14 Pressure Points That May Result in Your Family Inheriting a Grenade

by | Sep 28, 2017

dangers of failing to plan ahead; estate planning, business planning, asset protection planning. probate guardianship, testate, intestate. Trusts. South Florida.

By: Barry E. Haimo, Esq.

November 1, 2017

14 Pressure Points That May Result in Your Family Inheriting a Grenade

Everyone’s situation is unique, which means there are many hidden potential dangers awaiting those who wish to self-diagnose, ignore, or avoid estate planning ahead.

In this article, you’ll find a list of estate and business planning pressure points that extend across many dimensions of estate and business planning. What they have in common is that they all represent dangerous issues that could result in more than just a big headache for your family and/or business.

The points are not presented in any particular order, because some items on the list will affect certain families and businesses more than others. The ones that do apply will have significance to you.

It’s important to remember that estate and business planning is not just  about planning for death. Rather, it’s about planning to reduce complications following disability and death in order to achieve a seamless and smooth transition that protects and preserves assets and alleviates the burden on your family and/or business.

As is consistent throughout this post, don’t wait until it’s too late. In other words, don’t stick your head in the sand like an ostrich hoping everything’s going to be okay.

Pressure Point 1: Complicated Family Dynamics Can Wreak Havoc on an Estate and Family
Pressure Point 2: Remarriages / Subsequent Partners
Pressure Point 3: Homestead Traps
Pressure Point 4: Advanced Care Directives
Pressure Point 5: Asset Protection Planning
Pressure Point 6: Failure to Assemble the Right Team of Fiduciaries
Pressure Point 7: Probate and Guardianship Court
Pressure Point 8: Business Planning
Pressure Point 9: Business Succession Planning
Pressure Point 10: Rental Property
Pressure Point 11: Asset Disorganization
Pressure Point 12: Income Tax, Estate Tax and Gift Tax
Pressure Point 13: Copyright
Pressure Point 14: A Mistake in Timing Can be Fatal

1. Complicated Family Dynamics Can Wreak Havoc on an Estate and Family

Every family and family dynamic is unique. It’s important to plan ahead to ensure your hard-earned assets are preserved and protected for those you wish to inherit them.

Putting aside property, it’s important to understand that some of these issues can devastate a family. Below are a few ways that families can be unexpectedly and unintentionally divested of these assets, which can materially and adversely affect a family forever:

Blended Families

Sometimes people’s lack of understanding of the law results in family members inheriting assets that you never wanted them to receive or, conversely, family members not inheriting assets that you did want them to receive.

Remember, your state chooses your beneficiaries for you if you don’t decide for yourself. Bottom line: you need to take affirmative steps to ensure the right people inherit your estate.

Don’t assume anything, especially that your family will do the right thing later. If your family is kind enough to address your wishes on their own outside of court, that’s great, but there are income tax and gift tax consequences to consider. We recommend doing it now and doing it right.

Addiction Problems

Addiction destroys families. In fact, the United States is experiencing an opioid epidemic right now.

Addiction manifests itself in a variety of forms, such as drugs, alcohol, gambling, sex, and other destructive forces. You don’t want to enable an addict, and you certainly don’t want your precious assets that can be applied to treatment to be wasted by an addict.

Importantly, addicts heavily lean on those family members with a soft spot for helping others, so it’s necessary to ensure that the manager of the assets (i.e. the trustee or agent) is not someone who may be susceptible to such behavior. If it’s inevitable, at least build in some checks and balances to provide additional protections.

Elder abuse is also rampant in South Florida, as discussed below.

Special Needs Issues

People with special needs should not receive assets from any source, including inheritance, because it may disqualify them from receiving state and/or federal basic benefits to assist with basic living needs. Careful attention must be taken to ensure that beneficiaries with special needs inherit assets in the right way.

Importantly, it’s not just your estate plan to worry about either; other family members and friends can unknowingly devise or bequeath assets to your special needs family members, too, which may result in disqualification.

Bottom line: talk to your immediate and extended family if you have family members with special needs, and consult an estate and business attorney to help navigate the issues.

Irresponsible Beneficiaries (Spendthrift Issues)

Abuse and impropriety are not the only ways an estate can be depleted. Giving assets to irresponsible beneficiaries (including spendthrifts) can also decimate an estate, through wasteful spending and mismanagement.

Engaging in estate planning and business planning helps to preserve and protect these valuable and sentimental assets for your family and their descendants by ensuring that the manager of the assets (i.e. the trustee) is someone other than the beneficiary who is qualified, objective, diligent, responsible, and reliable; someone who understands finance, money management, and your goals and intent.

In addition to prudent management, the beneficiary’s rights to invade the trust can and should be limited.

Bottom line: planning can be done to protect and preserve assets. Giving assets outright to irresponsible beneficiaries is a potential mistake that can and should be avoided.

