Despite the pain (and cost) that not having an estate plan will cause your heirs, fully two-thirds of Americans don’t even have so much as a will if they got hit by a bus.
There are many reasons why people fail to create an estate plan. None are good.
So for this week’s podcast, I invited Spiro Verras, a Florida estate planning attorney, to share key things you need to know about creating a proper estate plan.
- Elements of a good estate plan
- How probate works step by step, how long it takes, and how much it costs
- At what point in your life you should write a will
- Differences between wills and trusts
- Legal formalities of wills and trusts
- How wills and trusts change the probate process
- What DIY-ers need to know before drafting their own estate planning docs
- Special considerations for real estate investors, family business owners, professional service practice owners, and high net-worth individuals
Do you have a will or trust? What about a medical directive or power of attorney agreement? Have you ever been through the probate process? What was it like for you? Let me know by leaving a comment!
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Links mentioned in this episode:
- Verras Law
- How to write a will
- How to set up a revocable living trust (with sample trust document)
- HYW private Facebook community
Read this episode as a post:
Andrew Chen 01:22
My guest today is Spiro Verras.
Spiro is a Florida-based attorney whose legal practice focuses on estate planning, probate, wills and trusts, and elder law.
He is active with the Tampa Bay Estate Planning Council and the Academy of Florida Elder Law Attorneys.
And he is licensed to practice law in Florida, Louisiana, and Texas.
Spiro, thanks so much for joining us today to share advice and tips about estate planning!
Spiro Verras 01:45
My pleasure, Andrew. Thanks for having me.
Andrew Chen 01:47
I’d love to start out just by learning a little bit more about your background. How did you get into practicing estate planning law?
Spiro Verras 01:54
It’s one of those things you fall into where you were destined to be.
I went to Yale undergrad and got a scholarship after I graduated to Tulane Law School. I had never even been to New Orleans before, but it was a great deal.
I graduated from Tulane. No idea what I wanted to do, but I was hired by a big New Orleans law firm. I was hired as a litigator and I spent several years as a litigator, made partner.
I actually grew up in the Tampa Bay Area. My parents were older. I was an only child and they were getting sick.
My firm had offices in Houston and New Orleans, and I convinced them to open a Tampa office.
After I got here, my parents’ friends asked me, “Spiro, you’re back.” I had to take the Florida Bar, of course.
And they said, “Spiro, can you write a will for us?”
So I started doing it and realized that I really liked it.
I was still with the New Orleans firm until 2005 when Hurricane Katrina shut down the firm for over a year. And we all scattered. The partners moved to New York, California, wherever they have family that they can go to be with.
I was already out. And I had staff here in Tampa, so I had to very quickly set up my own company and open my own accounts and get the payroll going, and I did.
I had been in solo practice ever since. And I’ve focused since then entirely on estate planning.
As soon as I came back to Florida, I started taking every class I could, every seminar I could. I loved it.
It’s not something that you dream of doing when you’re in law school. When you’re in law school, you dream of being in the courtroom with a really expensive suit and wooing the jury with your oratory.
But I discovered that I like the counseling aspect of it. I like sitting with people, learning what their needs are, and trying to identify the best plan for them.
Andrew Chen 03:59
Did you take estate planning classes in law school, or was this totally training on the job?
Spiro Verras 04:05
I did take estate planning classes in law school. They were required curriculum, though.
It wasn’t like I was taking the advanced electives because I didn’t think I was going to be writing wills for a living. It didn’t seem very exciting to 23-year-old Spiro.
But 53-year-old Spiro loved it, so I’ve had to learn as I’ve gone along all the more advanced aspects of estate planning.
Andrew Chen 04:29
Excellent. I’d love to dive into some of what those aspects are that people should keep in mind.
Estate planning is certainly one of those things that not everybody does it thoughtfully. Some people don’t even do it at all. And it can really hit you when you need it.
I understand the wisdom is get things in place before you need it, so that when you do need it, everything is already ready to go.
What are the elements of a good estate plan in general in your view?
Maybe it would be helpful, just to make it concrete for folks, to use three different personas to frame this.
Say a 25-year old young urban professional, unmarried, no kids, working a professional job, but otherwise no real obligations, versus a 40-year-old married professional, has kids, versus a 65-year-old retiree, empty nester.
What are the elements of a good estate plan for these three types of personas?
Spiro Verras 05:24
At each stage, there are two fundamental segments to the estate plan.
There is the portion of the plan that addresses what happens when you’re alive but unable to make decisions for yourself.
And then, of course, there’s the portion that governs what happens after your death with your property and with your family.
For the 25-year-old, it’s the “while you’re alive” part that’s going to be more often the focus.
Frankly, I don’t get that many 25-year-olds coming to do their estate plan, unless they are young parents, because young, single 25-year-olds tend to feel like nothing will ever happen to them.
But there are plenty of people also who have the wisdom to try and set up a plan before they need it, as you said.
For a 25-year-old, you’re really looking at the long term. And that client is not going to know where they’re going to be 60 years in the future, their likely life expectancy.
So you’re trying to set up something that will work, but you can’t anticipate everything.
For example, a 25-year-old will typically name a parent as the executor, or in Florida, we call them a personal representative, the administrator of their estate.
A parent as their agent on a durable power of attorney, or as their healthcare surrogate or medical power of attorney, as other states refer to it.
Those choices are going to shift over time, obviously. But the typical 25-year-old is focused primarily on things like a living will designation of healthcare surrogate.
In Florida, we combine those documents and it controls what happens to you medically and who can make decisions for you and speak with your doctors. Once we turn 18, our parents don’t have those rights anymore.
So I’d often have people in that 18 to 25 age group coming to me and asking, “Look, I want to make my mother my healthcare surrogate because I’m going in for some procedure and she needs to be able to make decisions while I’m under anesthesia.”
Likewise, they’ll frequently name a parent as their agent on a power of attorney. So if you’re traveling abroad, your mom can pay your bills for you.
And they fear accidental death more than they fear natural death, so that they’ll do a will if they’re going to go to Patagonia for three weeks and they want to make sure they have something in place.
When you get to be middle-aged, the 40-year-old married professional with children, the focus usually there is the children and guardians for the children, for example.
Most couples come to me with young children. Their primary decision is if something were to happen to both of them, who would be responsible for raising their kids?
And then a separate, or it could be the same, question is who would maintain the couple’s or the person’s assets for the children until some specified age?
And that age can be 18. It can be 25. It can be 35.
But the couple wants to make sure that if something happens to them, the appropriate persons are in charge of their child’s welfare and in charge of their child’s assets.
And it’s an interesting case because most of us inherit from our parents or from the previous generation. When we’re pretty old in the United States, typically when I do a probate, the beneficiaries, who are the children of the deceased, are in their 50s or 60s or even 70s because the parents were in their 70s or 80s or 90s.
When you’re a 40-year-old person, if something were to happen to you soon, your children are going to inherit at a very young age. Sometimes people try and create trusts to protect the assets until their children reach a level of maturity that we all take different times to reach.
And then finally, you get the senior, a person in their 60s or 70s who is retired or nearing retirement, and it’s an empty nest. The children are out of college, out of grad school, married themselves.
For that person, you return to the advanced directives as a key issue.
Who is going to make decisions for me if I can’t make them or if my spouse can’t make them for me? Who do I trust with those legal decisions, medical decisions, all kinds of decisions that maybe as we face our mortality, we realize they may be looming?
And then, of course, assets. In their 60s or 70s, most people have accumulated as much as they’re going to accumulate in their work lives.
Then it becomes an issue of how to preserve the wealth that they’ve accumulated, how best and how least expensively to convey it to the people they want to inherit, and how much control they want to exercise over what happens to their assets after their death.
Andrew Chen 10:56
That’s super helpful framing.
I think the distinction you drew between how affairs are handled when the principal is incapacitated versus when they pass is a really important one.
Do you find that clients of yours, is the greater amount of focus on the incapacity scenario versus the passing away scenario, or vice-versa, or about even?
Spiro Verras 11:27
I would say the incapacity scenario interests people more.
