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Bernie’s “For the 99.5% Act”: Is It Time to Start Thinking about Tax Planning?

For the year 2021, each individual has $11,700,000.00 of estate tax credit (or $23,400,000.00 for married couples), otherwise known as the “applicable exclusion amount.” For estates that exceed the applicable exclusion amount, the tax rate is up to 40.00% of the amount in excess of the applicable exclusion amount. The current estate tax credit is scheduled to maintain that level, indexed for inflation, until December 31, 2025, at which point the applicable exclusion amount will be reduced to approximately $6,000,000.00 ($12,000,000.00 for married couples).  However, since the Biden administration proposed major estate tax reform, there has been much discussion about whether the estate tax credit will be reduced earlier.

On March 25, 2021, Senator Bernie Sanders introduced the “For the 99.5% Act,” which proposed, among others, the following tax reforms:

Larry King’s Handwritten Will Ordeal

The recent passing of the broadcasting legend, Larry King, has resulted in his family not only mourning him but also fighting amongst themselves over his true last wishes. Larry, together with his wife, Shawn Southwick King, had executed estate planning documents in 2015, where he named her the personal representative of his estate. However, the couple faced some difficulties and Larry filed for divorce in August 2019. Just two months later, he executed a new handwritten will, leaving his entire estate valued at $2 million dollars to his five children. Two witnesses also signed their names to the hand-written will.

Larry’s eldest son, Larry King Jr., submitted the 2019 will to the court and has petitioned to be appointed the temporary administrator of Larry’s estate. However, Shawn has filed an objection to the 2019 will, claiming that the will is invalid and that Larry King Jr. exerted undue influence over his father towards the end of his life, and insisting that the 2015 will is the valid one.

2021 Biden Administration Proposed Tax Changes: Will My Estate Be Subject to Estate Tax?

Over the course of the last several decades, the federal estate tax credit has increased to the point that only very high net-worth individuals and families need to concern themselves with estate tax planning. For the year 2021, the “applicable exclusion amount” is $11,700,000.00 per individual (23,400,000.00 for married couples). The gift tax exclusion amount is the same, that is, each individual may give $11,700,000.00 during their lifetime without incurring any gift tax. If the sum of lifetime gifts and assets transferred at death is greater than the applicable exclusion amount, then such transfers will be taxed at a rate as high as 40%.

However, the Biden administration has proposed a reduction of the applicable exclusion amount to $3,500,000.00 per person for estates, $1,000,000.00 for lifetime gifts, and increase the tax rate to up to 45%. Such a change is made more likely by the fact that, in January, the Democratic party has consolidated power in both branches of the U.S. Congress. Last year, there was even fear that, if such a change came in to effect at any time during 2021, congress could make the change retroactive to January 1, 2020, prompting many families to make gifts before the end of the year to ensure their use of the current applicable exclusion amounts.

Contracts to Create a Will

A last will and testament must be the consequence of a person’s free will (which is why they are aptly referred to as “wills”). Nevertheless, a person may execute a contract during life to include certain terms and/or beneficiaries in their will in exchange for goods or services.

Enforcing a contract to create a will is more complex than enforcing a normal contract. With these types of agreements, it may be impossible to tell whether the testator lived up to his or her side of the bargain until their estate plan is revealed after their death. Additionally, the terms of a will do not come into effect until death, so there may not technically be a breach of the contract until the decedent’s death. Further, if you were supposed to be a part of the decedent’s estate plan, but were not included, it’s possible you may never even receive notice regarding the administration of the decedent’s estate.

Homestead Protection: Can You Lose It in Probate?

A person’s home (homestead) is often the most important asset in their estate plan because of the monetary and sentimental value that is inherent in a person’s main residence. Florida has special rules that govern a person’s primary residence, known as homestead property. Unless a creditor is the IRS, a mortgagee, or a laborer that performed work on the home, a homestead property is safe from creditors’ claims. Essentially, the homestead is exempt from a forced sale of the property unless there is a special creditor.

To qualify for homestead protection, a person must be a permanent resident of Florida, and the homestead must be that person’s primary place of residence, among other rules. This means that second homes and investment properties are ineligible for such protection. However, there is no monetary cap associated with the exemption, so a Florida resident that invests millions of dollars into their primary residence will receive full protection.

