- May 28, 2013
Virtually all of my clients want to know how to pass their assets to their children without the expense (legal fees) or delays that they think will be involved in probate. This article is not intended to discuss the probate process, but rather, to give a general understanding of the benefits of a life estate deed executed in the State of Florida. However, to do so, you must understand basic principles of deed transfers, such as I have briefly listed below:
First off, please know that if you own property in your own name when you die, your beneficiaries will have to hire a lawyer to probate your estate. This is not true of certain assets that will pass under the terms of the contract existing between you and, for example, your bank, where you (hopefully) have named a beneficiary on your account to be paid upon your death. Probate also should not be needed for other financial tools, such as insurance policies, annuities, and IRA accounts.
However, probate is often needed for real estate, such as if you own your condominium in your own name when you die, your family will have to go to court to clear the title so that they can sell the property. Nonetheless, there are exceptions to this:
1. Husband and Wife. When a husband and wife own the apartment jointly (known as an estate by the entireties), most people believe that the survivor will automatically own the property upon the death of the other.
However, a Florida statute provides that if a decedent is survived by a spouse and lineal descendants, the surviving spouse takes a life estate in the homestead,NOT FEE SIMPLE, and there will be a vested remainder to any and all lineal descendants. Which means that potentially if one spouse dies and the couple owned the property prior to that death as "estate by the entireties", that the surviving spouse could not then sell/mortgage/encumber, etc. that propertywithout the consent of each and every one of those children!
2. Transfer to Revocable Living Trust.Your personal residence, if declared properly as a homestead protected property, is secure in Florida and cannot be taken from you even if you have judgments against you. However, in 2001, a Bankruptcy Court case concluded that if you transfer your homestead into a revocable trust, it no longer is exempt from creditors’ claims. Since then, prudent estate planning attorneys resist transferring homesteads into revocable living trusts. This homestead protection has nothing to do with the Florida Homestead Tax Exemption. The tax exemptionis still available to personal residences in trust, provided that the trust specifically states that you can live in the property.
3. Jointly with Child (or Children). If you transfer title to a childand hold title as joint tenants with right of survivorship with the child,there will be no probate when you die (or the survivor of a husband and wife dies). Here also the (adult) child should see an attorney, but the legal services are minor in expense and time, as compared to going through probate.On the other hand, there are potential problems that should make you thinktwice before putting the title in joint names with your child. Some of those issues that may make you reconsider whether to do this are:
a. This may be prohibited or restricted under the condominium documents, or may require association approval.
b. If you have a mortgage, you will need lender approval. If they permit it, they will charge a fee.
c. The transfer may result in the partial loss of your homestead tax exemption.
d. The child will have to pay capital gains tax when the property is later sold based on his gain in the half interest. For example, if the apartment cost you $50,000 in 1996 and you later transferred half to your child, he would have a tax basis of $25,000 in one-half of the apartment and would have to pay tax on the difference between one-half of the sales price and $25,000.
e. If your child has any income tax liens or judgment liens against the child’s share, they must be cleared before the property could be sold.
f. You could no longer sell or mortgage your property without your adult child’s consent.
g. You may be required to file a gift tax return.
h. The value of the interest transferred will be considered a gift for Medicaid purposes and will be the basis for a five (5) year “waiting period” that could delay your access to Medicaid benefits to pay for skilled nursing home care.
4. Traditional Life Estate Deed. Alternatively, you could do a traditional Life Estate Deed under which you retain the right to possession and enjoyment for your lifetime, and upon your death (or the death of the surviving spouse),the remainder (what is left after your life estate terminates) will pass to thechild (here known as the “remainderman”) when you die. Although you may not have all of the problems mentioned under item 3, you will at least be faced with the some or all of the issues, as discusssed in items e, f, g and h, listed above.
5. Enhanced Life Estate Deed. With an Enhance Life Estate Deed, you could transfer the remainder to your child or to a revocable living trust thatwould permit greater control of the property after your death. The Enhanced Life Estate Deed is a specially designed instrument that is only available in afew states, including Florida. It is similar to a traditional Life Estate Deed,and there is no capital gains tax if the property is sold shortly after your death. However, you retain the right to change your mind. That’s right. Without your child’s consent, you can take the property back and give it to someone else. In addition, you have the right to sell or mortgage the property and keepall of the proceeds without your child’s consent. To underscore the difference between the Traditional and Enhanced Life Estate Deed, with an Enhanced LifeEstate Deed,
a. The condominium association approval should NOT be required.
b. You should NOT need mortgage company approval.
c. The transfer should NOT affect your homestead tax exemption.
d. You should be able to sell or mortgage your property without your child’s consent (although some title companies may ask for your child to sign).
e. You will NOT be required to file a gift tax return since IRS considers the transfer and incomplete gift.
f. The value of the interest transferred will NOT be considered as a completed gift for Medicaid purposes and will NOT be the basis for the five (5) year “waiting period”, which could delay your access to Medicaid benefits to pay for skilled nursing home care.
g. However, if your child has any income tax liens or judgment liens, they may have to be paid off before the property can be sold. There are differences of opinion on this point. Until there are more definitive court decisions resolving these issues, we assume that the liens will have to be cleared. Many attorneys hold the position that if you can sell your property without the signature of your child (the remainderman), then why should you have to pay off the remainderman’s lien in order to sell your property?
