South Florida Estate Planning Attorney: Handing Off Specific Real Estate Assets to the Next Generation

One of the questions that often comes in during estate planning for individuals of high net worth is passing down specific real estate assets to the next generation. Whether it's a commercial building, an apartment complex or a vacation home, not only can the legalities be complex but emotions can run high.

The Wall Street Journal recently posted a very interesting article on just this subject, entitled "Who Gets the Vacation Home?"

In the article, the author takes a look at different types of trusts to preserve that vacation home as an asset to be enjoyed for years to come. If you have similar types of concerns, please consult an experienced South Florida Estate Planning Attorney before making any final legal plans.

Congratulations to Stuart Morris on his Installment to the Junior Achievement of South Florida Board of Directors

Please join us in congratulating Stuart R. Morris for joining the Junior Achievement of South Florida Board of Directors.

Junior Achievement  (JA) is a non-profit organization providing a series of business, economics, free-enterprise and life-skills programs to enhance the education of young people and prepare them to succeed in a global economy. In the 2011 school year, JA reached approximately 48,000 students. JA Worldwide, through offices around the world, reaches approximately seven million students per year.

For more about Stuart Morris and the services his South Florida Estate Planning law firm offers, please click here.

South Florida Estate Planning Q&A: Second To Die Life Insurance Policy

Dear Mr. Morris,

Years ago I purchased a "second to die" life insurance policy insuring the lives of my spouse and I. Lately, I've seen many advertisements prompting me to consider a full review of the policy. I thought I had taken care of everything when I purchased the policy. Is this review process worthwhile?

Sincerely,

Wondering Insurance Owner
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Dear Wondering Insurance Owner,

The benefits of an insurance audit are definitely worth your while and pursuing one is strongly recommended.

What would you say to your friend if he told you he secures his stocks, bonds and real estate portfolios in his safe and doesn't bother to review them for several years at a time? You would probably shake your head in disbelief. However, many people routinely and detrimentally handle their life insurance policies this way. It is critical to recognize that life insurance is an asset that must be audited, frequently evaluated and managed along with the regular updating of estate planning documents or families could suffer severe consequences.

Policies currently in-force that were written many years ago are priced based upon older, more expensive and outdated mortality tables. The actual cost of life insurance or the mortality cost rises each year.

When life insurance is first purchased, the mortality cost is less than the premium, allowing the insured to build cash value. As the insured ages, there is a point in time when the mortality cost is greater than the annual premium. At that point, the cash value of the policy begins to erode as it is used to pay the increasing costs of the policy.

For example, Mr. Jones is now 70 years old; he took out his life insurance policy 30 years ago when he was only 40. The cost of his life insurance is based upon his attained age of 70 with internal mortality charges based upon a 70 year-old, of 30 years ago, when a 70 year-old was not expected to live very long.

In many cases, a policy audit will help identify ways in which to:

• Avert Massive Underperformance and Related Risks: Keeping an existing policy that combines expensive older mortality costs with low interest and dividend rates that have trended well below the policy assumptions made at origination will result in massive underperformance that can mean policy lapses even if premiums are paid.
• Dramatically Improve Insurance Portfolio Performance: By utilizing new policies with much lower insurance/mortality costs, the transfer of accrued cash value in an existing policy can provide the opportunity to:
• reduce the annual premium by as much as 70%;
• increase the death benefit by as much as 60% for the same premium;
• move to another carrier of equal or better ratings for the same premium with guarantees of annual premiums and ultimate death benefit that were not even available at the time the current policy was purchased;
• move to a carrier that writes policies for those up to 90 years of age and/or have pre-existing conditions such as diabetes or cancer.
• Avert Tax Ramifications: Many policies are owned incorrectly or many times even owned by the estate which could trigger a tremendous adverse consequence resulting in payments of thousands to millions of dollars in unnecessary tax.
• Ensure Proper Beneficiary Designations: Life changes, such as the death of a beneficiary, a divorce, or even a partnership dissolving, can make original beneficiary designations obsolete.

As life moves by very fast, you must reevaluate what is most important to you and plan accordingly. As always, the first step is to consult with an experienced South Florida Estate Planning Attorney.

South Florida Estate Planning: Florida Carves Away Trustee Liability as to Life Insurance

Effective July 1, 2010, Florida Statute §736.0902 now limits both a trustee's duties and liability in connection with life insurance held within a trust. This is great news for current and future trustees of trusts established in Florida which hold or will hold life insurance policies; however, if you are currently serving as trustee, you must take certain measures to afford yourself such liability protection.