Yesterday, I had a call with a couple and they came up with six backup healthcare surrogates, which in Florida is the person who can make medical decisions for you and can get your information.
They have each other and they each have six backups. They were really concerned with who would be making those decisions. Likewise, on their powers of attorney, they were really concerned.
Their wills were simple. “We’re leaving everything to our kids in equal shares.”
But they were very concerned with who would be making decisions for them, and they wanted to have complete control over that process.
Andrew Chen 12:09
Interesting. You alluded to probate a moment ago. I understand that planning around probate is really the heart of what drives estate planning.
What is probate at a high level? Can you help us understand the end-to-end process, ideally step by step?
If I don’t know about this and I just need an orientation, when does it begin? What happens at each key step of the way? And when does it end?
Assuming the decedent has no will, no trust, no beneficiaries, no estate plan. In other words, probate is fully in control of you.
Spiro Verras 12:45
Right. If a person dies and has any assets in their name that don’t have a beneficiary designation or a joint owner who would inherit the assets automatically at the time of death, those assets are in limbo because they’re titled to a dead person.
And if that person doesn’t have a will, the laws of the state in which the person resided prior to their death will control who inherits their assets or if anyone inherits their assets, because there are limits on how far the laws will go to family.
Typically, it’s the next of kin, which varies from state to state. But you’re going to have to establish the family tree in order to determine who the next of kin is.
In Florida, a person who knew the person well will be required to submit what we call an affidavit of heirship which establishes who the person’s next of kin are.
Starting with were they married? Do they have children?
Who were their parents? Are they alive or dead?
Who were their siblings? Are they alive or dead?
Who were their nieces and nephews? Who were their aunts and uncles? Who were their grandparents?
In Florida, the analysis stops with grandparents.
If you can’t find anybody, if you were an only child of only children who have all predeceased you, at some point, the estate will escheat to the state. It goes to the State of Florida.
So there are situations.
People are always afraid, “If I don’t have a will, the state is going to take my money.”
It can happen. It’s rare.
But that’s the first step in the probate process: establishing that family tree.
Then someone has to petition the court to open a probate because we have to deal with these assets.
That person can be a family member, a person who is inheriting. It can be a creditor, a person who is owed money by the deceased.
And that person asks the court to determine the beneficiaries of the deceased’s estate.
So that’s the first step in an intestate probate. An intestate probate being one where the person never prepared a will.
Andrew Chen 15:05
So an interested party initiates that process, it sounds like?
Spiro Verras 15:09
Correct. The legal term is the interested party. It can be a family member, a beneficiary, or a creditor.
So then the court will have to appoint someone, usually the person who is petitioning for the probate, to serve as the personal representative of the estate.
I use the term personal representative which is used in Florida and many other states. Some states still refer to the administrator as an executor. Some states use the term administrator.
But it’s all the same thing. It’s the person who is appointed by a judge to administer the estate of the deceased.
Although the process is varied between the states, there are some things that are similar.
Florida has a very formalistic probate process. There are states that have simplified probates. Florida is rather formal.
In this state, a personal representative is appointed by a court. Typically, we’ll have to post a bond, which is like an insurance policy to make sure they don’t make off with the assets of the estate or leave creditors on pay.
And then the court will issue to the personal representative what’s called letters of administration. It’s a deceptive term because it’s one piece of paper. But it’s the letters of administration.
The letters of administration essentially say that the administrator can do anything that the deceased can do with his assets. He is treated by law as if he were the deceased.
So now you have somebody who can liquidate stocks and bonds and mutual funds and sell real estate and marshal it all together.
Andrew Chen 16:49
How does the court select this person if there had been no prior instructions or indication by the deceased? How do they make sure that person is fair?
Spiro Verras 17:00
That’s an excellent question.
The way that Florida does it is a majority of the beneficiaries choose. It’s by a majority vote of the people who are inheriting.
It happens frequently. And there are some large estates where it’s a big fight.
For example, in one of the cases in which I’m involved, a relatively wealthy man died quite young, in his 50s, and he was survived by three minor daughters who were in the custody of his ex-wife, from whom he was very estranged.
His daughters nominated their mother as the administrator of his estate. His family was very upset by that nomination because he hadn’t spoken to his ex-wife in years and they were in bad terms, to say the least.
And they tried to fight it, but the court ultimately determined that even though she was the last person on earth that the deceased would have wanted administering his estate and taking over his company and his house and all of his assets (she made herself president of his company because she now controlled all the shares as the personal representative), there was nothing that could be done.
Florida law is absolute. The beneficiaries determine who will administer the estate.
There are limits.
A person who has been convicted of a felony cannot. A person who cannot be bonded cannot.
A person has to be a resident of the State of Florida, or a family member. A family member can serve even if they live outside of the state. But a non-family member has to be a resident of the state.
But other than those limits, the judge does not make a “who is best for the estate” determination. He’s guided by what the beneficiaries choose.
Andrew Chen 18:49
And then what happens after that person is appointed and begins that process?
Spiro Verras 18:56
The first step is to publish a notice to creditors in the newspaper. You want to do that as quickly as possible after the appointment because that is the primary delay that people don’t like about probate.
In Florida and many states, anyone who was a creditor of the deceased or of his estate has three months from the date of first publication of notice to creditors in which to file a claim for what they were owed.
It’s almost like a bankruptcy. You publish a notice and all the creditors have three months to come in and file claims.
You can’t, though, avoid creditors you know exist by simply putting a notice in the legal notices section of the paper. If you know of a creditor, you have to serve them by a certified mail with a notice to creditors as well. You have to serve all known creditors and publish for all unknown creditors.
And they have those three months to file their claims.
In the meantime, while you’re waiting for their claims to be filed, the personal representative can marshal the assets, open an account in the name of the estate, sell real estate, sell stocks and mutual funds, consolidate the assets in one place.
It’s usually what happens. There are exceptions.
In the example I just gave, the ex-wife was running the business because she was going to convey the business intact to her daughters.
Those three months are used for marshalling the assets of the estate, inventorying them. You have to get an inventory of the property of the deceased, cars, the contents of their homes, and all of that. You have valuations.
So there is work to be done during those three months.
At the end of the three months, the creditors have to be addressed. Anybody who filed claims, the personal representative has to get in touch with them and figure out whether they can try and settle the claim.
There is also an option where if the personal representative doesn’t feel that the claim is valid, she can object to the claim. In which case, that puts the creditor in a position where they have to sue the estate to try and collect on the claim.
So that’s the creditor aspect of it.
At that point also, the personal representative has to submit an inventory to the court showing what assets she was able to identify and marshal, what their date of death values were.
And then, after all the creditors are settled and all the assets have been inventoried, only then can the personal representative distribute the assets according to the inheritance laws of the state.
Andrew Chen 21:43
So when you add up all these actions that have to occur, how long does the probate process take end to end?
I know it can vary. There can be short ones and really long ones. But what have you seen in practice?
Spiro Verras 21:57
As a practical matter, because of the three months, you’re never going to go under three months. You’re not going to go under four months.
Because we file the petition. It has to be reviewed by the probate clerk. It has to be reviewed by an intake attorney, then sent to the judge, who also reviews it.
So it can take three or four weeks. A personal representative might be appointed a month after we file the probate.
Then we have to wait for three months. Then it’s going to take at least a month to deal with the creditors and make the distributions to the beneficiaries.
Assuming everything goes right, probate will take five to six months in Florida typically. It can take longer, but it really can’t go below five months.
Andrew Chen 22:44
So that’s best case scenario. In a bad case, it can stretch out for years, I imagine.
Spiro Verras 22:50
It can. There are scenarios where, for example, the deceased owns something that’s not readily marketable, so that can cause delays.
Or the deceased was involved in litigation and the personal representative has to keep the estate open until the other litigation is resolved. In fact, in that situation, the personal representative is usually substituted into the litigation for the deceased.
So there are cases where it can drag on for years. I have probates now that go back 10 years because of litigation.
Andrew Chen 23:24
One of the big incentives for having a good estate plan is that you can accelerate or sidestep probate and the attendant costs that are associated with that.
