WILLS, TRUSTS, and ARBITRATION AGREEMENTS

In previous blog posts, we have shown how wills and trusts are favored vehicles when protecting someone’s assets. Perhaps one of the purposes of a well-drafted will or trust is to avoid hearing the judge’s gavel when knowing who gets what part of the inheritance. Unfortunately, contentions amongst the parties may well exist. The good news is that since 2007, parties have another alternative to resolve disputes that arise out of a will or a trust. Florida Law provides the option for parties to have a clause in their will or trust requiring arbitration. See Fla. Stat. § 731.401.

Arbitration, is a private (not state-sponsored) method of resolving disputes. Arbitration is not to be confused with mediation: While mediators help the parties in finding a solution, arbitrators decide a dispute.

A Will can be challenged by Caveat or Functional equivalent

On March 9, 2018, Florida’s Second District Court of Appeal held that the functional equivalent of a caveat may serve to properly contest a will.[1]  The court observed that the Appellant in the case at issue “filed a pleading styled ‘Answer and Affirmative Defenses’ and did not file a pleading styled ‘caveat.’”[2]  Nonetheless, the court found the pleading sufficient to function as a caveat.[3]  Here is why.

First, what is a Caveat?

Undue Influence

For a Will to be valid, certain conditions must be met. The testator must have legal capacity, be at least eighteen years old, have testamentary intent, and the will must not be a product of undue influence or duress. The first two requirements are usually relatively easy issues to resolve, but undue influence and duress are not always clear. As the Supreme Court of Florida explained, “[u]ndue influence is not usually exercised openly in the presence of others, so that it may be directly proved, hence it may be proved by indirect evidence of facts and circumstances from which it may be inferred.”[1]

The Fourth District Court of Appeal, in Blinn v. Carlman,[2] stated that, “[w]hen a will is challenged on the grounds of undue influence, the influence must amount to over persuasion, duress, force, coercion, or artful or fraudulent contrivances to such an extent that there is a destruction of free agency and willpower of the testator.” When a will is a product of undue influence, it, by definition, is not the intent of the testator, and therefore courts should not give effect to it.

What is Probate?

Probate is a process, which the court supervises, for settling a deceased person’s estate.  The process involves identifying assets belonging to the estate, paying the decedent’s debt, and distributing the remainder of the assets to the decedent’s beneficiaries.  Costs for the probate proceeding have first priority for payment from the estate’s assets.

If a decedent dies testate (with a valid will) and designates a personal representative, then the will’s provisions govern disposition of the decedent’s probate assets.  If a decedent dies intestate (without a valid will), then Florida law will govern selection of a personal representative and will govern who will receive the decedent’s probate assets.

What is elder financial exploitation?

The Florida Department of Elder Affairs defines elder financial exploitation as “the illegal or improper use of another individual’s resources for personal profit or gain.”  This exploitation takes on many forms involving deception and/or coercion, including the improper use of a power of attorney.

What is a Power of Attorney (“POA”)?

IRREVOCABLE SPENDTHRIFT TRUSTS

Trusts are popular estate planning instruments that may bring many benefits both during lifetime and in the case of death. Some common reasons for setting up a trust include the avoidance of costs and time consumption of probate proceedings, property management for those who cannot or do not wish to manage the property themselves, continuance of property management after death or during disability, and saving of taxes and protection of the assets against the claims of creditors. However, there are several types of trusts and not all of them provide these benefits to the same extent.

The revocable trust is the most flexible one as the creator (settlor) can at modify the terms of the trust or completely revoke it at any time. See Fla. Stat. § 736.0602. However, the assets transferred into such trust are still considered personal assets of the settlor and accordingly, can be reached by his or her creditors. See Fla. Stat. § 736.0505(1)(a). Therefore, the revocable trust is not an ideal solution for asset protection purposes. Upon death of the settlor, this trust becomes irrevocable, meaning that the rules for asset distribution can no longer be changed. It is also possible to make a trust irrevocable from the outset and to afford protection against creditors by adding a spendthrift provision. See Fla. Stat. § 736.0502.

HOW THE NEW TAX BILL MAY AFFECT DIVORCES

In one of our previous posts we informed about the new Tax Cuts and Jobs Act (“TCJA”) and the major changes it brings, including the various adjustments in tax deductions. This article focuses on deductions applicable to alimony, as the new system may significantly affect and expedite divorce settlements in the months to come.

Alimony is a form of spousal support awarded by agreement or by court decision to the lower-income spouse after divorce, typically referred to as the “dependent” spouse. The courts have wide discretion in establishing the amount of alimony and the time period during which the higher-income spouse is obligated to pay. The purpose of alimony is to help the dependent spouse overcome the divorce and to at least partially maintain the standard of living the spouses shared during their marriage. To ease the burden of splitting one household into two, the alimonies were tax deductible – at least until now.

The New Tax Bill

At the end of last year, Congress passed the most significant tax reform since 1986 and unsurprisingly, it aroused many controversies. Its supporters are convinced that the bill is a big success for workers, pointing out positive changes already in effect, such as Wal-Mart raising its employee’s hourly rate. On the other side of the barricade, the opponents fear that the bill will have quite the opposite effect —that it will better benefit the company shareholders rather than its employees (numerous buybacks were announced in December). In the following months, we may witness attempts on the state level to mitigate some of the effects of the new federal law. While it is too soon to evaluate whether the bill will bring about the desired economic growth long-term, it is the right time to get acquainted with the most significant changes. Importantly, none of these changes will affect the 2017 taxes.

