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Estate Planning Basics

By David Finkelstein, Attorney, CPA and Realtor

Welcome to the Estate Planning Pages website of FInkelstein & Associates, Attorney and CPAs, Sarasota, Florida. This site is designed to define some basic terms and tools used by estate planning attorneys in Florida. This website is designed for use by Florida residents or people owning propety in Florida only. If you are Canadian, please visit http://www.crossbordertrusts.com/, where we describe trusts designed specifically for Canadians. Please use this contact information to reach us:

941-952-9999

info@AttorneyCPA.com

Wills

We all know basically what a will is. A will is a paper that describes your "will" or "desire" as to what will happen to your property after you die. There are some basic things about wills that we don't all know. Here are some of them.

For instance, what happens if you die without a will? The State of Florida has drafted a will for you if you die "intestate", that is, without writing your own will. The State drafted a very specific, and very strange will: It leaves your property in a way that almost no one ever choses when they draft their own will. If you die without a will, the will that the State of Florida drafts for you leaves the first $50,000 to your spouse and divides the rest into two halves, giving one half to your spouse and giving the other half equally to your children. Often when people draft their own wills, they provide for most everything to go to the spouse until the spouse also dies, at which point it goes to the children.

Another basic rule about wills you may not know is that they have to be witnessed by two people and notarized by a notary.

Wills don't have to be typed. They can be in handwriting, as long as they meet all the other requirements.

Trusts

A Trust is a special way to hold title to property. When you own a property, you really own a bundle of rights, some of which are vital and some of which are not important. A Trust separates those rights between you and a Trustee, giving you all the important rights, like possession, income, the right to sell and devise the property. It gives the Trustee one of the unimportant rights, what I call the "bare title." A Trust can also separate rights between that same Trustee and someone other than you, for instance, someone you want to give property to.

There are several reasons to use a Trust to remove "bare title" and give it to a Trustee. Sometimes this creates a tax savings, by making a property "not yours" under the particular definition of a particular tax (while still leaving the property yours for all practical reasons, i.e., usage, income, and maybe the ability to give it away. Sometimes giving a Trustee "bare title" enables you to share some aspects of property ownership with a beneficiary, like a steady income, without giving them free reign to do everything a person can normally do with an asset, like give it away or waste it.

Names of Trust

Unfortunately, lawyers get to pick the names of Trusts, and like we often do, we have caused some confusion. No matter what type of Trust you get, it will almost certainly perform a number of different functions for you. However, we lawyers often take ONE of those many functions and name the Trust for that one function, ignoring all the other functions that the Trust does. The discussion below is really a discussion of the different clauses that can be in a Trust. Usually, the trust is named for one of those clauses. Some of those clauses are mutually exclusive and some are not.

DON'T LET THE NAMES GET IN THE WAY. Trusts are basically a set of instructions about what you want to do with your property. If you do not see a name below that describes your goals or instructions, don't worry. Simply tell us what you want to accomplish. If it can be described in words, it can usually be put in a Trust, if it has no other adverse effects. Don't worry if you don't see a name for what you want to do. We can even make up a new name, like "the Rabbi Trust," a name coined by a lawyer who drafted a Trust with special provisions for a Rabbi.

Some Types of Trusts

Irrevocable Trusts. Irrevocable trusts have a clause it in that forbid the person who makes the trust (the grantor) from revoking it. Such clauses are used when it is important that all connection between the grantor and the property terminate (for tax or other purposes).

Revocable Trusts.   Revocable trusts have clauses in them that say that the trust can be revoked by the grantor.

Living Trusts.   The term Living Trust has been employed to describe a revocable trust with clauses in it that avoid probate and preserve the two death tax credits that two spouses theoretically have under US estate tax laws. In certain tax brackets, a married couple can lose one of their two estate tax credits if the first to die leaves everything directly to the spouse instead of letting it flow through a Living Trust.

Credit Shelter Trust. A Living Trust where the lawyer chose a name that emphasizes the clauses that keep a married couple from losing one of their two death tax credits (see Living Trusts, above).

Probate Avoidance Trust. A Living Trust where the lawyer chose a name that emphasizes the clauses that make it avoid probate (see Living Trusts, above).

