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August, 2019 | The Sheppard Law Firm

What is Probate?

Every so often I find it important to emphasize the importance of a topic.  Most of the readers of this column know I’ve discussed the Florida probate process before, but I find that, without some reminding, I often forget things outside my normal scope of operation daily.

With that in mind, many people who visit with me in my office are under the misconception that all Wills avoid probate.  False. Some people believe that if their estate is less than whatever the federal estate tax exemption is (currently the exemption is $11.4 million), then there won’t be a probate.  That’s false too.

Almost any asset that is subject to disposition by your loved one’s Will is actually distributed by the probate process.  Understanding what probate means, then, is crucial to understanding these issues.

Probate is a legal process under which the deceased’s assets are transferred to their beneficiaries.  The Last Will is filed with the probate court in the state and county in which the decedent resided at the time of his or her passing. This is known as the domiciliary estate. The personal representative (executor) in the Will petitions the court for Letters of Administration, which gives the personal representative the authority to transact business on the estate’s individually held accounts.

It does not matter whether bank and brokerage accounts are held in the same state in which the probate is opened. A bank account in New York, for example, is governed by the probate court in Florida.

If, however, the decedent owned real property in his or her individual name in another state, then an ancillary probate administration must usually be opened in that state. If the real estate is held in a trust, corporation, partnership, LLC, or in joint name, then the ancillary administration is usually not necessary.

Why is probate necessary? It’s not just for attorneys to make fees, as many might expect.  The probate process actually protects both the beneficiaries of your estate, as well as any potential creditors and of course, the taxing authorities.

Imagine that there was no probate process.  Suppose in a codicil to his Will your Aunt Wilhelmina left you her entire estate.  But what if Aunt Wilhelmina dies and your cousin brings a copy of her old Will into the bank naming cousin as the beneficiary, and cousin demands that Aunt’s accounts be distributed to him pursuant to the Will? How does the bank know that this is really Aunt Wilhelmina’s Last Will?  What if your cousin beat you to the bank and you didn’t realize it? What recourse would you have once the bank distributed to your cousin? The probate process protects against just this scenario and many others.

If you submit a Will as the Last Will of Aunt Wilhelmina to the court, and someone else submits a codicil to the Will to the same court, now we have a centralized system that can ensure Aunt Wilhelmina’s wishes are carried out.  The personal representative marshals all of the assets of the deceased and files an inventory with the court so all interested parties can determine in full light what the estate is worth. They can also question if the inventory is complete or may be missing assets.

Florida law provides that creditors have three months from the date of notice of publication of the probate administration to file a valid claim against the estate.  There are laws that deal with creditors, how they are to make claims, and how the personal representative may object to any such claim. The personal representative actually has a duty to notify reasonably known creditors of the administration.

Once all of the creditor claims have either been dealt with and all tax clearances have been obtained, the personal representative submits an accounting of the estate to the court.  All of the income and expenses are listed, as are items of capital gain and loss.  The personal representative presents a schedule of proposed distributions pursuant to the terms of the Will.

The distributions may be to beneficiaries, to trustees of testamentary (after death or continuing) trusts established under the terms of the will  or, in the case of a pour-over will (a will that distributes all assets into a revocable living trust), distribute the probate assets to the decedent’s trust.

All of the beneficiaries have the chance to object to any item listed in these petitions, and can appear before the court.  A judge decides if any objection has merit.

Once all of the distributions have been made, the personal representative petitions to close the estate and be discharged from further obligations as a fiduciary for the estate.  Receipts of distributions are filed with the court at this time.

So as you can see, probate is actually a strictly supervised court (public) process.  It is very hard for any foolery to get by a judge.  In a future column I’ll compare this process to a trust administration – which is necessary when all assets are owned by a revocable living trust.

©2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Liability Protection Important for Retirees Too

Many of my clients who are retired tell me that they want to simplify things. Their children have grown; their careers have wound down.  Now that they’re living off retirement savings, many start to look for expenses that can be cut back.

Since they have a fair amount of life savings and there are no more dependents, life insurance may not be as important as it once was. The thousands of dollars of annual premium payments may no longer be necessary or in the budget, so policies might be terminated or cashed in.

Professional and trade memberships aren’t useful anymore, so they’re discontinued. Business lunches aren’t part of the daily routine.  The country club membership up north isn’t used much anymore, so it’s discontinued in favor of the golf membership here in Florida.

Cars might be leased instead of bought. Eating out at restaurants might be curtailed.

