Naming a trust as a beneficiary of life insurance policy can have a huge benefit for people with large estates that are not taxable. It is also a great way to protect the insurance proceeds from future creditors and to help beneficiaries better manage their assets

There are a few common types of trusts that can serve as the owner or beneficiary of a life insurance policy. These trustees might include: an irrevocable life insurance trust, a living trust, a special needs trust and a spendthrift trust.

Irrevocable Life Insurance Trust

This type of trust, often referred to as ILIT, is used to irrevocably purchase insurance on the life of the grantor of the trust. This means the trust will have actual ownership of the policy, rather than the person the policy is for. This is done usually to avoid the taxing of life insurance proceeds at death under the Federal estate tax.  Since the person does not actually own the life insurance policy, the proceeds are not subject to estate tax or included in that person’s estate when he or she dies.

Once a person with an ILIT dies, the insurance proceeds will be deposited into the ILIT. Usually, an ILIT is set up to provide for the other spouse during his or her lifetime, and the balance passes to the children or other named beneficiaries.

ILITs are typically used to save money on estate taxes by ensuring the life insurance proceeds would not be included in the insured person’s estate.   In 2002, the estate tax exemption was only $1 million. Since 2013, Congress has raised the estate tax exemption has been raised to $5.43 million, and $10.86 for married couples.  This much higher exemption means a large number of estates are no longer facing estate taxes. However, those with larger estates can still benefit greatly from the use of an ILIT. In addition, some families are still using ILITs incase the estate tax exception is lowered in the future.

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The U.S. Supreme Court recently ruled that an inherited IRA is not a “retirement account” for purposes of protection under the Bankruptcy code. This now means that inherited IRAs are available to satisfy creditor’s claims in order to pay off debt.

The court characterized an inherited IRA as money that is set aside for the original owner’s retirement rather than money set aside for a designated beneficiary’s retirement. The court reached this conclusion using three elements to differentiate an inherited IRA from a participant-owned IRA:

  1. The beneficiary of an inherited IRA cannot make additional contributions to the account, while an IRA owner can.
  2. The beneficiary of an inherited IRA must take required minimum distributions from the account regardless of how far away the beneficiary is from actually retiring, while an IRA owner can defer distributions at least until age 70 1/2.
  3. The beneficiary of an inherited IRA can withdraw all of the funds at any time and for any purpose without a penalty, while an IRA owner must generally wait until age 59 1/2 to take penalty free distributions.

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In Florida, the assets of an estate can be transferred in three different ways upon the death of the estate owner. Some assets are transferred freely without a court’s approval by contractual terms. A court will also provide limited administration for an estate worth under $75,000. Finally, there is a formal administration for large estates without a valid will. A lengthy probate is not always necessary if the owner of the estate has a will that dictates how a person’s assets are to be distrusted upon his or her death.

Assets that Avoid Probate

There are some types of property that can be transferred to a new owner without a probate court’s approval. One of the most common types of non-probate property is property that is owned by multiple people in joint tenancy with rights of survivorship or as tenants by the entireties.  This property is usually owned by married couples such as a car or house.

Here at the Law Office of David Goldman, we wanted to list some of the more important clauses that might be used in a Florida will or Florida Living Trust. Every person who makes a will or trust has different circumstances and therefore every will or trust is designed with that person’s specific needs in mind. Many of these clauses might not be needed in your will or trust, but we like to include them anyway in case the unexpected happens to you or your family. We urge our clients to learn about these clauses, so they can decide if these clauses might help to meet their estate-planning needs or how they may want to make changes to deal with their specific family circumstances.

Disaster Clause

This clause deals with what happens if both spouses or a beneficiary die at the same time. This will or trust usually states that a spouse’s assets will only be transferred to the second spouse or beneficiary if the second spouse survives the first spouse by a certain time period. This period is usually 30 days. This clause can help to prevent the confusion of where assets should go based upon who died first.  The time limit can be increased to add additional protection, but this can delay distributions also.

There are many ways that a settlor, or a person who creates a trust, can help to prevent creditors from attacking the assets he or she leaves a beneficiary through a trust or a will. One of the best ways to protect a trust’s assets is through a spendthrift clause.

In a trust, most beneficiaries are able to freely transfer their interest in the trust to someone else. A spendthrift provision prevents a beneficiary from being able to transfer their interest in the trust either voluntarily or involuntarily. While this puts a restraint on the beneficiary’s rights, it has the added benefit of preventing creditors from reaching these funds.

The provision must restrict the beneficiary’s ability to make voluntary and involuntary transfers. A restriction on just involuntary transfers will generally not be deemed valid by a court and will still allow creditors to reach the trust funds.

