Estate Planning Primer

Nobody wants to think about dying, but most at least think they should have a plan for what happens to their assets when they die. If they do not get around to drafting a Will or other documents, their assets pass to others by what is known as intestacy.

An intestate estate does not automatically go to the State. It passes to heirs in accord with Florida Statutes. The legislature adopted statutes that set out who gets someone’s assets if they die without a Will or other dispositive document. The legislature’s distribution is generally to spouse and children, then parents, then brothers and sisters and so on. The legislature’s family tree is quite large. The legislature’s plan for distribution often differs from the person who dies without a Will. That is especially true when a second marriage is involved.

Some use payable on death accounts to provide distribution when they are gone. The benefit of those accounts is they avoid probate. Probate is the court administered process by which a decedent’s assets are distributed to the beneficiaries of the decedent’s estate. Most people setting up payable on death accounts want to avoid expense and delay of probate and the attorney fees that go with it. They also want to avoid attorney fees for drafting a Will.

There are real problems with payable on death accounts. One problem is not all assets can be owned in payable on death fashion. There is a way to title real estate so that it passes on death and most financial accounts are pretty easy. Retirement accounts are almost always made payable direct to beneficiaries. But it is almost impossible to own tangible personal property (i.e. boat, collectables, jewelry) that is transferable automatically at death. 

A second problem with transferable at death ownership is the person to get the asset may die before the owner and the asset may still have to go through probate. If so, the asset may be distributed following the legislature’s plan and not necessarily that of the owner. A third and related problem is it can be difficult to set up an account or ownership payable on death with desired alternative beneficiaries in case the primary does not outlive the owner. A fourth problem is the owner may spend or merge the account for a beneficiary and never add that beneficiary to any other payable on death account

Many people setting up payable on death accounts realize the shortcomings so they also get an attorney to draft a Will. A Will is a document that directs disposition of assets after one’s death. A Will also appoints someone to administer the estate. A Will has advantages over payable on death accounts.

The biggest advantage of a Will is the ability to fine tune distribution. The testator can say who gets assets, but also who gets them if the first beneficiary fails to survive. A Will can also direct delayed distribution so a beneficiary only gets assets if the beneficiary attains a certain age. A Will can limit distribution to certain purposes. 

Real world examples of how directing alternative distribution can be useful include delayed gifts to minors and leaving funds primarily for education or other special purposes. In some families, there are people who would not use funds wisely due to drug, gambling or other problems. A Will can leave funds in trust to a trustee chosen by the testator with direction for use of the funds (i.e., distribution of a set amount each year or even holding all as an emergency fund) rather than outright distribution of all. When a beneficiary is disabled and receiving government assistance, a special needs trust can be created to pay expenses not paid by the government while retaining the right to government assistance.

Biggest drawback to a Will is the Will goes through probate. Assets cannot even be administered until the court appoints a personal representative and once that is done the personal representative must follow probate procedure for notices, filings and accountings. An attorney is invariably needed to sort through the process and the administration is somewhat costly and time consuming. But it gets the job done.

An alternative to a Will is use of a Living Trust, also known as a Revocable Trust. With a Living Trust a person has an attorney draft a trust document under which the person is trustee until death, after which a successor chosen by the person takes office. The trust states that during life the person can do whatever the person wants with trust assets and even amend or revoke the trust. The trust also provides who gets what when the person dies and who appoints a successor trustee.

During life, even the IRS agrees the living trust is not a real trust and the person continues to file tax returns with the person’s social security number. When the person dies, the assets in the trust are considered owned by the trust so they do not have to go through probate.

A Living Trust has all of the benefits of a Will without the requirement of going through probate. A Living Trust does not save taxes and does not protect assets from creditors but saves a lot of expense and delay when the person creating the trust dies.

Estate planning involves more than just worry about who gets what after someone dies. It also involves planning for what goes wrong during life. Managing assets and making medical decisions before death cannot be done easily if someone is incapacitated. 

To make sure medical decisions can be made without obtaining a court appointed guardian, most should use a Designation of Health Care Surrogate. This document appoints someone to make medical decisions when the principal is unable to make them. Florida has a strong public policy allowing people to make their own medical decisions, even if foolish. Designating someone to make them in the event of incapacity does not change that. The Designation insures someone chosen will make decisions and not someone chosen by a judge or statutory priority.

Florida Statutes provide a pecking order of medical decision makers if someone is incapacitated. Spouse is first, followed by a majority of adult children, then a majority of adult siblings and followed by others. The statute may not reflect a person’s desire. I never like a committee to make decisions as that is subject to delay and deadlock. Designation of a Health Care Surrogate is an important document.

One can also have a Living Will. That is a document that expresses a person’s wishes with respect to end of life conditions. It differs from a Do Not Resuscitate, which is a document only a doctor can provide in Florida and directs only no resuscitation. 

In addition to medical decision making, a person should also have a Power of Attorney appointing someone to make decisions and take action concerning financial and contractual matters. A good example of need for this document is getting a health insurer to pay medical bills. 

Even if someone has been designated to make medical decisions (by statute or document), the insurance company is usually unwilling to discuss with them unless they also have a Power of Attorney. More mundane matters may also require a Power of Attorney, such as dealing with the electric company or pursuing a warranty repair. A regular Power of Attorney cannot be used if the principal cannot act, but Florida allows making the power durable. A Durable Power of Attorney can be used even if the principal is incapacitated. Most of the time, possible incapacity is why a power is prepared.

The do-it-yourselfer often wants to avoid probate and make life easy for beneficiaries by using payable on death accounts. That effort might fail if anything goes wrong with the plan (i.e., a beneficiary dies prematurely) and it also omits documents which protect during life. Estate planning is a lot more than just who gets what when someone dies.