Brown McCarroll Attorneys at Law

» Estate Planning & Probate - Disability Planning

• + What is disability planning?

  Everyone hopes to remain independent during their life.  Even if old age and disease decrease your capacities (both physical and mental), you will probably want to maintain control as long as possible.  However, without advance planning, if you become incapacitated, state laws will limit you and your family.  A court may determine when you need a guardian, who the guardian will be, and the cost, bond premiums, fees, etc., to be paid (from your property).  There are several ways an attorney can help you plan for the management of your property and your health care should you become unable to do so for yourself.

• + What steps can I take to protect myself and my estate in case I become incapacitated?

  A “Durable Power of Attorney” for financial purposes allows you to name another person, usually your spouse or children, as your agent or “attorney-in-fact.”  The agent is given broad powers to manage your assets on your behalf.  This way, if something should happen to you, it will be unnecessary to go to court to have a guardian appointed in order to give someone else authority to manage your assets for you.  Remember, guardianships can be very expensive because they require a great deal of involvement on the part of attorneys and the probate court.  The term “durable” merely means that the power of attorney will not terminate if you should become incapacitated.  That is important, because usually you don’t want the power of attorney to be used until you become incapacitated.  You may even provide that the power of attorney does not become effective until you become incapacitated, although we usually recommend that the power becomes effective immediately.

  Texas law also allows you to execute two documents that relate to you, not to your assets.  One is called the “Medical Power of Attorney.”  This document allows you to name someone else who knows your intentions who can make medical decisions for you consistent with your own values and beliefs.  The person you designate may only exercise decision-making authority for you if your attending physician certifies in writing that you lack the capacity to make the health care decision for yourself.

  A similar, but different, document is a “Directive to Physicians and Family or Surrogates,” also known as a “living will.”  A living will is limited in scope since it only addresses whether life-sustaining treatments should be withheld or withdrawn while you suffer from a terminal medical condition, or an irreversible condition preventing you from caring for yourself.  Copies of both of these documents are usually available for free or at a nominal cost from your local hospital, long-term care facility, physician, attorney, and other state health associations such as the Texas Department of Aging and Disability Services, the Texas Medical Association, the Texas Hospital Association, the Texas Health Care Association, and the Texas Association of Homes and Services for the Aging.

  If you become incapacitated, a guardianship should normally be avoided, if at all possible.  However, if for some reason a guardianship is required, then Texas law also allows you to designate in advance the person you would like to act as your guardian, or to designate any person you would not wish to be your guardian.

  Many people often place funeral and burial instructions in their will.   This is inappropriate, since it is possible that your family members may not read your will until after the funeral and burial have taken place.  There is no formal written document needed to express these desires.  You should let your family members know if you have any specific desires, or consider taking care of the funeral and burial arrangements in advance.

  Finally, many people wish to allow their bodies to be used to sustain others’ lives after their own deaths through organ donation.  Many of you may have seen these forms when your driver’s license was renewed.  Various organ procurement organizations can provide you with the forms necessary to make these wishes known.

» Estate Planning & Probate - Estate Administration

• + What is probate?

  Probate is the process by which an executor or administrator of your estate gathers all of the probate assets, pays all of the debts and expenses that need to be paid, including taxes, if any, and then distributes the property to the persons entitled under your will or the intestacy statutes.  With rare exceptions, there are two types of probate in Texas: dependent and independent.  In a dependent administration, the executor or administrator, after filing an inventory listing the assets of the estate, must ask for court permission to make sales, compromise claims, or to take most other actions.  Usually, a dependent executor or administrator must file a “bond” with the probate court.  A bond is an insurance policy that guarantees the executor will be honest and do a good job.  The cost of the policy is paid out of your estate.  In addition, the executor or administrator must file annual accounts with the court, reporting all receipts and all expenses.  This type of administration involves the extensive use of an attorney, and therefore can be quite costly.

  Most of the administrations in Texas, however, are “independent.”  In 1843, while Texas was still an independent nation, our legislature authorized for the first time in America the settlement of a decedent’s estate with virtually no court supervision.  When an “independent” executor or administrator is appointed, once the inventory is filed, the executor or administrator can take virtually all steps necessary to gather the assets, pay debts and expenses, and distribute them to the beneficiaries without further court involvement.  Usually, bond is waived.  The attorney’s role is reduced drastically, resulting in a much lower cost.

• + What are “probate” assets?

  Probate assets, simply put, consist of all of the assets that you own that either pass under your will, if you have one, or pass under the intestacy statutes, if you don’t have a will.  They are also the assets that may be subject to control or supervision of the probate court and your executor or administrator.  This includes all of your property that does not pass by the “other arrangements” mentioned above.  These other arrangements include a living trust, which is a trust you create during your lifetime that holds assets for your benefit and provides for the disposition of the property in the trust upon your death; bank accounts and other property held with another person as joint tenants “with right of survivorship;” and insurance proceeds or retirement plan benefits payable to another person directly by virtue of a beneficiary designation.  Note that some assets, such as retirement plan benefits and insurance proceeds, are almost never “probate” assets because they almost always pass under their beneficiary designations directly to some other individual, while bank accounts and real estate may or may not be owned as joint tenants with right of survivorship, and therefore can be either probate or nonprobate assets, depending on how they are held.  It is very important to coordinate the disposition of any nonprobate assets with the disposition of assets contained in your will.

