By Attorney Truman Scarborough

Anything can be written in a Will, even provisions that are contrary to the law. The problems occur after you are gone when the Will is probated. Some of the legal limitations on Wills include:

1] A Will cannot distribute non-probate assets. If property is jointly owned with survivorship rights, regardless of what the Will states, it goes to the joint owner. Likewise, if there are designated beneficiaries on an account, the property will go to the beneficiaries.

2] A Will cannot alter a surviving spouse’s rights to inherit. Florida law gives the surviving spouse certain rights in property. A new marriage automatically voids an existing Will. The new spouse will receive as a minimum the amount provided for a spouse under Florida Statutes when there is no Will. This is called “Intestate Succession”. If there are children from a prior marriage, the surviving spouse receives one-half of the probate estate.

Even when the estate plan is created after the marriage (unless there is a nuptial agreement) the surviving spouse has the legal right to:

1. a life estate or one-half interest in the home (if just titled in the deceased spouse’s name);
2. up to $20,000 in household furniture, appliances and furnishings, plus two vehicles; and,
3. 30% of the rest of the estate, including probate assets, joint accounts with survivorship, payment on death (POD) accounts, transfer on death (TOD) accounts, and property in Revocable Trusts

2] Although designated in the Will, a non-Floridian who isn’t a relative cannot be appointed as Personal Representative (executor) to administer the probate estate. On the other hand, there are no restrictions on who can be designated as successor trustee to settle a trust.

3] A Florida Will may not be able to transfer property in a foreign country. The reasons include: 1] There may be different requirements for a valid Will, 2] The foreign country’s laws may mandate that certain relatives inherit the property 3] The process of transferring property at death may be substantially different. A separate Will in the foreign country may be required.

4] A Will cannot leave property to a deceased person. A dead person cannot inherit property. When a beneficiary is dead, the gift he/she is to receive lapses (goes back into the pot) unless protected under Florida’s anti-lapse statutes. When a specific gift e.g. $10,000 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 is divided among the remaining residual beneficiaries. If there are no living beneficiaries, the estate goes to those persons who would inherit under Florida Statures if there was no Will.

Florida’s Probate Code has an anti-lapse provision. This provides that a gift will not lapse if the deceased beneficiary is a descendant of a grandparent of the person who created the will. The inheritance will go to the deceased beneficiary’s lineal descendants (children, then grandchildren).

5] A Will cannot penalize someone for challenging it. Some people want to include a provision that if a beneficiary challenges the Will he/she loses everything he/she was to receive. This is called a “terrorem clause” because it is intended to terrorize the person not to challenge the will. Terrorem clauses are not enforceable under Florida law.

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. Truman Scarborough’s office is located at 239 Harrison Street, in Titusville.

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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 children are made co-owners of property with the parent. In this article, we will look at these issues.

Parents add children’s names to accounts for various reasons. It may be so the child can access the account to pay the parent’s bills. Frequently, parents add their children’s names on accounts or deeds to avoid probate. The reason is when someone dies with assets titled just in his/her name without beneficiaries the asset is frozen. Probate is required to access the assets. No one can sign the deceased person’s name on checks, deeds, etc. 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.

The Personal Representative (executor) cannot access the assets until he/she is appointed by the court. Throughout the process of collecting assets, paying bills and finally making distribution to the beneficiaries, the Probate Court must be shown that everything is proceeding as required by Florida Statutes and Probate Rules. The word probate essentially means “to prove.” When everything runs smoothly, formal probate takes around six months from the time pleadings are first filed with the court. There are attorney fees and court costs with probate. For an estate between $100,000 and $1,000,000, Florida Statutes suggest in formal administration a reasonable fee for the Personal Representative (executor) and the attorney would be 3% of the gross assets.

This leads many people to ask: “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 to go to all of her children, sell, or mortgage the property the child could refuse to sign. 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, a Payment on Death (POD) or Transfer on Death (TOD) accounts may be used to avoid probate and not encounter these problems. Another option is the Revocable Living Trust which can be used with all types of assets and provides for incapacity.

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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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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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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