In conclusion, the Enhanced Life Estate Deed, generally speaking, is an incredible tool for avoiding probate with minimal downside when compared to the possible alternatives.
- Apr 8, 2013
The government recognizes that retirement costs are increasing and Social Security and Medicaid are not addressing individual needs whatsoever. Smart taxpayers utilize the government’s gift of contributing to an IRA to accomplish many financial and estate planning goals. This is one gift horse you want to take advantage of by establishing an IRA before the federal tax deadline of April 15! Do so and you will gain multiple estate, financial, retirement and tax planning benefits.
Yes! Whether you earn over $1 million per year or absolutely no income you can still qualify for an IRA.
However, in order to qualify for an IRA as a non-earner, your spouse must generate earned income (note:alimony is an exception). Earned income includes salary, self-employed incomeand sales commissions. This calculation does not include interest, dividends,pension income or social security income.
Caveat: Contributions are limited to the lesser of earned income or $5,000 ($5,500 for 2013) for thoseunder the age of 50 or $6,000 ($6,500 for 2013) for those aged 50 and over. For example, a 65-year-old retired husband and 63-year-old semi-retired wife, whoearns $12,000, could each contribute $6,000 to an IRA in 2012.
So don’t let this opportunity pass you by: establish and contribute to an IRA for the tax year 2012 up until the time you file your 2012 taxes (with a deadline of April 15, 2013). If you have a Keogh or Simplified Employee Pension (SEP) IRA you can receive a filing extension, extending your contribution deadline to October15, 2013.
- Feb 20, 2013
Recently, the “American Taxpayer Relief Act,” was enacted, which has permanently enlarged the estate tax exemption to $5,250,000 per person (for 2013). It also permits a married couple to effectively double their exemption even without special estate tax planning.
By comparison, before this, when you created your trust the estate tax exemption was much smaller, and special tax planning was required to minimize estate taxes. I usually would have recommended a form of trust, usually a Living Trust with a Bypass Sub-Trust built into it, which would have paid attention to the lower estate tax exemption. A Bypass Sub-Trust has also been known as a “B Trust,” an "Exemption Trust", a "Family Trust", and/or a "Credit Shelter Trust".
Bypass Trusts typically require that, on the death of the first spouse, a share of the couple’s assets be transferred into an irrevocable sub-trust called the “Bypass Trust”, rather than to the survivor directly. This preserves the first spouse’s estate tax exemption for later use at the survivor’s death. Without the Bypass, the first spouse’s exemption could potentially be unclaimed and lost and all trust assets at the survivor’s death would be sheltered by only the survivor’s one exemption and the excess (if any) was exposed to an estate tax at a rate as high as 55%. Understandably, couples went to great lengths to avoid that tax.
However, Bypass Trusts often presented its own set of issues, such as: (1) not taking into consideration change in family circumstances, and the Bypass Trust would prevent the survivor to lose the right to make any changes despite this; (2) restrictions on the survivor’s access to the Bypass assets; (3) problematic when applying for cerain long-term care benefits; and (4) it usually required the preparation of separate accounting and income tax returns during the lifetime of the survivor. Thereby, surviving spouses typically found the restrictions overly burdensome.
Two important new developments arrived with the new law: (a) as of 2013, the amount of the estate tax exemption has now permanently increased to $5,250,000 per person, to be annually adjusted for inflation, and (b) the unused portion of the first spouse’s full exemption is now preserved for use by the second spouse even without the use of the restrictive Bypass Trust, effectively doubling the exemption for most couples.
In view of these new developments, couples with Bypass Trusts created for estate tax purposes under the old law should have their trusts reviewed and, where appropriate, consider eliminating the mandatory funding feature at the first spouse’s death. Instead, they might now consider plans which give the survivor the option of doing postmortem planning after the first death, e.g. by funding a portion of trust assets into an optional Disclaimer Trust. The Disclaimer Trust would then operate as a tax-saving Bypass Trust if that later appeared necessary due to the increase in value of the couple’s estate.
In that sense, I suppose you could say that the Bypass Trust has gone the way of the Dinosaur for most middle income estate plans, where it is unlikely that the couple’s estate would ever exceed two exemptions, i.e. $10,500,000 (for persons dying in 2013), and inflation indexed thereafter.
An exception to the above recommendation: The use of the mandatory Bypass Trust is still useful for non-tax purposes, e.g. in situations involving second marriages. Here, each spouse usually wishes to provide financial security for the survivor, but also wishes to preserve a portion of assets for his/her own children. Under these circumstances, a Bypass Trust can still help these couples achieve their estate planning goals.