• + Is there a way to avoid the probate process?

  Texaslaw allows you to appoint an executor who will have authority to act independent of any probate court supervision.  This is known as “independent administration.”  If you choose independent administration, the probate court will not have any supervisory jurisdiction over your independent executor or your estate.  In fact, in an independent administration, the probate court initially only has the power to determine that (i) your will is valid under Texaslaw, was not revoked and was filed in the correct county, and (ii) the independent executor named by you is not disqualified under Texaslaw.  This is accomplished at a relatively informal hearing (the “probate hearing”) before the probate judge that can be scheduled after the will has been on file for approximately two weeks.  After the probate hearing, the only filings required in the probate court are (i) an affidavit that a notice to creditors was published in a local newspaper notifying them of the appointment of your independent executor, and (ii) an inventory of all assets passing under the will.  If you have a “living trust” (described below) and all of your assets are already held in the name of your “living trust,” then this “probate” portion of your estate administration may be unnecessary.  The “probate” portion of an estate administration typically costs about $250 in filing fees and a minimum of $1,000 to $2,000 in attorney fees.

  The remainder of your estate administration will be the same whether you have planned the disposition of your property through a will or a “living trust.”  Your executor (or the trustee of your living trust) is responsible for identifying, taking possession of and valuing all of your assets and determining and paying your liabilities.  Your executor (or trustee) is personally responsible for filing all federal and state tax returns for you and your estate and paying all taxes due.  This includes your final individual income tax return, any gift tax returns that should have been filed but weren’t, income tax returns for your estate (or trust) during administration, and estate tax returns if the value of your assets equals or exceeds the “tax-free amount” (discussed below).  After your executor (or trustee) has identified and valued all of your assets, paid all of your liabilities that are currently due, paid all of your tax liabilities, and filed all tax returns that are due, your remaining assets may be distributed to your beneficiaries in accordance with your will (or living trust).  Since your executor (or trustee) can be personally liable for your tax and other liabilities, most executors (and trustees) do not distribute assets to beneficiaries until all of the liabilities have been paid.  However, since the Internal Revenue Service has three years from the filing date of any tax return to audit and assess additional taxes, executors (and trustees) often make partial distributions to estate beneficiaries during the estate administration.

  The executor (or trustee) has authority to hire an attorney and an accountant to assist in the estate administration process.  The fees charged by these professionals are typically on an hourly basis.  In our firm, we have determined that much of the assistance the executor (or trustee) requires can be provided by our legal assistant under the supervision of one of our attorneys.  Typically, we provide the executor (or trustee) a checklist of items that must be completed and the executor (or trustee) determines which items will be completed by us, which items will be completed by the accountant, and which items will be completed by the executor (or trustee).  Under Texaslaw, an executor or trustee is entitled to reasonable compensation but provisions in the will (or trust) control whether executor (or trustee) compensation is authorized, and, if so, on what basis it is to be determined.

• + I keep hearing about “Living Trusts.” What are they, and should I have one?

  Living trusts consistently receive a great deal of publicity.  Basically, when you create a living trust, you create a trust for your own benefit that you may revoke at any time.  All of the property that you convey to the trust will be managed by the trustee of the trust.  Usually, you name yourself as the initial trustee.  The trust document will contain provisions directing the trustee to distribute whatever amounts you need to live on, while investing the remaining assets of the trust prudently.  If you should become incapacitated, then the trust provides for the appointment of a successor trustee to come in and manage the assets for you.  Upon your death, the assets pass directly to the beneficiaries named in the trust document, “avoiding probate.”  In effect, the living trust becomes a will substitute.

  While living trusts can be beneficial in certain circumstances (especially for individuals in states other than Texaswhere probate procedures are more burdensome and costly), a few misconceptions should be corrected.  First, a living trust for a Texasresident will not save a penny in estate taxes over a well-drafted, tax-planned will.  Second, the cost savings of a living trust versus a will that utilizes independent administration are minimal.  While the trust document itself may cost about the same as a will, in order for the trust to “avoid probate,” your assets must be transferred to the trust before your death.  This often may involve paying a lawyer an additional amount to prepare deeds to transfer real property or other transfer documents to transfer other property.  Third, you should still have a will.  There are invariably some assets that are not transferred to the living trust, and therefore, at the very least, you should have a will giving all of those assets to the living trust upon your death.  Finally, a living trust itself does nothing to protect the assets in the trust from your creditors.

  Because the “probate” portion of an estate administration is relatively simple and inexpensive in Texas, most of our clients typically utilize a living trust only if the trust will provide a solution to special circumstances in addition to probate avoidance.  Those circumstances include the ownership of out-of-state real property (especially if owned in a state with more burdensome probate procedures), the probability of long-term management by a third-party trustee due to the settlor’s disability, a strong desire for privacy, or the probability that the settlor will move to another state.  Avoiding probate saves court costs and attorneys’ fees at death but the costs of funding a living trust (i.e., transferring title to assets into the trust) may equal the cost of probate in an independent administration.  Therefore, if “avoiding probate” is the only reason that a living trust is being considered, the issue is whether the expected savings in “probate costs” will exceed the immediate cost of creating, funding and administering the living trust.

