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May 04
DIY Estate Planning -- Beneficiary Designations

My last article discussed holding assets in joint name as a powerful do-it-yourself estate planning tool to avoid probate and allow for quick transfers after death. As reviewed in the article, however, joint ownership may have unintended consequences and appropriate precautions must be taken. A safer alternative that offers many of the same benefits is to hold assets subject to a pay-on-death beneficiary designation. As these designations only take effect after death, they present fewer tax and creditor issues.

Under a beneficiary designation, an asset is transferred to a named beneficiary after the owner's death pursuant to a contractual obligation agreed to by the asset holder. No probate administration is required and thus the transfer occurs quickly after death. Further, a beneficiary designation is usually fully revocable by the owner and may be changed at any time without notification, consent or joinder of the beneficiary, unlike joint ownership which may require the consent of all co-owners.

While beneficiary designations allow for quick and efficient transfers after death, there are some drawbacks. First, only certain types of assets may be transferred pursuant to a beneficiary designation. Common examples are retirement accounts and life insurance policies. Under both, an agreement is entered into with the financial institution holding the account or issuing the policy that includes a provision governing the transfer of the asset after death. The selection of the beneficiary is usually indicated on a separate beneficiary designation form.

Some bank accounts may also be set up to transfer to one or more beneficiaries after death. The types of accounts and payout provisions allowed vary greatly from state to state and even from one institution to another. Language indicating a beneficiary designation on a bank account may be shown by "TOD" (transfer-on-death), "POD" (pay-on-death), "ITF" (in-trust-for) or "TOTTEN" (Totten Trust – allowed in some states). Care must be taken in reviewing your assets and your estate plan to determine which assets qualify for postmortem transfers pursuant to a beneficiary designation clause and which do not.

A second drawback is that payment may be made to the designated beneficiary regardless of different intentions expressed in the decedent's estate planning documents. For example, if an IRA account agreement designates John Doe as the beneficiary but the decedent's will gives the proceeds of the IRA to Jane Doe, John will end up with the account. So it is crucial to complete all account paperwork accurately and to ensure designations are kept up to date with your overall estate plan.

Equally important, you should understand how the asset would pass if no beneficiary is designated. In those cases, the asset will transfer pursuant to a boilerplate clause (the "fine print") buried in the agreement which may direct the asset to a spouse, descendants or to the decedent's estate (which would then likely require a probate administration). Using the example above, if John Doe had passed away prior to the owner's death and no alternate beneficiary was designated, the IRA might pass to the owner's surviving spouse or descendants despite the intention indicated in the will to give the IRA proceeds to Jane.

Like joint ownership, designating a beneficiary to receive an asset directly after death is a powerful tool that must be used carefully in constructing your estate plan. Fortunately, unlike joint ownership, amendments and corrections may usually be made without difficulty. In crafting your estate plan, all of your assets should be reviewed in detail and particular attention should be paid to assets that are subject to beneficiary designation clauses. If you have any questions or concerns about those designations, you should consult your financial institution and your estate planning attorney.

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Aug 04
DIY Estate Planning – Altering Asset Titles

In my last post I considered the implications of writing one's own will as a do-it-yourself ("DIY") project. Although I generally support the efforts of do-it-yourselfers ("DIYers"), I concluded a will was probably not the best project to tackle on one's own without an attorney. One estate planning project a DIYer might consider, with due caution, is reviewing and retitling assets to direct conveyance after death.

Most valuable assets are "titled" in the name of a person, company, or trust. Examples of titled assets include checking and savings accounts, stock certificates, real estate, and even some tangible property such as motor vehicles. The manner in which these assets are titled is the first indicator of what happens to them after you pass away.

Assets titled in sole name without an applicable pay-on-death provision must travel through the probate process after the owner's death. Depending upon the nature and value of the assets involved, this will likely require the appointment of a Personal Representative to marshal the  assets and distribute them pursuant to the instructions provided in the decedent's will. Assets titled in joint name with survivorship provisions, however, avoid the probate process altogether and pass to the surviving owner automatically. Most married couples probably hold the majority of their assets in this manner without having thought much about it.

