This planning technique works fine in Florida from an asset transfer standpoint. Assets owned by a valid living trust are not part of the Florida probate process.  But even though probate may not be required to transfer assets, the trustee may want to probate the deceased person’s estate for another reason:  to deal with creditors.

The creditors of a deceased person can be a problem for his or her living trust. If the decedent had creditors and there are no assets in the estate to pay the creditors, Florida law provides that the living trust is responsible for the creditor claims.[1]

When a person with a living trust dies, the trustee of the trust is required to file a notice of trust with the court.[2]  The purpose of the notice of trust is to let the decedent’s creditors know about the trust and of their rights to enforce claims against the trust assets.

Creditors have two years from the decedent’s death to assert their claims against the trust.  This means that the living trust is potentially liable for claims against the decedent’s estate for two years.  If the trustee distributes all of the assets within that two year period and a creditor submits a claim, the trustee could be liable to the creditors for the premature distribution.

Because of this rule, some trustees are reluctant to distribute assets within the two-year creditor period. This means that the beneficiaries will need to wait two years before they receive distributions from the trust.  If the trust doesn’t call for distributions within a two year period, this may not be an issue. But two years can be a long time to wait. In most situations, beneficiaries will want to receive at least some (if not all) of the trust assets shortly after the decedent’s death.

Fortunately, there is a way to shorten the period during which creditors can submit claims: probate.  As part of the Florida probate process, creditors are formally notified and given three months to submit a claim. Any claims that are not submitted within that three month period are barred.

In other words, even though it may not be required by law if all assets are in a living trust, probate has the practical benefit of shortening the creditor claims period.  In some situations, trustees may probate the estate to take advantage of this three month period (and avoid the two-year period generally required).

Whether or not Florida probate will be advisable depends on the circumstances.  Would the assets in the trust be exempt from creditor claims?  Is the trustee also the sole beneficiary?  Does the trust require assets to be held for two years anyway?  Is the trustee confident that all creditor claims have been paid (or otherwise risk tolerant)? Questions like these can help determine whether Florida probate is a good idea.

Of course, there are other reasons for setting up living trusts (such as incapacity protection).  There are also other ways of avoiding probate in Florida, such as using jointly titled bank accounts and deeds (like a Lady Bird deed) to transfer real estate outside of probate.  Some of these techniques also have important asset protection consequences. All of this should be considered as part of the estate planning process.

Why Living Trusts Don’t Always Avoid Probate in Florida is a post from: probate attorney Jeramie Fortenberry

• The Act raised the top rate for capital gains to 20 percent for taxpayers with income in excess of the high-earner threshold ($400,000 for single filers, $450,000 for joint filers, and $425,000 for heads of households); and
• The Act raised the maximum federal estate and gift tax rate to 40 percent (up from 35 percent under prior law).

Each of these new rates must be taken into account to decide between a lifetime gift and a transfer at death. Before making a lifetime gift, the taxpayer must weigh the tax exclusive nature of the federal gift tax against the income tax consequences resulting from the loss of basis step-up.

Transfer Tax Considerations: Tax Exclusive vs. Tax Inclusive Taxation

The federal transfer tax system taxes the transfer of wealth during one’s lifetime (the gift tax) and the transfer of property at death (the estate tax).  A third transfer tax—the federal generation-skipping transfer (GST) tax—applies to transfers to recipients that are removed by more than one generation from the transferor.

The estate tax is tax inclusive, meaning that the funds used to pay the estate tax are themselves subject to the tax. In other words, the estate tax is imposed on the entire value of the estate, including assets that will ultimately pass to the federal government in the form of estate taxes.[1]

In contrast, the gift tax and is calculated based on the value received by the recipient of the transferred property.  This means that the amount paid by the transferor in connection with the transfer is not subject to the tax.[2]  Because of this, the gift tax is said to be tax exclusive.

This distinction has important consequences. Because taxes on lifetime gifts are tax exclusive, they are less expensive from a transfer tax standpoint than transfers that take place at death.

To illustrate, assume that Biden wants to transfer $1 million in cash to his daughter when the estate tax rate is 45 percent.  Let’s also assume for simplicity that Biden has no unified credit/exclusion amount available.

If Biden transfers the cash during his lifetime, his gift tax will be based on the amount actually received by his daughter.  This creates a circular computation since the amount of the gift isn’t known until the amount of the tax is determined. However, this computation can be expressed in algebraic terms: The taxable transfer will equal the amount of the transfer ($1,000,000) divided by 1 + the tax rate (1.45). In this case, the taxable transfer would be $689,655. Applying the 45 percent tax rate to this amount will result in a gift tax of $310,345.

On the other hand, if Biden holds the cash until his death (assuming no changes in value), the estate tax will apply to the entire amount included in his estate ($1,000,000).  As a result, he will owe $450,000 in estate taxes – $139,655 more than Biden would have paid if he had given the cash away during his lifetime. In other words, all else being equal, a transfer at death will result $139,655 more transfer taxes than a lifetime transfer.

Income Tax Considerations: Loss of Basis Step-Up vs. Transfer Tax Savings

Of course, transfer taxes are only part of the equation. If the transfer includes appreciated property, the income tax rules must also be taken into account.  Specifically, the taxpayer should discount the transfer tax savings by any appreciation that would be preserved in the property due to the loss of stepped-up basis.

Under the income tax basis rules (IRC § 1014(b)(9)), property that is held until death qualifies for a basis step-up, effectively erasing any appreciation. This basis step-up is forfeited if the property is transferred during lifetime, in which case the recipient will take the transferor’s basis in the property. As a result, all appreciation in the property will be preserved and eventually taxed when the recipient disposes of the property.

Whether the transfer tax savings will outweigh the loss of the basis step-up depends on the tax rates involved. In the current environment, a built-in 15 percent or 20 percent capital gains tax could erase any transfer tax savings that may result from a lifetime gift.

In the example above, assume that, instead of cash, Biden wants to transfer $1 million in property to his daughter.  Assume that the property has a $200,000 cost basis and that Biden’s daughter is subject to a 20 percent capital gains rate. In that situation, the income tax cost of the lifetime transfer would be $160,000 due to the $800,000 of deferred capital gain built into the transfer. The additional income tax cost of a lifetime gift exceeds the $139,655 transfer tax savings.

In other words, number crunching is required to determine the tax consequences of holding property until death. Making the transfer at death will make sense if the capital gain built into the property exceeds the transfer tax saving attributable to the tax exclusive nature of the gift tax.  This requires a relatively low transfer tax rate and a relatively high built-in capital gain. If, on the other hand, the transfer tax savings inherent in a lifetime gift exceed the built-in capital gain, the taxpayer should consider a lifetime gift.

Taxation of Lifetime Gifts vs. Transfers at Death is a post from: probate attorney Jeramie Fortenberry

But since the Treasury recently released President Obama’s 2014 budget proposals, there’s been a lot of grumbling about the President’s proposed estate, gift, and generation-skipping transfer tax provisions. If enacted, these proposals would change the estate tax laws yet again.

So is the Current Estate Tax Law Really Permanent?

President Obama’s proposals have caused a stir in the estate planning community.  As one attorney complained, “estate planning should not be a process where the rules change every year and the government keeps moving the goal posts.”

So is ATRA permanent? In a word, yes. It is as permanent as it can be. But in this context, “permanent” must be understood relative to prior law. It simply means “does not automatically sunset.” It does not mean that it is an inviolable law that can never be changed.

I take President Obama’s budget proposals as position statements. His prior proposals regarding the transfer taxes had a zero effect when it came down to actually passing legislation. Both the budget and the Republican response are nothing more than political posturing.

I don’t think this is an uncertain tax environment. I hope that planners won’t latch onto this and encourage overly-complex planning “just in case” the President’s budget becomes law. While I think there’s still good reasons for credit shelter trusts and valuation techniques for taxpayers that are on the cusp of the current exemption, the vast majority of taxpayers don’t need full blown estate tax planning.

With that said, let’s take a look at the estate, gift, and generation-skipping transfer tax provisions of President Obama’s 2014 budget.

Reset Federal Estate, Gift, and Generation-Skipping Transfer Tax to 2009 Levels

ATRA set the exemption from estate, gift, and generation-skipping transfer (GST) taxes at $5 million, indexed for inflation after 2011 (currently $5.25 million). Surviving spouses may be eligible to double that amount using portability or credit shelter planning.  The tax rate on gifts in excess of that amount is 40 percent.