» Estate Planning & Probate - Family Limited Partnerships

• + What is a Family Limited Partnership?

  Family limited partnerships have received a great deal of publicity in recent years and have become popular estate planning vehicles.  A family limited partnership is simply a normal limited partnership structured under the laws of a state with family members as the partners.  Texas, as well as many other states, has adopted the newest version of the Uniform Limited Partnership Act which provides a uniform basis of law throughout most states.  In Texas, it is new called the Texas Limited Partnership Law.

• + Why use a Family Limited Partnership?

  In a limited partnership, day-to-day management of the partnership assets is centralized in the general partner(s), and the limited partners have no say in the day-to-day management of the partnership.  Retention and centralization of control is often an estate planning goal of clients.  A number of other benefits flow from family limited partnerships:

  • Gifts of limited partnership interests generally qualify for the federal gift tax “annual exclusion.”
  • The fair market value of limited partnership interests that are given to family members or trusts for the benefit of family members is usually discounted for federal estate and gift tax purposes.  In other words, due to the fact that a gift of a minority limited partnership usually transfers no management rights and remains subject to significant restrictions on further transfers, a significant discount is appropriate in valuing the partnership interest.
  • The family limited partnership can protect assets from transfers to outsiders through the transfer and buy-sell restrictions in the partnership agreement.
  • A limited partnership interest is very easy to transfer to a transferee who is a “permitted transferee.”  The transfer is similar to the transfer of a share of stock.
  • The assets in the partnership are not directly owned by the partners and, thus, are not subject to probate.  Therefore, if a Texas resident owns a limited partnership interest and the partnership owns out of state real property, no probate is required upon the death of a partner in the state where the real property is located.
  • Consolidating fragmented family interests in various assets can often be a significant advantage of a family limited partnership.
  • The partnership investment standard is lower than the standard applicable to a trustee.
  • A partnership agreement can be amended or revoked.  By comparison, an irrevocable trust cannot be amended or revoked.
  • Limited partnership interests are only subject to a charging order in Texas in the event that a partner’s creditor obtains a judgment against the partner, individually.  The charging order simply allows the creditor to receive any cash paid out with respect to the partner’s limited partnership interest but does not otherwise allow the creditor to take control of the limited partnership interest or the limited partnership assets or to be admitted as a limited partner.
• + Why doesn’t everyone have a Family Limited Partnership?

  Frankly, one of the main reasons that everyone doesn’t have a family limited partnership are the cost and paperwork associated with their creation and administration.  Aside from the legal costs associated with the preparation of the partnership agreement and the transfer of assets to the partnership, the initial filing fee alone is almost $800.  The partnership is a separate taxable entity that will have to file its own income tax return each year (i.e., accountant’s fees will be incurred annually).  Many partnerships are now subject to the Texas “margin tax.”  Also, if you plan to make gifts of partnership interests, we highly recommend that an appraiser value the partnership interests being gifted to determine the appropriate valuation discounts for lack of control and minority interest.  If the underlying assets of the partnership are hard to value, separate appraisers may be required to value these assets.  Because all of these costs can be significant, the advantages of family limited partnerships often can only be realized when the value of the partnership is significant and estate taxes are a significant concern.

» Estate Planning & Probate - Tax Planning

• + Is my estate large enough to be taxed?

  The vast majority of Americans will pay no inheritance or estate taxes.  If the value of your entire estate (including life insurance proceeds and retirement plan benefits) is less than the “tax-free amount,” after deducting debts and expenses, then there should be no federal estate taxes.  (There have been no Texas inheritance taxes since the end of 2004.)  The “tax-free amount” was $600,000 through 1997, but as a result of a 1997 change in the tax laws, the tax-free amount began increasing again, and was scheduled to reach $1 million by 2006.  However, in 2001, another tax act immediately increased the tax-free amount to  $1 million in 2002, and continued to increase it until it reached $3.5 million in 2009.  At the same time the tax-free amount was increasing, the maximum tax-rate on any estates in excess of the tax-free amount decreased from 55% to 45%.  The 2001 tax act repealed estate taxes completely for person dying after 2009 (i.e., in 2010).  However, the entire 2001 tax act expires at the end of 2010, so without further legislation, in 2011 the estate tax will revert to the changes enacted in 1997 – or a tax-free amount of $1 million, with a maximum rate of 55%.

  Most estate planners expected Congress to pass legislation in 2009 that would, at the very least, have frozen the estate tax at the 2009 $3.5 million tax-free amount, and avoid repeal of the estate tax in 2010 or reduction of the tax-free amount to $1 million in 2011.  This didn’t happen in 2009, or 2010 up to now for that matter.  We will to wait and see if Congress will allow the estate tax to return in 2011 with a $1 million tax-free amount.