Mental Disability / Declining Capacity (Dementia, Alzheimer’s, etc.)

Unfortunately, as our baby boomers age, more and more people are suffering from mental infirmities, such as dementia and Alzheimer’s disease. These illnesses adversely affect their abilities to make sound decisions, not to mention leave them vulnerable to elder abuse ( discussed below).

In addition, people suffering from these mental illnesses often need help with basic living needs, which leads to the need for bringing in nurses and other aides. These resources can be extremely expensive. Consequently, they tend to deplete even large estates if the person lives for many years under such circumstances and accommodations.

The remedy is to either become very wealthy; strip your assets to qualify for Medicaid benefits (arguably unethical), or invest in long-term care (LTC) insurance.

There are creative ways to obtain LTC insurance since the increased demand is making traditional LTC insurance less economical. This usually involves life insurance with a rider permitting lifetime access. Talk to your financial professional about this right away.

Elder Abuse

Sadly, elder abuse is rampant in South Florida. It has many forms, including unscrupulous family members looting the estate disguised in helpfulness or strangers running scams preying on the naive and vulnerable.

We see fake IRS claims, fake creditors’ claims, fake romances, nasty and imposter family members, etc. The commonality is that someone is inappropriately taking advantage of another’s mental infirmities (such as declining capacity).

Whether it’s Alzheimer’s disease, dementia, another mental ailment, or simply old age, having an honest and responsible person in place to assist or even control assets can be all the difference.

Unfortunately, not all families are lucky in this regard. The silver lining is that unlucky families can improve their luck with a little planning. As discussed later in this post, timing is critical.

Pressure Point 2: Remarriages / Subsequent Partners

Even happily married couples are very concerned about what happens to assets when they pass away. They want to ensure that their family assets remain in the family.

While they want their surviving spouse to perhaps find love again, they do not want their surviving spouse’s new partner and his or her family to share in the estate during the surviving spouse’s life or inherit the estate following his or her death.

That’s exactly what could happen without proper planning. Your family assets may be included in the marital estate in divorce proceedings or the “elective” estate following death in probate proceedings if great care is not taken to keep things separate.

One way to keep things separate is to execute a validly executed prenuptial or postnuptial agreement; another way is to use carefully crafted and drafted trusts. This is an area where failing to plan ahead can have a big impact on a family and/or business.

Pressure Point 3: Homestead Traps

In Florida, homestead is an intricate part of estate planning and estate administration (probate). Real property that qualifies for homestead typically has three main benefits in Florida:

  1. Asset protection of your primary residence with a few exceptions;
  2. Limits on how much real estate taxes may increase annually; and
  3. Limitations on who you can inherit it; i.e. ensures it remains in the family if survived by a spouse or minor child.

In Florida, if you devise your homestead property contrary to the Florida constitution, then it passes very differently than what you may have likely intended; particularly, just to the spouse if you’re only survived by a spouse and no minor children.

Alternatively, an improper devise of homestead can result in the surviving spouse inheriting a life estate and the minor children inheriting a remainder interest. Even still, the surviving spouse may timely elect to take half as a tenant in common with the minors sharing the other half as tenants in common. It depends on whether you’re survived by a spouse and/or minor children.

Each of the above has limitations on your ability to devise or even transfer the property during life and after death. Unsurprisingly, Florida homestead is complicated and requires a qualified attorney to understand the intricacies.

With that background, one of the most common scenarios with similar surprising and unintended results is when one spouse brings the homestead into the marriage and dies without updating his or her estate planning documents to ensure they remain consistent with the Florida constitution. As a result, the deceased spouse’s will violates the law, because it devises the property to someone other than the surviving spouse and that is where it gets complex.

Bottom line: homestead is very tricky and can have costly and unanticipated results for the unwary. Get competent professional advice.

Pressure Point 4: Advanced Care Directives

Advanced care directives include powers of attorney, health care surrogates, and living wills. Click on the below links to read other helpful posts on these subjects in our Knowledge Base.

What’s a Power of Attorney?

What’s a Health Care Surrogate?

What’s a Living Will?

It’s important to understand that you cannot act on the behalf of an adult family member simply because you are family. You need proper documentation to do so.

This is more commonly understood to apply to caring for aging parents or the elderly. However, it is less commonly understood – and quite surprising to those who find out the hard way – that you also cannot act on behalf of or gain access to your young adult child’s protected information. That’s true even you have always taken care of everything while they were young.

In this regard, a power of attorney will be required for action related to financial, administrative, legal, banking, tax, and insurance matters. Similarly, a health care surrogate will be required before you can make any healthcare-related decisions and access any health-related information.

Said differently, your child is an adult now. You cannot assist in decision-making or have access to their information without 1) their prior consent or 2) proper documentation under federal law. You can thank HIPAA (Health Information Portability and Accountability Act) for that.

