Trusts are the “Channels” of Your Family’s Future
By: Barry E. Haimo, Esq.
April 24, 2014
If you fail to plan your estate, here are a few things that you are setting your family up to experience.
During life, if you become mentally incapacitated by illness or injury, your family may have to initiate guardianship proceedings in order to appoint someone to administer your property and care for you personally. Guardianship is expensive and involves court intervention, which makes it time consuming and unpredictable. Think of the magnitude of a recent disagreement with a family member. To give you a proper frame of reference, now try to estimate the magnitude of disagreement when it relates to their basic rights to control their property, take care of themselves and basically make their own decisions. It’s an ultra-challenging situation filled with frustration, anger and sadness.
After death, owning assets in your name will require initiating a probate administration (also known as an estate administration). Like guardianship, probate is time consuming, expensive and unpredictable. It’s also not private. Most importantly, in my opinion, probate is like pouring salt on a wound. A family member will likely be appointed as personal representative (or executor) to administer the estate through probate (or estate administration). It’s like an undesired full-time job that requires the personal representative (or executor) to delve into the deceased’s personal and financial affairs. Sometimes it’s difficult to discover assets, creditors and beneficiaries. Other times it’s not so difficult, but what is discovered can be unsettling and extremely frustrating. In either case, it’s a job that must be done, and I have not heard one positive story relating to one’s experience dealing with probate. In fact, when a personal representative (or executor) realizes that the probate (or estate administration) could have been avoided, they generally become enraged at the family member for not caring enough about the family to engage in a little planning. However, in my experience, the family member was uninformed rather than irresponsible.
Click here to learn the fundamentals of probate.
Risk of Loss
In addition to the painful process of probate, there are many forms of risk of loss when it comes to failing to plan your estate. Here are a few that probably apply to you, your family or your friends.
“Outright” gifts (also known as bequests)
When you die, if you fail to plan ahead, your state will choose your beneficiaries for you. Moreover, your state-determined beneficiaries will inherit your assets “outright”, meaning he or she will acquire complete dominion and control over the asset(s) upon receipt. This represents a huge risk of loss to your assets because they immediately become vulnerable to mismanagement and waste. Consider how responsible you would be if you inherited assets before you were ready. More importantly, these assets will be exposed to the beneficiaries’ creditors, which is akin to an invitation. I regard the latter as bigger waste.
Click here to learn about the fundamentals of creditors.
In Florida, when you are separated you are still legally married. Therefore, your spouse would inherit from your estate if you leave the decision to the state in which you reside (Florida). Until you get divorced, your spouse will be entitled to an elective share, or 30% of your estate, even if you disinherit him or her. If you want to disinherit your spouse, finalize your divorce or move to Georgia, which is the only state that it’s still allowed.
In Florida, when you get divorced, your former spouse is treated as if he or she predeceased you (or died before you). It’s important to ensure your documents reflect the change in your family dynamic. If not, they may still go to your former spouse if not properly drafted. Moreover, divorce creates two new, but separate families, and that means new documents are needed at the least: last will and testament, power of attorney, health care surrogate, living will and potentially a trust.
Remarriage Following Death
In Florida, when you pass away owning assets in your name, beneficiaries that take priority are your spouse and children and the allocation between them changes if the children are minors. If your spouse inherits from your (probate) estate, then they inherit it outright, the dangers of which are set forth above. In this case, however, the added danger is that your surviving spouse remarries. While you want your spouse to probably move on and find happiness, you probably don’t want it to be at the expense of your children’s inheritance. Consequently, your surviving spouse will have unfettered control to do as he or she pleases, including spending it on their subsequent spouse rather than your children’s health and education. This fact pattern is far too common and represents an enormous risk of failing to plan ahead. The reality is that if you fail to utilize a trust or other vehicle, the surviving spouse is free to remarry and share the inheritance with the new spouse instead of your children. The solution is to place assets in trust — a strategy commonly employed for tax planning and probate and guardianship avoidance. As mentioned above, placing the assets in trust ensures that they are devised to your chosen beneficiaries and descend to your children and flows downwards to their descendants. Even if you do want your surviving spouse to inherit from your estate, this avenue offers more protection, certainty and control.
Placing assets in trust will direct and protect assets much like a channel protects boats from rocks and shallow areas and guides them towards their ultimate destination. Naturally, boaters will better appreciate this metaphor.
Click here learn the fundamentals of trusts (video).
As indicated above, properly structured and executed trusts will also help avoid guardianship during life and probate following death. As the creator, you can exercise tremendous control over your assets for quite a ways into the future (360 years in Florida). You can address all the questions of who, what, when, where and why relating to your beneficiaries’ inheritance. Placing assets in trust will direct and protect assets much like a channel protects boats from rocks and shallow areas and guides them towards their ultimate destination. It will protect your beneficiaries’ interest from themselves and their creditors, limit inheritance of those unavoidable beneficiaries and hopefully eliminate your families’ need to experience the emotional roller coaster of probate and guardianship. Hopefully this post helps you realize the benefits of planning ahead, the value of trusts in your family dynamic, and why trusts are extremely relevant to all families and especially those who have experienced a divorce or death.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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