Estate Planning

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What’s Mine is Mine and What’s Yours is Mine – The Homestead Trap

Jane and Harry decide to marry. Both Jane and Harry have been married previously, each owns assets that he/she acquired prior to this marriage and, each have children from prior relationships. Jane and Harry both agree that they will pass their respective estates to their own children (i.e., nothing will pass to Jane/Harry as surviving spouse). Jane and Harry each execute a Last Will and Testament leaving everything to their respective children. After they marry, Jane and Harry will live in a beautiful house in Plantation, Florida that Jane owned prior to their marriage.

Jane and Harry have a beautiful wedding in Boca Raton, Florida and are living happily ever after – for one day – and then sadly Jane is in a terrible car accident with a Broward County bus and dies. After Harry grieves for 3 months, he consults with a Trust & Estate lawyer to discuss administering Jane’s estate. Harry’s lawyer advises him that he has rights to Jane’s house and also to part of her estate. Harry explains to his lawyer that he and Jane were only married for 1 day, and besides, they agreed they wouldn’t leave anything to each other and that they even have a Last Will and Testament stating such. Harry’s lawyer says it doesn’t matter how long they were married or what their wills say, under Florida law Harry (as a surviving spouse) automatically gets a life estate in Jane’s homestead; alternatively, Harry can make an election to take a 50% tenant-in-common (“TIC”) interest in the homestead. The TIC election MUST be made within 6 months of death (this is a strict deadline). But is the TIC election really important to make? It certainly can be! Although a life estate is nice, it’s very restrictive. Neither the life tenant nor the remainderman can really do much with the property without the other’s consent. The main advantage of the TIC interest is that it allows either owner to force a sale of the property (through a process called “partition”). This can be a crucial benefit when the life tenant and remainderman don’t get along.

In addition to the homestead interest, Harry’s lawyer tells him that he can also take an elective share, which is 30% of all of Jane’s assets. Harry tells his lawyer that Jane named beneficiaries on all of her financial accounts, so nothing will pass through probate. The lawyer explains to Harry that it doesn’t matter, the elective share applies to ALL of Jane’s assets (with some exceptions), including her $2,000,000 Fidelity account which should have passed directly to her children. Harry is shocked by this information. But the elective share is not automatic like the homestead interest. If Harry decides he wants to pursue his elective share rights, then he has to file an election in Jane’s probate administration (if there is no probate administration, he would have to initiate one).   The good news for Jane’s children is that the elective share is inclusive of the homestead rights, so in simple terms (because the elective share calculation can be quite complex), if the homestead is worth $1,000,000, then Harry is deemed to have received $500,000 (i.e., ½), so he would only be entitled to $100,000 from the Fidelity account.

What did Jane and Harry do wrong? Was there any way to accomplish their goal of their respective children inheriting their estates? There sure was. Jane and Harry could have executed a marital agreement (either before or after their marriage), or they could have signed a simple waiver of rights under Florida Statute 732.702 (such a waiver requires financial disclosure). Marriage is a significant legal step. If you are thinking of getting married and you have assets or children from a prior relationship, I strongly suggest you meet with your lawyer before getting married. The Law Offices of Samantha J. Fitzgerald has counseled numerous clients on how to protect their estates from unintended consequences.

My daughter’s ex-husband took my savings account!

Mary Client, a 72 year old widow with 3 adult children, comes into my Plantation office to discuss doing a simple Will. Mary says she wants to leave her assets equally to her 3 kids upon her death. Mary’s only assets consist of a checking and savings account. I explain to Mary that she should have a durable power of attorney as part of her estate plan so that her children can help pay her bills and help with other financial matters in the event she became incapacitated. Mary says that she added her daughter June to her checking and savings accounts, so she doesn’t need a durable power of attorney. I explain to Mary that upon her death, her checking and savings account will automatically belong to June 100%, even if Mary’s Will says she leaves all her assets equally to her 3 children. The accounts will not pass through probate since they are jointly owned and therefore the Will does not control them. This is a surprise to Mary and it is not the outcome she intended. But what’s even worse, Mary then tells me that June is being sued after defaulting on a loan and she is also in the middle of a divorce. Since June is legally the owner of the bank accounts and can withdraw 100% of the balance as a joint owner, the full value of both accounts is at risk of being taken by June’s creditors and being divided as a marital asset in her divorce. Mary was shocked by this news and did not anticipate these outcomes when she added June to her accounts. I advised Mary that she should remove June as an owner of her accounts. Unfortunately, June would have to sign off on this since she is a legal owner of the accounts and June lives in Minnesota, and it would be very costly for her to travel to Florida to sign the paperwork.

What did Mary do wrong? Mary should have consulted with a lawyer prior to adding June to the accounts. Often times people do things out of convenience not realizing that there may be significant legal consequences. Had Mary met with me before doing this, I would have advised her that she could execute a durable power of attorney that would give June all the power that she needed to help Mary pay bills, and many other things, and it would not automatically transfer the accounts 100% to June upon Mary’s death. The durable power of attorney would not subject Mary’s accounts to June’s creditors nor would it cause the accounts to be treated as marital assets subject to division in a dissolution proceeding. June might be able to prove in court that the money really belongs to mom and that she was only added to the accounts for convenience purposes and that she is not “really” an owner. But who wants to be litigating that issue in court? How much money in legal fees will that cost June and/or Mary? The moral of the story is, Mary should have a trusted attorney that she can call before she makes any sort of decision like this in the future.

I had a Last Will and Testament, but my estate still ended up in probate court!

Welcome to my blog! This is my first post and I am excited to educate readers in Plantation and other areas of Broward County about estate planning and probate & trust administration. One topic that is near and dear to my heart is what a Last Will and Testament is and does, and what it is not and does not. A Last Will and Testament(referred to herein simply as a “Will”) does not keep your estate out of probate. That’s right . . . . . . . your estate does not end up in probate because you didn’t have a Will.

Now, that doesn’t mean you shouldn’t have a will, because there are many reasons to have a one. But often times, people make a Will assuming that it is going to accomplish certain objectives, and unfortunately because they are misinformed, there are unintended consequences.

Florida Probate is a process of transferring title to your assets at death. If your assets don’t automatically pass to someone (discussed more below), then they must go through the Florida probate process in order to properly transfer title to the recipient. Then what does a Will do? A Will controls the probate process. If you have assets that pass through probate then the Will controls who receives those assets and who is appointed to be in charge of the process (called a personal representative in Florida, aka executor). A Will does not have any impact over assets that don’t pass through the probate process.So what doesn’t pass through probate? Potentially lots of things! Do you have an IRA or 401(k) with a designated beneficiary? Do you have a life insurance policy with a designated beneficiary? Do you have a bank account that you added your adult child on in case you need help paying bills as you get older?

These are all examples of assets that don’t pass through the probate process and that are not controlled by the provisions in your Will. For instance, let’s say that your only asset is your IRA with a balance of $700,000, and the IRA names your daughter and son as beneficiaries. Your Will leaves $50,000 to each grandchild and then the balance to your girlfriend because your kids never visit you. Guess what . . . . . . . . your kids get your entire IRA and your grandkids and girlfriend get nothing because the IRA passes outside of the probate process and the Will only controls assets that must pass through probate.Consulting with a lawyer is tremendously important because estate planning is tricky and unintended consequences happen all of the time.