By Steven J. Gibbs, Esq.
Here at Health and Wellness, summer travel month brings a reminder to drive safely. When accidents occur, sometimes lawsuits result and personal injury settlements follow. However, you may be surprised to learn that receiving a lump sum of cash may not always be a good thing. What I mean is, a lump sum can create estate planning complications that you may not have anticipated.
This article will offer an idea of what to consider and expect, so you can properly create a new estate plan or update your existing plan.
There are a few key estate planning areas that are impacted if you receive a legal judgment award as follows.
2. ESTATE TAXES
3. ESTATE DISTRIBUTIONS
Probate is a court process that is necessary to get your assets re-titled and distributed to your heirs and/or beneficiaries. Probate fees and costs and often based upon the value of the estate assets, is if a lump sum legal award is received, this means probate costs and fees may have just gone up significantly.
Like any other court process, probate is a formal proceeding that involves a judge. Legal paperwork, called a petition, must be filed to open what is called an “administration” of the estate. When someone dies without a last will and testament, this process gets even trickier.
Common ways to avoid probate are through using a revocable or irrevocable trust OR through joint titling of assets. Transfers upon death are also sometimes used. All of these methods are designed to pass title to the assets without the need for a probate judge’s order.
Legal Awards and Probate
When it comes to legal awards and probate then, the proper approach is to make sure they are in an account that is titled either in a trust OR jointly OR in a POD or TOD account. If this is properly done, then probate of the proceeds can be avoided.
Overview of Estate Taxes
For larger estates, a legal award may be subject to federal and/or state estate taxes. As a brief overview, the federal estate tax is a lump sum tax based upon the value of the gross estate at the estate owner’s death. This amount includes the death benefits from all accounts and insurance and is approximately 40% of the value. So a $500,000 legal award may be reduced for your heirs by 40% or $200,000. State estate taxes vary and may or may not apply based upon the state laws.
Estate Tax Exemption
As of this writing, you can pass $5,490,000 as a single person and double that if you’re married without incurring estate taxes. This may all change with the current administration who is considering abolishing the federal estate tax, although this question has been being debated for years.
Limiting Estate Taxes
Estate taxes can be avoided or limited by spousal planning, gifting, using trusts OR charitable planning strategies. These strategies are all somewhat complicated, so you’ll need the assistance of an estate tax expert if you’re facing this circumstance.
Legal Awards and Estate Taxes
Regardless of the strategy used, the key to estate tax planning, similar to probate, is how the assets are titled. The legal award can be transferred to an irrevocable trust, such as an ILIT, and used to purchase insurance. Another way may be to use a charitable trust. These are ways for you to use the income AND to preserve assets free of estate taxes for your heirs.
Another possible unintended consequence of your legal award, is to throw off the distributions or your current estate plan.
An Overview of Estate Distributions
Your last will and testament AND/OR your trust will determine “who gets what” of the remains of your estate. Often, people are making distributions based upon their current knowledge of their estate. Personal and business assets may be involved, and certain assets may be designated to go to certain people.
Estate Distributions and Legal Awards
For example, let’s say you received $300,000 as a legal judgment award BUT your last will or trust provides for something other than an equal distribution of your estate. If your estate plan isn’t updated, in order to factor in your legal award AND direct how much of the balance goes to each heir, needless confusion and litigation can result.
The point of all of this, is that you’ve probably spent enough time in hard fought court battles to obtain your legal judgment award. You don’t want your loved ones to endure the same experience. Yet, failure to update your estate plan after having receive a substantial legal award can throw your heirs into a needless court battle. On the other hand, updating your plan with the help of an experienced estate planning attorney can be a simple and empowering process.
Steven J. Gibbs is a trust and estate planning attorney who provides complete Estate Planning, Trust Planning, Business Planning, Asset Protection, Elder and Medicaid Planning, Real Estate, Probate and Trust Administration legal services in Florida and California. Steve’s main offices are located in Fort Myers, Florida, and San Juan Capistrano, California. Estate planning legal services are provided statewide in these locations.
The Gibbs Law Office was founded by Steven Gibbs in January 2009 upon the commitment to provide client-centered legal services.
Steven Gibbs founded the Gibbs Law Office in January 2009, committed to providing client-centered legal services.
Steve as he would rather be called, is not your typical attorney. If you appreciate the staunch egotistical mannerism of most firms, you will be delighted with Steve’s unpretentious approach to educating and then assisting his client. Instead of giving you his complacent and lofty ideas, he would rather pursue your expectations with professional conversation about resolving your concerns under the Law. It’s your life and it’s his job to make your legal expectations come true while using years of his guidance and knowledge.
Steve was admitted to the Minnesota Bar in 1999, the Florida Bar in 2007 and was recently admitted to the California bar. Keeping abreast of law changes in these three States, as well as the United States, assists him in all aspects of the types of law the firm practices.
Along his career path, he was an associate attorney for an insurance defense law firm; an in-house real estate negotiator for Target Corporation; and corporate counsel for Civix, LLC and Vice President for North American Properties where he was responsible for various real estate transactions, including legal issues and negotiating unresolved business issues. Prior to opening Gibbs Law Office, PLLC, he was an associate with the firm of Roberts & Engvalson, P.A. where he gained his knowledge of trusts, estate planing and Wills. He opened his own firm in 2008 and now focuses on laws that will enrich the needs of his clients throughout their lives and those of their children. The firm has developed a practice dealing only with Trusts and Estate Planning, Wills, Medicaid Planning, Elder Law, Real Estate, Business Law and Probate.
Quoting from Steve “I decided to practice in areas that families will need as they progress down life’s path. To help them with a solid foundation that will carry them throughout there lives is a rewarding experience for me and my staff.”
Steven J. Gibbs, Esq.