Because, as I understand it, probate is costly. It’s not a free process.
Can you comment on, for folks who do not have a good estate plan, how costly is probate? And what are the sources of that cost?
Spiro Verras 23:56
In Florida, probate fees are set by statute. Some states, you can charge whatever you want.
In Florida, you can charge whatever you want, but there is a presumed reasonable fee that you are automatically entitled to. That fee is based on percentage of the value of the estate.
It starts with a minimum fee of $1500. And there are estates that have zero assets, but there’s a reason why you need to open a probate. Even though there are zero assets, the personal representative is going to have to pay the lawyer at least that $1500.
Beyond that, it’s basically 3% of the value of the estate up to $1 million, 2.5% between $1 million and $3 million, 2% between $3 million and $5 million.
And it’s a declining percentage above that that I don’t have memorized because I rarely have an estate that large that the person has not done a real estate plan for. God willing, they come as often as possible.
So it can be substantial. Even just a $1 million estate, you’re talking about a $30,000 fee to the lawyer. And the lawyer does a lot of work in probate, but there are certainly ways to avoid that.
There are also court costs. Typically, court costs, filing fees, certified mail charges, publication of notice to creditors, posting a bond can run over $1000 for a probate. And those are in addition to the fees.
In addition, if you don’t have a will, the petition to determine beneficiaries and all of that first stage is excluded from the statutory fee. That’s extra. That’s an extraordinary fee.
If creditors file separate suits against the estate, that’s another extraordinary fee where the lawyer is supposed to charge hourly.
And dealing with real estate, also extraordinary. So it can run quite a high bill if you don’t have a good estate plan in place.
Andrew Chen 25:48
For a decedent that does have their estate go through probate, what ways have you seen that probate can actually cause distribution outcomes that the decedent clearly would not have wanted or expected?
I was just wondering if you could comment on how intestacy laws, while they’re meant to simulate what the state’s best guess is in terms of how the decedent “probably” would have wanted their estate distributed, how that can actually get screwed up in certain cases.
I was wondering if you could comment. Maybe have examples from prior experience.
Spiro Verras 26:32
Absolutely. One example that comes to mind is a woman that had MS.
When she was diagnosed and started to become disabled by this terrible disease, her husband abandoned her. He left.
No one knows where he went. He never reached out to her.
But she had no assets. She was unable to work. She ended up moving in with her parents.
And shortly before her death, she was badly injured in an accident. Her mother was able to hire a personal injury lawyer to pursue a wrongful death case. She actually died from the accident rather than from the MS.
Since she was dead, I had to open an estate for her and the personal representative pursued the case. The problem was she was still married to the guy who had abandoned her decades earlier.
Under the laws of intestacy of the State of Florida, he was her sole heir. She was a childless person with a spouse. So under Florida law, he was her sole heir.
She never thought she needed a will because she had nothing. She was on disability because of her disease and never expected that she would end up with an estate with half-a-million-dollar wrongful death judgment that ended up getting paid out to her good-for-nothing husband who she never divorced.
So that’s one example.
The case of the gentleman with the ex-wife is another example. His ex-wife is still running his company.
I’m sure if he had taken the time to prepare a will (and it remains a mystery why he didn’t), that would not have been the outcome that he would have predicted.
So really, even if you have nothing, you should at least have a will so that the person you hate most in the world is not in charge of your family and everything that you own after your death. You never know.
Andrew Chen 28:39
That’s a real rallying cry to make sure you at least do the basics, at least have a will. I appreciate you sharing the examples.
And that’s actually a really good segue into wills. I’d love to get some of your deeper thoughts on this.
I think most people will intuitively understand that a will is a document. You write specifying how you want your belongings and estate to be distributed when you die.
At what point in one’s life does it make sense to write a will and have a will?
Spiro Verras 29:06
In my opinion, you should write a will early. That 25-year-old should do a will.
You don’t want to be intestate because we don’t have in the United States a central registry of family, and there are states in which it’s much harder to prove.
For example, in some states, that affidavit of heirs that says your family tree can’t be written by one of your heirs. It has to be prepared by a third party who is familiar.
What third party is going to know my grandmother’s name? That can be a real roadblock to establishing who your heirs are.
Again, there’s a possibility in many states that your estate ends up going to the state rather than to who you want it to go to.
And many of us aren’t really that close with our families too. Our society is somewhat different than more traditional cultures where people’s friends are their family. So you don’t necessarily want your next of kin to be making decisions for you or inheriting what you’ve worked for.
Andrew Chen 30:12
Do you recommend that as soon as you reach majority age, 18 in most states, that you write a will then even if you have nothing?
Spiro Verras 30:22
I recommend it for using the case of the woman as an example. She had nothing. A will would have been helpful and would have avoided another outcome.
Now, as a practical matter, I can count the number of 18-year-olds that I’ve written wills for on one hand.
Andrew Chen 30:39
Most of them can’t even get through the DMV.
Spiro Verras 30:44
Usually their parents drag them kicking and screaming to my office to do a basic estate plan. It’s just not something that’s on your mind at that age.
At 25, you start to get a few people in. Primarily, though, it’s not the example that I gave earlier.
It’s young married couple in their 20s. They’ve had a baby, and now all of a sudden, it’s like, “Oh, no, I don’t want your mother to have custody over our baby if something happens.”
There’s that dynamic. But they do need it. Once they have a child, it becomes increasingly important.
Andrew Chen 31:18
Once you have a will, how does the probate process now shift? What steps of the process change, and how is it accelerated?
Spiro Verras 31:29
The initial stage is simplified and accelerated, let’s just say. The will establishes who will be the personal representative. It doesn’t matter what your heirs think.
If you say, “This person is going to be administrator of my estate,” your beneficiaries don’t have a vote on this.
The other difference is you don’t have to establish a family tree. The people that you say in your will are the people who are going to inherit.
The judge doesn’t care what your family tree is or whether your grandmother died in 1957. None of that is relevant at that point.
So it really does simplify the process. You file the petition and the intake attorney doesn’t have to go through the analysis correctly. And it speeds up that initial period.
At that month that I said, that’s usually when there’s a will. If there’s no will, you’re looking at two or three months to establish.
I have one now where I’m the administrator because the person who died was an only child. He was never married, no children.
And his condo association hired me to administer his estate because he had died and the condo fees were being debited from his account. And then they had run out of money in the account, so they said, “Somebody has to do this probate for this guy because his condo is in limbo.”
I’ve spent a year trying to establish his family tree because I found people on one side of the family but they know none of the people on the other side of the family. And I finally found the other people.
So you can really shorten that initial period down to three to four weeks if you have a will. Then, obviously, the judge’s job is easier.
You just have to follow what the will says. All the court is looking at is to confirm that the personal representative is executing the will as it was written. It simplifies the process.
That’s when you can do a five- or six-month probate. If you have no will, you’re not going to do it in five or six months.
Andrew Chen 33:30
Are you still having to do the three-month notice to creditors even with a will?
Spiro Verras 33:34
You do. That’s unavoidable, unless you have a trust.
Andrew Chen 33:41
And the creditors get paid out first before the remainder gets distributed?
Spiro Verras 33:45
Absolutely. And that can really cause unintended consequences.
For example, the way that wills are interpreted, you have special requests. You say, “I’m leaving my car to my son and $50,000 to my daughter and all the residue of the estate to my spouse,” which is everything else.
And you think your estate big, but because creditors get paid first, if the estate is depleted, your spouse could end up inheriting much less than your daughter.
If you had half a million dollars but you ended up in a nursing home, it was a gigantic creditor in your estate. Your son gets the car, your daughter gets the $50,000, and your spouse ends up with $10,000.
So creditors can affect the outcome and can thwart the deceased’s intentions.
Andrew Chen 34:43
For folks who write their own will themselves, this is not uncommon. Obviously, you could probably do it more accurately if you have legal counsel representing you.
But a lot of people will write their own will, maybe even just handwritten on a piece of paper. There’s various ways people do it.
What do folks need to know to make sure that they actually have a valid will in terms of the legally required formalities? What are key gotchas or issues that commonly trip up people who are writing their own wills?
