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31.
When should I use an Irrevocable Life Insurance Trust?
If your estate is taxable, then a life insurance trust should be seriously considered.
The use of an irrevocable life insurance trust is preferable to giving a policy to an individual
outright. Giving a policy to your spouse may cause the policy to be included in your
spouse's estate and to revert to your (the insured's) estate should your spouse die before
you. If the life insurance policy is transferred within three years of the insured's death, then
the proceeds will be included in the insured's estate. Giving ownership to another will
cause a loss of control over the policy. The new owner could change the beneficiaries,
take the cash value, and even cancel the policy. For married individuals an irrevocable
trust can provide benefits to the surviving spouse for his or her health, education, support
and maintenance. The assets remaining at the spouse's death can still pass estate tax
free to children or other designated beneficiaries.
32.
Should I transfer existing life insurance policies into an Irrevocable Life Insurance
Trust?
It may be best to purchase a new policy to fund the trust. Otherwise, a gift of
existing policies would be subject to the three year rule and be included in your gross
estate. However, if you are no longer insurable, or purchasing a new policy will be very
expensive, then it may be best to gift existing policies to a trust subject to the three year
rule.
33.
Who should be the beneficiaries of life insurance policies?
If the proceeds of policies will be included in your estate, and if you have a surviving
spouse, then these monies will be eligible for the marital deduction and therefore defer the
tax on the policies. You should name a contingent beneficiary, such as adult children. If a
minor child is a beneficiary, then name a trust for the minor as the beneficiary. This can be
a revocable living trust if you have one or a trust created under your will.
34.
What will a trustee be required to do?
Serving as trustee is no simple task. While very important, prudently investing trust
assets is not a trustee's only responsibility. The job's scope is generally much broader.
Your trustee's exact powers and duties will depend on the instruction in your trust
agreement but, in general, your trustee will:
-
Hold trust property
-
Invest the trust assets
-
Distribute trust income and/or principal to the beneficiaries, as directed in the trust agreement
-
Make tax decisions concerning the trust
-
Keep records of all trust transactions
-
Issue statements of account and tax reports to the trust beneficiaries
-
Answer any questions and the beneficiaries may have concerning the trust
-
Make reports to the probate court when necessary
35.
Why should a corporate institution be named as trustee and what is its
responsibilities?
A corporate institution should be considered as trustee of a revocable trust because
of its permanence, safety, experience, group judgment and investment expertise. Unlike
individuals who might not outlive you or who might move away, a corporate institution
continues on and would remain available to handle the trust administration. If desired, a
corporate institution can also serve as co-trustee with a designated individual, such as a
family member.
In administering a revocable trust the corporate institution receives the assets and
arranges for the transfers of title into trust registration. The corporate institution safeguards
the trust assets, collects income when due, and distributes income and/or principal as
requested or needed by the trust beneficiaries. If the grantor becomes incapacitated, then
the corporate institution can pay his or her bills directly from the trust and collect any
applicable medical insurance reimbursement.
An investment objective is established by the corporate institution and the grantor.
The corporate institution's investment officers then periodically review the trust portfolio and
make any recommendations they feel will better accomplish the objectives.
Upon the grantor's death the corporate institution pays any final debts, taxes and
expenses and then distributes the remaining assets as directed by the trust agreement.
Most corporate institutions publish a fee schedule detailing the charges for the
various services involved in administering a trust.
36.
Who should I name as trustee or as successor trustee?
You can name almost anyone as your trustee. Your spouse, a sibling, a friend, a
business associate or even yourself as long as the person named has reached the age of
majority and is not legally disqualified from serving. You can also name a corporate trustee,
such as a bank or trust company. How much authority you give your trustee depends on
your trust document as you and your attorney determine. Your trustee may have broad
powers or very limited powers. In any case, your trustee, as a fiduciary, is held by law to a
strict standard of care in performing trust functions.
37.
Does Medicaid pay for nursing home care?
There are a complex set of rules governing qualification for Medicaid assistance. In
general, there are stringent asset requirements and restrictions on asset transfers by the
person trying to qualify. There are also certain exemptions for individuals and their
spouses. The rules are too complex to explain in this limited space. If you are interested in
more details, then it would be advisable to see an attorney that specializes in this area.
38.
What is homestead property?
Under the Florida constitution a person's personal residence or homestead is entitled
to certain protection. First, a person's homestead is not subject to claims of creditors.
Thus, a creditor cannot force one to sell one's home to pay off one's debts. This applies
even if a person has filed bankruptcy. A person's homestead is also eligible for a $25,000
annual exemption against the assessed value for purposes of calculating the ad valorem
taxes on the property. The homestead is also subject to the favorable “save our home cap”
which limits annual increases in real estate taxes.
There are also restrictions on how a person's homestead may be devised at death. If
a person is survived by a spouse and minor children, then the surviving spouse must
receive a life estate in the property with the minor children taking a remainder interest.