Does My Will Control My Joint Property?

There are several different ways to hold real property with another individual in Florida. The three main ones are: 1) tenancy in common, 2) joint tenancy with a right of survivorship, and 3) tenancy by the entirety. The way co-ownership of real property is classified may have significant impacts on the disposition of an estate after one of the owners dies.

In Florida, the default classification of real estate ownership is known as tenancy in common. If a property title lists only the names of owners without specifying another classification, there is a presumption that the property is a tenancy in common (unless the individuals are married). Additionally, unless specifically stated otherwise, tenants in common own equal shares of the property. When a tenant in common dies, the real property passes according to that person’s estate plan. This type of ownership will ensure that the property will flow through the owner’s estate. However, unless this property is held by a mechanism that can avoid probate proceedings (e.g. a Revocable Trust), it must go through the time consuming, expensive and public probate process to transfer title to the heirs.

COVID 19 – Is Your Estate In Order? Non-Probate Transfers and Pitfalls of Beneficiary Designations

In the wake of the recent Corona virus pandemic, many people are understandably concerned about their estate plan. A common misconception is that if you have executed a will or even a trust, then you are all set. In fact, it may not be that simple. In fact, a will is not the only instrument capable of passing down an estate to the decedent’s heirs, and some assets may not be controlled by your will and/or trust at all.

For example, in a joint tenancy with rights of survivorship, the property automatically passes to the surviving owner. So, if A and B own a piece of land in joint tenancy and A dies, B immediately gains full ownership of the land, without a probate administration. A’s right to the land extinguishes and thus, A has nothing to leave to his heirs through a will, or otherwise. Another way to avoid probate is through accounts with Transfer-on-Death (TOD) clauses. An account with a TOD beneficiary will transfer the ownership of the account will be transferred to the beneficiary at the decedent’s death, without a will or trust.

The Secure Act: Retirement Accounts and Your Estate Plan

Beginning on December 20, 2019, the Secure Act substantially changed the rules for designated beneficiaries of retirement plans, with wide raging implications for estate planning.

The old rule used to be that upon the death of a retirement account owner, the beneficiary of the plan would be able to take required minimum distributions based on that beneficiary’s life expectancy. This was beneficial especially for younger beneficiaries with long life expectancies who could “stretch” the payments over many years, allowing the assets to stay invested in the plan longer. It was also possible for beneficiaries to receive these stretch payments if a trust for their benefit was named as the beneficiary, as long as the trust qualified as a “see-through” trust. If no beneficiary was named, or if a non-see-through trust was named as beneficiary, the entire plan had to be distributed within 5 years of the date of death of the participant. Because many clients wish to leave their assets in trust for their children, much of the focus of estate planners up until this point had been drafting trusts so that they qualified as see-through trusts in order to avoid the 5-year rule.

How Can you Prove Undue Influence?

For a Will to be valid, certain conditions must be met. The testator must have legal capacity, at least eighteen years old, must 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 is 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.”

In In re Estate of Carpenter, the Supreme Court of Florida listed a set of seven, non-exhaustive factors to consider when deciding cases of Undue Influence:

I Already Have a Will; When Should I Update My Estate Planning Documents?

When someone executes a valid will, some people assume that if their wishes do not change, they should never have to revisit their estate plan. However, there are certain common events in life that should cause you to review or update your estate planning documents.

Marriage/Divorce: A surviving spouse is entitled to a percentage of a decedent’s estate, regardless of whether the decedent included the spouse in the decedent’s will. Interestingly, the amount that a surviving spouse is entitled to may vary depending on whether the will was executed before or after the marriage. If you execute a will and subsequently marry, the spouse will receive a share equal to what he or she would have had, had the testator died intestate. This typically amounts to either one-half of the estate (if there are children of the decedent who are not children of the surviving spouse), or the entire estate (if there are no surviving children, or if the surviving spouse and the decedent are the parents of the only surviving children). Fla. Stat, Sec. 732.301 and Sec. 732.102. In either case, this is more than the amount that a surviving spouse is entitled to under the “elective share” which is thirty percent (30%) of the decedent’s estate.

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