Spendthrift Trust.   Any type of Trust where the lawyer chose a name that emphasizes the clauses that provide for one or more beneficiaries to receive only income and not large distributions of principal because of the concern that the beneficiary may not use the principal wisely.

Special Needs Trust. Any type of Trust where the lawyer chose a name that emphasizes special provisions that the lawyer has included for disabled or young beneficiaries.

Land Trust.   Any type of Trust where the lawyer chose a name that emphasizes the special provisions that were included to deal with the fact that the Trust will hold land.

Charitable Remainder Trusts/Charitable Lead Trusts/Charitable Annuity Trusts. These are a group of Trusts that let you use your property while you are alive and then pass the property to a charity when you die. You can do that with a will, so why do you need this type of Trust? Remember our discussion that owning property is really owning a bundle of rights, which can be separated into important an unimportant rights and that we give away the unimportant right called "bare title" to the Trustee? Well, to some people, the right to give property away at death is not important (perhaps because they have already provided for their beneficiaries, or don't wish to). These types of Trust give that particular right to a charity under provisions that make the gift "complete" under income tax laws, giving the Grantor a charitable deduction under those income tax laws. The result is if you draft the trust just right, a) it will provide for you to use the property during your life by getting interest income from it, b) upon your death the property will go to the charity, and c) you will get a deduction from your income tax for the present value of the property the charity will get upon your death. You can also do it "backwards," giving the charity the income now. There are very specific parameters you must fall within to qualify for this deduction, so don't try this at home. Call a lawyer.

Living Will

A Living Will is NOT A WILL. It's a bad choice for a name, because it sounds like it's a will. It is not. It is merely an instruction to your doctors regarding one particular medical situation. It is an instruction to be used by your doctor if a) your medical situation is such that you cannot communicate your wishes to your doctor, AND b) if you are certain to die, or c) certain to live only as a body, with no brain function. It tells the doctor either to continue life support or discontinue life support.

I refer to a Living Will as one of the most "efficient" estate planning document, because it turns a decision that can be heart-wrenching (terminating life support for someone else) into what seems to be an easy decision (terminating life support for yourself). For this reason, we recommend that, if you have no other estate planning document drafted, get one of these. Health Care Powers of Attorney or Health Care Surrogate Designations are a close second.

Powers of Attorney

Here the terminology can get a little confusing. First of all, a Power of Attorney refers to a broad range of powers to act on behalf of another person who is still alive. A power of attorney is useful in an estate planning context to give authorty to a person to make financial or health care decision for you if and when you are too ill to communicate or think about those matters. It can be used for other situations, like making decisions regarding your children when you are out of the country, or signing documents for a closing you cannot attend. There are many reasons someone might want another to act for them, and there are many types of powers of attorney.

Remember, Powers of Attorney don't work after you die.

Here are some definitions that you may find helpful.

Attorney. A lawyer, right? NO. The term is broader than that. An attorney is a person who is authorized to act for another.

Attorney-at-Law. If an attorney is authorized to act on your behalf on legal matters, he or she is an Attorney-at-Law. We often shorten that to "Attorney", but the real term is "Attorney-at-Law". The authority to act as an Attorney-at-Law comes from many rules, regulations and the act of hiring someone to serve in that capacity.

Attorney-in-Fact. An attorney that is not a lawyer, they are an "Attorney-in-Fact" and are authorized to act on your behalf only to the extent that is described in the document creating the relationship, that is, the Power of Attorney designation.

Power of Attorney. Technically, this phrase only refers to the "power" given to an attorney-in-fact or an attorney-at-law, but it is also used to refer to the document that grants the power to act on another's behalf.

Power of Attorney Designation. A phrase that is never used, but would be more accurate to describe the document granting the power to act on behalf of another.

Health Care Power of Attorney. A straightforward phrase refering to the power to make health care decisions for another. It is used because often a person is so sick they cannot communicate.

Health Care Surrogate Designation. A Health Care Power of Attorney.

Durable Power of Attorney. A power to act for another that 'endures' beyond the point that the person no longer is legally capable of having the intent normally required to give permission for someone else to act on their behalf.

General Power of Attorney. The power to do anything on behalf of another (anything allowed by law).

Limited Power of Attorney. The power to do only certain things described in the document creating the limited power of attorney. For example, the power to sign the closing documents for one particular transaction.