  Remember that if a couple’s estate consists of community property, then only the deceased spouse’s half is considered in determining whether he or she is under these limits.  In addition, a dollar-for-dollar deduction is allowed for all property given outright to the survivor.  Therefore, a will (and other arrangements) leaving all of your property to your spouse should guarantee that no taxes will be due upon your death, no matter how large your estate.  However, if a married couple’s combined estate exceeds the tax-free amount, or may exceed that amount upon the death of the survivor, you should see an attorney who is familiar with tax-saving provisions in order to save estate taxes that might otherwise be due upon the survivor’s death.

• + What property is subject to estate taxation?

  All of your property is included in your gross estate for federal estate tax purposes upon your death.  The gross estate for federal estate tax purposes will also include any life insurance proceeds payable as a result of your death to the extent you own any rights in the policies, retirement benefits, and other property that you have transferred (as a gift) during your lifetime, if you have retained rights to receive benefits from the property or impermissibly control the transferred property.  This would include any property you have placed in a living trust for your own benefit.  In addition, the gift tax values of any taxable gifts made by you after 1976 will be added to the value of the property included in your estate in determining the amount of estate taxes.  In other words, the concept of an “estate” for estate taxation is much broader than the probate estate (the portion that your will controls).  Taxes are imposed upon your property regardless of whether it passes under your will, a beneficiary designation (e.g., a life insurance, annuity or retirement plan beneficiary designation), a contract (e.g., a bank or brokerage account contract), or in some other manner.

• + Are there exceptions for spouses?

  If you are married, all property that you give (during lifetime or at death) to your spouse passes free of estate and gift taxation (exceptions apply if your spouse is not a U. S. citizen).  This allows a married couple, through proper planning, to postpone all estate taxation of their property – no matter the size of their combined estates – until the surviving spouse’s death, preserving all of their property for the support and maintenance of the surviving spouse.  This is accomplished by giving all of the first spouse’s property that exceeds the tax-free amount at the death of the first spouse to the surviving spouse in a qualifying manner.  This property (and its appreciation) will be taxed when the surviving spouse dies.  The surviving spouse gets the interest‑free use of the tax dollars that would otherwise have been paid upon the first spouse’s death.

  Coordinating the Unlimited Marital Deduction with the Tax-Free Amount. – In most circumstances where a couple’s combined estates will exceed the tax-free amount, the marital deduction gift is combined with a “bypass” trust.  All of the first spouse’s property, up to the tax-free amount at the time of the first spouse’s death, will be placed in a trust that bypasses the surviving spouse’s estate for estate tax purposes upon the survivor’s death.  The survivor is a still a beneficiary of the trust and usually is also the trustee of the bypass trust.  However, the assets in the trust (regardless of value) will not be taxed at the survivor’s death.  In other words, it’s only the estate taxes in the surviving spouse’s estate that are being “bypassed,” not the surviving spouse.

  Qualifying Marital Deduction Gifts. – As noted above, the balance of the first spouse’s property (not passing to the bypass trust) usually passes to the survivor in a manner that qualifies for the unlimited marital deduction.  The two most common options for this marital deduction gift are an outright gift of property to the survivor or a gift of property to a special trust for the survivor’s benefit.  Generally, in order for a gift in trust to qualify for the marital deduction, the surviving spouse must be entitled to all of the income from the trust for life and no distributions may be made to anyone else during the survivor’s lifetime.  The assets in this trust will be subject to estate tax at the survivor’s death.  This type of trust is typically called a “QTIP” trust, which stands for qualified terminable interest property.  And even more stringent requirements must be met to qualify property passing to a non-U. S. citizen spouse for the marital deduction.

• + Are there tax advantages to leaving a portion of my estate to charity?

  If you wish to make charitable gifts in your will, the form of the gift must be carefully reviewed, especially if the gift will be in a trust with non-charitable beneficiaries as well.  Special requirements must be met to assure that the gift will qualify for a charitable deduction for estate tax purposes.  If funds are available for lifetime gifts to charity, the overall tax benefits may be greater, since lifetime charitable gifts will usually generate income tax savings not available for gifts made by will.

• + Do my beneficiaries have to pay income taxes on their inheritance?

  Generally, assets received by the beneficiaries of your estate are not taxable as income to them.  Income taxes will have to be paid on any income earned by those assets following your death, and retirement plan benefits will constitute taxable income to the recipients (although surviving spouses may roll these benefits over into an IRA and defer income taxation).  Also, except for 2010 when there is no estate tax, the assets passing to your beneficiaries receive a new “basis” for determining capital gains equal to their value on the date of your death.  This means that even if you purchased an asset at a very low price, if your children sell that asset following your death, they will only have to pay capital gains taxes on the appreciation of that asset between the date of your death and the date they sell the asset.  And even though this complete basis increase is not available in 2010, a $1.3 million basis increase (plus an additional $3 million basis increase for property passing to a surviving spouse) may be available for property passing as a result of deaths that year.

• + If I start giving away portions of my estate now, will it reduce my estate taxes?