According to the President:

ATRA retained a substantial portion of the tax cut provided to the most affluent taxpayers under [Tax Relief Act of 2010] that we cannot afford to continue. We need an estate tax law that is fair and raises an appropriate amount of revenue.

The President would reset the estate, gift, and GST tax to 2009 levels. As a result, the exemption amount would be reduced to $3.5 million for estate and GST taxes and $1 million for gift taxes, without indexing for inflation.  The top tax rate would rise from 40 to 45 percent. Taxpayers would not owe taxes on prior gifts made while the exclusion was set at the current amount, and portability would still apply.

Require Consistency in Basis and Fair Market Value Reporting

Under current law, a taxpayer’s basis in property inherited from a decedent is stepped up to the fair market value of the property at the date of death. This is an income tax concept. Property included in a decedent’s gross estate is also valued at fair market value on the date of death. This is a transfer tax concept. Even though both the income tax laws and the transfer tax laws require the property to be valued at fair market value, current law does not require that the value for income tax purposes be the same as the value for transfer tax purposes.

The President believes that taxpayers should be required to take consistent positions when reporting basis and fair market value to the IRS.  This would require both a consistency and a reporting requirement. The value used to step up basis for income tax purposes would be required to match value used for estate tax purposes. The executor of the decedent’s estate would be required to report the basis and valuation information to the recipient and the IRS. Similar rules would apply to lifetime gifts.

Require a Minimum Term for Grantor Retained Annuity Trusts

Grantor-retained annuity trusts (GRATs) have been a perennial concern of the President’s budget proposals. According to the President:

GRATs have proven to be a popular and efficient technique for transferring wealth while minimizing the gift tax cost of transfers, providing that the grantor survives the GRAT term and the trust assets do not appreciate in value. The greater the appreciation, the greater the transfer tax benefit achieved. Taxpayers have become adept at maximizing the benefit of this technique, often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during the term), in many cases to two years, and by retaining annuity interests significant enough to reduce the gift tax value of the remainder interest to zero or to a number small enough to generate only a minimal gift tax liability.

In other words, the President is targeting short-term, zeroed out GRATs.  Under current law, zeroed-out GRATs are a low-risk, high yield estate planning technique that exploit the Internal Revenue Code’s fixed valuation assumptions. If the assets in the GRAT decrease in value, the grantor is in no worse position than if the GRAT had not been established. But to the extent that the GRAT assets outperform the Internal Revenue Code’s valuation assumptions, the benefit is passed to the remainder beneficiaries tax-free.

The President’s proposal would make GRATs more risky by imposing a minimum and maximum term for the GRAT. The minimum would be 10 years; the maximum would be the grantor’s life expectancy plus 10 years. The GRAT would also be required to have a remainder interest with a value that is greater than zero at the time the interest is created and prohibit a decrease in the annuity during the term of the GRAT. These rules would apply prospectively to trusts established after the date of enactment. If enacted, these proposals would curb, if not eliminate, the use of GRATs as an estate tax planning technique.

Limitation of Duration of GST Exemption

Under current law, the allocation of GST exclusion to a trust excludes all future appreciation and income of the trust from GST tax for as long as the trust is in existence. At the time that the GST was enacted, the law of almost all states had some version of the rule against perpetuities, which limited the term of the trust.

Many states have now repealed or extended their rule against perpetuities statutes. By choosing a favorable jurisdiction, taxpayers can create GST exempt trusts that will grow in perpetuity, without the assets ever being subject to future transfer taxes.

The President would put a 90-year expiration date on the GST exclusion. On the 90^th anniversary of the creation of a GST-exempt trust, the GST exclusion would terminate and the trust would become subject to GST tax.

Eliminate Intentionally Defective Grantor Trusts

Under current law, grantors can make gifts to trusts that are considered complete for federal tax purposes but incomplete for federal income tax purposes. These “intentionally defective grantor trusts” allow the grantor to decrease the value of his taxable estate by the amount of the gift and continue to pay income tax on the gift as though he had not made the transfer. The payment of income taxes on the completed gift further decreases the grantor’s taxable estate.

The President would eliminate this planning technique by coordinating the transfer tax and income tax rules. Gifts to trusts that are treated as grantor trusts for income tax purposes would be treated as incomplete gifts for federal transfer tax purposes.

As stated above, I take these proposals with a grain of salt. We can expect more of the same as Congress grapples with the budget deficit and discuss tax reform. But that doesn’t mean that change is imminent or that it’s time to plan for a speculative worst case scenario.  We have a law that doesn’t automatically sunset.  And, all things considered, a $5 million exemption indexed for inflation and built-in portability is a good deal.

Estate Tax Provisions of the 2014 Budget: Is the Current Estate Tax Law Permanent? is a post from: probate attorney Jeramie Fortenberry

On the plus side, ATRA set the exemption for federal estate, gift, and generation-skipping transfer taxes at $5 million, indexed for inflation since 2011. It also made portability a permanent feature of the tax law.  For 2013, that means that taxpayers can pass $5.25 million ($10.5 for a married couple using credit shelter trusts or portability) to the next generation free of all transfer taxes.

But not all changes were positive. ATRA raised the maximum transfer tax rate from 35 percent to 40 percent.  ATRA also added a 39.6 percent high income tax bracket and raised the capital gains rate to 20 percent for taxpayers with income in excess of the high-earner threshold ($400,000 for single filers, $450,000 for joint filers, and $425,000 for heads of households). These higher tax rates are in addition to the 3.8 percent tax on net investment income required under the Patient Protection and Affordable Care Act.

How ATRA Affects Estate Planning in 2013 and Beyond

ATRA didn’t make any revolutionary changes to the way estate tax planning is done. Many of the same techniques that worked in 2012 still work under ATRA. But ATRA did affect the estate planning environment in several ways:

• Unlike its predecessors, ATRA is permanent. There is no automatic sunset provision that will cause ATRA to expire automatically if not extended. ATRA gives a much-needed reprieve from the uncertainty that has plagued estate and gift tax planning for the past decade.
• Very wealthy taxpayers who haven’t already used their exemption still have an opportunity to do so through lifetime gifting. Even though ATRA doesn’t automatically sunset, Congress may still lower the exemption or raise the tax rates. The only way to lock in the current favorable exemption is to fund the exemption amount now. Making the transfer now will also move all future appreciation out of the taxpayer’s estate.
• Very wealthy taxpayers might also consider making taxable gifts in excess of their exemption amount. Due to the tax inclusive nature of the estate tax, lifetime transfers are more tax-efficient than transfers that take place at death.
• Given the higher capital gains rates, the use of intentionally-defective grantor trusts (which allow the grantor to continue to pay the tax on completed gifts) may no longer be the right choice. If the transferee is in a lower tax bracket, the better choice may be to terminate the grantor trust status.  This would allow the beneficiaries to pay tax on the trust income at lower rates (assuming that the grantor’s spouse is not a co-beneficiary of the trust). The trust could make distributions to the beneficiaries to cover the additional tax liability.

Perhaps the biggest takeaway is that the vast majority of Americans need not be concerned with federal transfer tax issues. Only individuals with gross estates (defined very broadly) worth more than $5.25 million are potentially subject to estate tax. This means that most people can forget about estate tax planning and focus on what truly motivates them, including:

• Ensuring that their assets are distributed to the people that they want to have them and at the time that they want them to have them;
• Protecting estate assets from actual or potential creditors of family members and loved ones (or from their own bad decisions);
• Planning for the possibility of their own incapacity; and
• Protecting assets from frivolous lawsuits.

These non-tax goals are at the heart of most estate planning decisions for everyday clients. Advisors can now focus on accomplishing these goals without the unnecessary complication of estate tax planning.

What ATRA Didn’t Do

ATRA is also significant for what it doesn’t include. President Obama’s budget proposals (including the recently-released budget proposal for 2014) continue to include provisions that would curtail the use of taxpayer-friendly planning techniques.  Specifically, the President would:

• Require a minimum term for grantor-retained annuity trusts (GRATs);
• Limit the duration of the generation-skipping transfer (GST) tax exemption;
• Include the assets of an intentionally-defective grantor trust in the grantor’s estate; and
• Impose additional consistency and reporting requirements relating to basis in property inherited from a decedent.

Whether any of these proposals will become law is a matter of speculation. It seems clear that the Obama administration will continue to propose these changes, especially in a time when the issue of tax reform pervades most political discussions. But for now, there are still opportunities for estate tax planning for taxpayers with estates that exceed the $5.25 million (2013) threshold.

