Now, if you are single and have a net worth including death benefits from personally owned life insurance, group life and retirement plans of ALL types of over $5 million, then you are subject to estate tax. The rate is 35% of the excess. NOTE: your proper administrative costs are also deductible, so if you are just over, your estate isn’t likely to suffer the tax.

If you are married, your tax situation improves if you are leaving assets to your spouse. There is no tax on assets left to a spouse – or those provided as gifts to a spouse during lifetime. If a well considered trust is created, a married person can create benefits for a surviving spouse and children, and exempt a total of $10 million – $5 million for each spouse.

Estimates are that less than 1% of residents to whom this law applies will actually be taxable. The gift and estate tax combined has never raised over 6% of the Federal Budget. It has remained conceptually one of the more irritating taxes ever imposed, even for those whom it does not affect.

OK, so your estate is going to be taxable. You get it. Your family will be paying out a chunk. In order to be prepared for that reality, you can choose to keep that chunk in cash or near cash assets – which we all know gives pretty poor returns AND isn’t always possible to do. Just to be realisitic, you may have mortgages or lines of credit that will be called due at death. Read your promissory note sometime; death is usually a basis for the lender to demand full payment. Or they could just “deem themselves insecure.” Had a bad day? Feel a little insecure? Call in some loans!!

Wouldn’t it be nice if you could buy that money at the very time it is needed at a discount? You are right, that is life insurance. Pay a little each year over your lifetime and a lot is paid out where you want it at your death. Sorry, not a lot of fun for you, but boy, it will care for the people you care for! Great. Buy life insurance and it increases your estate tax! About one-third to one half of the added insurance will go to taxes – - – unless you create an Irrevocable Life Insurance Trust to buy and own the insurance. If you do that, the money needed will be there without estate tax. The amount saved is truly free!

How does it work? You – called the “Settlor” or “Grantor” – create a special type of trust called an Irrevocable Life Insurance Trust, or ILIT for short. It may be just labeled as an Irrevocable Trust, but have extra language that facilitates the ownership, management and use of the life insurance death benefit to coordinate with your estate. If so, it is an ILIT, a carefully designed trust for a very specific purpose. In the ILIT you name someone other than yourself as Trustee. Usually the Trustee is a professional or institutional trustee, because it is important enough to use professionals, a little complex, and a bit of a burden to family and friends. The professionals will cost something, probably $2,000 to $5,000 annually, depending on a number of factors.

You as the Settlor make a contribution to the trust. In the Trust, you have named certain persons to be “present interest” beneficiaries, with a right to receive a pro-rata share of any contribution. They are entitled to receive notice of the contribution, and may exercise their withdrawal right for up to thirty days following receipt of the notice. Currently the annual gift exemption is $13,000 per donor, and per donee. Married persons may join with each other to make gifts. So if there are three “present interest” beneficiaries named in the trust, and spouses join together to make the contribution to the Trust, the maximum amount which can be treated as annual exempt gifts is:

The Trustee says: “Settlor, I have the money you contributed, and the notices to the present interest beneficiaries have come back with all of them waiving their withdrawal rights. I would like to buy life insurance on your life, and have arranged with this fine representative to do that.” The life insurance is owned by the trustee on behalf of the Trust, and is NOT part of your estate. If you transfer existing life insurance to an ILIT, the Internal Revenue Code treats it as taxable in your estate if you die in three years or less.

Now what? You continue to make contributions to the Trust. Contributing more than is needed for the insurance premium is wise, and the Trustee will invest it, probably in cash accounts until there is enough to do something else. Variable Life Insurance would allow most of the extra contribution to be invested within the life insurance, into the various investment funds available.

The best part is there is more “FREE MONEY.” Investment yield “inside” a life insurance policy is not income taxable until a policy is surrendered. That’s right, not even at death! The proceeds of the death benefit are both income and estate tax free in the ILIT. The ILIT is both authorized and directed to use the proceeds to loan to your estate, or buy assets from it. Your estate (or living trust) then has the cash it needs to pay loans and estate taxes. The assets now held by the ILIT are used for the benefit of your beneficiaries – and note – the “present interest” beneficiaries may not all be the ultimate beneficiaries!

ILITs are therefore “free money,” and one of our favorite tools to preserve families and their assets.

1. Limited liability of owners and managers for entity level acts;
2. Limited ability to “take” an ownership interest away to collect for an outside personal liability.