Spiro Verras 35:16
That’s an excellent question. You really need to know the formalities in your state because they vary dramatically.
For example, in Louisiana, what you described, a holographic will, one written in your own handwriting and signed by you is valid.
In Florida, it’s totally not valid. In Florida, every will has to be signed in front of two witnesses who are disinterested parties.
Also, if the will is not self-proving, in other words, there wasn’t a notary involved and certain other formalities, the witnesses have to physically appear at the courthouse to swear that they saw the person sign the will.
Those formalities need to be followed. Obviously, if you do a will with an attorney, they will be followed in most cases. So that’s a critical part.
Another thing that is an issue, there are many reasons to see a lawyer, but I’ll give you an example that’s Florida-specific.
Florida, as many people know, has tremendous homestead protection. You can owe a fortune in debts. Your Florida homestead cannot be attached by your creditors.
And there’s no limit on the value. It can be a multimillion-dollar home.
If it’s your Florida homestead, the only entity that can touch it is the IRS, the federal government.
Andrew Chen 36:39
I was about to say. They’ll go after you for every last dime.
Spiro Verras 36:42
Yeah. They can bust the homestead. Any other creditor can’t.
OJ Simpson famously used that technique, went after his ex-in-laws, and the Goldman family got a humongous judgment against him in Los Angeles.
He sold everything he had and bought a really expensive house in Miami and declared himself a Florida resident.
He was untouchable, even for the 17 years that he was in prison in Nevada, because he had the intention of returning to Florida. Florida courts refused to allow a lien to attach to his house.
And that exemption passes beyond the grave. You can owe a fortune in debts, drop dead, and as long as you leave your home to your heirs-at-law, family members, your creditors can’t attach it in the probate. It passes exempt.
Except if your will says, “I direct that my home be sold and the proceeds be distributed to my children.”
People like that because if your kids don’t like each other, they don’t get along, you don’t want them co-owning a piece of real estate.
So people often will write that into their wills. That idea, if you do that, it becomes non-exempt and your creditors can grab that asset.
That’s one of the reasons, obviously, that speaking to a lawyer is important. Those sorts of gotchas that you might not think about are very serious.
Another issue is if there’s any possibility whatsoever that somebody could challenge your will, you need to go to a lawyer.
I’ve had to testify dozens of times at this point, defending wills that I wrote, basically saying, “No, Grandma knew what she was doing when she disinherited you. She was totally competent and nobody was unduly influencing her.”
“I met with her privately. She told me her wishes. She told me her reasons.”
And their case basically gets thrown out because I don’t have an interest in the outcome of this. I’m just telling you what happened.
So that’s critical. Is there any possibility whatsoever?
I like doing things from home too. I shop online. I book my travel online.
It’s worth putting some clothes on and going to a lawyer’s office for a number of reasons.
Andrew Chen 38:54
In the example that you just gave there, do you recommend that those types of conversations typically be even recorded?
I know they’re not evidentially required in court, but they may have some persuasive authority.
Do you recommend that these types of meetings be recorded so that you have more than just somebody’s word, even if it’s a neutral attorney?
Spiro Verras 39:22
Yes, if there’s some sort of extreme deviation from what the expected distribution would be.
I usually do like recording.
People don’t feel comfortable with it, so I won’t do it. But there are some situations.
I consider prenuptial agreements part of an estate plan sometimes because most people don’t stay married to the same person for the rest of their lives.
They have kids with one person, then they get divorced, and they marry somebody else. They still want their kids to inherit, so they do prenups as part of their estate plan.
I do like to record those, if there’s a substantial estate, because that’s always an issue that’s brought up. And I’m not a divorce lawyer, but I hear the horror stories. So if I can do a video, that’s great.
As I said, for normal estate plans, unless there’s a deviation from what would be expected where, say, you’re suddenly changing an estate plan that was in place for a long time and a child who is expected to inherit equally is being excluded, obviously, you’ll tell me the reason, so I’m going to put them in my notes.
They’re going to be in my file. But having you saying it on video is very persuasive.
Andrew Chen 40:35
And I know this is specific to Florida because of the example you just gave. But in the example of the homestead having almost an absolute shield in probate, you mentioned if the will directs the home to be sold, not exempt.
If the beneficiaries just independently, separate and apart from the will, sell it later, that would be still exempt, right? Because it had already passed.
Spiro Verras 41:04
Correct. The way that Florida law sees it, there are textbooks and books, treatises written on Florida homestead. This is an issue that has fascinated Florida lawyers for decades.
The current understanding is from the Florida Supreme Court, the homestead, using the terms that they use in their opinions, is “inured” to the heirs at the moment of the decedent’s death.
It never went through probate. It was theirs at the instant the parent died. Typically, it’s the parent.
So it was never available to creditors. It became theirs and the creditors have no claim against them for it.
Andrew Chen 41:46
Makes sense. And then more broadly, is there any other advice that you have or common problems that you see when people try to draft their own estate planning documents, whether it’s a will or other types of documents?
Spiro Verras 42:05
Yes. I’ve seen so many examples of incomprehensible wills that we’ve had to sit there with the judge and try and figure out what this says.
But one that recently wrapped up was, a decedent, he was dying. He had cancer and he knew that he was dying and, for some reason, did his own will, even though he owned quite a bit of real estate and had some substantial assets and was living with his girlfriend.
The will had special requests, and it said, “All the property located at 123 Main Street, to my girlfriend.” And the next request said, “The property located at 123 Main Street, in equal shares to my children.”
So it was hard to understand what that meant. What I was able to infer was that he meant the contents of the property to his girlfriend (that’s where they lived together) and the real estate itself to his children.
But that’s an ambiguity. But for the fact that the girlfriend consented to that interpretation of the will, the court would have had to give her the house because all the property located at 123 Main Street means everything, including the real estate.
So it was only because of her desire to honor his wishes that we were able to actually clear that up in a way that everybody was happy with.
But that sort of mistake happens all the time. You’ve got to be very careful about clarity.
People frequently do their wills online and they’re being interviewed and they’ll see that the question usually is “Who do you want to inherit the residue of your estate?”
They leave it blank because they don’t think they have any residue.
Residue is a legal term for everything else. That is a big question to leave blank.
So don’t leave anything blank. There’s a reason why they’re asking you that question.
But they’re just very common problems that lead to a big mess in interpreting. So it’s really strongly advisable to just see a lawyer for a will. It’s a very important document.
Andrew Chen 44:26
On this topic, how do you evaluate a good lawyer, for somebody who is not a lawyer?
Spiro Verras 44:35
It’s tough. When I was a litigator, I was a very kindly litigator. I was not a pit bull.
And there were other lawyers at my firm who were pit bulls. They were so aggressive. They were ready to go to battle from the moment they walked in the courtroom.
I have always been a “you get more flies with honey” kind of a guy. Also, it just doesn’t suit my personality.
There are a lot of good lawyers. Most lawyers are good.
There are exceptions, but most lawyers know what they’re doing. Most estate planning lawyers know what they’re doing.
It’s about a personal fit, because you’re going to have to reveal to me all your personal business.
Why are you disinheriting your child? What are your real goals in life? What do you want to happen when you retire?
So you have to have a good personal relationship.
I consider most of my clients friends. We spend so much time together.
Typically, an estate planning intake appointment takes two hours. It’s a lot of time.
So I think it’s all about personal fit.
Obviously, there are credentialing. You want someone who is active in organizations.
I’ve become an estate planning geek over the last 20 years. I’ve joined every committee, every group. And I’m fascinated by the more esoteric questions, but also developments in the law.
I consider that a good sign. I would like my doctor, for example, to be interested in medicine.
I think it’s good. You should look for somebody who is involved in law.
Andrew Chen 46:31
That was some great advice about wills.
I wanted to shift to talking about trusts. At the risk of sounding obvious, what is a trust? How does it differ from a will?
How should people think about the differences in goals between setting up a trust versus just having a will? How do the goals differ between these two instruments?