  A gift program not only benefits your family during your lifetime but also reduces the potential estate tax impact upon your estate.  The gift program may also accomplish some income tax savings.

  Beginning in 2009, you may give up to $13,000 annually to any number of people you desire and the gifts will not be considered taxable gifts so long as the total given to any one person during a calendar year does not exceed $13,000, and the gift is of a present interest.  This $13,000 limit is called the “annual exclusion” and may be used each year.  A present interest means that the gifts are given outright to the donee or to a special, qualifying trust for the donee’s benefit.  In addition, any amounts paid on behalf of another (i) as tuition to certain educational organizations or for the person’s education or training or (ii) as a payment for medical care to any person who provides medical care will not be considered as taxable gifts.  The exclusion for medical expenses and tuition is in addition to the $13,000 annual gift tax exclusion.  Any non-taxable gifts (with limited exceptions relating to transfers of life insurance and certain other retained interests within three years of your death) will permanently remove the gifts from taxation in your estate and will not be considered in computing the estate taxes due upon your death.

  In addition to outright gifts, there are two types of trusts that normally can qualify for the annual exclusion:

  Twenty-One Year Trust. – One type of trust that can be used for gifts for the benefit of a minor is referred to as a twenty‑one year trust because the beneficiary must be given the right to receive all of the trust property upon attaining twenty‑one years of age.  Income earned by the property given to the trust can be distributed to the beneficiary or accumulated in the trust prior to this time.

  Annual Withdrawal Trust. – Another type of trust that allows gifts to qualify for the annual exclusion is referred to as the annual withdrawal “Crummey” trust because it allows the beneficiary to withdraw from the trust each year an amount of property equal to the total annual exclusions available to donors who have given property to the trust that year.  This trust is patterned after the trust approved in the case of Crummey vs. Commissioner.  The beneficiary need not withdraw the annual exclusion amounts from the trust; he must only have the right to do so.  This is the type of trust most often used for annual exclusion gifts.

  Taxable Gifts – Any gift (other than the payment of tuition and medical expenses) that exceeds the amount of the annual exclusion available for the donee or does not qualify for the annual exclusion because the gift is not a present interest will be considered a “taxable gift,” and will require the filing of a gift tax return.  However, you won’t have to actually pay any gift taxes until your cumulative lifetime taxable gifts exceed the tax-free amount for gift tax purposes ($1 million).  The value of the taxable gifts at the date of the gift will be included in computing the estate taxes due upon your estate.  However, since the value of a taxable gift on the date of gift is used in computing estate taxes, the appreciation in value of the gift between the date of the gift and the date of your death is not included in the computation and escapes taxation.  Therefore, taxable gifts can be an effective estate planning tool if the property has a high potential for rapid appreciation and there is a substantial period of time between the date of the gift and the date of your death.

• + Are there any income tax benefits to giving gifts?

  The Donee’s Income Tax Bracket – In some situations, a gift program may generate income tax benefits.  Under current law, if you give property outright to a donee, the donee is taxed on all income generated by the property after the gift.  However, if the donee is a minor under the age of 14 years, while the minor will be taxed on all income generated by the property, the tax will be imposed at his or her parents’ rates.  If property is given to a trust for the benefit of a donee, income generated by the property will be taxed (i) to the donee to the extent that the donee could have withdrawn the income from the trust, or to the extent income was distributed from the trust to the donee (but at the parents’ rates if the donee is under 14), or (ii) to the trust to the extent that income was not distributed to or withdrawable by the donee.  Thus, when you give property to a trust, the income generated by the property may not only be removed from your taxable income but may be split between the trust and the beneficiary.  Generally, the more your income can be split, the lower the tax.  Unfortunately, trusts usually reach the maximum level of income taxationvery quickly.  Sometimes, we can structure a trust so that the original donor pays the income taxes on the trust’s income.  This payment does not constitute an additional gift to the trust, even though it, in effect, allows the trust to grow “free” of income taxes.  Trusts can also be extremely beneficial if you are currently supplementing another person’s income, such as an elderly parent living on a fixed income or a child or grandchild attending school.  However, very little income shifting results from gifts for the benefit of a person under the age of 14 years.

  “Grantor Trusts” – Some trusts can be drafted so that the assets of the trust will be excluded from the donor’s estate, for estate tax purposes, but the income generated by those assets will still be taxed to the donor for income tax purposes.  Technically, this might logically be seen as an income-tax disadvantage to the donor.  But in this situation, the donor’s payment of the income taxes on property that has already been given away is not considered an additional gift.  Therefore, if the donor’s objective is to maximize the amount of property passing to the beneficiaries of the trust, this strategy effectively results in a tax-free gift of the income taxes that would otherwise be paid by the trust or its beneficiaries.

» Estate Planning & Probate - Trusts

• + Can I set up a trust now to manage my family’s estate for future generations?