If the decedent is survived by a spouse, but no minor children, then it may be devised
outright in fee simple to the surviving spouse. If the property is not devised in fee simple,
outright to the surviving spouse, and the decedent is survived by lineal descendants, then
the spouse will receive a life estate and the lineal descendants will receive the remainder.
The surviving spouse will take the entire property if it is held as tenants-by-theentirety
(husband and wife) regardless if there are minor or adult children.
If the decedent is survived by lineal descendants, but no spouse, and there is no
devise of the homestead, then the lineal descendants will take the property as tenants-incommon.
Finally, if the decedent is not survived by a spouse, and has no minor children, then
the homestead may be devised to whomever the decedent has designated in his or her will.
39.
What is an "elective share?"
An "elective share" is the right of a spouse to elect against the provisions of a will
and/or trust. On October 1, 2001, the legislature changed the law regarding the right of a
spouse to make an Aelective share.@ Prior to the change a spouse generally had the right of
a 30% elective share of the probate assets. If no assets were distributed through probate
(i.e., if all of the assets were in an revocable trust), then a spouse would get 30% of zero
which was nothing. The legislature changed this law now providing that the 30% is based
upon a total of all of the “elective share estate” of the decedent, not just the probate assets
in a certain order under the statute. Basically, the law calculates the amount of the elective
share and then satisfies that amount with assets. For example, if an estate is worth
$1,000,000, then a spouse would be entitled to $300,000. If the spouse did not otherwise
receive that amount, (other than the homestead), then he or she can make an election to
take the elective share. The $300,000 is then satisfied with assets distributed to the spouse
directly, including, but not limited to, life insurance, IRAs, pension plans and trust assets.
The statute then provides for the distribution of certain assets, such as real estate and
assets in trust, etc. to the spouse.
40.
What is the generation-skipping tax and should I worry about it?
The generation-skipping tax is a tax in addition to gift and estate taxes. The tax is
imposed on transfers that Askip@ generations. The generation-skipping tax laws are very
complex. Each individual may exempt $2,000,000 from this tax. A typical generationskipping
transfer would be as follows: a trust is created by an individual which provides the
individual's son with income and upon the son's death the trust property passes to the
grandchildren. The trust property is not subject to tax in the son's estate, thus "skipping" a
generation level of estate taxes. The tax also applies to a direct transfer of property froman
individual to his or her grandchildren.
41.
Who should be the beneficiaries of my retirement plan?
Careful planning in naming the beneficiaries of your plan is important. Estate tax and
income tax impact of the designations must be considered. Funds contributed to the plan
by an employer have been previously excluded from income taxation. Upon death your
vested balance in a plan is included in your taxable estate. Your beneficiary will also be
subject to income tax on the benefits. Some death benefits are excluded from the income
tax and you may also receive a credit for estate taxes paid on the retirement plan assets.
Only a surviving spouse may rollover the distribution to his or her own IRA which allows the
surviving spouse to defer paying income tax on the distribution until he or she begins
withdrawals from the rollover IRA. Since taxation in this area is very complex proper
evaluation is imperative if assets in a plan are significant.
42.
What is the Florida Uniform Transfers to Minors Act?
This is a statutory provision for holding assets for the benefit of a minor. Since
minors are unable to own property the law allows you to designate a "custodian" to be
responsible for the assets until they reach majority. If a minor receives property by will, and
it is held by a custodian for the minor's benefit, then the minor will be entitled to receive the
property when he or she turns 18. However, if you specifically designate a custodian for gifts
made to the minor during your lifetime, or to receive distributions fromyour estate upon your
death, then the assets can be held by the custodian until the minor is 21. The custodian is
authorized to use the assets for the minor's education and other necessary expenditures.
43.
What happens to my safe deposit box upon my death?
If you are the only person authorized to enter the box, then a court order must be
obtained to enter the box and remove any contents. However, if you have other authorized
signers, such as a spouse or children, then they may access the box after your death or in
the event of your incapacity. Florida does not "freeze" safe deposit boxes like many other
states.
44.
How did the law passed in 2001 affect estate planning?
Generally, the 2001 Tax Act provides the largest tax cut since 1981 for individuals,
mainly in the form of tax benefits (i.e., income tax rate reductions; increases in the child tax
credit; decreases in the federal "death tax"; greater retirement savings incentives, including
increases in the contribution limits to individual retirement accounts (IRAs); employersponsored
retirement programs, such as 401(k) plans; several education related tax
benefits; and individual alternative minimum tax (AMT) relief).
