September 6, 2012 – What To Tell $5,120,000 Trust Procrastinators and Elective Share Statute and Spousal Homestead Rights Avoidance Planning

Providing updates and comments on Florida estate planning and creditor protection developments and insight for lawyers, CPAs, and other planning professionals

1. What To Tell $5,120,000 Trust Procrastinators
2. Elective Share Statute and Spousal Homestead Rights Avoidance Planning

Welcome to this week’s Thursday Report, in which we discuss what to tell $5,120,000 trust procrastinators and how to avoid the spousal elective share and homestead rights when planning asset disposition.

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What To Tell $5,120,000 Trust Procrastinators

A good many affluent individuals are still on the sidelines on if and when to make use of their $5,120,000 gift allowance. We have found that a number of these individuals are basically insecure about whether they could run out of assets, and are simply not going to make these gifts without assurances that if their financial world were to end they would have access to these assets.

The Trick

The only viable solution for a client who insists upon this mechanism is to establish a trust in a creditor protection jurisdiction and to have the client either be a discretionary beneficiary, or an individual who could be added to the trust as a discretionary beneficiary by one or more independent Trust Protectors.

Attorney and author Steven Oshins of the Oshins & Oshins law firm in Nevada has done a great job of writing about the use of asset protection trusts under the above scenario. His article on Hybrid Domestic Asset Protection Trust, which was published in Leimberg Information Services on May 10, 2012 can be reviewed by clicking here.

Commonly we will have a husband establish an irrevocable trust for the wife and descendants and the wife establish an irrevocable trust for the descendants. The husband can be the trustee of the trust for the descendants and may receive trustee fees and possibly even borrow at arm’s-length from the descendants trust. In addition the descendants trust could be formed in Nevada or another appropriate asset protection jurisdiction with Trust Protectors who could add the husband as a discretionary beneficiary to the trust. Alternatively, the husband might be a named discretionary beneficiary of the trust, but with no right to receive distributions unless or until deemed appropriate by one or more independent third parties.

A copy of Private Letter Ruling 200944002 in which the Service ruled that a completed gift to an Alaska asset protection trust occurred when the grantor was a discretionary beneficiary can be reviewed by clicking here. The Ruling also concluded that unless there was a pre-existing understanding or agreement that the grantor would actually receive distributions the trust assets should not be subject to federal estate tax in his estate.

The Trap

Time is running fast on the ability to establish and fund this type of trust. Call your clients and get them on the calendar while there is still time to make this happen.

Elective Share Statute and Spousal Homestead Avoidance Planning

“It’s tough to stay married. My wife kisses the dog on the lips, yet she won’t drink from my glass.” – Rodney Dangerfield

A great many wealthy individuals are in second or subsequent marriages where the spouse has not signed a marital agreement or waiver of homestead or elective share and is not willing to do so.

In those situations, Florida’s elective share and homestead laws can create significant obstacles for individuals who wish to leave a considerable portion of their wealth to descendants, charities, or other family members.

Most readers are well aware that an individually owned homestead must be devised to the surviving spouse, or at minimum the surviving spouse will receive a life estate with the children of the decedent receiving a vested remainder interest. Many planners are not aware of the recent law changes which give the surviving spouse the right to convert her life estate to a 50% undivided ownership interest.

In addition, the 30% elective share can be difficult to avoid unless the client is willing to place significant assets into life insurance policies and/or special irrevocable trusts that are specifically described in the elective share statute.

Another alternative is to provide for 37.5% of the estate to go into a trust that will pay income plus amounts as reasonably needed for the health, education, and maintenance of the surviving spouse.

The Trick

We have commonly drafted documents which provide that the spouse can have a choice of receiving (a) an outright disposition that is less than 30% or, (b) a 3.75% disposition into a trust that will be handled as conservatively as possible by a trust company that the spouse will have very little control or input over.

This could even be an offshore trust that the spouse might not feel very comfortable with.

Alternatively, making a $5,000,000 gift to an irrevocable trust in a creditor protection jurisdiction with the client and at least one other family member as beneficiaries can be facilitated in order to provide good year-end 2012 estate tax planning and incidental avoidance of elective share exposure.

Homestead does not have to be owned directly by an individual. Some individuals place their home under a limited liability company and then lease the home under a 99-year lease that will expire on death and thus may qualify the homestead for the $50,000 property tax exemption and the 3%/CPI annual cap on taxable value. The property would therefore not be individually owned for purposes of the forced inheritance provisions under the Florida Constitution.

More about these topics can be found by clicking here.

The Trap

Maybe the client should get a different type of counseling! It is important to carefully review the applicable rules and planning opportunities and not let the tail wag the dog when clients have marital situations that merit this type of planning and analysis.

The Florida elective share statutes should be reviewed carefully and savings clauses can be used in trust documents to help facilitate compliance with these rules without inadvertently losing the federal estate tax marital deduction. The statutes can be found by clicking here.

Most importantly, make sure that any drafting takes into account the importance of qualifying for the federal estate tax marital deduction. There are ways to limit elective share rights without losing the marital deduction for assets that go into a trust, but it is essential that this be done properly.

“I told my wife the truth. I told her I was seeing a psychiatrist. Then she told me the truth: that she was seeing a psychiatrist, two plumbers, and a bartender.” – Rodney Dangerfield

NEWS AND UPCOMING EVENTS

• Renowned author and speaker, Dr. Srikumar Rao will be in Clearwater working with us and we have arranged for him to provide a free lecture at 10:30 am on Saturday, September 22, 2012 at the Hilton Carrillon Park in St. Petersburg on the topic of Good Thing – Bad Thing – Who Knows? Changing Your Immediate and Long-Term Responses to Events and Challenges. All Thursday Report recipients, friends and colleagues are invited. Dr. Rao will also be providing an afternoon workshop as described in the attachment. For more information please click here.
• September 20, 2012 – We are providing a private physician creditor protection presentation for selected SunTrust clients in Tampa. The PowerPoint for this presentation is available upon request by emailing Janine@gassmanpa.com.
• September 27, 2012 , 4:00 p.m. – 4:50 p.m. Please join us for The 4-4-4 Show, a monthly Clearwater Bar Association continuing education webinar series that qualifies for 1 hour of continuing education credit and is moderated by Alan S. Gassman, Esq. This month’s topic is “Florida LLC and Limited Partnership Law and Strategies Update” with well known expert Tom Wells, Esquire of Coral Gables, Florida. To register please visit: www.clearwaterbar.org
• October 1, 2012 12:30 p.m. – 1:00 p.m. Please join us for Lunch Talk, a free monthly webinar series sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman, Esq. This month’s topic is 7 Habits of Highly Effective Attorneys with attorney Wally Pope of the Johnson Pope Law Firm in Clearwater, Florida. To register please visit www.clearwaterbar.org

Thank you to our law clerks who assisted us in preparing this report:

Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is Kacie@gassmanpa.com.

Alexandra Fugate earned her B.A. in English from the University of Florida in 2008, and J.D. from Stetson University College of Law in 2012. She has been a Guardian ad Litem for the past two years, a judicial intern for the Twelfth Circuit in Bradenton, and is currently seeking admission to the Florida Bar. She wants to pursue a career in Business, Employment, and Property law.