ATRA: What the New Estate Tax Law Means to You is a post from: probate attorney Jeramie Fortenberry

Cuts to Social Security Benefits

President’s budget would cut Social Security by changing the index used to calculate inflation adjustments, including increases in Social Security payments. The current inflation-adjustment formula is based on the CPI for all Urban Consumers (CPI-U). The CPI-U is an index that measures prices paid by typical urban consumers on a broad range of products. According to the Treasury:

The CPI-U typically overstates the effects of inflation because it does not fully reflect changes in consumption patterns in response to relative price changes. The chained CPI-U (C-CPI-U) would account more fully for this substitution effect and therefore better reflect changes in the cost of living.

The President wants to ditch the CPI-U in favor of the C-CPI-U. Economists agree that a chained CPI is a more accurate measure of how people spend when prices rise. But adopting the C-CPI-U will lower the inflation rate that is used to calculate cost-of-living increases for Social Security recipients. These lower inflation adjustments for Social Security benefits will effectively reduce future payments to Social Security recipients.

Thirty Percent Minimum Tax on Millionaires

The President would impose a new minimum tax, called the Fair Share Tax (FST), on high earners. The FST targets itemized deductions, which disproportionately benefit high-income taxpayers. These deductions, coupled with preferential capital gains rates, can give high-income taxpayers a lower average tax rate than a lower-income, wage-earning taxpayer.  The President believes that restricting deductibility with an across-the-board minimum tax would make the tax system more progressive and distribute the cost of government more fairly among taxpayers.

The tentative FST equals 30 percent of AGI, less a credit for 28 percent of charitable gifts. The FST would be phased in linearly starting at $1 million of AGI ($500,000 in the case of a married individual filing a separate return). The FST is fully phased in at $2 million of AGI ($1 million in the case of a married individual filing a separate return).

Restrictions on Itemized Deductions that Exceed 20 Percent of AGI

Under current law, individual taxpayers can choose to itemize their deductions instead of claiming the standard deduction (currently $6,100 for individuals and $12,200 for married taxpayers filing jointly). Common itemized deductions include:

• Medical and dental expenses that exceed 10 percent of AGI (7.5 percent for taxpayers over age 65);
• State and local property and income taxes; and
• Gifts to charities.

In addition to itemized deductions, taxpayers can reduce their income by excluding certain types of income and claiming certain deductions in the computation of AGI (“above the line” deductions).

The administration believes that limiting these deductions will help close the tax gap. The President’s budget proposal would limit the tax value of certain deductions and exclusions from AGI and all itemized deductions for taxpayers in tax brackets that are 33 percent and above. That would hit individuals with income over $185,000 ($225,000 for married couples).

This new restriction would affect items that have generally considered tax-free. For example, the new rule would effectively impose a tax of up to 11.6 percent for tax-exempt interest and the value of employer-provided health insurance. Other targets include health insurance costs of self-employed individuals, interest on education loans, employee contributions to defined contribution retirement plans and IRAs, contributions to HSAs and Archer MSAs, and higher education expenses.

Restrictions on Contributions to Large Retirement Plans

Current law limits contributions to and benefits paid from different types of retirement plans. For 2013:

• The maximum amount permitted to be paid under a qualified defined benefit plan is $205,000 annually;
• The maximum annual contribution to a defined contribution plan is $51,000, with a separate $17,500 elective deferral limit;
• The maximum annual contribution to an individual retirement account or annuity (IRA) is $5,500, with an additional $1,000 for taxpayers who are over age 50.

The annual contribution limit for IRAs is applied by aggregating all of the taxpayer’s IRAs. But the limitation on accruals from defined benefit plans and the limitation on contributions are generally not aggregated.  This effectively allows taxpayers with multiple plans established by different employers to exceed the limits.

The Obama administration believes that the current rules do not adequately limit the extent to which a taxpayer can accumulate amounts through the use of multiple plans.  Under the proposed 2014 budget, taxpayers could make no further contributions or receive additional accruals from tax-favored retirement accounts that exceed the amount necessary to provide the maximum annuity permitted for a tax-free defined benefit plan under current law (the $205,000 limitation mentioned above).

In other words, under the President’s budget proposal, individuals with total retirement plan assets that exceed the threshold amount could no longer make tax-favored contributions to their retirement plans.  The threshold is based on the present value of a $205,000 for a 62-year-old (currently $3.4 million). Although the existing balance in the accounts could continue to grow, no additional contributions would be permitted.  If enacted, this proposal would effectively curtail the use of tax-favored retirement planning for wealthy individuals.

Loosening of Distribution Rules for Modest Retirement Plans

Under current law, the required minimum distribution (RMD) rules require participants in tax-favored retirement plans to start drawing distributions after reaching age 70½. The purpose of these rules is to prevent taxpayers from stretching the tax deferral by over-funding retirement and not withdrawing funds, leaving the accounts to accumulate tax-free for estate planning purposes.

The President’s budget recognizes that the RMD rules affect millions of senior citizens with only modest tax-favored retirement accounts. The budget explanation states that taxpayers with small retirement accounts are less likely to be motivated by estate planning purposes to leave funds to accumulate tax-free for the benefit of the next generation.  Under the President’s budget proposal, taxpayers with less than $75,000 in tax-favored retirement accounts would not be subject to the RMD rules.

Republican Response to the President’s 2014 Budget

As to be expected, top Republicans are less than enthusiastic about President Obama’s proposals. Senate Republican Leader Mitch McConnell has already called it “just another left-wing wish list” that “does not represent some grand pivot from left to center. It’s really just a pivot from left – to left.”

But some Republicans have also given a nod of approval to the President for at least proposing spending cuts. House Speaker John Boehner stated:

While the president has backtracked on some of his entitlement reforms that were in conversations that we had a year and a half ago, he does deserve some credit for some incremental entitlement reforms that he has outlined in his budget. But I would hope that he not hold hostage these modest reforms for his demand for bigger tax hikes.

To call this a measure of bipartisan support, though, would be unrealistic. It is likely that this budget will—like the President’s prior budgets—end up as a position statement with no real chance of becoming law. The continuing lack of bipartisan solutions signals a difficult road to tax reform.

Explanation of President Obama’s 2014 Budget is a post from: probate attorney Jeramie Fortenberry

• Retained Control – Unrecorded deeds allow the transferor to retain control of the property during his lifetime. Since the unrecorded deed isn’t a matter of public record, the transferor is still the record owner of the property.  If the deed stays in his possession, he can even destroy the deed if he changes his mind.
• Avoiding Probate – The recording of the deed after the transferor’s death is intended to avoid probate.  If it works (that’s a big assumption), the transfer will be treated as being effective when the deed was signed and the property won’t be included in the transferor’s probate estate.

Here in Florida, these two goals—retained control and probate avoidance—are easily accomplished with a Florida Lady Bird Deed (also called an enhanced life estate deed). But even in jurisdictions that do not recognize enhanced life estate deeds, using an unrecorded deed to avoid probate is still a bad idea. Here are a few reasons why.

Unrecorded Deeds Can Create a Cloud on Title

Under the laws of most jurisdictions, a deed is not effective until it has been properly signed and delivered.  The delivery requirement is important. Just signing the deed is not enough to complete the transfer.

In ordinary real estate transfers, the deed is delivered and recorded at the time of the conveyance.  But with pocket deeds, the deed is not recorded. There is no proof of delivery. This raises a number of questions: Was the deed delivered to the transferee at all? Can it be proved? Who is to say that the transferee didn’t find it after the transferor’s death?

Questions like these can create a cloud on title, meaning that title insurers will not write a policy on the property without some legal action to clear things up. The transferee would have every incentive to claim that the deed was delivered before the transferor died, and the transferor isn’t around to say otherwise. In these circumstances, title companies may be reluctant to simply accept the transferee’s word that the deed was properly delivered prior to the transferor’s death.

In some situations, a title company will simply presume that there was valid delivery. But conservative title companies may require a declaratory action to quiet title before it will issue a policy on the property.  An action to quiet title will convert the transferee’s statements regarding delivery to legal testimony in a declaratory action, after publication and notice to anyone who may claim otherwise. Only then can the title company be sure that there aren’t any competing claims to the property.

If a title company will not write a policy on the property without a declaratory action, the transferee’s title to the property is unmarketable. The transferee will be unable to sell, mortgage, or otherwise deal with the property until the title issue is resolved.  The legal fees for bringing an action to quiet title are usually more expensive and time consuming than proper planning on the front end.

