- Do I really need a Will?
- What are “probate” and “non-probate” assets?
- Is it really important to avoid probate?
- What are the most common types of Wills?
- What is a Revocable Living Trust?
- Is a Revocable Living Trust better than a Will?
- Are there any issues that arise when a Revocable Living Trust is used instead of a Will?
- How can I reduce my federal estate taxes?
- What is the difference between an “executor”, a “guardian,” and a “trustee”?
- How can I plan for my possible incapacity?
- What is a Durable Power of Attorney?
- What is a Medical Power of Attorney?
- What is a HIPAA Authorization?
- What is a Directive to Physicians, Family or Surrogates?
- What is a Declaration of Guardian in Event of Later Incapacity or Need of Guardian?
- Estate Planning Questionnaires
A Will, of course, is a written document designed to dispose of your probate assets in the event of your death. Do you need a Will? No, not really. You don’t need a Will. After your death, you won’t need anything this world has to offer! On the other hand, if you desire to responsibly provide for the disposition of your property for the benefit of your family after your death, then your family may need for you to have a Will to make it as easy as possible for your loved ones. Following are a few examples of when it can be very important for you to have a Will.
- If you have minor children. If you have one or more children under age 18, then you should have a Will for several reasons. First of all, with a Will you can name a guardian of the person to raise your children if your spouse is not living. You can name the person of your choice, who may or may not be a family member, and you can name alternates in the order you wish them to serve. If you do not name guardians in your Will or another document, then the probate court will choose the guardian for your children, based on a statutory order of preference. Next, you can provide that your property will go into trusts for your children, instead of to your children outright, so that an expensive, court-supervised, guardianship of the estate will not be necessary for your children (See Children’s Trust Wills.)
- If you and your spouse have been married before. If either you or your spouse has children from prior marriages, then you and your spouse should each have Wills specifying to whom your property will go in the event of death of either of you. If you have children from a prior marriage, then in the event of your death without a Will, your one-half of any community property will go to your children, rather than your spouse. And if your spouse has children from a prior marriage, then at your spouse’s death without a Will, your spouse’s one-half of any community property will go to your spouse’s children, and not to you. If you or your spouse wishes to change that result, then you will need to have a Will to do so.
- If you want to lower the costs of administering your estate. With a Will, you can name an executor of your choice, make the executor independent of probate court supervision, eliminate the requirement of bond, provide that your executor will serve without compensation, and give the executor powers which may be needed to administer your estate. If you do that, then the cost of administering your estate and transferring your estate to your beneficiaries can be reduced. Please note, however, that in some cases, compensation paid to the executor is well-deserved.
- If you have a large estate and wish to reduce federal estate taxes. One of the basic estate planning strategies for married couples with large estates is to create a “bypass trust” for the survivor. In order to do this, you will need a Will (or a Will substitute, like a Revocable Living Trust). See Bypass Trust Wills or Bypass/QTIP Trust Wills.
- If you wish to provide for charitable gifts. If you should die without a Will, your probate assets will pass to your heirs. The identity of your heirs depends on your marital status, whether you have children, whether your property is community property or separate property, and other factors. If you have no living heirs (which is very rare), your property will pass to the State of Texas. If you would prefer that any of your probate assets be given to charitable organizations, then you need a Will (or a Will substitute, like a Revocable Living Trust) to achieve that result.
This answer is intended to provide general information and should not be considered as the rendering of legal advice. If you need advice about a particular legal matter, you should consult an attorney.
Probate Assets. The assets which are subject to disposition in your Will are referred to as probate assets and constitute your probate estate. Assets are generally probate assets, unless they fall within one of the categories of non-probate assets. In Texas, real estate is almost always a probate asset.
Non-Probate Assets. Non-probate assets are assets which do not pass under your Will, but rather pass directly to the recipient without going through the probate process. The recipient of non-probate assets is not determined by your Will, but is determined by a contractual relationship or beneficiary designation signed or entered into while you are living. The most common categories of non-probate assets are:
- Life insurance proceeds, which are paid according to a beneficiary designation signed by you as the owner of the policy.