  In general, if your estate is sizable, you should also consider the potential estate tax liabilities of your children.  If your children will have significant estates, either through inheritance or through their own earning capacities, it may be desirable to replace outright gifts to children with trusts for their and their descendants’ benefit, designed to avoid estate taxes upon the children’s deaths (“generation‑skipping transfers” or “GST”).  Please note that the phrase “generation-skipping transfers” refers to the skipping of estate taxes only in the estates of younger generation beneficiaries, not the skipping of any younger generation members as beneficiaries.  These types of transfers are subject to a separate “generation‑skipping transfer tax” or “GST tax.”  Any transfers subject to the GST tax are taxed at the highest marginal estate tax bracket.

  However, through the end of 2009, each donor had a “GST tax exemption” equal to the tax-free amount for estate tax purposes (described below), plus certain transfers within the annual gift tax exclusion.  The GST tax is subject to temporary repeal in 2010, but absent federal legislative action, will be reinstated in 2011 with a GST tax exemption of $1 million, indexed for inflation following 1997 (estimated to be about $1.35 million in 2011).

  Tax Benefits. – Through proper planning, a husband and wife can place assets with a value equal to their combined GST tax exemptions in GST trusts that can last for several generations without further estate taxation.  The only limit on the duration of these trusts is the “rule against perpetuities,” which basically requires that all trusts terminate 21 years following the death of all “lives in being.”  Usually, this means that the trusts must terminate 21 years after the death of all of your descendants who are alive at your death (or when you make an irrevocable gift to the trust).  During the lifetime of a beneficiary of a GST trust, the beneficiary and his or her descendants may receive distributions for their benefit.  Upon the beneficiary’s death, the property remains in trust for the benefit of the beneficiary’s descendants, but is not included in the beneficiary’s estate for estate tax purposes.

  Non‑Tax Benefits. – Since the beneficiary does not directly own the property in the GST trust, the property will not be subject to the claims of the beneficiary’s creditors.  The beneficiary may be in a high‑risk profession (e.g., malpractice suits against a doctor or lawyer), or may face large potential debts (e.g., liability on real estate loans).  The GST trust can provide a “nest egg” against unforeseen adverse economic situations that might wipe out the rest of the beneficiary’s estate.  Through proper planning, the beneficiary can protect these assets from creditors, and still maintain a significant degree of control over the assets as trustee of the GST trust.  This same feature of the trust may keep the assets in the GST trust from becoming “marital property” subject to division in the event of the beneficiary’s divorce.  The GST trust may also provide a means of centralizing the management of certain family assets in a limited number of trustees while spreading the economic benefit of these assets among a large number of family members.

• + I am on my second marriage, and have children from both marriages. Can I set up a trust that will protect the rights of all of my heirs?

  Congress first authorized the use of QTIP (qualified terminable interest property) trusts in 1981 in response to the large number of second marriages.  Before then, in order for the first spouse’s estate to take advantage of the marital deduction (and defer estate taxation until the survivor’s death), the surviving spouse had to have a power of disposition over the assets at his or her death.  If the first spouse had children by a prior marriage, this put them at risk of being disinherited by the surviving spouse.  The QTIP trust was an attempt to address this problem by eliminating the requirement that the survivor have a power of disposition over the assets.  In fact, if the first spouse wishes, he or she can name someone other than the survivor as trustee, prohibit distributions of principal to the survivor, and control the disposition of these assets at the survivor’s death.

  Non-Tax Benefits of QTIP Trusts. – While many of our clients may have no desire to place these types of restrictions upon the survivor, QTIP trusts can still serve a valuable non-tax purpose.  They can provide an efficient vehicle for asset management if there are concerns about the survivor’s ability to manage the assets given to him or her in satisfaction of the marital deduction gift.  Even if management is not a concern, the QTIP trust can provide protection for these assets from the survivor’s creditors that would not be available if the assets were given to the survivor outright.  Also, the first spouse to die can control the disposition of these assets at the surviving spouse’s death through the QTIP trust, rather than have the disposition of these assets controlled by the surviving spouse’s will.  QTIP trusts may also play a role in maximizing the use of both spouses’ GST exemptions.

• + Will my family have to pay taxes on my life insurance benefits? If so, is there a trust that can help minimize the tax burden?

  Many of our clients are under the mistaken impression that life insurance benefits pass free of estate taxes.  While the proceeds of life insurance generally are paid to the beneficiaries free of income taxes, those proceeds will normally be included in the insured’s estate for estate tax purposes.  If you have a substantial amount of life insurance that you intend to keep until your death, there may be measures you can tax to shield the proceeds from estate taxes also.  For example, assume that a husband is heavily insured.  The husband may create an irrevocable (meaning it cannot be changed later) trust for the benefit of his wife and descendants and give the insurance policies on his life to the trust.  He also continues to give sufficient cash to the trust each year to allow the trustee to pay the premiums on the policies.  If the trust remains both the owner and the beneficiary of the policies and the husband retains no control or access to the policies, then the proceeds will be excluded from the husband’s estate for estate tax purposes (and if properly structured, will be excluded from the wife’s estate also).  If the husband does not wish to create an irrevocable trust during his lifetime, as a partial measure, his wife could include provisions in her will giving her interest in those policies to a trust in the event she dies before her husband..  This can prevent the wife’s portion of the proceeds from being taxable at the husband’s death.