Changing the way an asset is titled, such as from sole name to husband and wife, is a powerful tool in the estate planner's tool chest, trumping the directions provided in a decedent's will and avoiding the probate process. As with any powerful tool, however, precautions must be taken as mistakes and missteps may lead to disastrous results.  

First, changing asset titles requires using specific language that is dependent upon the location of the property and the state of residence. Mistakes made in this process may lead to unintentionally adding a co-owner or tenant-in-common instead of a survivor beneficiary and could require a partial interest in the property to pass through probate regardless. These concerns are particularly true for real estate which will require a deed to change title and should be prepared by an attorney in the state where the property is located. Note that if you reside in a title insurance state, your title policy may need to be updated to reflect the new status of ownership.

Second, there are some potentially negative ramifications to retitling assets that must be considered. Transferring an interest to a non-spouse may trigger gift tax if the value transferred exceeds the current annual exclusion ($13,000 per individual in 2012). Also, if an interest is transferred to a co-owner, the property may become subject to claims by the co-owner's creditors. Conversely, if liability claims arise from the property itself, the new co-owner may be held liable along with the original owner. It is also possible unforeseen income tax issues will impact the new owner by virtue of holding title. Finally, assets transferred from one spouse's name to both spouses may be converted from the separate property of one spouse to the marital property of both spouses and eligible for division upon divorce. All of these potential negatives must be carefully considered before proceeding with asset transfers.

For some DIYers, retitling assets without professional assistance may be a bad idea from the start. Those living in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington & Wisconsin) are subject to default rules regarding assets owned by husband and wife regardless of the manner of title. Persons in those states will need to review their situation with an estate planning attorney well versed in their state's community property rules.

Further, DIYers who have reason to be concerned about estate tax (the federal estate and gift tax exemption is $5,120,000 per individual in 2012 but is set to decrease to $1,000,000 in 2013 unless changed), must be extra cautious regarding asset titles as improper planning may have significant and costly estate tax impacts. When all assets are owned jointly with a spouse, the estate of the first spouse to die will not be able to shelter assets with the first decedent's applicable estate tax exclusion and will unnecessarily increase the taxable estate of the survivor. While there are some limited postmortem fixes, I recommend anyone with estate tax concerns consult with a qualified estate planning attorney.

Altering asset titles is a powerful estate planning tool and one that a DIYer might use in limited circumstances. As with any powerful tool, caution must be exercised to ensure assets will pass in the manner intended and that no unintended tax, creditor or liability issues are created. If in doubt, I recommend consulting with an estate planning attorney to ensure assets are titled in a manner that is appropriate for your situation and your estate planning objectives. At a minimum, carefully reviewing your assets and the manner in which they are titled is a great first step and will assist your advisor in crafting your estate plan.

Check back for my next post which will address beneficiary designations and pay-on-death provisions, other great tools in the estate planner's tool chest.

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Apr 07
DIY Estate Planning -- Should You Prepare Your Own Will?

I have to admit I am an obsessive do-it-yourselfer ("DIYer"). From fixing cars to tiling a kitchen, I do like to get my hands dirty. Most of the time, I have little idea of what I am doing at the start, but with the dawn of the information age, DIYers around the world have been empowered by step-by-step directions available on the internet for almost any project.

Usually my DIY projects are more or less successful, although there have been catastrophic failures when even the most explicit set of directions were not sufficient to replace experience, know-how and basic common sense. Fortunately, my mistakes have never resulted in bodily injury although property damage is not out of the question.

But there are some things even I will not attempt, such as doing my own taxes. While I am sure I could muddle through a 1040 return, I feel better turning the job over to an accountant to ensure a proper return is filed. The downsides of a poorly prepared return are just too great. I have often wondered if I were not an estate planning attorney, would I attempt my own will? I think not. For starters, much of my DIY work is an escape from my "regular job", desk work. If you mostly work away from a desk then perhaps preparing a will could be seen as recreational, but frankly I can think of better ways to have fun.