Unrecorded Deeds Can Give Creditors a Lien on the Property

An unrecorded deed does not put third party creditors on notice that the property has been transferred. This means that the transferor’s creditors (including creditors of his or her estate) may put a lien on the property. This leaves the transferee open to a claim by the transferor’s creditors. If that happens, the transferee would need a legal action to deal with the lien.

Unrecorded Deeds Can Create Tax Issues

Assuming that the transferor does not have an estate that is taxable for Federal transfer tax purposes (i.e., assuming the transferor’s estate is worth less than $5.25 million under current law), it is usually better from a tax perspective for the transferor to hold onto the property until death. This will give the transferee a full stepped-up basis in the real estate, effectively erasing any appreciation that accrued while the transferor owned the property. This can result in a significant income tax savings. This tax planning opportunity forfeited when a pocket deed is signed during the transferor’s lifetime.

In addition, the transferor is required to file a federal gift tax return (Form 709) for any transfer of property that exceeds the annual exclusion amount (currently $14,000). Since most real estate is worth more than $14,000, the transferor is usually required to file this return when the pocket deed is actually signed. The hassle and expense of filing the Form 709 can be avoided by holding the property until death.

Unrecorded Deeds Don’t Always Avoid Probate

Unrecorded deeds don’t always avoid probate. Say, for example, that the recording laws change after the transferor signs the deed. This can make the deed unrecordable at a later date. Similar issues arise if the deed is misplaced, destroyed, or hidden by an interested party. Probate may be required to straighten out the botched conveyance, often at a much greater cost than a simple probate proceeding. These risks are simply not worth the perceived savings.

There’s a Better Way

If unrecorded deeds were the only way to allow the grantor to retain control over the property and still avoid probate, they may be worth the risk in very limited circumstances. But they aren’t the only way. Enhanced life estate deeds or revocable trusts can accomplish these same goals with less risk. There’s no reason to ever use a pocket deed as an estate planning tool.

Using an Unrecorded Pocket Deed to Avoid Probate is a post from: probate attorney Jeramie Fortenberry

Double taxation is a common problem when real estate is owned by a C corporation. When appreciated real estate is sold, the corporation will pay Federal tax at the corporate tax rates (which range from 15 percent to 39 percent).  Under the rules governing distributions from C corporations, the same income is taxed again at the shareholder level when it is distributed to the shareholders.

S corporations and limited liability companies can provide the liability protection of a corporation without the double taxation. If the business will own real estate, these “passthrough entities” are usually a better choice than a C corporation. But a few decades ago, limited liability companies were not widely accepted and S corporations were subject to more restrictions than they are now. Corporations were often used to hold real estate, creating a legacy of tax inefficiency.

When it comes to getting appreciated real estate out of a C corporation, there are no quick and easy solutions. But the tax problem usually gets worse if it is not addressed. The best time to deal with the issue is usually ten years ago; the second best time is now.

Fortunately, now may be the best time in years to move real estate out of a C corporation.  After several years of declining property values, we may be at the bottom of the real estate market. This gives taxpayers the opportunity to transfer real estate out of a corporation at a relatively low tax cost. If the business owners act now, future appreciation of the real estate as the market improves can escape double taxation.

There are three ways to deal with appreciated real estate owned by a C corporation:

1. Distribute the property in kind to the shareholders;
2. Sell the real estate to the shareholder or an unrelated party; or
3. Convert the C corporation into a subchapter S corporation.

This article will look at the tax consequences of the first two choices.  Later articles will deal with converting a C corporation to another form of business entity.

Distributing Appreciated Real Estate to Shareholders

One option is for the corporation to simply deed the appreciated real estate to one or more shareholders. The transfer is treated as a “deemed sale” that is taxable to both the corporation and the shareholders. At the corporate level, the distribution is treated as a sale to the shareholder for fair market value.[1]  To the extent that the fair market value exceeds the corporation’s basis in the real estate, the corporation will have taxable gain. The shareholders that receive the property will be taxed on the full amount of the distribution. To the extent that the corporation has current or accumulated earnings and profits, the distribution will be treated as a dividend.[2]

Whether this “deemed sale” treatment will be feasible depends on the circumstances. If the corporation has a low basis in the real estate due to depreciation deductions, the built-in gain may be substantial.  To make matters worse, there is no actual infusion of cash to the corporation in connection with the transfer. Unless the corporation has a cash surplus, this can leave a shortage of corporate funds to pay the taxes on the deemed sale.  In these situations, an in kind distribution may not be a viable alternative.

On the other hand, if the property has not appreciated substantially, or if the corporation has a net operating or capital loss to offset the corporation’s gain, the deemed sale may not create a significant tax problem. In that case, the shareholders may decide to “bite the bullet” and make the distribution now, before the real estate market rebounds.

Selling Appreciated Real Estate to C Corporation Shareholders or Third Parties

A second option is to actually sell the real estate. The sale of the real estate will be taxable to the corporation. But unlike the “deemed sale” treatment that applies to in kind distributions of real estate to shareholders, an actual sale will generate cash for the corporation to pay the tax incurred on the sale. Although the proceeds from the sale will ultimately be taxed when they are distributed, there is no immediate tax to the shareholders on the sale.

It will often make sense for a shareholder to purchase the property from the corporation and rent it back to the corporation. The shareholder will take a cost basis in the property, allowing the shareholder to take increased depreciation deductions. In some situations, depreciation deductions can help offset the rental income from the property.

Whether a sale of real estate will is a good alternative depends on the situation. At a minimum, the shareholder (or other buyer) must have the ability to fund the purchase.  And, like a distribution of real estate in kind, this transaction does not entirely avoid double taxation. The appreciation in the property will still be taxed twice: once to the corporation at the time of the sale and again to the shareholders when the proceeds are distributed.

As mentioned above, there is a third method of dealing with appreciated real estate owned by a C corporation: The shareholders can convert the C corporation into a subchapter S corporation. Unlike these first two alternatives, conversion to subchapter S status can completely avoid double taxation. This technique will be discussed in a later article.

How to Get Appreciated Real Estate Out of C Corporations is a post from: probate attorney Jeramie Fortenberry

George Washington’s Last Will and Testament

President Washington wrote his Last Will and Testament himself, without consulting any “professional character.” The will is dated July 9, 1799, less than six months before his death on December 14, 1799. He put his name at the bottom of almost all of the pages (still good practice to be sure that pages aren’t substituted).  A Schedule of Property was attached to the will. It included all of Washington’s property and assets not left to specific individuals (i.e, his residuary estate).

There were apparently two versions of Washington’s will.  From his deathbed on December 14, 1799, Washington asked his wife to bring him both versions of the will. After reviewing them, he asked her to safeguard one of them and throw the other in the fire.

Instead of leaving his wife only a widow’s portion of his estate, Washington’s will leaves his entire estate to Mrs. Washington during her lifetime. At Mrs. Washington’s death (which occurred on May 22, 1802), the estate was to be sold and distributed among various parties.

Washington’s will included a few philanthropic bequests. He was particularly concerned with the custom of sending American youth to Europe for education, “often before their minds were formed, or they had imbibed any adequate ideas of the happiness of their own.” He feared Europe had a corrupting influence on the youth, where they would acquire “not only habits of dissipation and extravagance, but principles unfriendly to Republican Government & to the true and genuine liberties of mankind; which, thereafter are rarely overcome.”

To accomplish his charitable goals, Washington left 50 shares in the Potomac Company to be used to endow a university in the Disctrict of Columbia, a goal that was never reached. He also left 100 shares in the James River Company for the use and benefit of what eventually became Washington and Lee University.

Washington named seven executors of his Last Will and Testament. The executors included Martha Washington (wife), George Washington Parke Custis (Martha’s grandson), and five of his nephews: William Augustine Washington, Bushrod Washington, George Steptoe Washington, Samuel Washington, and Lawrence Lewis.

Probate lasted for some time. The will was presented for probate on January 10, 1800. (The will was printed as a pamphlet a few days later and circulated throughout the country.)  The court appointed a group of appraisers to value the assets at Mount Vernon.  Although the appraisal was conducted fairly quickly (probably in 1800), the results weren’t filed with the court until 1810. The estate was not closed until June 21, 1847.

Abraham Lincoln’s Last Will and Testament

The most striking feature of Abraham Lincoln’s Last Will and Testament was its absence. He died intestate!