Single member LLCs (just one owner) were determined to be unprotected in the decision of the Florida Supreme Court in Olmstead v. Federal Trade Commission, SC08?1009 (June 24, 2010) http://caselaw.findlaw.com/fl-supreme-court/1528945.html.  That decision reached beyond the question asked by the 11th Federal Circuit Court of Appeals to frame a solution which effectively recast interests in LLC to have the same legal attributes as stock in corporations. That means that such interests are legally freely transferable, and capable of seizure and sale in judicial process.

The Florida Bar has sought a middle ground in negotiation with the banking lobby to protect multi-member LLCs.  Legislation is expected to be signed by Governor Scott shortly.  However many of us are not convinced that the legislation cures the patient’s ills, and firmly believe that this is a palliative at best.

LLCs have been the most popular form of business today due to their supposed dual protection attributes of protecting individual owners as to operational liability, and limiting third party collection.  We have devised alternative planning for our clients, and will continue to seek to improve protective plans and choices.  LLCs have been a very capable tool in estate planning as well as business, allowing the grouping of assets, structuring buy-sell agreements, providing for active business continuity, and for post-death control by the best equipped person. 

Regretably, the influence of the large banking lobby on this legislative “fix” (and the level of campaign contributions made by banking interests) has damaged the reputation of Florida in the business and estate planning arena beyond that which favorable weather will offset.  There are other place to live or move your business to.  We already have seen the movement away from our state, and expect more.

In Florida as in most states, age eighteen is the age of majority.  Your progeny can contract, marry, vote, join the military, cannot drink until 21, but do have privacy rights.  Yes, even from you.  Their University, School or College cannot provide any privacy protected information to you, including health, grades, class attendance or anything else.  A call in the night to inform you that your child has been injured (you were on the Emergency Notification), followed by the statement that they cannot disclose anything more, is seriously distressing.  It is even more distressing if that educational institution is a long distance away.  So what can you do?

 Now, before the migration back to higher learning takes place, consider that if your child executes a Durable Power of Attorney, Health Care Designation (called a Health Care Power of Attorney, Authority or Surrogacy – all mean the same), and Living Will, these concerns are generally resolved, because you will have the authority to be informed, and to act on your child’s behalf.  You could add a Will to the list, although that is more of an education in responsibility than a necessity.  Most states provide that the parents are default beneficiaries, and few college age children have much in the way of assets.

 Your family or estate planning attorney can quickly prepare these documents; the young generally have simple issues.  Call, but be prepared to provide the responses as to who will be named with authority under each document.  Probably that will be you as parents, and possibly an older brother or sister, or another relative as a backup in case you aren’t available.  Remember that it is your child’s choice, not yours.  Of course, they may prefer going to college than being out on the street, so you do have some influence.  Once executed, the documents are usually scanned to PDF files, and can be sent to the institution when needed.  The cost to prepare these documents is much less than a plane ticket or lost workday, traveling with the fear that your child needs you.

You may wish to consider our posting at http://www.strattonlaw.com/archives/214 for further thoughts.

If you have no family, friends or favorite charities, AND you have little or no assets and don’t expect to have this change anytime soon, skip this and read something else.  If you have some assets  and people (or a charity, school or similar institution) you care about, then here are our thoughts:

1. A Will, and if you have minor children, guardians are named, and maybe a “standby trust” to manage assets for the children;
2. Durable Power of Attorney
3. Health Care Power of Attorney or Surrogacy
4. Living Will
5. In our office, we also add an Authority to Dispose of Remains – for the choices of burial, cremation, and other directions.  These choices are some of the most difficult for the survivors.

If your assets are sufficient, you may wish to create one or more trusts during your lifetime.  If you have any significant life insurance, possibly one of these trusts would be to hold your life insurance to keep it out of you estate for Federal Estate Tax purposes.  For larger levels of assets, it is often very useful to interpose an entity or entities to hold logical sets of assets for management and liability protection, and to have those entities owned by one or more of the trusts you have created.  There are additional, specialized techniques which provide tax incentives and retirement structures, but the main list is above.

The process may be simple and direct, or quite elaborate and extend over time.  The purposes served are for management, tax efficiency, liability protection, convenience and control as to beneficiaries, and for expedited transfer of authority upon death.  Indirectly, this process creates structure and organization leading to financial efficiencies.  In all instances, the core documents are the same, and the enhanced planning has specific and determinable benefits and purposes.

If you are single and sharing your life with a “significant other,” you MUST state your wishes in writing, or else.  The law will not protect your unwritten informal declarations.  You may wish to look at our article, “Living Together” at http://www.strattonlaw.com/archives/5 in this Web Site. 

Children who have recently become age 18 have special problems.  We refer you to the our article, at http://www.strattonlaw.com/archives/295 entitled “It was a Very Good Year”.  Remember that these, your children now have independence under law, and privacy rights.