Irrevocable trusts which own life insurance are used frequently as one component of a person's overall estate plan. These trusts are prevalent due to the tax advantage they create; generally, if an insured owns the policy in his name, the death benefit will be included in his or her estate for estate tax purposes, whereas, in a properly structured irrevocable trust, the beneficiaries of the policy can receive the proceeds free of any estate taxes. Additionally, such trusts can be structured to keep the proceeds safe from the beneficiaries' creditors and free from the beneficiaries' estate taxes at their death.

The new statute reduces the certain liabilities and duties of the trustee with respect to any contract for life insurance on the life of a qualified person. A "qualified person" is the insured, or the spouse of that person, who has provided the trustee with the funds used to acquire the policy or pay premiums thereon. In the typical irrevocable trust arrangement, the insured or person to be insured (or their spouse) will transfer funds to the trustee and thereafter, the trustee transfers the funds, or a portion of the funds, to the insurance company to pay the premiums on the policy, so generally, this requirement is satisfied.

As long as the insured is a qualified person, the statute provides that a trustee will not be liable to the beneficiaries of the trust or any other person for any loss sustained with respect to the contract for life insurance and, unless otherwise provided in the trust instrument, the trustee now has no duty to determine whether the life insurance is or was procured with a proper insurable interest.

Additionally, as long as either a) the trust instrument, by reference to §736.0902, makes the statute applicable to contracts for life insurance or b) the trustee gives notice to the qualified beneficiaries that this section applies, then the trustee will have no duty to determine whether any contract of life insurance is, or remains, a proper investment or whether to exercise any policy option available under the life insurance contract. Nor will the trustee have a duty to investigate the financial strength of the life insurance company, diversify the assets of the trust with respect to the contract for life insurance or investigate the health or financial condition of any insureds.

If you are serving as a trustee on a trust which owns a life insurance policy, it would be prudent for you to provide proper notice to the qualified beneficiaries of the trust that this section applies; by doing so, unless you receive an objection within 30 days from a beneficiary, you will be relieved of any duty to determine if the policy is a proper investment or if options under the life insurance policy's contract should be exercised. The trustee will not have to worry about investigating the financial strength of the insurance company, diversifying assets with respect to the life insurance or investigating the health or financial condition of the insured person. This can help you focus on your role of accepting funds from the insured, sending Crummey letters to the beneficiaries (if applicable) and paying the insurance premiums on time to avoid a lapse of the policy.

Of course, before making any final decisions, please consult with a qualified South Florida Trust Attorney.

South Florida Estate Planning: Protecting Your Business: S Corporation Conversion to a Limited Liability Company

Use of an S corporation as an operating business entity has been a common practice given certain tax advantages over operation as a C corporation or an limited liability company ("LLC") taxed as a partnership. Namely, use of an S corporation avoids the double taxation of a C corporation and can provide savings with respect to self-employment taxes when compared to an LLC taxed as a partnership, as income from an LLC is subject to self-employment tax. However, operating as an S corporation can have downsides from a wealth preservation perspective.

Stock in an S corporation or a C corporation is freely attachable by a shareholder's judgment creditor. If you own your business as an S corporation and you are personally sued outside of the business (for example, if you signed a personal guarantee on real estate which is foreclosed with a resulting deficiency judgment), your creditor can foreclose the stock you own in your S corporation to satisfy the judgment. Once the creditor has your stock, they can begin voting and, depending on the amount of stock they possess, they may even be able to gain control of your S corporation and force the sale of assets or liquidation of the entity. For purposes of wealth preservation, this is a terrible result.

The membership interest in a multiple-member LLC cannot be levied by a creditor nor can the creditor levy on the assets owned by the LLC. Instead, the creditor is limited to a "charging lien" on the debtor's membership interest. The creditor will only be entitled to receive distributions made to the debtor member, but cannot compel such distributions, vote the member's interest or control the business operations of the LLC in any way. If the debtor member controls the distributions from the LLC, many times the charging lien will be worthless to a creditor.

Based upon the foregoing, conversion of an existing S corporation to a multi-member LLC for state law purposes is preferable. However, when doing so, adverse tax ramifications need to be addressed in order to avoid a deemed sale of the assets within the S corporation and associated potential taxable gains. The conversion can be treated as a tax-free F-reorganization under §368(a)(1)(F) if the conversion constitutes a "mere change in identity, form or place or organization of one corporation, however effected." Thus, if the conversion is done properly and the ownership does not change, the existing S corporation can be converted to an LLC, thereby deriving all of the asset protection benefits; at the same time, the LLC can continue to be taxed as an S corporation, thereby avoiding a deemed sale of assets with associated potential taxable gains and can continue the tax advantages regarding self-employment tax minimization. For state law purposes, the conversion is deemed to have occurred on the date of the formation of the original S Corporation. However, care must be taken to comply with §601.1112, the Florida conversion statute, as well as timely filing Form 8832 to tax the new LLC as an S corporation.