Some money magazines even suggest cutting back on your homeowner’s liability, automobile and umbrella liability policies. But that would be a big mistake.

Why?

The answer is simple. Because if you get into a car accident that is your fault, you might find yourself responsible for damages beyond the liability protection that you’ve cut back to under your car insurance policy.  If the injured party sues you after the accident, and a judgment is entered against you, then the plaintiff could go after your life savings to make up the difference between what your automobile liability policy pays and the amount of the judgment.

Assume, for example, a terrible scenario where you are involved in an accident that severely injures someone – crippling them for life.  The liability that you may be held responsible for could certainly be more than a $250,000 limit one finds on many automobile insurance policies. Medical costs, lost wages, pain and suffering, the loss of the injured person’s ability to enjoy life among all of the other damages could be in the millions.

The same holds true for your homeowner’s liability insurance. If someone is injured on your property and you are deemed to have been somehow negligent, then you could find yourself at the wrong end of a judgment and have to pay damages over the amount that your homeowner’s liability insurance policy covers. A pool, for example, is considered under the law to be an “attractive nuisance”. If a neighborhood toddler should wander onto your property and drown in the pool, you may be held negligently liable even though the child was not invited onto your property.

So even if you are retired, you remain subject to many of the same risks and liabilities that everyone else must guard against. Nevertheless, I’ve heard all sorts of excuses why retirees shouldn’t purchase maximum liability protection. But to counter those all you have to do is turn on the television. How many personal injury attorney ads do you see? And each one essentially asks the viewer, “isn’t there anyone we can sue for you?”

Liability insurance is so important not only for the amount of protection that it offers, but because it also pays for attorney fees to defend you in case you are simply accused of negligence. Even if it turns out that you are not negligent the costs of defending a claim might take a big chunk out of your life savings if you don’t have a policy that also serves to pay these expenses.

Then there’s the mistake that some make with regard to their estate planning. Some wrongly assume that if they have placed all of their assets inside of a revocable living trust, then they’ve protected the trust assets from liability. This isn’t the case. In almost all revocable trusts – the trust and its assets are legally yours – which means that you can do anything that you want with your trust assets. Because you have that much dominion and control over the assets, your judgment creditors can demand restitution from your trust assets.

So what should you do? The best practice is to increase the liability coverage on your home and car and then purchase, in addition to those policies, an “umbrella” policy. The “umbrella” policy covers liability up to its stated policy amount over and above the home and car policies.

A $2 million umbrella policy might cost a couple thousand dollars annually (or perhaps even less) which is a great investment to protect you and your hard earned savings from the claims of a judgment creditor. Not only will this provide much needed coverage, it should also give you peace of mind.

If you value what you’ve worked so hard to accumulate over the course of your working career, consider making a visit to your liability insurance carrier to review whether your coverage adequately protects you.

©2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Estate Planning Nesting Dolls

I remember when my sister, as a young girl, would play with my grandmother’s collection of matryoshka dolls. Those are the wooden dolls, commonly known as Russian nesting dolls, of decreasing size placed one inside of the other. The outer layer is usually the painting of a woman wearing a dress and a babushka with figurines inside that are either male or female characters with the smallest usually looking like an infant carved out of a single wood chip.

The matryoshka doll is a good analogy for an estate planning technique that attorneys frequently use but that many of their clients don’t quite understand – the “testamentary trust”.

Think of a “testamentary trust” as the inside doll of one larger than it. The “outside” or main element is usually a will or a revocable living trust. If I create the Craig Hersch Revocable Trust, then that is the biggest matryoshka doll. Inside of my main doll might be a bunch of smaller dolls, the “testamentary trusts”.

When the grantor of that trust dies, the next inside trust comes out – which is a testamentary trust. “Testamentary” refers to “after death” meaning that the revocable trust may split into one or more testamentary trusts that can continue on for a period of years or the lifetime of their beneficiaries who follow the person who originally created the trust.

Let’s say that Ronald creates a revocable living trust. At his death, a testamentary marital trust is created for and benefits his wife Tiffany for the rest of her life. When Tiffany dies, two more testamentary trusts are created to benefit their children, Ron Jr. and Kathleen. Like the matryoshka doll, the trusts keep dividing.

But the testamentary trusts are not new trusts that require new language. They always existed inside of their parent trust but didn’t spring into life until the trust before them dies or is taken apart so that the new trust becomes the governing language.