On the day of his death, Lincoln’s family contacted sitting United States Supreme Court Justice David Davis to assist with Lincoln’s final affairs. The telegram read: “Please come at once to Washington to take charge of my father’s affairs.  Answer.” Justice Davis complied and was appointed as administrator of Lincoln’s estate not long thereafter.

The Probate Lawyer Blog has a good summary of the estate proceeding. Unlike Washington’s estate, Lincoln’s final affairs were concluded quickly—his estate was finally settled in November 1867, less than three years from his death on April 15, 1865.

I find it interesting that neither man paid for professional assistance with his estate planning. Washington wrote his own will only a few months before his death; Lincoln didn’t have one. Perhaps the reluctance to pay lawyers for estate planning reaches even the highest office of the state!

The Estate Plans of George Washington and Abraham Lincoln is a post from: probate attorney Jeramie Fortenberry

2013 Estate Tax Rates is a post from: probate attorney Jeramie Fortenberry

So how do we resolve the problem?  Who gets what?  Here’s a step by step process to help you sort it out.

Step One: Make a List How the Deceased Person’s Assets are Titled

As discussed in our free probate guides (hint hint), it is important to start with a solid list of the decedent’s assets and how they are titled.  That will determine the need for probate and the rights of the various parties. If you don’t know what the assets are and how they are titled, you’re stuck.

Step Two: Remove All Non-Probate Assets From the List

Not all assets are probate assets. Many assets pass automatically to a survivor based on how the asset is titled. Common examples of “non-probate” assets include:

• Real estate that is owned jointly with rights of survivorship will pass to the surviving owner(s).
• Bank accounts that are jointly owned will pass to the surviving owners.
• Life insurance and financial accounts (bank accounts, brokerage accounts, CDs) that have valid beneficiary designations will pass to the surviving beneficiaries.
• Assets that are titled in a living trust will pass in accordance with the terms of the trust.

In most cases, if the stepmother is able to get to the assets, it’s because she has a right to them. That’s not a hard and fast rule (after all, there is still some good old fashioned theft going around). But keep in mind that third parties (like banks, realtors, and title companies) know when probate is required and when it isn’t. If they are giving the stepmother access to the decedent’s property, it is usually because she became the owner of the property at the decedent’s death.

In other words, if the stepmother is spending money from a bank account, it is usually because she is a joint owner or designated beneficiary on the account. Otherwise, the bank wouldn’t give her access to the account. Similarly, if she sells real estate, it is because the real estate was titled jointly with rights of survivorship. Otherwise, she wouldn’t have insurable title.  You get the picture. The ability to deal with the assets usually indicates ownership of the assets.

Step Three: Be Sure that You can Prove Ownership of Whatever is Left

Once you’ve made a list of assets, then subtracted out the non-probate assets, the assets that remain are assets of the estate.  These are the “probate assets” that are governed by the deceased person’s will (if he had one) or the intestacy laws (if he died without a will).

If the decedent had a bank account or parcel of real estate in his name alone, everything is straightforward. That property will pass under the will or through the intestacy laws to his heirs are beneficiaries.  The rights of the children and the stepmother in the property are easy to determine.  All that needs to be done is to choose the person to represent the estate, hire the probate attorney, and start the process.

But many times, all that is left after subtracting out the non-probate assets is miscellaneous personal property (household furnishings, etc.).  You then need to be able to prove who owns that property.  If dad and stepmother went to the local retail store and bought a big screen TV, who did it really belong to?  Can you prove in court that it was your father’s alone and not the stepmothers?  In most cases, the answer is “no.” This kind of factual difficulty makes it almost impossible to claim an interest in most personal property.

Step Four: Decide Whether it’s Worth It

If you’ve gone through the first four steps, you should have a list of assets and know about what they are worth.  You then need to compare the value of the assets with the cost of probate (or an alternative to probate) to determine whether it is worthwhile to deal with the estate in court.

For small estates, there may be an alternative to full estate administration that will make financial sense.  If a full administration is required, you will want to be sure that the net value of the assets (after subtracting out the debts) involved exceed the value of the decedent’s property.

The best way to compare cost to value is to talk to an attorney.  We offer a value pricing model that gives you an up-front fee quote.  With that information, you can make an informed decision about which type of probate proceeding is right for you.

Rights of Stepchildren to Assets of a Deceased Parent in Probate is a post from: probate attorney Jeramie Fortenberry

There are potentially millions of dollars at stake for people with taxable estates.  If Congress fails to act by the end of the year, the estate tax exclusion will drop from $5.12 million to $1 million, meaning that anyone with a taxable estate worth more than $1 million could be subject to estate tax. At the same time, the estate tax rate could increase from 35 percent to as high as 55 percent, taking more than half of the estate.

The taxable estate includes many items that people don’t normally think of as assets, such as life insurance. By the time these assets are factored in, a $1 million exclusion would hit a much larger portion of the population than a $5 million exclusion.  This has many moderately-wealthy individuals on pins and needles as we get closer to 2013.

Given the rampant speculation about what could happen, I thought I’d throw my guesses in the hat.  But they are just that – guesses. Educated guesses (hopefully), but still guesses.  With that warning aside, here are my thoughts.

I Don’t Think We Will Return to a Pre-EGTRRA Estate Tax Environment

The Taxpayer Relief Act of 2010, which was enacted in late December 2010, gave us the current $5 million exemption, 35 percent estate tax rate, and portability of the deceased spouse’s unused applicable exclusion amount, among other things.  But that law wasn’t a new law as much as a modification of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

EGTRRA (as amended and extended by the Tax Relief Act of 2010) was built to self-destruct if not extended by Congress. As a result, if Congress doesn’t act by the end of the year, in 2013 we will return to the law that was in effect prior to EGTRRA.  The federal exclusion amount will drop to $1 million, the maximum tax rate will rise to 55%, and portability will disappear.

Thankfully, I think this is the least likely alternative. I have followed the estate tax dialog fairly closely, both in 2010 and this year. I don’t hear a credible voice calling for a return to pre-EGTRRA law.

In an all-Democrat Congress, the exclusion would likely be set at $3.5 million with a 45 percent rate; in an all-Republican Congress, the estate tax would likely be repealed. We may disagree about which of these is correct on policy grounds. But, no matter which side you are on, I think these are the best and worst case scenarios and that the solution will fall somewhere in the middle. There are simply no credible advocates for a $1 million exclusion and a 55 percent maximum rate.

Of course, this assumes at least some degree of Congressional cooperation.  Congress could end up deadlocked in political bickering, in which case we would return to pre-EGTRRA law by default.  If that happens, it wouldn’t be because either party wanted it, but because they couldn’t reach a suitable compromise.

I have failed to appreciate the full extent of Congress’s ineptitude in the past.  I expected Congress to act before the end of 2009 and would have bet against the full repeal of the estate tax for 2010. I was wrong then, and I could be wrong now. But I just don’t see this as a real likelihood. I believe that Congress will act prior to year end.

Two More-Likely Scenarios

Given that I don’t think that we will return to pre-EGTRRA law, I see two likely scenarios: Congress defers a decision by extending the current law ($5.12 million exclusion, 35% tax rate) into 2013, or Congress lowers the exclusion to $3.5 million and raises the maximum rate to 45 percent.

The possibility of a $3.5 million exclusion and a 45 percent tax rate has been a favorite of Democrats in the past and has been included in President Obama’s budgets.  I don’t rule that out as a possibility, but I think the extension of the current law is the most likely.  The estate tax debate is part of a much larger dilemma about how to overhaul our tax code, and there’s not bipartisan consensus on that topic.  In situations like this, history has shown a Congressional penchant for procrastination. Kick the can down the road, we’ll figure it out later.  That’s what I think will happen in December.

The State of the Estate Tax – Thoughts for December 2012 is a post from: probate attorney Jeramie Fortenberry

Florida Statutes Section 319.29(1)(b) is very specific that formal estate administration is not required for transfer of ownership of a motor vehicle or mobile home.  In the context of intestate Florida estates, the statute provides:

When the application for a certificate of title is made by an heir of a previous owner who died intestate, it shall not be necessary to accompany the application with an order of a probate court if the applicant files with the department an affidavit that the estate is not indebted and the surviving spouse, if any, and the heirs, if any, have amicably agreed among themselves upon a division of the estate.

This rule allows the transfer of assets by affidavit if the deceased owner did not leave a will.  In that case, the application will include:

• The certificate of title or other satisfactory proof of ownership;
• The completed application for the certificate of title;
• A statement that the estate is not indebted; and
• A statement that the surviving spouse, if any, and the heirs agree about how the estate should be divided.

