At the risk of sounding self serving, today I’m going to relate to you a story that occurs in my office too frequently. Regular readers of my column will recall that I commonly write how each state’s tax, trust and estate laws are different, and therefore upon becoming a Florida resident, one should visit with qualified estate planning counsel to ensure that one’s plan is up to date.

I commonly give the same advice to my clients who are moving away from Florida. When you have Florida documents but are moving to a different state, I tell my clients to have their documents reviewed in their new home state. If you fail to do so, you are running the risk of adverse legal and/or tax consequences.

Back to my story. “Jerry” comes in to see me just to make sure that everything in his estate plan is okay. “My attorney up north is also licensed in Florida,” he said, “and my attorney tells me that my documents are just fine.”

Jerry is in a second marriage. He wants his Florida home to be held in trust for his wife’s lifetime, and then at her death he wants it to revert back to his children, not his wife’s family. He has declared homestead status on his Florida home. Jerry does not have a revocable trust “because my attorney up north tells me those are just schemes Florida lawyers use to make money.”

Jerry’s will provides that his assets are held in a Marital Trust for his wife’s lifetime, and then at her death it reverts to his children. The trust also says that it will pay the mortgage and other expenses associated with the residence for his wife’s lifetime.

Jerry’s other major assets include his IRA account. This is the source of most of Jerry’s liquid assets that he uses to live off of and that he intends to be the source of the funds to maintain the home for his wife for the rest of her life. Since he doesn’t want her to be able to roll over his IRA (thereby making it hers and allowing her to designate the IRA beneficiaries at her death) he has designated his estate as the beneficiary to the IRA.

“My attorney up north told me that the IRA will funnel into the Marital Trust that is created in my will and will be held like my house is held.”

I identified a number of issues with Jerry’s planning. The first issue concerns the descent and devise of the Florida homestead. Under Florida law, absent a valid nuptial agreement where the spouse waives her descent and devise rights to the home, she must be the beneficiary in “fee simple”. In other words, she must have full and clear title to the home through the disposition in Jerry’s will.

Even though Jerry’s will gives her an equivalent “life estate” in the home, it is not enough under Florida law. Consequently, Jerry’s devise of the Florida home is invalid. When one has an invalid devise under Florida law the spouse receives a “life estate” in the home and Jerry’s kids get the remainder interest.

While this might seem consistent with Jerry’s intent, it may turn out problematic. The trustee of Jerry’s testamentary trust inside of Jerry’s will has no control over the home. Therefore the provisions about who is to pay for its taxes, expenses and maintenance during his wife’s lifetime might be called into jeopardy. Further, if the home is sold during his wife’s lifetime, she is entitled to an actuarial determined value of what her life interest is in the sale, and the kids get the remainder interest. She walks with part of the sales proceeds. Again this is against Jerry’s intent as he expressed to me.

Further, the home can’t be sold without all of the interested parties signing off on the deed. My experience is that this can become a huge problem, even if all in the family agree that the home should be sold.

The second issue rests with the Marital Trust itself. Assuming that the invalid devise can be cured by a nuptial agreement, the trust is drafted to comply with the federal estate tax laws. As such, the home is called an “unproductive asset” in that it doesn’t generate any income. Therefore, Jerry’s wife can make demand on the trustee of the Marital Trust to sell the home and to invest in income producing assets. This flies in the face of Jerry’s intent that he wants his children to inherit the home one day.

Third, the IRA planning could use some work. While its true that naming Jerry’s estate as the beneficiary of the IRA limits his wife’s ability to redirect the remainder of the IRA away from Jerry’s children one day, the act of naming the estate as the beneficiary of the IRA results in the acceleration of the recognition of income – and the payment of income tax.

You may know that an IRA can grow tax deferred and can be withdrawn over the lifetime of a beneficiary – these are the general rules when you have an “inherited IRA.” When you name a trust (such as a Marital Trust) as the beneficiary of an IRA – and that trust is inside of a will – generally speaking you are not going to be able to comply with the rules that allow the beneficiary of the trust to withdraw the money over her expected lifetime. These rules are known as the “identifiable beneficiary” rules. It seems counter intuitive that Jerry’s wife won’t qualify as an identifiable beneficiary under his testamentary Marital Trust, but that is likely to be the case. I’ll leave that discussion for another column.

When you don’t have an “identifiable beneficiary” then the net result is that all of the income that hasn’t been taxed will be taxed in the year following Jerry’s death. Because that income will be accumulated in the Marital Trust for his wife’s benefit (as opposed to an outright distribution to her – which is the point of a Marital Trust) – the income will be taxed at higher trust income tax rates. Accumulation trusts have a “collapsed” income tax bracket resulting in most income (for substantial trusts) being taxed at the highest marginal tax rates.

Jerry’s planning goals can be accomplished, by the way. It will take a combination of revocable trusts, nuptial waivers and a retirement plan trust to achieve them.

Despite his licensure in Florida, since Jerry’s attorney practices primarily in a northern state he may not keep up with the nuances of Florida law. That’s why I think it’s wise to investigate estate and tax planning issues with competent Florida counsel when you become a Florida resident.

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