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Florida’s Elective Share: Part II

Our previous blog post two weeks ago addressed Florida law regarding the protection to surviving spouses provided by the elective share from the perspective of estate planning (Elective Share – what is it and why you should know more about it). This post focusses on the options of a surviving spouse after declaring elective share. However, electing against the decedent’s estate may not always be the most beneficial option for a surviving spouse. Depending on the circumstances, a surviving spouse’s pretermitted share of decedent’s estate can be much larger than their elective share, and therefore, in some cases, it may not be beneficial to utilize the elective share.

Intestacy and Pretermitted Spouse

How does Florida’s Elective Share Affect my Estate Plan? Part One.

What is an “Elective Share”?

In situations where the decedent’s will has left their surviving spouse very little, or nothing, Florida law protects surviving spouse’s in two major ways: The Elective Share and Homestead. While both of these laws may affect your estate plan in significant ways, this blog and the next blog will focus on the elective share. A surviving spouse has the right to claim an elective share of the decedent’s estate, often termed “electing against the will.” By opting to claim their elective share, a surviving spouse can essentially supersede the terms of a will and bequests to other people in order to obtain a percentage of the decedent’s estate.

Biden’s Tax Proposal and the “Step-Up in Basis”: What it Means for Your Estate Plan or Trust

A commonly utilized tax law in estate planning considerations, known as the “step up in basis,” may be in jeopardy. The “step-up,” derived from section 1014 of the Internal Revenue Code, gets applied to the cost basis of property when it is transferred upon death of the transferor. This mechanism has been a beneficial way to minimize the capital gains tax of one’s heirs, especially for property that has greatly appreciated over time. For example, if someone buys a home for $100,000 dollars, and fifty years later the owner sells the home at a time when the home has appreciated in value to $1,000,000, there would be a capital gain of $900,000, to which a long-term capital gains tax rate of 20.00% is applied. However, if the owner dies owning the home, and the home is transferred upon the homeowner’s death at a time when the home has appreciated in value to $100,000, the step up in basis converts the original cost basis to the fair market value of the transferred property at the time of the homeowner’s death. Thus, if the persons inheriting the property were to immediately sell it for $1,000,000, there would be zero capital gain, because the basis is equivalent to the sale price. The step-up in basis has allowed for taxpayers to save tremendous amounts of money on capital gains tax. Note that, although it is often referred to as a “step-up” in basis, it could be a “step-down” if the value of the property a the time of death is less than what the owner purchased it for.

However, the Biden Administration has proposed to eliminate the step-up in basis. In short, this means that heirs will have to pay capital gains tax on inherited assets based upon the cost basis of the donor’s purchase price. According to Biden’s proposed tax plan, there would still be an exemption for capital gains on the first $1,000,000 of capital gains ($2,000,000 for married couples), but gains above the $1,000,000 ($2,000,000 for married couples) will not receive step-up in basis treatment.

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.

I Made an Irrevocable Trust a Long Time Ago: Can I Change it Now?

People make irrevocable trusts for many reasons, one major reason being tax planning. In order to make a completed gift for tax reasons, a donor has to part with control over the gifted asset, and making a gift to a trust that is irrevocable is one of the ways this can be accomplished. But that if your circumstances change, or tax laws change, and you would like to modify or terminate an irrevocable trust? Can a trust still be modified if it is irrevocable?

The answer is yes, if certain conditions are met. Florida statutes specifically allow for modification of irrevocable trusts in certain circumstances. For instance, by court order (Fla. Stat. § 736.0410), to modify tax provisions (Fla. Stat. § 736.04114), or where the trustee and all beneficiaries unanimously agree (Fla. Stat. § 736.0412), just to name a few. But there are certain situations where none of the Florida statutes apply. For instance, a modification under Fla. Stat. § 736.0412 by agreement of trustees and beneficiaries can only be accomplished if the settlor has passed away and only with respect to a trust that was made irrevocable after January 1, 2001. That leaves some situations that are not covered by the Florida statute.

Needs Based Government Assistance and Special Needs Trusts

It is never too early to start Medicaid planning. The goal is to focus on paying for long-term medical care and protecting your assets. By planning for Medicaid to pay for an amount of long-term care, it allows seniors to pass on their wealth while still maintaining long term medical care. With careful planning and the assistance of an attorney, you may be able to receive needs-based government benefits without having to deplete your assets, and ensure that and your children will be able to receive such government assistance if needed.

There are selected categories of people in Florida who may be eligible for Medicaid benefits, such as the elderly (age 65 and above), pregnant women, and people with certain disabilities. There are also a few other requirements to be eligible for Florida Medicaid, such as being a resident of the State of Florida, a U.S. national, citizen, permanent resident, or legal alien; having a financial situation that is considered low income or very low income; and owning assets below a certain threshold. If you are one of the selected categories of people who qualify for Medicaid, there is planning that can be done to help you meet the other requirements. However, there is a 5 year look-back rule regarding any uncompensated transfers that you make, so it is best to plan early and anticipate your future need.

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.

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