If these requirements are met, the automobile or mobile home can be transferred without a probate proceeding.

Similar rules apply if the decedent had a valid Florida Last Will and Testament.  Florida Statutes Section 319.29(1)(b) continues:

If the previous owner died testate, the application shall be accompanied by a certified copy of the will, if probated, and an affidavit that the estate is solvent with sufficient assets to pay all just claims or, if the will is not being probated, by a sworn copy of the will and an affidavit that the estate is not indebted.

Although the statute doesn’t say who should file the application, it is usually the job of the person who would inherit the automobile or mobile home under the will.  The application will include:

• The certificate of title or other satisfactory proof of ownership;
• The completed application for the certificate of title;
• If the will is being probated, a certified copy of the will and an affidavit that the estate is solvent; or
• If the will is not being probated, a sworn copy of the will and an affidavit that the estate is not indebted.

There isn’t a limit on how many cars or mobile homes can be transferred without probate using the affidavit procedure, but note the requirement of a sworn statement that “the estate is not indebted.”  This means that the transfer without probate will be unavailable if the decedent had any debts.  In that case, the heirs or beneficiaries must either pay the debts in full before filing the affidavit or proceed with formal administration to deal with creditor claims.

The affidavit is usually filed through the county tax collector’s office.  The tax collector’s office can provide you with the forms and instructions on how to transfer title. Once the affidavit is complete, you can leave it with the tax collector’s office, along with the applicable fee.  The tax collector’s office will process the affidavit with Department of Highway Safety and Motor Vehicles.

How to Transfer of Automobile or Mobile Home without Probate in Florida is a post from: probate attorney Jeramie Fortenberry

These changes, which would require 60 percent of the vote to pass, deal with some heavy issues, such as abortion rights and funding and religious freedom. But property taxes appear to be top-of-mind – 4 of the 11 proposed amendments deal with changes to the Florida homestead laws. Here’s a quick rundown of the proposed changes to Florida homestead protection:

Amendment 2: Veterans Disabled Due to Combat Injury; Homestead Property Tax Discount

Florida law currently provides increased homestead benefits for Florida resident that are disabled in military combat. Disabled veterans are given a reduction in property taxes that is based on the veteran’s disability, as determined by the U.S. Department of Veterans Affairs.  Amendment 2 would extend the protection to individuals who were not Florida residents when they entered the military.

Amendment 4: Property Tax Limitations; Property Value Decline; Reduction for Nonhomestead Assessment Increases, Delay of Scheduled Repeal

Among the many benefits of qualification for Florida homestead is a 3 percent limitation on property tax increases under the “Save Our Homes” legislation.  No matter how much a homestead may increase in value, the tax-assessed value cannot increase more than 3 percent over the prior year’s value.

The Save Our Homes cap only applies to homestead property.  Non-homestead property, such as rental or commercial real estate, is not covered by the cap. Amendment Four would extend protection to these non-homestead properties by capping the annual increase at 5 percent.

Amendment Four also provides additional benefits to new home buyers. Under the Amendment, new home buyers would receive a 50 percent exemption on the value of their homestead property for the first year of ownership.

Amendment 9: Homestead Property Tax Exemption for Surviving Spouse of Military Veteran or First Responder

Amendment 9 would provide tax relief to spouses of military members or first responders that died in the line of duty by allowing the Florida legislature to totally or partially exempt the surviving spouse’s homestead property from taxation.

Amendment 11: Additional Homestead Exemption; Low-Income Seniors Who Maintain Long-Term Residency on Property; Equal to Assessed Value

Amendment 11 provides additional homestead benefits for senior citizens that have lived in their home for at least 25 years.  The additional homestead exemption would equal the assessed value of the property. To qualify:

• The property must be worth less than $250,000.00;
• The homeowner must have legal or equitable title to the property;
• The homeowner must have used the property as permanent legal residence for 25 years;
• The homeowner must be age 65 or older; and
• The homeowner’s income must be less than $27,030.00.

If these conditions are satisfied, the county or municipality that provides the exemption must pass a local government ordinance to implement the law.  The exemption only applies to counties and cities that already offer an exemption for low-income seniors.

Proposed Amendments to Florida Constitution Would Extend Homestead Benefits is a post from: probate attorney Jeramie Fortenberry

Probate Court (Photo credit: Josh Michtom)

A few weeks ago, Mississippi Chancery Judge Larry Primeaux published a cautionary blog post about the recent increase in judicial oversight of the Mississippi probate process. According to Judge Primeaux, “chancellors across the state are approaching zero tolerance for sloppy handling of estates, guardianships and conservatorships.”

As Judge Primeaux notes, the Mississippi Chancery Courts (equivalent of probate courts in other states) are the last line of defense to protect the parties who stand to lose if an estate is mishandled.  In this model:

• The personal representative (executor or administrator) of the estate is responsible to do the right thing;
• The probate attorney is responsible to advise the personal representative about how to do the right thing (and what not to do); and
• The court is responsible to be sure that the right thing gets done.

So what happens when the system fails?

Sometimes not much.  Many inadvertent mistakes can be corrected with a little time and effort.  But when intentional wrongdoing occurs, the results often can’t be undone.  In that case, the parties with an interest in the estate – the beneficiaries, heirs, and creditors – can be left left with little hope of recovery.

I recently closed an estate that had been opened by one of the attorneys mentioned in Judge Primeaux’s post.  Thankfully, no funds were missing. But the estate had been mishandled from day one.  Clear statutory requirements were simply ignored. There’s a good chance that the assigned chancellor would have caught these mistakes before the estate was closed. I caught them first and was able to clean things up and settle the estate.

But where does the blame belong when no one catches the problems with the estate?  I’m glad to hear that the judiciary is tightening up fiduciary oversight, but can we expect our judges to catch every mishandled estate? Can we expect clients to always do the right thing, especially when many of them don’t really understand their fiduciary responsibilities?  Or can we expect attorneys to always police the actions of their clients?

Perhaps the blame lies not with the various actors but with the system itself. No legal system is perfect, but that doesn’t mean that improvement is impossible. Sometimes a naïve question or two can advance the status quo.  Here are a few humble suggestions that I think would improve the current Mississippi probate system.

Require Basic Client Education

Attorneys should be required to provide their clients with a basic, written overview of the Mississippi probate process and their fiduciary responsibilities. The client should also have the opportunity to ask any questions up-front.  This initial review need not be a long, drawn out discussion or even a face-to-face meeting.  But the client should have baseline expectations for how the probate process progresses and should know the dos and don’ts of Mississippi probate and estate administration.

Once the client and attorney have discussed the written overview, they should each sign a statement that the required material (which should be uniform across the state) has been reviewed and understood.  This statement should be filed with the court.  This lets the judge know that the client has been informed of the basics.

In my experience, most clients want to do the right thing but are often confused about their role.  This requirement would clear up most of this confusion.   There will always be bad actors – clients who simply disregard the rules.  A basic education requirement would help ensure that the client was at least aware of his or her responsibilities.

Use Action-Specific Checklists

Many of the motions that are filed in a Mississippi estate administration are routine.  The legal requirements are clear.  The attorney follows the rules, the judge approves the motion.  Simple as that, right?

Well, unfortunately quite a bit slips through the cracks. For example, I recently took over a case where the original will had not been submitted to the court.  The client had the original will, but the attorney had not advised the client of the need to present it to the court.  The judge had admitted the will to probate without having the will or any explanation for its absence.

Oversights like this may be less common if the attorney was required to submit a checklist along with the petitions he submits to a judge.  If, for example, the attorney who opened the estate in the above example had to fill out a checklist certifying to the judge that the original will was attached, chances are that the attorney or the judge would have caught the mistake.

I use checklists internally to help keep me on track.  If, for example, I want to ask the judge to approve a sale of real estate, I know that the court will want to know whether any creditor claims were filed, whether the sale of real estate is necessary to pay debts of the estate, and whether all parties in interest have been notified and/or have consented to the sale.  Keeping a checklist of these items helps me be sure that I give the judge what he or she needs to approve my petition.  There’s no reason for the judge not to have the benefit of these checklists as well.

There are some situations where a checklist would do no good.  Not all estates fit into a nice pattern.  But most estate matters that come before judges are routine.  Simple checklists associated with the most common matters would help judges and attorneys to be sure that everything is in order before the judge considers a motion.