Pressure Point 5: Asset Protection Planning

Basic estate and business planning is only the first step. It’s insufficient to just designate the right people in the right positions to assist with your estate or managing trust assets. You don’t want to lose your assets to creditors.

Liability insurance is usually the first line of defense when it comes to asset protection. Then maxing out your qualified retirement accounts comes next. You can work with trusts and business entities, both of which have asset protection benefits to further insulate and isolate assets as well. This is a strategy frequently employed in real estate.

In addition, trusts can also provide a great asset protection vehicle. There are many types of trusts and not all have the same benefits. If done properly, you want to ensure that trust assets are protected from irresponsible beneficiaries and even financially intelligent beneficiaries’ creditors. Creditors generally will include spouses of the beneficiaries in divorce and creditors in bankruptcy if structured properly.

While there are many ways to accomplish asset protection, it cannot effectively be done without proper planning. Don’t wait until it’s too late. Click on the below links to read other helpful posts in our Knowledge Base.

Asset Protection Planning 101 – Build Your Financial Fortress

9 Ways to Protect Your Assets

Important Point

If you wait until it’s too late to engage in asset protection planning, you are often in danger of running afoul of the fraudulent conveyance act, which can unwind transfers perceived to have been made to avoid creditors.

Pressure Point 6: Failure to Assemble the Right Team of Fiduciaries

It’s important that you have a list of documents that you’ve executed, and you should know where they are stored. Attorneys frequently keep original copies.

Make sure your fiduciaries are aware of their appointments and willing to serve in the capacity designated. You also want to ensure they have access to all other materially important information about accounts and people’s contact information who are material to those accounts. That way they can act and, as is sometimes necessary, act quickly.

Bottom line: you are assembling a team of people to help you in your time of need both during life and after death. Make sure they are the right people appointed in the right way, and that they are ready, willing, and able to step in as necessary.

Pressure Point 7: Probate and Guardianship

Probate, which is sometimes referred to as probate court, probate proceedings, or estate administration, is the legal process through which a deceased person’s affairs are formally settled. It deals with identifying assets, beneficiaries, and creditors (ABCs); addressing entitlement to estate assets; and disbursing the assets to the rightful parties.

This long, expensive, and frustrating process (often 1 to 1.5 years) requires judicial oversight at nearly every step. It also can and should be avoided. Click the links below to read more about probate:

Main probate page

Probate briefly explored

Guardianship relates to the legal proceeding whereupon someone is designated as legally responsible for another person. This can be necessary as a result of mental illness, injury, minority (age), or other reasons.

This long process also can and should be avoided. It can often be intrusive, uncomfortable, and embarrassing. Your mental health is adjudicated, and your family members are relevant parties to the action. One way to avoid the process is to execute advanced care directives (see point 4).

Pressure Point 8: Business Planning

Business planning relates to the strategic way you organize and position your business to maximize its likelihood of succeeding. It typically includes tax and entity selection, governing documents, and agreements for key personnel (including owners or equity partners).

Governing documents typically address ownership, control, management, taxation, allocation of profits and losses, and distributions to partners (for partnerships not c/s corps). Governing documents and employment agreements also address transfer of ownership, death, disability, divorce, bankruptcy, noncompetes, nonsolicitations, and confidentiality.

Ensuring key personnel agreements, customer agreements, and relationships with vendors are structured properly can be instrumental in solidifying a strong infrastructure in which to grow. Basic legal terms, such as venue, fee shifting, integration clauses, waivers, remedies, and assignments, can have significant impacts on the company as well.

Not having basic business planning in order can be fatal if any of these areas are not properly flushed out. It’s another hidden danger of failing to plan ahead. Having an attorney on your team is critical.

Bottom line: startups and existing businesses should not overlook the importance of ensuring their fundamental legal needs are met. It is also important to mention that tax, accounting, and risk management should be addressed at the outset, too.

See our Prezi presentation on this subject here:

Business Planning Prezi Presentation

Pressure Point 9: Business Succession Planning

Engaging in business succession planning is crucial to any successful business. It’s forward thinking to address how your precious business will transition to new management, control, and possibly ownership under various circumstances, such as disability and death. It considers taxation and who will own and control the business when you’ve moved on.

Your business may be materially harmed if it has to go through guardianship or probate. Similarly, you don’t want your business run by your surviving spouse or children if they are not qualified or so designated. Rather, you want to ensure that you have a qualified transition team ready, willing, and able to take over when necessary. And you should have all the necessary documentation to reflect the plan. It will definitely change management and control and may shift ownership through privately structured or insurance financed buy-outs.

Lastly, it’s critical that you ensure that your business succession plan integrates and harmonizes with your estate planning documents.

Pressure Point 10: Rental Property

Many people own and rent out residential or commercial properties. They can be a great way to generate income, produce passive losses, and enjoy deductions.