Under the 2001 Tax Act estate tax rates are reduced and the exemption amount is
increased between 2002 through 2009. In 2010 there is complete repeal of the estate tax;
however, as discussed below, the current estate tax systemwill be reinstated in 2011 due to
the "sunset" provision. The following chart indicates the numbers:
Estate Tax Exclusion Amt/
|
Year
|
Top Estate Tax Rate
|
Credit Equivalent
|
Gift Tax Exemption Amt
|
|
2001
|
55%
|
$675,000 ($220,550)
|
$675,000
|
|
2002
|
50%
|
$1 million ($345,800)
|
$1 million
|
|
2003
|
49%
|
$1 million ($345,800)
|
$1 million
|
|
2004
|
48%
|
$1.5 million ($555,800)
|
$1 million
|
|
2005
|
47%
|
$1.5 million ($555,800)
|
$1 million
|
|
2006
|
46%
|
$2 million ($780,800)
|
$1 million
|
|
2007
|
45%
|
$2 million ($780,800)
|
$1 million
|
|
2008
|
45%
|
$2 million ($780,800)
|
$1 million
|
|
2009
|
45%
|
$3.5 million ($1,455,800)
|
$1 million
|
|
2010
|
repealed
|
N/A
|
$1 million
|
|
2011& thereafter
|
55%
|
$1 million ($345,800)
|
$1 million
|
While the gift tax rates mirror the estate tax rates through 2009, the increase in the
gift tax exemption is limited to $1 million. Accordingly, the existing unified transfer tax
system will become more complex as the estate tax exemption increases, reaching $3.5
million by 2009. While the estate tax is repealed in 2010 (for only one year) the 2001 Tax
Act retains a gift tax to prevent excessive gifts of appreciated property from high income tax
bracket taxpayers to low income tax bracket taxpayers. In 2010 gifts in excess of the
lifetime $1 million exemption will be subject to gift tax at the top individual income tax rate at
the time of the gift (under the 2001 Tax Act, 35%).
Beginning in 2004, the 2001 Tax Act also coordinates the generation-skipping
transfer tax ("GSTT") exemption to the estate tax exemption and repeals the GSTT tax in
the year 2010 and reinstates the GSTT in 2011. In 2002, the 2001 Tax Act repeals the 5%
surtax that applies to large estates (i.e., estates valued at more than $10 million). In 2004,
the deduction for qualified family- owned business interests also is repealed.
An immediate impact of the 2001 Tax Act on plans for married couples occurred
because many Revocable Trusts, which are created to save estate taxes, create a Family
Part and a Marital Part that are funded by a formula at the death of the first spouse.
Generally, the funding formula provides that the Family Part is funded with the applicable
exclusion amount (in 2001 the amount was $675,000) and all remaining assets fund the
Marital Part. Because the applicable exclusion amount will be increasing drastically
between now and 2009, under the traditional funding formula a greater proportion of the
estate will fund the Family Part (rather than the Marital Part).
THUS, IT IS IMPERATIVE TO
REVIEW THE VALUE OF YOUR ASSETS AND YOUR DOCUMENTS TO BE SURE THE
FUNDING IS CONSISTENTWITH YOURWISHES
. An alternative is to limit the Family Part
to a percentage or dollar amount so that the spouse knows that his or her Marital Part will
be funded.
Faced with the prospect that an individual may die before repeal of the estate tax, or
after repeal if the current transfer tax rules are reinstated, an individual=s future estate
planningmay need to use a two-pronged approach: one plan if the individual dies when the
estate tax is repealed (currently only in the year 2010) and one plan if the individual dies
while an estate tax is still imposed. This determination will need to be made on a case-bycase
basis because each family=s goals may be different. Remember also that further
changes are almost a certainty.
Furthermore, upon an individual=s death, his or her assets generally receive a
"stepped-up" basis to their date of death value. Thus, if a beneficiary immediately sells an
inherited asset, little gain or loss will result. Subject to a few exceptions described below,
when the estate tax is repealed in 2010, the 2001 Tax Act will require the person acquiring
property from a decedent to retain the decedent=s basis in that property (i.e., carryover
basis). Under the 2001 Tax Act, however, each decedent is allowed a $1.3 million
exemption from this carryover basis rule, thus assets may continue to receive a "step-up" in
basis of up to $1.3 million above the basis in the hands of the decedent. For married
couples, there is an additional $3 million "step-up" available for transfers to a surviving
spouse. Estate planning documents may need to be revised prior to 2010 to take
advantage of the limited basis "step-up" opportunities. Again, due to the Asunset@
provisions, when the current estate tax rules are reinstated in 2011, the automatic Astep-up@
basis rules will be reinstated as well. Nonetheless, it may be prudent to ensure that all tax
basis records are retained until an asset is sold.
One final aspect of the legislation merits comment. Technically the changes made
by the new law, including the "death tax repeal," will cease to apply after 2010. This highly
unusual provision was included to insure technical compliance with the federal budget law.
The lawmakers obviously assume that this provision will be eliminated in future legislation.
As of 2007 many tax bills have been proposed but none have passed. The most
recent legislation proposed House Bill 3170 on July 24, 2007 and proposes the following:
(1) Coordinating the gift tax credit with the estate tax credit
(2) Increasing the applicable exclusion amount as follows:
2010 $3,750,000
2011 $4,000,000
2012 $4,250,000
2013 $4,500,000
2014 $4,750,000
2015 $5,000,000
and thereafter
(3) Rates double as estate increases over $25,000,000
(4) Inflation adjustments
(5) Carryover of unused applicable exclusion amount by surviving
spouse
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