court. Florida Probate Rules require that every Personal

Representative (executor) be represented by an attorney unless he/she is the sole

interested person. Fee schedules are set forth in the Florida Statutes. With an estate

between $100,000 and $1 million, the suggested fees for the attorney as well as the

Personal Representative are 3% of the gross assets.

 

This may lead to the question: “Can probate be avoided by adding children’s names

to property?” Yes, jointly owned property with survivorship rights goes to the survivor.

Unfortunately, this simple solution can create other problems: First, with joint bank accounts,

the child has the ability to use the funds as he desires. Second, with real estate there is a loss

of control. Any further transfer will require the child’s signature on the deed. For example, a

widow could add one of several children’s names on the deed to her home. But if later the

mother wanted the home go to all of her children the child could refuse to sign, knowing the

home would be just hers on her mother’s demise. Third, the property will be exposed to the

child’s creditors when held jointly with the child. Fourth, only one-half of the property will receive

a “stepped-up basis.” In determining the capital gain on appreciated property, the basis (the

original purchase) is subtracted from the sales price. When property is inherited at death, the

date of death value becomes the basis. This reduces the capital gains tax when the property

is sold. Fifth, adding a child’s name on the title to the home may delay the parent’s receiving

Medicaid benefits. Sixth, with the home the parent may lose some of his/her homestead

property tax exemption. Seventh, if the child dies first, the property will again be part of the

parent’s probate estate.

 

With some types of assets, you can establish a Payment on Death (POD) or Transfer on Death

(TOD) account or name beneficiaries to avoid probate and not encounter these problems.

Another option is the Revocable Living Trust which offers greater flexibility and provides for

incapacity.

 

For further information on your estate planning options you may be interested in Attorney

Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or

obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville,

Florida.

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Are there legal issues to consider before making lifetime gifts to children?

By Attorney Truman Scarborough

 

From time to time there may be a need to financially help adult children. Although the child does

not have to pay income taxes on the gift, there are legal issues that should be considered in

making a gift. In this article I will look at three of these:

STEPPED-UP BASIS FOR CAPITAL GAINS TAX: Gifting of appreciated real estate or

securities can result in your child paying higher capital gains taxes. When the property is sold,

the appreciation in value is reported on the 1040 income tax return as capital gain. The gain

is calculated by subtracting the “basis” from the sales price. The purchase price plus closing

costs and costs of improvements is your basis in the property. With a gift, your child takes your

basis in the property. If the child receives property at your demise, he/she obtains a “stepped-up

basis”, which is the value of the property at time of death.

 

For example, let’s say your basis in the property is $50,000, but it is worth $80,000 when you

die. If you gave it to your children during your life, they would have your basis of $50,000. But if

it went to your children at your death, they would receive a new (stepped-up) basis of $80,000.

That is a difference of $30,000 subject to capital gains tax.

 

LOOK-BACK PERIOD FOR MEDICAID: Long term nursing home expenses are covered by

Medicaid. Unlike Medicare, Medicaid is only available to those persons who meet an income

and asset test. Gifts within a “look-back period” can disqualify you for Medicaid benefits for a

period of time. Florida is moving from a three year (36 months) to a five year (60 months) “look-
back period”. Beginning in January 2013, every month the look back period has been extended

by one additional month.

 

GIFT TAX RETURN: Currently you can pass $5,340,000 free of both gift and estate taxes. For

a couple that is $10,680,000. To the extent you use a portion of this exemption with gifts during

your life, it is not available at your demise. In addition, you may give $14,000 each year (“annual

gift tax exclusion”) to any number of people and that does not count against the $5,340,000.

Although no estate taxes are due until total gifts exceed $5,340,000, a 709 gift tax return is

required in any year you exceed the $14,000 annual exclusion per person. The gift can be

anything, including real estate. Forbes Magazine reported IRS believes that sixty to ninety

percent of taxpayers fail to file the required 709 gift tax return and is increasing its investigations

of unreported gifts.

 

You and your spouse can each give $14,000 to a child, for a total of $28,000 year. Nonetheless,

you are required to file a 709 gift tax return when you and your spouse’s combined gifts to one

individual exceed $14,000 in any given year.

 

Sometimes, these issues can get confused. We are asked: Can I give each of my children

$14,000 to qualify for Medicaid? No, the $14,000 applies to estate taxes; Medicaid has a totally

different set of rules.

 

In this article we have only considered outright gifts to children; there are many other issues

to be considered when adding their names to your property. This will be the subject of our

discussion in next month’s Senior Scene.

 

Attorney Truman Scarborough’s Booklet on Estate Planning in Florida is available

without charge or obligation by calling (321) 267-4770. Truman Scarborough’s office is

located at 239 Harrison Street, in Titusville.

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Will owning out of state property create problems in settling an estate?

By: Attorney Truman Scarborough

 

In my articles for Senior Scene, I have tried to address problems we encounter in estate

planning. For this discussion, I will look at owning property in another state. Whether or not we

have problems can depend on several factors including: the type of asset; how title to the asset

is held; the laws of the state where the asset is located; and if that state has its own estate or

inheritance tax: The two problems we most commonly encounter with out of state property are:

1] Multiple probates and 2] State Inheritance and Estate Taxes.

 

Multiple Probates: Probate can be a lengthy expensive process. If there is property in another

state titled just in the decedent’s name, it probably will require a domiciliary probate in Florida

and an ancillary probate in the state where the property is located. Each state has exclusive

control over real property within its borders, and the Florida Probate Court does not have the

authority to transfer title to property in another state. Ancillary probate procedure varies from

state to state and entails hiring an attorney in that state to handle the ancillary administration.

Assets other than real estate may or may not require ancillary administration depending on the

laws of the state.

 

The problem of having to probate in two states can be eliminated by completely avoiding

probate. This can be accomplished by holding title to the property in two or more names with

the right of survivorship. A payment on death, transfer on death or beneficiary designation

can accomplish this with some types of property. There are various risks with these methods

including: 1] if the joint owner experiences financial or marital problems, it can affect the

property and 2] if the other person dies first, the property will again be part of the probate estate.

A preferred way to avoid probate is to have property titled in a revocable trust.

 

State Inheritance and Estate Taxes: Even if we avoid ancillary probate, there can be estate

and inheritance tax issues in the state where the property is located. Florida does not have an

estate or an inheritance tax, so these concepts may not be familiar to Floridians. But property

owned by a Floridian in some states will be subject to these taxes. Currently eighteen states

and the District of Columbia have estate taxes that are in addition to the Federal Estate Tax.

There are also seven states with an inheritance tax. The difference is that an estate tax is paid

by the estate, while an inheritance tax is paid by the person who inherits the property.

State inheritance and estate tax laws can contain unpleasant surprises. Unlike the Federal

Estate Tax where the first $5,340,000 passes free of taxes, these state taxes are sometimes

imposed on the very first dollar of the property value. For example, Pennsylvania’s Inheritance

Tax is applied to the full value of any real or tangible property in the state. The rate is dependent

upon who receives the property. With a sibling the rate is 12%. If a Floridian leaves his brother

property in Pennsylvania worth $10,000, the inheritance tax would be $1,200. Your Florida

attorney can work with an attorney in the state where the assets are located to determine

whether these taxes can be avoided.

 

Attorney Truman Scarborough’s Booklet on Estate Planning in Florida is available

without charge or obligation by calling (321) 267-4770. Truman Scarborough’s office is

located at 239 Harrison Street, in Titusville.

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