Spiro Verras 46:54
There are a number of different types of trusts. In terms of your question, I think we’re talking about what we call the revocable trust, also called a living trust, a grantor trust, for example.
The term means it’s an entity that you create while you’re alive that serves as the owner of your assets. And in terms of taxes and for most legal purposes, a revocable trust is disregarded.
It’s not protection against creditors. It’s not a separate entity in the sense that an LLC or a corporation is a separate entity. But for purposes of probate, it is very effective.
What it does is because the trust owns assets, when you create a trust, one of the important parts after you create a trust is putting assets in the trust or making them go to the trust on your debt.
If you would fund it properly, if the trust either owns or will own upon your death all of your assets, there’s no need to probate your estate because you may be dead.
I’ll make myself the dead person. My house, my mutual funds, the stock in my corporation, I retitled that all to the Spiro Verras revocable trust.
When I die, Spiro Verras revocable trust still exists. There’s nothing that’s titled to a dead person at that point.
My successor trustee, whoever is named in my trust to take over the reins upon my death or disability, can take over right away.
Give a death certificate to the bank. Give a death certificate to the brokerage that has my mutual funds, and can immediately liquidate them, can record a death certificate in the official records and immediately sell my house.
So the trust avoids probate, avoids the fees associated with probate.
If you have a trust, you don’t really fully fund a trust. You may not need a lawyer at all.
Your heirs, upon your death, they can administer it themselves. They can hire a lawyer if they want help, but there’s no court proceeding that’s required.
So it’s primarily structured to avoid a probate.
Now, that being said, I like to do a probate also just for the creditor protection because by publishing notice to creditors, you block any creditors from coming along later.
That’s either zero value probate or it’s $1500. It may be worth the $1500 for peace of mind purposes because by publishing notice to creditors, if they don’t file a claim in three months, they’re forever barred from pursuing the estate or the heirs.
Andrew Chen 49:44
So if you have a validly implemented trust, it is not a technical requirement to ever set foot or file any paper in a probate court, but it might be strategically wise to do that for the creditor reason you just mentioned. Is that an accurate summary?
Spiro Verras 50:01
Correct. Yes. That’s right.
Andrew Chen 50:03
When you mentioned that it’s important to fund the trust to validate that it’s a properly created trust, does that mean that I have to go and re-record real estate at the county clerk’s office in the trust’s name?
I have to go and send certified documentation to my mutual fund company to retitle that account in the trust’s name, etc.?
Or do I just set my beneficiary to be the trust? Or in the case of real estate, do I really need to retitle that asset, etc.?
Will that actually invalidate the trust if I don’t do those things?
Spiro Verras 50:45
It will reduce the value of the trust if you don’t do those things.
Because when I create a trust for a person, I also create what we call a pour-over will. A pour-over will is a will, the beneficiary of which is the trust. So in case I forgot to put something in my trust while I was alive, the pour-over will will probate it into my trust.
And there are unexpected things that can happen. Alanis Morissette, the guy who wins the lottery and dies the next day. He’s not going to have time to fund his trust.
He might have had a perfectly funded trust, but he won the lottery and needed probate to get that money into the trust.
But any assets that you are aware of should go into the trust.
For a long time here in Florida, we were very scared about putting homesteads in trusts because we were afraid of impairing that absolute protection against creditors.
But there have been statutes enacted by the Florida legislature establishing that the homestead is protected even if it’s an irrevocable trust. And there have been cases with the Florida Supreme Court repeatedly that said that the same thing.
There was one unfortunate opinion out of a bankruptcy court in Miami that suggested otherwise, but virtually unanimous in the Florida legal system that it’s wise to put the home into the trust, and other real estate as well.
Typically, the lawyer who prepares the trust should convey all real estate owned by the grantors into the trust. The lawyer should prepare the quitclaim deed and should get them recorded.
Now, you have to be careful about trusts because I’ve had to do many probates where a couple was invited to some dinner at B.T. Bones by a lawyer. “Free dinner and learn about trusts.”
They paid $1500 for a trust, or some relatively small amount for trusts.
It was a template trust. You fill out a form. They get it ready for you to sign.
You go to the office and sign it and give them the money, and that’s it.
They didn’t put any assets in the trust. And they weren’t instructed to put any assets in the trust.
The person dies and the daughter comes along and says, “Wait a minute. Why do I have to pay you to do a probate? Mom’s assets weren’t in her trusts.”
So it’s important because you end up in a position where you have to probate anyway and you pay a substantial amount of money to create a trust. Everything should go in.
It is a hassle, and a lot of people don’t do it until they’re older because they don’t want the hassle of putting your home in your trust and your brokerage account. You hit upon something which is actually a good strategy.
Rather than retitling your accounts, you can make them payable on death to the trust or name the trust as the beneficiary of your IRA, for example.
And that avoids having to change title on things. Instead of paying out to people, they’ll pay out to your trusts.
Andrew Chen 53:46
So it sounds like the really right way to do it is to actually go through the hassle on some time scale to officially retitle assets like your bank brokerage accounts, your real estate, etc.
That would be the really right way to do it. Is that a fair statement?
Spiro Verras 54:04
Yeah. I think that’s fair.
Andrew Chen 54:06
How do you handle personal property?
If I as the principal want to put literally everything I own in a trust, how do I put my iPhone in a trust? I never titled that anywhere.
So that maybe I have a strategy of I want to put a nominal amount in a trust to satisfy the formalities, and then I’ll retitle my home later. I’ll do the bank and brokerage accounts later.
But I just want to make sure my trust is up and running. Maybe I have a pour-over will as well, so I’m guarded on that side.
How do I verify that I can fund the trust with at least something nominal, even though it’s personal property? The mechanics, how would I do that?
Spiro Verras 54:49
When I prepare a trust, like a revocable trust, I always also include an assignment of all property to the trust.
Personal property can be conveyed because it doesn’t have titles. And you can just say, “I’m putting all my personal property in the trust.”
It doesn’t require any registration. It doesn’t require a recording.
That basically says, “All property that I can retitle, I am retitling to my trust.”
And that’s enforced by the courts. The courts will decide, “That property is in the trust.”
Andrew Chen 55:19
And that would be sufficient to at least create a valid trust, if I just have that clause in the trust agreement itself?
Spiro Verras 55:27
Absolutely. Yes, that will do it.
Andrew Chen 55:30
For somebody who did that approach and did not go through the hassle, at least when they were alive, of retitling more consequential assets like your home or your brokerage accounts…
But they did have a pour-over will that said, “Upon my death, anything I may have missed should automatically get poured over into the trust.”
Does that person in their lifetime need to go through that hassle of retitling in that case? Or does that pour-over will pretty much guard them?
Spiro Verras 56:01
By doing it that way or by not retitling during your lifetime or making accounts payable on death (you can’t do that with real estate, but with the bank and brokerage accounts), you will still have to probate those assets after the person dies.
So you’re not going to avoid that dreaded 3% that the lawyer gets.
Most people who come to me and most people who opt for a trust with me do so because they don’t want their children to have to pay some lawyer $30,000 to probate their estate. By not funding the trust during their lifetimes, they are not achieving that goal.
Andrew Chen 56:40
So it’s a cost consideration, not a legal impact or legal consequences decision. It’s really a cost consideration?
Spiro Verras 56:51
Primarily cost. Also, the time delays.
For example, usually the clients use myself as the dead person to avoid jinxing anything.
I own a law firm. It’s a corporation.
If I have my shares titled to myself, it could take five months before my personal representative can sell the firm, do anything with the firm. That’s a long time to have nobody able to manage.
And my personal representative is not a lawyer. He can’t do anything. He has to sell it right away.
So that’s an issue. The delay can sometimes be a big consideration and a big motivating factor for the trust in addition to the cost.
Andrew Chen 57:40
Tactically, how do you actually create a trust?
What are the key legally required formalities to have a valid trust? And what common mistakes do you see people sometimes get in trouble to when it comes to having a valid trust?
Spiro Verras 57:59
One of the things that people will say in their trust document is that everything is going to be sold.
Again, if your homestead is in the trust, don’t say that. You don’t want to say that.