The converted S corporation will for all purposes be the same entity that existed prior to the conversion; the new LLC will be liable for all the existing liabilities of the converting S corporation and title of all assets will remain vested in the new LLC. As the new LLC will be treated as the same entity and title to real property remains vested in the new LLC, if there is any real estate with existing mortgages, the conversion can be argued not to violate such mortgages' due on sale clauses. Additionally, in Revenue Ruling 73-526, the IRS ruled that the taxpayer identification number of the original S-corporation would be continued by the surviving corporation, further facilitating the ease of conversion.

Care should be used in exercising this conversation, particularly with the S-corporation rules and regulations. If you have an existing S corporation which you would like to convert to an LLC, please contact our South Florida Attorney office for further information.

South Florida Estate Planning: Premarital Agreement Alternative

Without proper pre-marital planning, upon divorce, a spouse may be entitled to an equitable distribution of marital property, which may include assets which the wealthy spouse expected to be excluded from division as their "separate" premarital assets. Even inheritances, in certain cases, can be commingled and subjected to such distribution on divorce. Therefore, it is important that individuals in contemplation of marriage plan accordingly; traditionally, this meant entering into a premarital agreement with the spouse to be.

Entering into a premarital agreement can be a daunting task. Although it can be helpful from a wealth preservation perspective, for most couples who intend on getting married, negotiating a future divorce is uncomfortable at best and many times, can end the marriage before it starts. For those individuals who want to avoid such discomfort, the use of a Domestic Asset Protection Trust (DAPT) may serve as a viable alternative. DAPTs can help protect assets from claims of future spouses and avoid providing the type of financial disclosure that is required to implement effective prenuptial agreements.

A DAPT is a trust designed to preserve the assets within the trust for use by the trust's beneficiaries while shielding the assets from the creditors of the beneficiaries. Generally speaking, most U.S. jurisdictions hold that trusts created for the benefit of third party beneficiaries are not reachable by the beneficiaries' creditors. Thus, if structured properly, a parent can establish a trust for the benefit of their child without worrying that their child's creditors will have access to the trust funds. This type of third party trust is commonly referred to as a "spendthrift" trust. However, for public policy reasons, "self-settled" spendthrift trusts have traditionally been prohibited. For example, an individual cannot set aside assets within a trust for their own benefit and expect the assets to be protected from their creditors. In recent years, this general prohibition has changed for trusts established in select US states.

Thirteen states now recognize self-settled spendthrift trusts, including Nevada, Alaska, Delaware, South Dakota, Utah and Rhode Island. In these select states, a person may place their own assets into a properly drafted and administered trust and, provided that the transfer of assets to the trust does not violate applicable fraudulent transfer law, the assets in the trust will thereafter be protected from their creditors, including their future spouses.

To achieve such wealth protection, care must be taken to comply with the specific state's requirements in establishing the self-settled spendthrift trust. Generally, the trust would need to be irrevocable, have a spendthrift clause and appoint a trustee that is a resident of the selected state who will have discretion over making distributions to the beneficiaries. As the spendthrift clause restricts the transferability of the creator's interests in the trust property before the trustee actually makes a distribution of the property, the protection of the assets in the trust will substantially increase. By timely placing premarital assets into a properly structured DAPT, the assets will no longer be subject to equitable distribution on divorce. These assets are not the husband's or the wife's, but rather, the assets are the property of the trust; the creator of the trust has but a mere beneficial interest in the assets, subject to the trustee's discretion.

It is important to realize that even if a premarital agreement is entered into, it may be subject to attack. Upon divorce, a spouse could argue that such agreement was unconscionable or was entered into under duress, especially if there was not a sufficient lapse of time between the execution of the agreement and the date of the marriage. The agreement could also be set aside in certain circumstances if adequate disclosures were not made or if both the husband and wife were not independently represented in the agreement's negotiations. Thus, even with a marital agreement in place, it may still be prudent to take extra steps, such as the establishment of a DAPT, to ensure premarital assets are protected.

Of course, before making any final plans, please consult with an experienced South Florida Estate Planning Attorney.

Florida Estate Planning: Trio of Articles from the WSJ on End of Year Estate Planning

I recently came across three articles from the Wall Street Journal on end-of-year estate planning that I thought would provide an interesting read for our clients:

• How Volatility Eases Estate Planning
• Survivors' Biggest Mistakes
• More Year-End Tax Savings

Of course, before taking any concrete estate planning or tax planning actions, please contact a qualified Florida estate planning attorney.