However, for a few reasons, rental properties can be inherently dangerous without careful planning:

  1. As the owner, you can be liable for damages deriving from the property, such as slip and falls, negligence, etc.
  2. Your ownership interest in the property may be vulnerable to your personal creditors, or creditors that are unrelated to the property, if not owned properly. In other words, creditors can take your property away from you to satisfy a judgment that has nothing to do with the property. This is called an outside creditor.
  3. Last but not least, if owned improperly, you run the risk of having a probate in every single county in which you own real property (real estate), which exponentially increases the time, frustration, disruption, and expense of your family members’ lives.

The solution is to first maintain adequate insurance coverage and then utilize nested business entities and trusts.

Pressure Point 11: Asset Disorganization

Unless by design, it’s important that you don’t have assets and liabilities all over the place, such as duplicate types of accounts and accounts at multiple organizations. If you don’t even know where your accounts are located and how they are titled, you have a problem brewing.

Keeping assets organized is key. This will save money later, especially on professionals during life and after death.

For example, if you and your family don’t know the identity and location of your assets, it can be time consuming, frustrating, and expensive to work through the proper transition, which you can expect to occur in probate court. This is especially true in families where the surviving individual did not manage the finances.

Bottom line: disorganization can be expensive. Your family are the ones who pay for the emotional and financial costs of cleaning it up. We offer a proprietary Snapshot (called the “Haimo Law Snapshot”) to our clients to help in this regard.

Pressure Point 12: Income Tax, Estate Tax and Gift Tax

Unmarried United States citizens that have total assets exceeding $11+ (post updated 3.17.19) million dollars will have to worry about estate taxes. That number is indexed for inflation, and subject to political winds of change, it will slightly increase annually.

With careful planning or a timely filed portability election, married couples can double that amount and defer estate tax until the surviving spouse’s death. If you’re close to this amount, you want to plan ahead to ensure you fall under it using the tax code to your advantage, which you have every right to do.

There are many ways to plan ahead in this regard, including gifting, gifting schedules, entity discounts, shifting assets, sales to trusts, asset freezes, and trusts. It’s most important not to wait until it’s too late.

Estate taxes are presently assessed on taxable estates at a rate of 40% of the excess over the above (the “unified credit”). Remember, that amount is subject to the winds of political change, meaning it can change depending on who is the President of the United States.

For example, the unified credit was 1 million dollars in the early 2000s, giving rise to irrevocable life insurance trust (ILIT) planning, which is the subject of another post.

Most people are not subject to estate and gift taxes given the huge exemption presently in place. As a result, income tax planning is more important to more people. Understanding basis adjustments is critical to minimizing taxes for your family now and after you’re gone; it could mean the difference between paying tens or hundreds of thousands in dollars in taxes later.

Pressure Point 13: Copyright

Copyright protection is complicated in estate planning, particularly for artists. This is because the physical embodiment of artwork and the copyright in that work may not automatically get devised to the designated beneficiary together. That can be very surprising to someone who thinks they own both the physical work and the copyright to the work.

Importantly, copyright to a work may likely more valuable than the work itself. In addition, transferring copyright contrary to the law will, years later, result in beneficiaries having a right to unwind such transfers.

Great care must be exercised before engaging in estate planning relating to copyright protected works.

Pressure Point 14: A Mistake in Timing Can be Fatal

The importance of planning early cannot be overstated. Waiting until the last minute can be just as fatal as failing to plan.

As it relates to estate planning, the two most common ways to contest planning documents are:

  1. allegations of a lack of requisite testamentary (or mental) capacity, and
  2. undue influence by someone in a position of trust and confidence.

While the burden rests on the challenger, it can be shifted back to the proponent of the documents. It’s based on a variety of factors, some of which are called the Carpenter Factors. Regardless, waiting until the last minute strengthens unhappy beneficiaries’ ammunition to fight.

Unfortunately, aside from open-and-shut cases (which are few and far between), the time, expense, and emotional toll of going through the legal system only favors the challenger. And it will likely not end well for you.

There are many firms that will take the case if it has a glimmer of hope, as long as there are assets waiting safely frozen at the end of the tunnel. (Reminder: no contests clauses are NOT enforceable in Florida, so you cannot rely on that.)

Bottom line: litigation can and should be avoided unless necessary. Strategic Planning With Purpose® can mitigate the potential for a challenge and increase the probability for a smoother transition from during life and after death.

These concepts above represent significant reasons to engage in planning. There are others. What’s most important is this:

Don’t Leave Your Family or Business “The Gift of a Grenade” and Don’t Be an Ostrich.

Barry E. Haimo, Esq.
Kaleem Sikandar, Esq., contributor
Haimo Law
Strategic Planning with Purpose
Email: barry@haimolaw.com
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