But the major motivator for many DIYers, myself included, is not recreation but cost savings. I think a DIY will fails on this point as well. Most people sign a will only several times in their lifetime. The time required to learn the legal requirements for the preparation of a will is not insignificant. Further, the law is in a constant state of change. Even the most interested DIYer would have trouble keeping up to date with all of the legal and tax aspects of estate planning. In my opinion, the effort required vs. the monetary savings doesn't add up. You would be better off putting that time into something repetitive such as mowing the lawn, maintaining your car, or even doing your own taxes (with caution!). All of these tasks must be performed on a regular basis and will add up to substantial savings over the years.

Further, mistakes made in preparing your will may result in significant expenses after your passing. Unlike most DIY projects, you will not know if you have made a mistake until it is too late. Of course you will be gone, but your loved ones will be left to clean up the mess. Whatever savings you may have realized on the front end may cost thousands of dollars in unnecessary legal fees and expenses, not to mention undue delays, trauma and angst for your beneficiaries.

I have seen only a handful of self-prepared wills over the years and nearly all of them had some type of defect, some more damaging than others. One lacked the required number of witnesses (two for Florida, three in some states). Another used such ambiguous language in making specific gifts it was difficult to tell exactly what the decedent wanted. A third lacked a residuary clause. The decedent had carefully listed a number of gifts with great detail but never identified what was to happen to the remaining assets which were not insignificant. All of these problems were surmountable, but would likely require court intervention and additional attorney's fees, costs and delays that could have easily been avoided from the start.

As much as I generally support DIY projects, I do not believe a DIY will is a good candidate nor do I think I would tackle it myself if I did not know what I was doing. So, what is a committed DIYer to do? Well, the prudent thing would be to hire the services of an attorney specializing in estate planning to prepare your will, trust (if needed) and related documents addressing incapacity as part of a comprehensive estate plan. The costs of basic estate planning services may be less than you think and again this is not something you are going to do very often.

But I know there are those who cannot resist the attraction of another DIY project, so check back next month for a review of some basic estate planning steps that anyone may take to control the passing of their assets at death and that do not require the preparation of a will. One requires you to do absolutely nothing at all. How's that for an easy DIY!

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Mar 07
Getting Started -- Glossary of Florida Estate Planning Documents

​Estate planning can be daunting for individuals who do not work in the field on a regular basis. This area of law relies on a lot of specialized terminology and the concepts and doctrine are not always intuitive. Further, estate planning needs vary greatly from one individual to another, so what worked for your neighbor may be totally inappropriate for you. Whether you are setting up an estate plan for the first time or have a plan that requires modifications, you should consult with a qualified attorney well versed in estate planning.

As a starting point, you may consider completing a basic estate planning package which in Florida typically includes a Last Will & Testament, Power of Attorney, Designation of Health Care Surrogate, Living Will, Declaration Naming a Preneed Guardian for self and any minor children, Authorization for Care of Minors (if applicable), and Funeral Directive. Individuals with more complex needs and goals such as estate and income tax planning, special needs for children or other loved ones, probate avoidance, or property owned in multiple states should consider additional planning options such as creation of a Revocable Trust, establishment of continuing trusts for future generations, estate tax planning, lifetime gifting strategies, and Irrevocable Trusts.

The more you understand about estate planning and the options available to you, the better you will be able to work with your estate planning attorney in creating your individual estate plan. To provide you with some background information, I have created this glossary (not in alphabetical order) with a brief explanation of common estate planning documents in Florida.

Last Will & Testament: This document provides instruction as to the disposition of property held in your sole name after your passing. In addition, the document appoints a Personal Representative (Executor) to handle the administration of your estate and directs the payment of your debts and expenses. Instructions provided in a will may include provisions for specific gifts of tangible property (ex. a coin collection), cash gifts (ex. $5,000 to my nephew) and residuary distribution provisions (ex. the rest, residue and remainder to my spouse).

Memorandum Disposing of Tangible Personal Property: While not required, Florida law allows a decedent to direct gifts of specific items of tangible property through a separate written memorandum provided that is authorized by the decedent's will. This is a flexible way of handling specific gifts of tangible property as the memo requires only a signature and a date and may be added to, amended or re-written entirely without making changes to the underlying will. Note that this document can only pass tangible items. It does not affect cash, securities, investments or other intangible property. Any items of tangible property not listed in the memo would pass through a residue clause in the will (ex. all other tangible property I own not gifted by my memorandum shall go to my spouse).