You know what might happen the last years before your death. Nursing homes are very expensive, so it becomes a big creditor issue.
That’s one thing to look for is don’t require immediate liquidation of assets. Give as much flexibility as possible to your successor trustee. I give them absolute and uncontrolled discretion.
That doesn’t mean that they can run off to Tahiti with all of your money and not do what the trust says. It just means you don’t second-guess their decisions.
Because every beneficiary thinks, “Oh, you sold Dad’s shares on the wrong day.” It creates problems.
You want the trustee to have as much discretion as possible in administering the trust and as much flexibility in administering the trust as possible.
For example, sometimes people will have one child who they feel is not responsible with money. Let’s say they have two children.
They’ll say, “Son A gets his half of my estate outright. The trustee shall hold the other half of my estate in trust for Son B for the rest of his life.”
And then they’ll make Son A the trustee for Son B. That’s a nightmare because you’re going to be having your brother calling you and asking for money for the rest of his life.
So you want to give the trustee the flexibility to be able to resign and say, “We’re making this bank your trustee. You can deal with them.”
You want to create as much flexibility, because trusts can do a lot of wonderful things.
If you have, say, a disabled child, you can have their assets be covered by a supplemental needs trust that allows them to qualify for benefits without being disqualified because they inherited something from their parents.
There are a number of things you can do, but you want to give the trustee the flexibility to do all of those things. So I build in as many of those provisions as I can.
Andrew Chen 1:00:14
What are legally required formalities that folks will need to observe?
Spiro Verras 1:00:21
In Florida, the trusts have the same signing formalities as the will. You need two disinterested witnesses and a notary.
The trust is an unusual document. It’s like a contract between the grantor and the trustee.
It’s a trust agreement. The trustee is agreeing to maintain the assets of the grantor according to the terms of the trust.
And the terms change. When the grantor is alive, it’s one set of terms. When the grantor is dead, it’s a different set of terms.
And both of them have to sign. You can’t just have the grantor sign.
Usually the grantor and the trustee are the same person or people. But if they’re not, you’ve got to get your trustee into the room to sign that he agrees to all this.
That’s a very important formality. Otherwise, it’s the same as wills.
Andrew Chen 1:01:11
We talked a little bit about how trusts can help protect wealth by reducing probate costs, by averting beneficiary infighting. But I also understand that trusts have an advantage over wills in that they can provide anonymity. They can help minimize estate taxes.
I was wondering if you could comment on how a trust can accomplish these things and why a will can’t accomplish the same.
Spiro Verras 1:01:42
Sure. Traditional revocable trusts really are only able to avoid probate and speed everything up. But trusts come in a number of different flavors.
Irrevocable trusts are especially powerful because when you convey something to an irrevocable trust, you no longer own it. So it’s not an asset of yours that’s available to your creditors.
A revocable trust, in the eyes of the law, when you convey an asset to a revocable or a living trust, you still own it.
An irrevocable trust has its own tax ID number. It’s a separate entity from the grantor.
Over the years, estate planning lawyers have become very clever in making irrevocable trusts that aren’t entirely irrevocable. You can still change them and decanting provisions and all kinds of things.
Or trust protectors. Making your lawyer the trust protector, which means you can modify the terms of your trust at your instruction in the future. These sorts of provisions.
So it’s not as scary as it used to be. But they can protect your will because they can provide asset protection.
If I’m being sued by a bunch of people, I’m not going to be able to say, “I’ll put all my assets in irrevocable trusts. Not mine anymore. You can’t touch me.”
That would be considered a fraudulent conveyance.
But if you did it in advance because of other reasons and then you got sued, that would not be a fraudulent conveyance.
So it can protect your assets from potential creditors. It can provide anonymity.
A lot of wealthy people or people who are well-known in Florida use land trusts.
In Florida, we have a law, “Florida in the sunshine.”
Basically, everything about all of us is available online. You can go to the county tax records and see what all your neighbors paid for their houses. Everything is very public.
Other states, not so much. But Florida is extremely public.
I could never find anything in California on real estate records. But Florida, you can find anything you want.
I’ve had clients come in and ask me, “Why do you have such a cheap house?”
They’ve already stalked me before they met me. So it’s annoying.
And if I were a celebrity, if I were Tiger Woods or something like that, it would be really annoying because they can also find my address and show up in front of my house.
So a lot of people use land trusts primarily for anonymity purposes. A land trust, typically it’s the person’s lawyer who is the trustee.
You look up the address of my client with the land trust and it will say “Spiro J. Verras, Esq., trustee of the ABC land trust.”
When you try and look at places like Worth Drive in Palm Beach, it’s actually fun to do. I’ve had to do it one time because I was trying to find a defendant.
Every house is in a land trust. You can’t find Rose Kennedy’s house on the Palm Beach County Property Appraisers website.
So that’s a way of providing anonymity.
Estate taxes. It has become less of an issue because the current lifetime gift and estate tax exemption is $11.5 million per individual. Double that for a married couple.
That excludes 99.9% of us on our deaths who do not die that rich. But some people do.
For my clients who will, irrevocable trusts of a variety of natures provide one of the key strategies for minimizing estate taxes.
You can gift a certain amount every year, currently around $14,000, to an infinite number of individuals and you don’t have to file a gift tax return with the IRS.
By doing that and using that to fund irrevocable trusts, over time, you can deplete your assets and they still go to your beneficiaries as you intended, but you can use the irrevocable nature of the trust and gifting to those trusts, among other strategies, to reduce your estate taxes.
A will can’t do any of these things.
Andrew Chen 1:06:22
Do you have to have an irrevocable trust for anonymity? Or can a revocable trust also provide anonymity for you?
Because you don’t register your trust anywhere.
Spiro Verras 1:06:38
If you don’t have real estate, you can get some anonymity with a revocable trust because you don’t have to name.
I don’t have to name my trust the Spiro J. Verras irrevocable trust. It can be called the Babadook trust or something like that.
But the problem is that when you have real estate owned by the trust, in addition to deeding the property to the trust, it’s prudent and really very wise to record a certificate of trust in the public records.
The reason that’s important is say I have a son and he’s my successor trustee. I title my home to my Babadook trust. That’s great.
But when I die, who is going to establish who my successor trustee is?
So I usually record a certificate of trust that only contains the successor trust provisions. But it will have to say, “On September 25th 2020, Spiro Verras created the Babadook trust with himself as initial trustee.”
“The trust is currently in existence. Upon Spiro’s death, his son becomes the trustee.”
That’s great because when I die, my son can take a death certificate and record it in the official records and he has a clear ability to sell the home.
But that loses some of the anonymity. That’s part of the problem when trusts are really the only flavor of trust that don’t require that sort of a recording because you never identify the grantor of the land trust.
That’s probably, for real estate purposes, the most anonymous. And that’s really where the anonymity comes most into play because of the public nature of real estate records.
You can’t really look it up to see where my Merrill Lynch accounts are. But my house, you can Google me and there I am.
Andrew Chen 1:08:29
Are land trusts irrevocable or revocable?
Spiro Verras 1:08:33
They’re irrevocable. But because of the fact that the trustee has tremendous flexibility and it’s usually the lawyers for the grantor, they can be decanted.
For example, if I own a piece of real estate in a land trust and I sell it, my trustee usually has the ability to decant the proceeds into a different trust or into any other entity he wants. So he can give it back to me.
Even though the trust itself can’t be revoked, assets can be moved in and out.
Andrew Chen 1:09:09
What are estate planning considerations that the following types of folks should be thinking about especially? I had three personas in mind.
One is real estate property owners. A second is owners of family businesses or professional services practices, like legal practices or medical practices.
And a third is owners of very sizable stock holdings. Maybe they had company stock options, which is common in the tech industry. For example, the company had an IPO and they suddenly get a really big windfall.
What are estate planning considerations that these types of folks should be thinking about?
Spiro Verras 1:09:51
Real estate holdings are important. If you own rental real estate in your own name, it creates liability problems.
If there is an injury or an accident on the premises, the premises liability would hold the owner liable. Owners get sued all the time because someone slipped and fell on a piece of property.