The Problem of Mishandled Mississippi Probate Matters is a post from: probate attorney Jeramie Fortenberry

William Hogarth: A Rake’s Progress, Plate 1: The Young Heir Takes Possession Of The Miser’s Effects

In our Mississippi probate practice, we sometimes get calls from heirs or beneficiaries who are anxious to close or settle an estate. Often the estate proceedinghas stalled, and the heirs simply want to know why.

There are many causes for delay in closing estate, some legitimate (e.g., assets to gather or creditor issues to resolve), some not (e.g., unresponsive personal representative, inattentive attorney). In this situation, the heir or beneficiary has two options to force someone to settle a Mississippi estate:

• Compel a Distribution – If at least 6 months have passed from the date that letters of administration or letters testamentary were issued, the heir can petition the court to compel a distribution from the estate. Notice must be given to the personal representative and to all of the other heirs of the estate.  The court can then order the distribution.
• Compel the Closing of the Estate – The heir or beneficiary can petition the court to order the personal representative to wind up the estate.  This essentially shifts the burden to the personal representative to demonstrate why the estate can’t be closed.

Failure to promptly close an estate is serious business.  Mississippi law provides:

If an executor or administrator improperly delay making a final settlement, he shall be summoned to show cause why a final settlement should not be made. On the return of summons executed, if a final settlement be not made or cause shown why it cannot then be made, the court may fine such delinquent in any sum not exceeding five hundred dollars and imprison him not exceeding three months, for a contempt. Any executor or administrator whose letters have been revoked may be dealt with in like manner for failure to make settlement.

In other words, improper delay in closing the estate can result in a fine of up to $500.00 and three months in jail. This is why we sometimes overstress the importance of taking care of estate business in a timely manner.  Our clients understand their responsibility to move things along.  But when someone else is handling the estate, these provisions can help nudge them toward final settlement.

How to Force Someone to Close or Settle an Estate in Mississippi is a post from: probate attorney Jeramie Fortenberry

Barack Obama signing the Patient Protection and Affordable Care Act at the White House

With the Supreme Court’s ruling that the Patient Protection and Affordable Care Act, informally called Obamacare, is constitutional, it will continue into effect in 2013.  Among the many provisions of the massive law is a 3.8 percent Medicare surtax on investment income.

While the recent Congressional banter has centered on whether to extend the Bush tax cuts, this Medicare surtax has not been widely discussed. Even if lawmakers extend the Bush tax cuts for 2013 (I think that they will), this new 3.8 percent tax will effectively raise the top tax rate on capital gains and dividends to 18.8 percent. If the Bush tax cuts do expire, the capital gains rate will increase to $23.8 percent in 2013.

About the Medicare Surtax

The new Medicare surtax is assessed on the lesser of (a) net investment income or (b) the excess of modified adjusted gross income (adjusted gross income plus foreign earned income) over a “threshold amount.” The threshold amount for married taxpayers filing jointly is $250,000.00.  For married taxpayers filing separately, it is $125,000.00, and for everyone else it is $200,000.00.

In other words, if your income is more than $200,000.00 for a single person, $125,000.00 for a married person that doesn’t file jointly, or $250,000.00 for a married couple filing jointly, you can expect to pay the tax.  It will be assessed on your net investment income or the excess of your modified adjusted gross income over the applicable amount.  If your income isn’t over the threshold that applies to you, you don’t need to worry about the tax.

What You Can Do About It

If the Medicare surtax applies to you, there are a few steps that you can take now to reduce your tax liability beginning in 2013. Here are a few:

• Sell appreciated assets – If you have assets that you are thinking of selling, do it in 2012.  That will save 3.8 percent Medicare surtax, which doesn’t apply until January 1, 2013.
• Think about your real estate – The surtax could apply to your profit from sales of any real estate that is not a personal residence.  Any depreciation will increase the amount owned. If you are considering selling the real estate soon, do it in 2012.

• Talk to your investment adviser about your investment portfolio – Will deferring income until 2013 push you over the threshold? Given that withdrawals from regular IRAs raise your adjusted gross income, should you consider a Roth conversion this year? Could the demand for tax-exempt bonds increase given that interest on them is exempt and won’t increase AGI?  These are all questions to discuss with your adviser.

No matter what happens in November, 2013 is on schedule to have the highest tax rates that we’ve seen in the past several years.  Begin taking steps now to prepare for it.

Obamacare: The Upcoming Medicare Tax Hike and What to Do About It is a post from: probate attorney Jeramie Fortenberry

Tax (Photo credit: 401(K) 2012)

It’s that time of year when interest in Mississippi tax sales seems to heat up as investors large and small gather in Mississippi courthouses to seek their fortunes.  Given that my prior posts on Mississippi tax sales seem to attract attention, I thought I would provide a basic explanation of the process in Q and A format.

This post discusses the basics of the actual tax sale process.  A future post will talk about clearing title to property acquired in a tax sale if the purchase price remains unpaid, as well as providing a few practical Mississippi tax sale investment tips.

When are Property Taxes Due?

Mississippi law provides that all outstanding ad valorem (property) taxes “shall be due, payable and collectible by the tax collector and shall be paid on or before the first day of February next succeeding the date of the assessment and levying of such taxes.”  In other words, taxes are paid in arrears and are due by February 1. If the taxes aren’t paid by then, they become delinquent.

What Happens if Property Taxes Are Not Paid?

Mississippi law provides: “If any unpaid balance exists on August 1, then the lands shall be sold at the land sale on the last Monday in August for said unpaid balance.”  These tax sales are held annually on the last weekend in August across the state.

To Whom are Property Taxes Sold at a Mississippi Tax Sale?

At a tax sale, the property tax obligations are sold to the highest bidder through a public auction.  Specifically, the law provides:

[The] tax collector shall proceed to sell, for the payment of taxes then remaining due and unpaid, together with all fees, penalties and damages provided by law, the land or so much and such parts of the land of each delinquent taxpayer to the highest and best bidder for cash as will pay the amount of taxes due by him and all costs and charges.

Bidding starts at a minimum bid amount equal to the outstanding taxes and unpaid costs.  If more than one person wants the tax lien, they can bid against each other through the auction process. The high bidder gets to purchase the tax obligations.

What is the Effect of a Purchase at a Mississippi Tax Sale?

The purchaser at a tax sale receives a “tax lien certificate,” which is basically a receipt to show that he or she paid the outstanding property taxes.  The tax lien certificate gives the purchaser the priority lien on the property. This gives an economic interest in the property, but not the right to possession. The right to possession requires the issuance of a tax deed, discussed below. Until then, the tax lien certificate is similar to a mortgage on the property.

What Happens if No One Bids on the Taxes at a Mississippi Tax Sale?

If no one purchases the outstanding taxes, the local taxing authority will strike the property off to the State of Mississippi.  If the property is not redeemed, it is placed in the State of Mississippi’s inventory of forfeited properties, where it can be purchased by private parties.

What are the Rights of a Property Owner Following a Mississippi Tax Sale?

After a tax sale, the property owner is given a two-year redemption period. During that time, the property owner can pay the delinquent taxes and all interest, penalties, and other costs that may be due.  Specifically, the owner must pay:

[The] amount of all taxes for which the land was sold, with all costs incident to the sale, and five percent (5%) damages on the amount of taxes for which the land was sold, and interest on all such taxes and costs at the rate of one and one-half percent (1- 1/2%) per month, or any fractional part thereof, from the date of such sale, and all costs that have accrued on the land since the sale, with interest thereon from the date such costs shall have accrued, at the rate of one and one-half percent (1- 1/2%) per month, or any fractional part thereof.

In other words, the owner must pay taxes at the rate of 1.5 percent per month (18% annually) and all other costs associated with the sale.  This amount is paid regardless of the amount of the purchaser’s bid at the tax sale.  This means that if the purchaser pays more than the outstanding taxes, his or her return will be less than the full 1.5 percent per month.

What Happens to the Tax Lien Certificate if the Owner Pays the Taxes?

If the owner pays all outstanding taxes within the two-year redemption period, the clerk will issue a tax sale release.  This release terminates the interest that the tax lien purchaser acquired in the tax sale.

A tax sale release will stop the purchaser from acquiring a possessory interest the property.  Instead, the tax lien purchaser will receive back an amount equal to the unpaid taxes, plus interest at a rate of 1.5 percent per month.  The result: owner will receive the property back free and clear and the tax lien purchaser gets an 18 percent annual return on their investment.

What Happens if the Owner Does Not Pay the Taxes Within the Redemption Period?