Many people, including those who work in the financial services industry, get confused by testamentary trusts. When Ronald dies, for example, my office might call the bank and tell them to change the account to the marital trust created for Tiffany. It’s easy for them to get confused. “Where is this marital trust?” they might ask. Or, “we need a copy of the marital trust” when, in fact, they always had the copy of the marital trust because it was already embedded inside of Ronald’s trust, which they knew about from the beginning!

As each testamentary trust is established, the title on the accounts changes and a new taxpayer identification number is obtained. Like the matryoshka doll, it’s a new trust that came out from inside of the old one but is a completely different “person” in that it might have different provisions and beneficiaries. That is why the banks and brokerage houses have to change the title to the accounts that are now divided between the testamentary trusts.

You might wonder why anyone would use a testamentary trust to begin with. Why don’t you just divide all of your estate and leave everything outright to your children? Testamentary trusts are useful in that they can serve to protect the assets that you are leaving your children from the threat of a divorcing spouse, creditors and predators.

Assume the example where a son got foreclosed and the bank obtained a deficiency judgment on the mortgage balance. If you leave an inheritance outright to him, the bank may be able to force collection on their judgment. Another example would be your daughter the doctor who is in the middle of a malpractice case when you die. There, the inheritance you leave her might be at risk. Testamentary trusts can be built to mitigate these problems.

In years past, testamentary trusts got a bad rap. Many named banks as trustees that didn’t perform well or were loathe to distribute any of the money to the trust beneficiaries. Those days are past. A good estate planning attorney can draft a trust that gives its beneficiaries control over the investments and distributions of the trust. We can also draft provisions that allow a corporate trustee to serve alongside and be replaced by your selected trustee.

Testamentary trusts can also be drafted to accomplish income tax savings amongst its beneficiaries that cannot otherwise be achieved when an estate is distributed outright. There are all sorts of benefits to drafting testamentary trusts inside of your revocable trust or will, and many of these benefits have nothing at all to do with estate taxes.

So when your attorney starts talking about the use of a testamentary trust, think about the old wooden matryoshka dolls.  They’re not quite as beautiful or as much fun, but they can sure add some life and good benefits to your estate plan.

©2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Don’t Major in “Pre-Law”

A recent report from the Law School Admission Council showed that the number of law school applications for the 2018-2019 admissions cycle was nearly 11 percent higher than the previous cycle. This is likely a reflection of our economic growth and political news cycle. There are many now who aspire to the degree.

Since having two daughters who have graduated college, their friends (who had one day hoped to become lawyers) often asked me whether they should, as an undergraduate in college, major in pre-law.

I always tell them “No!”

Before being accepted into and attending law school in the United States, one must first earn an undergraduate degree. The degree can be in anything, so long as it is earned at an accredited institution. Many colleges and universities now offer a “pre-law” curriculum designed to attract undergraduate students who plan to attend law school.

I advise against an undergraduate degree in pre-law because I believe that it doesn’t provide a solid foundation in a base knowledge that is necessary to become a better practicing lawyer. Further, I believe that a pre-law degree doesn’t give the student any more than what he or she will learn during their first year of law school. A pre-law major, for example, will likely take courses in introductory research, writing and reasoning classes, philosophy of law and courses covering the makeup of our government and constitutional systems.

First year law students get all of that and more as they are required to complete courses in contracts, torts, jurisprudence (history of the law), research and writing, constitutional, criminal, civil procedure, and property law.  The second and third year of law school allows the student to take “electives” where they can learn certain specialty areas, which is very important today, since law, like most occupations is highly specialized.

You don’t find many “general practitioners” any more, as most attorneys concentrate their practices in one field or another such as estate planning, tax, real estate, business organizations, civil litigation, intellectual property, and family practice.

If one wants to become a tax or estate planning attorney, for example, it would be far better as an undergraduate to major in accounting or business so that the student will have a frame of reference for the complex income, gift, estate, business, and trust laws that they will encounter in practice.  Many attorneys who practice intellectual property law (patents, trademarks and copyrights) have an engineering degree which helps them understand the complexities of their clients’ inventions.  One of my law school classmates was a physician who went into medical malpractice law.

Other undergraduate majors that aren’t occupational specific serve better than pre-law in the lead in to law school. English and literature majors, for example, become proficient in reading, analyzing and expressing thoughts through superior written communication skills. Some of my classmates who were tapped to write for the prestigious Florida Law Review were English majors as undergrads.