Obviously, you can deal with that to some degree with insurance. But for the most part, I recommend that people put their rental real estate into a separate entity that they then own. Typically an LLC simply because it’s easier.
It’s a bit of a hassle. You have to file an annual report. You may have to file a separate tax return for the LLC.
But the protection that it provides is great because what it does is the LLC only owns that piece of real estate, so the most that a judgment creditor can get is that piece of real estate. They cannot get through the corporate veil and get any of your personal assets.
That’s usually what I recommend for rental property owners.
I have a number of clients who retired in Florida and bought a strip shopping center, a strip mall, with the proceeds of the business they sold. I recommend very strongly to those people that they put them in an LLC.
Current owners of family businesses and professional services practices, like mine, it’s a difficult situation. You obviously want it to be in some sort of a corporation. You do not want to be a sole proprietor of a business that has potential creditors.
So if a lawyer makes a terrible error and gets sued, the lawyer’s liability should be limited to the assets of his firm and not his personal assets. Doctors and everyone, it’s the same.
Obviously, insurance is also important for that. Every professional should carry adequate liability insurance.
But beyond that, when you have a family business, there’s a succession plan. You might want to establish in, say, the operating agreement of your LLC who is going to inherit if one of the members dies.
I try to build that in. It avoids probate.
It’s private. There’s no public record of LLC operating agreements.
You can do a lot of estate planning for business owners using the corporate documents to allow for the succession of the business to the people you want to inherit it and excluding the people you don’t want to inherit it.
That’s an important consideration.
With regard to people with sizable stock holdings, that’s primarily more of a wealth and asset protection consideration.
There’s no liability in the sense that the real estate owner and the business owner might be liable. If I own stock in Apple, just because Apple gets sued, I’m not going to get sued. I’m fine.
But if I own a lot of stock in Apple and I get sued by somebody else, they’re going to go after that stock.
That’s where irrevocable trusts come into play. You may want to title your shares to an irrevocable trust that will go to your children, let’s say, upon your death or disability. You could do that.
And there’s unfortunate tax consequences to that. Trusts are taxed at a higher rate than people.
Irrevocable trusts are among those trusts that are taxed at a higher rate. Revocable trusts are not. That just flows under your personal return.
Irrevocable trusts are taxed worse. But the asset protection is great. If you have substantial wealth, that’s a consideration.
Another consideration is placing that wealth in a family limited partnership or limited liability company. That’s a way of making your entire family and their wealth protected from everybody’s creditors.
It’s a very powerful tool. I don’t know if you want me to go into that, but it’s a very effective way.
Andrew Chen 1:14:05
At a high level, what I’m taking away is that estate planning is more than just wills and trusts. It can start to touch upon things like corporate formation documents or governing documents, partnership documents, etc.
Just in that last scenario that you painted, I was just curious. In the family example you gave, how does that family create an LLC without having a business purpose?
They’re not running a company, but they’re just doing it for estate planning purposes. How does that actually work?
Spiro Verras 1:04:43
Most of the time, it’s for a company. Typically, it’s a family business and they put the business in the family limited liability partnership or, now more common, family limited liability company.
But it can be done with any asset. It doesn’t necessarily have to be a business.
And it has two benefits. One is asset protection.
If I am a member of an LLC or a limited partner of a limited partnership, and I get sued and I get a judgment against me, the most that my creditor can get is a charging order against the LLC or limited partnership, which allows them to seize distributions made to me by the LLC. They stand in my place as a member with regard to distributions.
They can’t take my membership interests or my partnership interests. They can only get a charging order as to distributions.
There’s no requirement the LLC make distributions or pay them out. You can keep them in.
And that can have bad consequences for my creditor because they get taxed on my distributions even if the distributions were not made. So they’re either going to get a 1099 or a K-1 that is going to put them on the hook for the distributions.
It’s a very powerful tool that wealthy families use for that reason to protect all the kids and everything from creditors.
With a typical family company, but also with just wealth. Land or whatever, it all goes in there. And stock and bond holdings.
The same asset protection is achieved.
In addition, the parents can start gifting membership interests or partnership interests to their children and their grandchildren every year.
If those interests, if it’s a company, are deeply discounted for what the real value would be for that company, over time, much of their wealth will have shifted to the children.
And by the time the parents pass away, they will be under the $22 or $23 million lifetime gift and estate tax exemption for a married couple. That’s very effective.
Andrew Chen 1:16:57
In that slow amortization of shifting wealth from parents to children, that can be accomplished outside of the reach of creditors, for example, as we were discussing a moment ago? Is that accurate?
Spiro Verras 1:17:12
Absolutely. Whether you use irrevocable trusts to do it or use a family limited liability company or partnership.
Andrew Chen 1:17:18
So the scenario of the Apple stockholder who has a bunch of Apple stock, they can create a limited partnership or an LLC. It’s not meant to conduct a business as such.
It might have some ancillary revenue such as from dividends. But you could use that instrument, it sounds like, for just the purpose of asset protection and eventually transferring your wealth to family members, even though it’s not in itself a business. Is that correct?
Spiro Verras 1:17:50
That’s correct. There’s no requirement that there be a business in that limited liability company.
Andrew Chen 1:17:54
Have you found that, in your past experience, clients who transfer money into an irrevocable trust, is a common strategy to do that at the moment of death rather than during their lifetime?
Just so that they retain that control during their lifetime, but then at death, it immediately pours over into an irrevocable trust?
Spiro Verras 1:18:16
That doesn’t get the asset protection that they would have had during their lifetime if there had been an irrevocable trust. But as a practical matter, every revocable trust becomes irrevocable on the death of the grantor.
Andrew Chen 1:18:29
That’s true. So it doesn’t get the asset protection due to the fraudulent conveyance rule or because that’s just the way the law is?
Spiro Verras 1:18:36
Because while it’s revocable, it’s considered your asset. As long as you put assets into a revocable trust, the revocable trust is disregarded for asset protection purposes and tax purposes.
Andrew Chen 1:18:47
But if you poured over assets in your will into an irrevocable trust, it sounded like you were saying that doesn’t actually accomplish asset protection?
Spiro Verras 1:18:56
That’s interesting. A hypothetical, let’s say I have a son. I use him as the example.
Instead of leaving to him outright, I’m leaving to an irrevocable trust that he’s the beneficiary of.
Andrew Chen 1:19:09
Yeah, because maybe my goals are asset protection and I want to avoid probate at the same time.
Spiro Verras 1:19:16
Yeah. In that situation, my revocable trust pours over into a new irrevocable trust for my son. Is that what’s happening?
Andrew Chen 1:19:28
I assumed you could just pour directly using your will, so that will will have to be probated. But upon your death, all the assets just go immediately into an irrevocable trust with no intermediate step.
Is that possible? I assumed it was.
Spiro Verras 1:19:42
No, not really. If I own them in my own name, they’ll have to be probated. And during the probate, my creditors can attach them.
Andrew Chen 1:19:53
Spiro Verras 1:19:53
Of course, if he’s the beneficiary of an irrevocable trust, he would be protected from his creditors.
Let’s say, for example, my son has judgments against him, and I know that he’s not going to pay them off. I could do that.
My will can create a trust. They’re called testamentary trusts.
I can build the trust into my will and say, “Upon my death, all of this is going to go to the Spiro Jr. irrevocable trust with Uncle Bob as the trustee.”
So his creditors will not be able to touch that asset. He will be the beneficiary of the trust, but he’ll never own the assets outright.
People do that actually frequently in their wills when they have a child that has tremendous debt.
Andrew Chen 1:20:40
Let me ask a derivative of this, which is, instead of doing a pour-over, if somebody who is expecting death, they don’t know when but they know it’s coming soon, maybe because they’re in hospice care or something like that.
If they create an irrevocable trust prior to death and they transfer all their assets in, as long as they don’t run afoul of any fraudulent conveyance rules, would that allow them to accomplish the goal of maintaining control and ownership during their lifetime, but only shortly before death transferring everything for asset protection and avoiding probate purposes?
