THE 4 MOST COMMON ESTATE PLANNING MYTHS | MYTH #1: WILLS AVOID PROBATE (PART 2)
by Rachel Drude-Tomori on April 28th, 2020 in Estate Planning Law, Wills, Trusts and Probate
One of the biggest misconceptions about estate planning is the belief that having a Last Will & Testament avoids probate. As explained in Part 1 of this series, Wills do not avoid probate; rather, having a Will allows you to choose who will inherit your property at death instead of relying on Florida’s default statutory rules known as “intestate succession.” Part 1 of this series discussed several techniques that do avoid probate, such as joint ownership with right of survivorship and beneficiary designations, including examples and potential pitfalls if these techniques are not used correctly. This article continues this discussion by explaining how Enhanced Life Estate Deeds and Revocable Trusts also can be used to avoid probate in Florida.
Enhanced Life Estate Deeds
Similar to naming POD or TOD beneficiaries on financial accounts and life insurance policies, Florida law allows you to name beneficiaries on real property, which also can avoid probate (as long as your beneficiaries survive you). The preferred form of this technique is known as an “Enhanced Life Estate Deed,” also known as a “Lady Bird Deed.”
This form of life estate deed is “enhanced” because it allows the original owner or owners to continue to use and enjoy the property without any interference from the remainder beneficiaries named in the deed – this is true legally speaking. However, in reality, life estate deeds (even “enhanced” life estate deeds) can cause title issues when the original owner wants to sell or refinance the property.
For example, suppose at death Rick and Marty wish to leave their house to Rick’s son, Bobby, from a prior marriage. Rick and Marty execute and record an Enhanced Life Estate Deed reserving an enhanced life estate for their lifetimes, with the remainder to Bobby when both Rick and Marty have passed away. Suppose further that Rick dies first, and thereafter Marty wants to sell the property and downsize to a smaller residence. Although Marty legally can sell the property without Bobby’s joinder or permission, in reality, the title agent handling the real estate closing will require Bobby’s signature in order for Marty to sell the property.
This is important to understand in deciding whether an Enhanced Life Estate Deed is a suitable component of your overall estate plan. For senior clients who do not plan to sell their residence before death, an Enhanced Life Estate Deed may be the perfect fit to avoid probate upon their demise; however, for younger clients who plan to sell or refinance their residence property in the next 5 or 10 years, an Enhanced Life Estate Deed may prove to be a burden rather than a benefit.
Property titled in the name of a Revocable Trust avoids probate upon the death of the original owner (known as the “Settlor” of the Trust). This is because the Trust is a legal entity that lives beyond the Settlor; in fact, Trusts can last up to 360 years in Florida. Of all of the probate avoidance techniques described in this Parts 1 and 2 of this article, Revocable Trusts certainly are the most flexible, in part because as long as the Settlor is alive and has capacity, he or she can modify the Trust from time to time. Common reasons clients modify their Revocable Trusts include:
- Changes in family dynamics (e.g. marriage, death, divorce, birth of children or grandchildren).
- Change in net worth or acquisition of new assets (e.g. purchase of a new residence or vacation residence).
- Changes in the tax laws.
- Changes in state law.
Revocable Trusts are also preferred because they allow you to plan for multiple contingencies, including for minor beneficiaries, beneficiaries with special needs, beneficiaries with addiction issues, or beneficiaries who simply just are not good at managing money.
Comparison: Trusts vs. Joint Ownership vs. Beneficiary Designations
Bringing it all together, consider the pros and cons of using a Revocable Trust vs. joint ownership vs. beneficiary designations to avoid probate. For example, suppose Rick and Marty are married and have a $2 million brokerage account to which they have contributed relatively equally over the years. They own the account as joint tenants with right of survivorship (JTROS). Rick wants his 50% of the account ultimately to pass to his son, Bobby, and Marty wants his 50% of the account ultimately to pass to a combination of nieces and nephews and his favorite charity. As such, Rick’s Will leaves his entire estate to Marty, followed by Bobby, and Marty’s Will leaves his entire estate to Rick, followed by his nieces, nephews, and the charity.
Joint Ownership + Wills:
If Rick and Marty rely on joint ownership and their respective Wills, then who ultimately inherits the account will depend upon who dies first. For example, if Rick dies first, then Marty will inherit the entire account automatically by right of survivorship, and when Marty dies, the account will be distributed to his nieces, nephews and his favorite charity pursuant to his Will, and Bobby will get nothing. Conversely, if Marty dies first, Rick will inherit the entire account by right of survivorship, and when Rick dies, the account will be distributed to Bobby, and Marty’s nieces and nephews and charity will get nothing.
Suppose instead that Rick and Marty name Bobby as 50% POD beneficiary on the joint account, with Marty’s nieces, nephews and the charity designated to split the remaining 50% as POD beneficiaries. Suppose further that Bobby dies before Rick and Marty, and Rick dies soon after, having never updated the beneficiary designation to Bobby on the account. When Marty dies, who receives the 50% originally allocated to Bobby? Unfortunately, the answer here is unknown. Likely, the result will depend in large part on how the particular financial institution’s beneficiary forms and internal policy function when a named beneficiary predeceases the account owner.
Suppose instead that Rick and Marty establish a Revocable Trust and title the $2 million brokerage account in the name of the Trust. The terms of the Trust provide that upon the first spouse’s death, the surviving spouse continues to have access to the account funds; however, when the surviving spouse dies, the proceeds are to be split 50% to Bobby, and 50% to Marty’s nieces, nephews, and his favorite charity. Importantly, the terms of the Trust further provide that if Bobby fails to survive Rick and Marty, then Bobby’s 50% should be distributed: one-half to Bobby’s wife and one-half in further trust for Bobby’s minor children (i.e., Rick’s grandchildren). What’s more, the Trust also provides that the funds in Bobby’s children’s trusts can be used to fund their college education, and if there is any property remaining after college, they can have the rest when they turn 25. As you can see, for Rick and Marty, their Revocable Trust not only avoided probate, but it also allowed them to plan for contingencies like Bobby’s unexpected death, including taking care of Bobby’s surviving spouse and his minor children’s college education.
In reality, most of my clients use a combination of joint ownership, beneficiary designations, and Revocable Trusts as key components of their overall estate plan. A qualified estate planning attorney will examine each of your assets with you, including current ownership and beneficiary designations, to determine how best to structure your estate plan based upon your unique circumstances, family dynamics, and goals. Occasionally, some clients can get away with relying on beneficiary designations supplemented by a simple Will. However, most clients reap huge benefits by incorporating a Revocable Trust as the cornerstone of their estate plan.
Please click here to read Part 1 of The 4 Most Common Estate Planning Myths: Myth #1: Wills Avoid Probate.