If the owner does not pay the taxes within the two-year redemption period, the tax purchaser can request the issuance of a city or county tax deed, depending on whether the city or the county auctioned the taxes.  Technically, the tax deed gives the tax lien purchaser ownership of the property.  In practice, though, things are rarely so clear cut. We’ll get to that in the next article.

Mississippi Tax Sales and Tax Lien Certificates: A Primer for Investors is a post from: probate attorney Jeramie Fortenberry

Letters Testamentary and Letters of Administration aren’t really “letters” in the common sense of the word. They are documents issued by the court as part of a probate proceeding. The purpose of these documents is to prove to third parties that the court is overseeing the estate. If the deceased person had a valid Mississippi Last Will and Testament, the document is called “Letters Testamentary.” If there is no will (i.e., if the estate is intestate), the document is called “Letters of Administration.”

As an initial matter, it is important to determine whether Letters Testamentary or Letters of Administration are really necessary. Often the client is dealing with a low-level bureaucrat at a financial institution who isn’t familiar with the nuances of Mississippi law. In some circumstances, an alternative to probate could make Letters of Administration or Letters Testamentary unnecessary.

If Letters are necessary, then the estate will need to go through probate. Although the Letters are issued fairly early in the process, the client can’t stop there. Once the estate is opened with the court, the client will have taken an Oath to fully administer the estate. This requires creditors to be notified, inventories to be filed, and further documents to be presented to the court to close the estate. Failure to diligently see the estate through to a conclusion will make the client liable to the court.

Since the Mississippi Chancery Court Rules require an attorney to represent all estates in Mississippi probate proceedings, an attorney will need to be consulted early to be sure that the right documents are filed. The documents required to open a Mississippi estate differ depending on whether the estate is testate or intestate.

Opening a Testate Estate

The following documents are typically required to open a testate estate in Mississippi:

• The original Last Will and Testament (or proof of why a photocopy should be accepted due to the unavailability of the original)
• A Petition for Probate of Will and Issuance of Letters Testamentary
• An Affidavit of Subscribing Witness (Proof of Will) (Most attorneys now include this as part of the will itself, so it is not usually necessary to file this as a separate document)
• A Civil Cover Sheet (some counties have other specific probate worksheets that they prefer)
• Waivers and Joinders by each person named in the will.

Once these documents are presented to the court, the attorney will usually attend a hearing to present the Petition for Probate of Will and Issuance of Letters Testamentary to the judge. If everything is in order, the judge will sign an Order admitting the will and providing for the issuance of Letters Testamentary upon oath and, if required, bond of the executor.

After the Order is issued, the executor will sign and the attorney will file an Oath in the form required by Miss. Code Ann. § 91-7-41.  If bond is not waived in the will or is otherwise required by the court, a fiduciary bond must be issued and filed as well.  The attorney can then present Letters Testamentary to the Chancery Clerk for issuance. The Letters Testamentary serve as proof that the executor has been duly appointed to act on behalf of the estate.

Opening the Intestate Estate

The documents differ slightly for an intestate estate due to the fact that there is no will to prove. An heirship suit (discussed above) is also necessary to identify the persons who will share in the decedent’s estate. Although the heirship suit can be brought before or during the estate administration, it is usually initiated at the time that the estate is opened. The following documents are usually required to open an intestate estate:

• A Petition for Grant of Letters of Administration
• A Petition to Establish Heirs
• A Civil Cover Sheet (some counties have other specific probate worksheets that they prefer)
• Waivers and Joinders by each heir at law

After the initial documents are filed, the opening of an intestate estate is procedurally similar to the opening of a testate estate.  The biggest difference is the lack of a will to waive the requirement of posting bond. In many cases, bond may still be waived if there are no assets other than real estate or if all heirs at law are adults and join in the petition to request that bond be waived.

How to Get Letters Testamentary or Letters of Administration in Mississippi is a post from: probate attorney Jeramie Fortenberry

Mississippi recognizes two forms of estate administration: solemn form and common form.  The two types of proceedings are distinguished by the type of notice that is provided to the interested parties.  ”Interested parties” would include the beneficiaries listed in a Mississippi Last Will and Testament and possibly the spouse if he or she is left out of the will.  For an intestate estate, “interested parties” would include a person’s heirs at law.

A common form probate is an informal, one-sided proceeding in which the executor presents the will for probate without formal notice to interested parties.  This avoids the delay associated with having to arrange for legal service of formal notice on each party.  The attorney will usually present affidavits of subscribing witnesses (if no self-proving affidavit is attached to the will) and waivers and joinders from each interested person (heirs of an intestate estate or beneficiaries of a will).

Probate in common form is popular due to its relative brevity. Most Mississippi probates are done in common form.  There is a downside, though: probate in common form is not binding on anyone who is not a party to the proceeding. Interested parties have two years from the conclusion of the probate proceeding to contest the probate proceeding. This leaves the estate open to a challenge for a two year period.

If a contest is likely, many attorneys will bring a second form of proceeding, called a solemn form probate.  In a solemn form probate, the attorney will name all interested persons as parties to the proceeding and serve them with formal notice.  A trial may be held to establish the validity of the decedent’s will.

Solemn form probate proceedings are binding on anyone that is made a party.  When the proceeding ends, that’s it. The interested parties are not allowed to bring a contest at a later time because they have already had their day in court. This can bring finality to the probate. But because of the additional work required, solemn form probate proceedings can be much more expensive than common form probate proceedings.

How Long Does a Person Have to Challenge or Contest a Will in Mississippi? is a post from: probate attorney Jeramie Fortenberry

I’ve been working on a pot trust for a client and thought I’d share the clause I’m drafting. This particular client wants the trust assets to be held in trust until all of his children have either graduated from college and had two years of graduate education or have reached age 26. One of the children has already been in drug rehabilitation, so the client wants to be sure that the pot trust isn’t drained to provide for that child’s drug problems. He wants to do this by capping the total amount of drug and alcohol related expenses to $20,000.00 for any one child. Here’s the clauses that I’m using:

4.01       Management of Trust for the Benefit of My Children.

Until all of my children have either completed all undergraduate education and at least two years of graduate education or attained the age of twenty-six (26) years, whichever occurs first, the Trustee shall from time to time pay to or use and apply for the benefit of any child of mine so much of the net income of this Trust and principal thereof, in such amounts and proportions, equal or unequal, as the Trustee may deem necessary for the health, support or maintenance of such child in accordance with his or her standard of living prior to my death, and for the education of such child at any available level and at any formal educational institution, whether or not accredited, including college and postgraduate schools; provided, however, that in no circumstances shall my Trustee make more than Twenty Thousand Dollars ($20,000.00) in aggregate distributions to pay for any single child’s care in alcohol or drug rehabilitation facilities or programs.  In each case, the Trustee shall take into consideration other income and assets of such child and trusts of which he or she is a beneficiary and which are known to the Trustee.  The Trustee (i) may pay all or part or none of the net income or principal of the Trust or both; (ii) may make unequal payments; (iii) may from time to time exclude one or more of such persons from payments hereunder; and (iv) may make payments to any such person who is living at the time of such payments even though such person is not living at the time of the creation of the Trust.  Any part of the net income of the Trust not so paid or used shall be accumulated, added to and made a part of the principal of such Trust.

4.02       Distribution of Trust.

As soon as practical after the date upon which all of my children have either completed all undergraduate education and at least two years of graduate education or attained the age of twenty-six (26), whichever occurs first, the Trustee shall divide the Trust into as many shares as there are children of mine then living, and one share for the then living descendants, collectively, of each deceased child of mine (a “Child’s Share”).  The Trustee shall distribute, outright and free of trust, one Child’s Share to each child of mine and one share to the living descendants, collectively, of each deceased child of mine, the lineal and adopted lineal descendants of any child who predeceases me to take the share such deceased child would have taken if living, per stirpes and not per capita, subject to the provisions of Section 4.03 hereof.

4.03       Trust for Descendant of a Deceased Child of Mine.

If any part or share of the Trust becomes distributable to a descendant of a deceased child of mine who is under the age of twenty-six (26) years, then though his or her share shall be vested in him or her, the Trustee may, but shall not be required to, continue to hold the same in trust with all of the powers and authority given to the Trustee with respect to other trust property held hereunder, until such descendant attains the age of twenty-six (26) years.

So what do you think? Is it helpful? Any room for improvement? Let me know in the comments below.

Sample Pot Trust Form Clauses is a post from: probate attorney Jeramie Fortenberry