Spiro Verras 1:21:27
Yes. And that’s not uncommon.
I’ve had people who had to go to the ICU to set up their trusts. They wanted to get it set up and funded before they died, so they’re signing deeds, putting real estate into trusts.
It happens. As long as it’s not a fraudulent conveyance, there’s no problem with doing that.
Andrew Chen 1:21:48
Wrapping up here, I would love to get your quick thoughts. Maybe we can just treat these as quick hits, just to give folks a flavor of the type of estate planning instruments that might apply to different personas.
There are lots of different types of trusts that you can create. As you mentioned, some are very common. Others are more obscure.
And what’s right for you depends on what your estate planning goals are, your level of wealth, maybe even what state you live in.
I was just curious to get quick reactions on what are the types of trusts that you might potentially advise for high earners or high net worth individuals?
Let’s say you’re advising the following personas.
Number one would be an early retiree, 30-year-old, married, no kids, say $3 million net worth, and they’re really just trying to accomplish wealth preservation and facilitating a smooth transition if they pass.
Any quick thoughts on likely appropriate trust instruments that would benefit them?
Spiro Verras 1:22:47
Yeah. In this case, they’re not concerned about what they pass on to the next generation. They’re just focused on, I presume, asset protection during their lifetimes.
They could create an irrevocable trust and make themselves the beneficiary of it, and they will be provided for for the rest of their lives. And their creditors would not be able to touch that money.
Andrew Chen 1:23:06
And if they wanted to make sure those assets could pass smoothly to a spouse?
Spiro Verras 1:23:12
They could both be beneficiaries. What they can do is they’re both beneficiaries.
The grantor creates the trust. They have two beneficiaries. The spouse will be able to get the money when the grantor dies.
Andrew Chen 1:23:25
Second persona: a high-earning professional, 40 years old, married, two kids, dual incomes. Say both spouses are earning six figures.
Maybe they have half a dozen rental properties with mortgages still on them. Also, they have $3 million in net wealth when you net everything out.
Maybe their estate planning goals are wealth preservation, asset protection. They would like to avoid probate and facilitate a smooth transition to their heirs or their beneficiaries if they pass.
What are initial reactions on what might be appropriate for this profile?
Spiro Verras 1:24:03
In this case, I think the typical solution would be a joint revocable trust for the two of them. And I would make the trust the sole member of LLCs to own each of the rental properties.
I think that would achieve they would avoid probate. They would facilitate a smooth transition. And it would preserve their wealth from potential liability arising from rental properties.
Andrew Chen 1:24:28
Third persona: a high-earning business owner, 40-year-old, married, two young children.
They own a successful family business and their household income overall is now seven figures. Maybe one spouse doesn’t work.
They have $10 million of net wealth and a primary residence worth $1.5 million. And their ownership stake in their closely held family business is illiquid.
Their estate planning goals are similar to the previous scenario, but they also want that business continuity. They’d like to avoid taxes as much as possible at death and providing income security for the non-working spouse in case it’s the working spouse that gets hit by a bus.
Spiro Verras 1:25:12
This is an interesting case. They’re below the threshold for estate tax considerations, so that would not be an issue.
Although politically, who knows what’s going to happen? The estate tax exemption recently doubled, so it could be halved in the future.
I should add that many states have inheritance taxes and estate taxes of their own. You have to check the tax situation in your own state.
Florida has no inheritance or estate tax, so our only concern here is federal taxes.
They own a closely held business and it’s illiquid, so that should probably be in a family limited partnership or family limited corporation. That would be a classic example.
And if estate tax laws did change, it will be a great vehicle for minimizing their exposure there. And that would also protect them from personal liability arising in the business.
Otherwise, I would just use a revocable trust for this family and title assets other than the business to the trust.
Andrew Chen 1:26:28
And the last persona I have is a 60-year-old married retiree, very large stock option windfall from their former company’s IPO, two adult children, two grandchildren, $30 million in net wealth, half of it still in company stock, and a $7 million primary residence. So doing pretty well.
In this case, their estate planning goals really are wealth preservation and true tax minimization, providing income security for spouse, safety for their children without encouraging dependency. They want their children to make an effort, but they also want to provide a safety net.
What might be appropriate? And I know this can start to get complicated, but at least any initial reactions?
Spiro Verras 1:27:11
There are a number of things you can use to reduce their estate tax liability.
I would start with the residence. I think a qualified personal residence trust would make sense for this couple. It’s a technique that you use to take the house, if you have a very high-valued house, out of the estate for estate tax purposes.
The other thing that they might consider to simplify things is an ILIT, an irrevocable life insurance trust. It’s a way that you can prepay for your expected estate tax exposure.
The problem with life insurance is that it’s an estate asset. But an irrevocable life insurance trust allows you to take life insurance out of the estate.
Because it can be self-defeating. If I try and take out a life insurance policy to cover my estate tax liability, the proceeds of my life insurance policy add to my total taxable estate.
But not if you have an ILIT. So that might be a simple way to handle this for this couple.
And you could do it on first death, possibly, or partial payout to make sure that there’s plenty of liquidity.
I would put them in a traditional trust.
And this is an issue many of my high net worth people suffer from. What do you do to avoid making your kids not incentivized to work?
The worst mistake that I’ve seen over the years is the monthly income approach or the annual income approach. If they’re just getting $300,000 a year from the trust, it disincentivizes hard work.
What most people choose to do is an incremental payout of wealth. Or sometimes they can kick the can down the road by not allowing the kids to get more than a certain amount and then giving the kids perhaps the power of appointment with regard to their share.
What happens with their kids? They let it go down the estate.
I’m involved with some probate litigation right now involving a family that three generations ago had banking wealth from upstate New York. As the family has grown, the amount that everybody gets has shrunk, but it’s still pretty substantial.
And nobody in this family has a job. All they’re doing is fighting about what share they’d get of the last person to die.
So it’s a real problem. And I prefer the chunk approach.
“When you turn 50, you’re going to get a million dollars,” rather than “I’m going to provide income for the rest of your life” approach.
But it’s a very personal decision and I like to get the whole family involved, including the kids typically, so that everybody is on the same page about it.
Because it’s going to continue. What do you do with the grandkids? If you have that amount of wealth, it’s going to be a situation that you’re dealing with for, in that case, decades to come.
Andrew Chen 1:30:06
Any other potential techniques that might apply to this scenario besides the qualified personal residence, the irrevocable life insurance, and the chunked approach?
Spiro Verras 1:30:17
Yeah. There are GRITs and GRATs, different types of irrevocable trusts.
Grantor Retained Interest Trusts, where basically you’re creating an irrevocable trust but controlling what it’s doing for the rest of your life.
They’re not rich enough that I would overcomplicate their lives with irrevocable trusts. If it were an order of magnitude wealthier, then perhaps.
But this couple, the reason I said the ILIT is because even if they did nothing, their taxable estate would be $7 million.
And if we did a QPRT, it would be zero. Because if their house is $7 million, we just addressed it by putting it in the QPRT. If there were any excess, I would use an ILIT.
Because the problem with your irrevocable trust is it does become a management issue.
I have a client who had their CPA handling all of their irrevocable trusts and he’s now out of the picture. And we’re trying to figure out what’s happening with all these irrevocable trusts.
We don’t have the records. It’s chaotic.
So it can become very complicated. I’d like to keep my clients’ lives as simple as possible.
For a $30 million wealth couple, I would do a QPRT and/or an ILIT and allow them the flexibility over their wealth and simplify their lives.
Andrew Chen 1:31:44
Perfect. Spiro, this has been really informative and insightful and a lot of fun.
Where can people find out more about you and your legal practice and services?
Spiro Verras 1:31:54
Thanks, Andrew. It’s been a lot of fun for me too.
They can visit my website. It’s verras-law.com.
Andrew Chen 1:32:05
We’ll definitely link to that in the show notes.
Thanks so much again for taking the time to chat with us today. I look forward to sharing this with all of our listeners.
Spiro Verras 1:32:14
My pleasure. Take care.
Andrew Chen 1:32:15
Cheers. Take care.