Individuals:

The provisions applicable to individuals are temporary and will expire at the end of 2025, at which time the brackets will return to the old rates, unless Congress extends this period. The rates will still be distributed into seven brackets based on income. Rates for six of the brackets have been lowered and accordingly, most of us will benefit from this. However, some who were in the 33% bracket may now find themselves in the 35% bracket.

Old rates: 10% 15% 25% 28% 33% 35% 39.6%

 

New rates: 10% 12% 22% 24% 32% 35% 37%
Income from (Individuals): $0 $9,526 $38,701 $82,501 $157,501 $200,001 $500,001
Income from (Couples): $0 $19,051 $77,401 $165,001 $315,001 $400,001 $600,001

 

Another benefit is that the personal deductions were nearly doubled to: $12,000 for single filers, $18,000 for head of households, and $24,000 for married couples filing jointly. On the other hand, the $4,450 deduction you could claim for yourself, your spouse, and each of your dependents, was eliminated. In sum, this may completely negate the new benefits for some families. Deductions for the elderly and for those who are blind stay in place and the tax credit for children under 17 was doubled to $2,000. The new law also allows parents to take a $500 credit for each non-child dependent they’re supporting.

The deductions for state and local income and property taxes will be newly capped to $10,000 and foreign real property taxes will no longer be deductible at all. Also, the deductions for itemized interest expense from mortgage debt (to acquire a first or second residence) were lowered from $1 million to $750,000. This change will not affect old mortgages that will be refinanced under the new law, as long as the old loan balance is not exceeded at the time of refinancing. The current up to $100,000 deduction for the interest on home equity loans will no longer be allowed.

Corporations and Businesses

As opposed to the changes affecting individuals, most of the corporate provisions are permanent. The corporate tax rate has been slashed from 35% to 21%. This deduction will not apply to some specific service industries, such as health, law, and professional services. However, single filers with income below $157,500 and joint filers with income below $315,000 can claim this deduction fully on income from service business. This provision is, like in the case of individual tax rates, only temporary.

American corporations will no longer be required to pay corporate taxes on money earned abroad if the corporation stays abroad. Once the income is brought back to the United States, it will be taxed at a new, considerably lower, rate of 15.5% on cash assets and 8% on non-cash assets.

Pass-through businesses such as S corporations and limited liability companies will benefit from the tax deduction as well. This might motivate people to either incorporate their businesses or to disguise their personal income as business income. However, the incorporation may not be the right choice for everyone and people should be cautious, as the bill incorporates some provisions to prevent income mischaracterization. If the owner or partner in a business will draw salary from it, it would be subject to ordinary income tax. Moreover, the bill also limits the income, which qualifies for the deduction. Nevertheless, it seems that the system will not be bullet-proof and will benefit the passive owners over the active ones.

If you are interested in learning how the new tax bill may affect you or your estate please do not hesitate to contact the attorneys at Chepenik Trushin LLP, who are ready, willing, and able to assist you with your estate planning needs. Bart Chepenik, 305-613-3548. Brad Trushin, 305-321-4946. Offices 305-981-8889.

Other Sources

Introduction:

https://www.cnbc.com/2018/01/17/how-democrats-can-neutralize-gop-tax-law-commentary.html

https://www.politico.com/agenda/story/2018/01/15/tax-law-bonuses-wages-trump-000617

Individuals:

https://www.forbes.com/sites/robertberger/2017/12/17/the-new-2018-federal-income-tax-brackets-rates/#fd26309292a3

http://money.cnn.com/2017/12/15/news/economy/gop-tax-plan-details/index.html?iid=EL

http://money.cnn.com/2017/12/20/news/economy/republican-tax-reform-everything-you-need-to-know/index.html

https://www.marketwatch.com/story/10-things-you-need-to-know-about-the-new-tax-law-2017-12-20

Corporations:

https://www.forbes.com/sites/kellyphillipserb/2017/12/22/what-tax-reform-means-for-small-businesses-pass-through-entities/#68335fd66de3

https://www.fool.com/taxes/2018/01/03/heres-who-got-the-biggest-tax-rate-break-from-corp.aspx

https://www.marketplace.org/2018/01/16/business/ive-always-wondered-tax-bill-2017/corporations-pay-effective-rate-corporate-tax

https://www.vox.com/2017/12/20/16790040/gop-tax-bill-winners

https://www.inc.com/zoe-henry/final-tax-bill-impacts-businesses-2017.html

https://hbr.org/ideacast/2017/12/breaking-down-the-new-u-s-corporate-tax-law

Guardianship:  When No Less Restrictive Alternative is Available

What is guardianship?

The simple answer: court intervention to safeguard the property and care of an individual unable to make such decisions themselves.

IRREVOCABLE SPENDTHRIFT TRUSTS

Trusts are popular estate planning instruments that may bring many benefits both during lifetime and in the case of death. Some common reasons for setting up a trust include the avoidance of costs and time consumption of probate proceedings, property management for those who cannot or do not wish to manage the property themselves, continuance of property management after death or during disability, and saving of taxes and protection of the assets against the claims of creditors. However, there are several types of trusts and not all of them provide these benefits to the same extent.

The revocable trust is the most flexible one as the creator (settlor) can at modify the terms of the trust or completely revoke it at any time. See Fla. Stat. § 736.0602. However, the assets transferred into such trust are still considered personal assets of the settlor and accordingly, can be reached by his or her creditors. See Fla. Stat. § 736.0505(1)(a). Therefore, the revocable trust is not an ideal solution for asset protection purposes. Upon death of the settlor, this trust becomes irrevocable, meaning that the rules for asset distribution can no longer be changed. It is also possible to make a trust irrevocable from the outset and to afford protection against creditors by adding a spendthrift provision. See Fla. Stat. § 736.0502.