Most people assume when they receive an inheritance, either through a will or a trust, that they must accept it. This is actually not the case as a beneficiary is also allowed to disclaim, or not to accept, the inheritance. Refusing an inheritance may seem like an alien concept, but can actually be the best course of action for many beneficiaries in some situations.

There are many reasons to disclaim an inheritance, with the most common reason being to avoid costly taxes. A common example of this might happen when parents leave money to affluent adult children. In this case, the children could disclaim the inheritance in order for the grandchildren to receive the inheritance instead. The money would then be taxed at the grandchildren’s tax rate rather the adult’s rate, which could save a large portion of the inheritance from being taxed. In addition, if the disclaimed assets would not be subject to the estate taxes of the parent.

Letting the inheritance pass to the next beneficiary through a disclaimer can be a much more efficient process compared to the beneficiary accepting the gift and passing the gift to the next beneficiary herself.   This is especially true if the gift is real property as is does not require the first beneficiary to go through the re-titling process. Someone with a large estate can also use a disclaimer to save on gift taxes, which will be incurred if the beneficiary takes the inheritance and passes it to another person.

A common estate-planning problem arises when parents with young children die or become incapacitated. Usually when one parent dies, the second parent assumes custody, but if the second parent is also not available the issue is who has the right to and who will raise the minor children.

The best solution to avoid this issue is to plan ahead by naming a guardian through a will. A guardian should be someone who is willing to raise the minor children in the event something happens to the parents. To qualify as a guardian in Florida, the person must be at least 18 years old and of sound mind.

In the will, a personal guardian should be named for each of the parent’s children. It is also a good idea to name an alternative guardian in the event the first guardian is unable to serve. Besides the age requirement, a guardian must be a Florida resident unless a close blood relative or spouse of one. A testator, or one who executes a will, may also name co-guardians if they prefer that two people care for the child. This could allow another couple to raise the children, and would give each guardian the ability to make important decisions for the child.

A will is an important tool in the estate planning process that allows a testator, a person who creates a will, to distribute the assets of an estate in the manner is deemed most appropriate. If no will is present, a testator’s estate is executed by the rules of intestate succession and assets are distrusted to the testator’s predetermined beneficiaries at a certain percentage.

To create a valid will, Florida requires the testator to posses the intent to create a will. To make a will, Florida requires the testator to be of sound mind and at least 18 years old. Additionally, a court requires the testator to understand the extent of her property, and to know the nature and scope of the act of executing a will. The testator must also be able to sign the will with this intent.

Courts do not allow a will to be signed by a power of attorney, guardian, or conservator of the testator.

The estate executor or personal representative is one of the most important roles in managing a loved one’s estate after death.   Serving as an executor comes with many responsibilities, but knowing what to expect will make the transition into this important role much easier. The following checklist can be helpful in organizing your efforts.

The first step an executor should take is to look for records and important documents that relate to the deceased’s estate.

The common places to look for records

  • Personal filing cabinets: Many people keep physical copies of financial records in a home filing cabinet, safe, or in other types of physical storage. Financial records might also be kept near areas where bills are paid in the home.
  • Electronic storage: Search through the deceased’s home computer, laptops, and other electronic devices for folder names that might relate to the estate. A good place to look on a computer include the “my documents” and “downloads” folders on PC or Mac.   Important files are often times kept in storage devices such as an external hard drive or USB thumb drive.
  • Mail: Look for correspondence from banks and other investment companies. These institutions will periodically send financial statements or even checks.

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The duties of a trustee vary depending on the laws of the state in which the trust is situated and the extent of the trustee’s powers provided for in the trust agreement. In some cases where there are conflicts between the terms of the trust and the state laws, the duty or obligation can vary depending on what the state law permits. In some cases, the terms of the trust will prevail and in others, the default law cannot be modified by the terms of the trust. When you become a trustee of a trust, it is recommended that you sit down with a trust attorney to review the terms of the trust as well as how state law may impact the written terms of the trust.

In addition, the type of trust can change your obligations and the role of a trustee in dealing with beneficiaries. Below is a list of some of the typical duties that are contained in trust agreements and the laws of many states:

Fiduciary Duty. A trustee has a fiduciary duty to the beneficiaries of the trust, This includes both the current beneficiaries and any remainder beneficiary’s name in the trust. A fiduciary duty is a very high standard to do what is in the best interest of the beneficiary. This is not necessarily what the beneficiary asks for or what you want.

The Trust’s Terms. It is important to read the terms of the trust carefully and understand your duties and how state laws may impose additional provisions or remove or modify the terms of the trust. The trust is a flow chart of what actions you must take and when. Some states, like Florida, reduce the statute of limitations when certain disclosures are made. This can reduce the potential liability of a trustee to the beneficiaries. Continue reading

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