The problem with what I am recommending is that it asks an eighteen or nineteen year old not only to commit to a path that leads to law school, but also to commit to a specific type of law. Most young people coming out of high school have no idea where their career interests may lie.

One good way to look at obtaining an undergraduate degree that provides certain definable skills is that if the individual changes their mind about going to law school, at least they will have a solid undergraduate degree in something worthwhile. Where is a pre-law degree going to take you if you either can’t get into law school or don’t want to go after your undergraduate years? Perhaps it would be a good background to work as a paralegal or in law enforcement, so if that’s your fall back, then that could work.

A varied undergraduate degree will also help the student land their first job.  As an estate planning lawyer, when I am looking to add an associate lawyer in my office I’ll likely look for a candidate who has an accounting or business background. In my field of work, I feel that a candidate with such a background will likely hit the ground running faster than someone with a pre-law undergraduate degree.

Equally important to the undergraduate degree is the course work that the student selects in their second and third years of law school. Most law schools offer a wide variety of electives for the second and third years, allowing students to specialize their education into a given field.

There are many choices out there. If one is crazy enough to want to earn a law degree and then go out and practice law, I hope that I have provided some valuable insight.

©2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.

Tom Petty and the Heartbreakers

During the 1980s I attended college and law school at the University of Florida in Gainesville, which also happens to be the hometown of rock and roll legend, Tom Petty.

I was not a big Petty fan before attending UF. You couldn’t help it, however, from becoming a fan while living in Gainesville during the height of his popularity. Over time his music grew on me. He was the hometown hero who busted it “Into the Great Wide Open.”

As an undergrad, one Thursday night I happened to take a date to Rickenbacker’s Bar in downtown Gainesville, when Petty, at the height of his career when he normally played to packed stadiums, strolled in with an acoustic guitar and a friend.

He proceeded to play two sets to the uncrowded room, (this was before cell phones which would have resulted in an immediate madhouse), allowing me to enjoy a personal concert from one of the biggest musical names at the time. He sang some songs and chatted with the 20 or so people in the bar about his music.

It was a great experience, and I became a much bigger fan.

Petty’s “Last Dance with Mary Jane” happened from an accidental drug overdose in October of 2017. Since that time, his widow, Dona York Petty, and his two daughters Adria Robin Petty and Annakim Violette, both from a prior marriage, have been trying to “Break Down” one another over his estimated $95 million estate.

The disagreement between step-mother and step-daughters boiled over in lawsuits, each vying for control over Petty’s intellectual property rights, including marketing rights to his name and image, royalties and artistic creations.

Dana chides Adria for wanting to authorize Petty’s likeness to promote products like salad dressing, a la Paul Newman. She accuses her step-daughters of locking her out of the management of the intellectual property rights, claiming that Petty’s trust directs those rights to be contributed to an LLC, which she wants managed professionally.

Adria and Annakim have said “Don’t Do Me Like That” to Dana over these same issues, claiming that Petty’s trust directs the intellectual property rights to be maintained in an LLC with all three having equal membership interests, which would create a situation where the step-daughters could outvote their step-mother at any time.

The two sides “Won’t Back Down.”  It looks like all of the parties will be “Free Fallin’ ”  for quite some time until the legal process works all of this out. I’m sure that either side would like to be “Runnin Down a Dream” and get their own way, but that doesn’t look likely anytime in the near future.

The Tom Petty saga speaks to many universal estate planning truths. Economically tying a step-parent to step-children can be a recipe for disaster, especially when there’s not an impartial trustee named to ensure that your dispositive intent is carried out the way that you would like.

Your trustee decides how the trust assets are invested and distributed. In Tom Petty’s case, an impartial LLC manager could decide how to optimize the intellectual property rights.

Obviously Petty wanted to take care of all his “American Girls.” It appears that his estate had more than enough assets and revenue to do so. Instead his family turned into “Tom Petty and the Heartbreakers.”

Neither his wife nor his daughters will have to “Live Like a Refugee.” But when the glue that holds the family relationship is no longer there, it comes down to money and control

I’m sure if he were alive today, he’d tell his wife and his daughters “You Wreck Me,” and “It’s Time to Move On,” to “The Best of Everything.”

But Tom’s not with us anymore.

It doesn’t take millions to put your family in a similar situation. In fact, the less money and assets available makes the investments and distribution allocation decisions that much more important and vital to each party’s interest.

If you have a similar situation, make sure that you think through the issues, so everyone will “Feel a Whole Lot Better.”

© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.