Durable Power of Attorney: A Power of Attorney names an agent to handle a variety of financial matters on your behalf such as asset sales, tax filings, and property management. Florida allows for a Durable Power of Attorney, meaning the document survives your incapacity. Typically, the purpose of this document is to appoint an agent to handle your financial affairs should you become unable to do so. However, a Florida Power of Attorney is effective upon execution. Your agent may exercise the authority given whether or not you have capacity or are even made aware of your agent's activities. Thus, the appointment of an agent should be made carefully and only to someone you trust completely. A successor agent may be appointed if the primary agent is unable to serve and the same concerns would apply. Further, unless stated otherwise in the document, a copy of the Power of Attorney is effective as if it were the original, raising issues with document duplication. If you are concerned about your Power of Attorney, an option may be to escrow the document in which case only one original is signed and then held by an escrow agent (typically the drafting attorney) only to be released upon the occurrence of certain predefined conditions (such as proof of your incapacity). Note that the authority given under a Power of Attorney ends upon your passing.

Designation of Health Care Surrogate: Similar to the Durable Power of Attorney, this document names a surrogate to make medical decisions on your behalf in the event you are unable to do so. Typically a primary and a backup surrogate are named and should be persons you trust with your medical decisions and who are available in times of need. Detailed contact information should be provided for each of your surrogates including home, work and cell phone numbers so that they may be easily reached in case of emergency.

Living Will: A Living Will sets forth your intentions regarding the withdrawal of life sustaining treatment in the event of terminal illness. While standard forms are readily available, custom language may be developed to meet your particular wishes.

Declaration Naming Preneed Guardian for Self: The Durable Power of Attorney is designed to prevent the need for guardianship appointment in the event of your incapacity. However, circumstances could still arise when guardianship proceedings would be required. This document states your desire in naming a guardian of your person (to make life decisions for you such as medical, housing and nutrition needs) and your property (to make financial decisions for you such as asset management, tax filings and bill payment). You may name different persons to each role.

Declaration Naming Preneed Guardian for Minor: If you have minor children, you may designate who should serve as their guardian in the event you are unable to care for them due to death or disability. This declaration may not always be binding, but it is given great weight as evidence of your intentions should guardianship proceedings for your children become necessary.

Authorization for Care of Minors: The Authorization for Care of Minors grants authority to an agent to care for your minor children if you are not present or have become incapacitated. This is in essence a limited power of attorney for a specific purpose and, while not expressly authorized by Florida law, is commonly used in cases of a minor traveling with or under the care of a non-parent on a temporary basis. Although serious circumstances, such as death or long-term incapacity of both parents, would require guardianship proceedings as addressed above, this document may suffice for temporary situations.

Funeral Directive: You may wish to provide direction regarding the disposition of your remains and services to be held after your passing. While these directions may be stated in a will, a separate writing is more flexible as it may be destroyed and resigned without requiring will modification. Further, a decedent's will may not be produced for days after passing in which case the instructions would come too late. This separate directive may be given to loved ones and medical providers so that it is readily found when needed without disclosing the sensitive information contained in your will.

Revocable Trust: Benefits of establishing a Revocable Trust during lifetime include avoidance of probate for those assets titled in the trust, simplified transition of asset management to a successor trustee after your disability or death, and the potential for faster asset distributions to beneficiaries after passing. Disposition of your property through a Revocable Trust may be made by outright gifts, continuing trusts, or by a general residuary clause. Revocable Trust planning may include basic estate tax planning strategies as well. Note that in order for a revocable trust to be effective in transferring property at death without probate, assets must be transferred to the trust prior to passing or otherwise be set up to pass to the trust after death pursuant to pay-on-death provisions.

Irrevocable Trust: Irrevocable Trusts may be used to implement estate tax savings strategies by way of estate reduction, implementing value discounting, or making provisions for beneficiaries of multiple generations. The general concept behind irrevocable trusts is that they represent a completed transfer of assets that no longer belong to the grantor and thus are not part of the grantor's taxable estate at death.

For further reading, I recommend the consumer pamphlets available at the Florida Bar website, www.floridabar.org, under "For the Public" (the direct link is.................


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