» Estate Planning & Probate - Wills

• + Do I need a will?

  Yes!  Even though it is possible to structure the ownership of your assets to avoid the need for any of these assets to pass “under your will,” this method is almost always more cumbersome and expensive than a will.  Many people do this in order to try to avoid probate because of the perception that probate is an expensive procedure.  In Texas, because of our “independent administration” statutes, probate can be relatively easy and inexpensive if the will is properly drafted (and the attorney handling the estate knows what he or she is doing).  And no matter how diligent you are in structuring the ownership of your assets, almost everyone owns some asset (a car, household goods, or a rent deposit, for example) that does not automatically pass to their beneficiaries at death without some type of probate proceeding.  In Texas, a will is the simplest and easiest form of accomplishing the goal of making sure that your property passes at your death to the right people in the right way.

• + Who will get my property if I don’t have a will?

  In the absence of a will or other arrangements controlling the transfer of your property at death, your property passes under the “intestacy” statutes.  (Those “other arrangements” are discussed below.)  A person is said to die “intestate” if he or she dies without a will.  If a person has a will, but it fails to deal with all of the person’s property, the person dies “partially intestate.”

  The rules governing community property (i.e., the property a married couple accumulates during marriage) remained unchanged in Texas for well over 100 years.  Any community property (almost all property acquired by spouses during marriage) was divided in half.  The surviving spouse kept his or her half, while the deceased spouse’s half passed to his or her descendants (children, grandchildren, etc.).  Many people assumed [incorrectly!] that the survivor would get all of the community property.  However, until 1993, this wasn’t the case if the deceased spouse had any descendants.  Then, effective September 1, 1993, the intestacy statutes were changed.  Since then, all of the community property will pass to the surviving spouse as long as all of the deceased spouse’s descendants are also descendants of the surviving spouse.  If the deceased spouse has any descendants who are not also the survivor’s descendants, then the old rules apply, and the deceased spouse’s half passes to his or her descendants.

  Separate property passes by a different set of intestacy rules.  Separate property consists of any property owned by a person before they were married, and any property that they were given or inherited after marriage (plus the appreciation on the separate property).  If you are married and have descendants, one-third of your separate real estate (which includes mineral interests) will pass to your spouse “for life,” and the other two-thirds will pass to your descendants.  Your spouse will be entitled to the income generated by the portion of the real estate passing to him or her, but the underlying property will eventually pass to your descendants upon your spouse’s death.  All of the rest of your property, such as personal effects, bank accounts, stocks, bonds, etc. (“personal property”), passes one-third to your spouse and two-thirds to your descendants.

  If you are married but have no descendants, then half of your separate real estate passes to your spouse, while the other half passes to your parents, siblings, or their descendants.  All of your separate personal property passes to your spouse.

  If you are not married, all of your property passes to your descendants, if any.  If you have no descendants, your property passes to your parents, siblings, or their descendants.

  One “exception” to these rules applies to your homestead.  Unless properly waived, your spouse has the right to use and occupy your homestead as his or her home for the rest of her life, regardless of whether the homestead was community property or your separate property, or who inherits the property.  Similar rules apply to limited amounts of exempt personal property.

• + Okay, so I need a will. Can I write it myself?

  Yes and no.  There is certainly no legal requirement that a will be drafted by an attorney.  In fact, it does not even have to be witnessed.  Texas law allows anyone to execute a “holographic” will.  This is a will that is written entirely in your own handwriting and signed by you.  Unfortunately, while a holographic will may be valid to dispose of your property, the money saved by avoiding a lawyer today is usually far less than the extra cost of dealing with the problems associated with most holographic wills, such as getting the holographic will admitted to probate, dealing with property that is not disposed of by the will, the failure to provide for independent administration, or an unfair disposition of your property because the will failed to anticipate an unusual order of deaths among the beneficiaries.  In other words, “pay now or pay later.”

• + What should my will contain?

  There are a number of provisions a will should contain in order to make sure property ultimately gets to your intended beneficiaries with the least difficulty and cost.  Your will should state the county and state of your residence.  The will should appoint one or more executors (with alternates).  The executor can be an individual or a bank with trust powers, but need not live in Texas.  In order to avoid added expense, you should provide that your executors be “independent executors” and waive bond.  Independent administration eliminates most of the expenses normally associated with probate.  A bond is usually unnecessary if you appoint someone you trust.

  Many wills begin with directions that the executor pay all debts, taxes and expenses.  These directions are not necessary, since the executor is under a statutory duty to pay these items even in the absence of any directions in the will.  However, if your will makes any specific gifts to particular beneficiaries, your will should say whether or not those gifts should bear a proportionate share of taxes and expenses.

  For most people, the most important provisions of their wills deal with who gets the property.  You need to consider whether to leave all of your property to your spouse, or whether to make some provisions for children or other loved ones.  A well drafted will should also contain provisions dealing with the possibility that your intended beneficiaries may not die in the normal order.  You may not get around to executing another will after one of those beneficiaries dies (or you may not have the legal capacity to change your will at that time), so the will should take this possibility into account.  After you have made any special gifts that you desire, your will should contain a “residuary clause” that disposes of anything else you may own at your death (whether or not you own it now, or know you own it at your death).  Special provisions for minor or incapacitated beneficiaries are discussed below.  The will may name guardians for your minor children, although that is often done in a separate instrument.  Your will should give the executor all necessary powers to settle your estate and divide up your assets among the beneficiaries.  Your will must be signed and dated by you (“the testator”).  In addition, the will should be signed by two witnesses older than the age of fourteen who are not beneficiaries named in the will (unless the will is “holographic”).  Most Texas wills also have a provision called a “self-proving affidavit” that makes it much easier (and less expensive) to probate the will following your death.

• + What about the kids?

  There are two different big questions that you should consider, and the answers to those two questions may not be the same.  First, you need to decide who will take care of your children if you die before they become adults.  The person who gets custody of your children is called a “guardian of the person.”  You can name a guardian either in your will or in a separate document.  You can name two people to serve as co-guardians for your children, but only if they are married to each other.  Again, you should designate alternate guardians in case the people you choose first either cannot or will not act as guardians.  Also, you should appoint someone you trust, and waive any bond requirement.

  If you fail to name a guardian for your minor children, then their closest ancestor (your parents, for example) is entitled to be appointed.  If there is more than one ancestor in the same generation, they are equally entitled, and it is up to the probate court to determine whose appointment would be in the child’s best interest.  If there are no grandparents (or great-grandparents), then the “nearest of kin” is appointed guardian.  This would usually be an uncle or aunt, but could be a sibling if you had an adult child.

  The second question you should address is who will take care of any property passing to your children.  As minors, the children do not have the legal right to take possession of any property passing to them.  If you do not make any other provisions in your will, then someone will be appointed by the court as “guardian of the estate.”  This type of guardianship (as opposed to a guardianship of the person) can be very expensive.  The guardian of the estate must seek court permission for virtually any action, and must file an “account” annually, listing every receipt, every expense, and the property remaining on hand.  Because all of these documents that are filed with the court are prepared by lawyers, the cost of a guardianship can be extremely high.  You can and should avoid a guardianship of the estate for your children by providing in your will that any property passing to your children will pass instead to a trust for their benefit if they are under the age of eighteen years (you can set a higher age if you wish, and most people do).  The property that would otherwise pass to a minor child will instead pass to one or more trustees whom you select who will then invest the property for the benefit of the child and distribute funds to the person having custody of the child as necessary for their health, support and education.  The trustee is not subject to day-to-day court supervision, and therefore the expenses associated with property held in trust are minimal.

  The guardian of the person is in charge of raising your children, while the trustee is in charge of prudently managing and spending the property passing to your children.  It may be that one person (or one couple) will not be the best person to fill both roles.  Therefore, you may decide to name one person or couple as guardian of the person, and name someone else as trustee.

  Your will can also contain a trust similar to the one described above for minor children that would automatically hold any property passing to an incapacitated beneficiary until the beneficiary regained capacity.  Again, the benefit of this trust is the avoidance of the high cost usually associated with a guardianship of the estate.

• + What if I get divorced?

  If you are divorced after executing your will, Texas law provides that any provision in your will giving your ex-spouse property or naming the ex-spouse as a fiduciary (executor, trustee, or guardian) is read as if the ex-spouse died before you.  The same rule applies to any gifts or appointments in favor of relatives of the ex-spouse (unless they’re also related to you)  A similar rule usually applies to life insurance payable to an ex-spouse.  However, reviewing the provisions of your will and the beneficiary designations for your life insurance and retirement plans should always be done during or immediately following a divorce.  And keep in mind that there is no such provision automatically revoking the survivorship provisions of bank accounts held jointly with rights of survivorship.

• + How do I designate a beneficiary for my life insurance proceeds and retirement plan benefits?

  Normally, you would name your spouse as the primary beneficiary of insurance proceeds and retirement benefits upon your death by executing a beneficiary designation provided by the insurance company or the retirement plan administrator.  You also need to name a “contingent” beneficiary.  This is the person who will receive the proceeds in the event your primary beneficiary dies before you do.  Most people name their children.  This may not be best.  If your children are minors, then the proceeds or benefits may have to be paid to a guardian of the estate which can generate substantial costs.  This could be the case even if your will provides for trusts for your children because the beneficiary designations override the provisions of your will.  In addition, the beneficiary designation may not make clear what happens to the share of a deceased child (for example, whether it passes to that child’s children, or to your other children).  You can, however, coordinate these beneficiary designations with the provisions of your will.  Your will should contain a provision placing any of these proceeds that are made payable to the trustees named in your will into trusts for your children or their descendants.  By naming the trustees in your will as contingent beneficiaries, the proceeds will pass directly to the trusts for your children.  One benefit of this arrangement is that your children get the benefit of the proceeds as if they had passed to them under the will, but the proceeds are not subject to your creditors’ claims.  This can be a problem, however, if you are relying upon these proceeds to pay debts, funeral or other administrative expenses after your death.  The best solution is to discuss these questions with an estate planning attorney when your will is drafted.