- Retirement plan benefits, including individual retirement accounts, 401(k) plans and other qualified plans, 403(b) annuity plans, and similar arrangements. The benefits from these plans and arrangements are generally paid pursuant to a beneficiary designation which you have signed as the participant or owner.
- Tax-deferred annuities are paid according to the contract or the applicable beneficiary designation.
- Real property, securities, bank accounts, brokerage accounts, and other property owned by you and another person as joint tenants with right of survivorship, as community property with right of survivor or in multiple party accounts with right of survivorship. (In Texas, real property is rarely owned as joint tenants with right of survivorship.) After the death of one party, these assets generally belong to the surviving party.
- Accounts in banks and other financial institutions which you hold as “payable on death” (or “P.O.D.”) accounts or as Totten trust accounts (accounts styled as “John as trustee for Mary” when there is no separate trust agreement). After the death of the owner, the funds in these accounts are payable to the designated payee or beneficiary.
- Brokerage accounts or securities held as “transfer on death” (“T.O.D.”) accounts or securities. After the death of the owner, the funds in these accounts are payable to the designated transferee.
- Assets held in revocable and irrevocable trusts created during your lifetime. The assets in the trust are generally not covered by your Will.
There may be other types of non-probate assets as well. Please note that non-probate assets can become probate assets if there is no named or surviving beneficiary. As part of the estate planning process, it is important to review ownership and beneficiary designations for non-probate assets to make sure that they are properly coordinated with your estate plan. If they are not properly coordinated, then you may not be able to achieve your planning objectives.
This answer is intended to provide general information and should not be considered as the rendering of legal advice. If you need advice about a particular legal matter, you should consult an attorney.
“Probate” is the term used to broadly describe the process of administering an estate after a person’s death. The process begins when the decedent’s Will is filed with the probate court, after which a hearing is held to determine whether the decedent has died, whether the document filed with the court is the decedent’s final Will, and whether the person named in the Will as executor should be appointed to serve in that capacity. The judge then signs an order which admits the Will to probate and appoints an executor who is responsible for carrying out (“executing”) the terms of the Will. This usually involves collecting the probate assets, paying debts, filing any necessary income tax, estate tax, and inheritance tax returns, and then distributing the property to the proper persons as provided in the Will. The probate process usually involves procedures whereby creditors of the decedent can advise the executor of the decedent’s debts in order to receive repayment. The probate process can serve important functions in transferring property, and especially in clearing title to real estate.
Note: While the term “probate” technically applies only to a proceeding involving a Will (“probate” literally refers to proving that a document is the decedent’s Will), the term is now broadly used to describe most proceedings in the probate courts, even those involving decedents who die intestate (that is, without a Will).
The details of the probate process vary tremendously from state to state. In many states, the process is closely supervised by the probate court, resulting in a lengthy and expensive process. In some states, the cost of probate in terms of statutory attorneys’ fees and executor’s fees is measured as a percentage of the probate estate. In the case of smaller estates, the cost of probate may exceed 7% or more of the total probate estate. In states like these, it is not uncommon to hear someone say something like, “The most important thing you can do while you are living is to arrange your estate so that your heirs can avoid probate when you die.” A great deal of time and effort is then expended on arranging one’s affairs so probate can be avoided. In these states especially, the Revocable Living Trust has become an important estate planning tool to use as a substitute for a Will, because using a fully funded Revocable Living Trust may result in significant savings.
In other states, the probate process is much more streamlined and can be completed relatively quickly and inexpensively. This is usually accomplished by reducing the extent to which the probate courts are involved in the process. Several states provide for a streamlined process for smaller estates, but more extensive supervision for larger estates. A few states, however, provide a streamlined process applicable to any estate for which a decedent indicates an intention that the streamlined process apply. In Texas, for example, well-drafted Wills usually provide that the executor is to be “independent” of probate court supervision, making the process much simpler and less expensive. In Texas, attorney’s fees for probate are generally computed based on the time expended by the attorney at the attorney’s hourly rate. In some cases, attorneys will charge a flat fee for probating a Will. On the other hand, if a Texas decedent dies without a Will, the costs of the probate process in Texas may be comparable to the costs in other states.
This answer is intended to provide general information and should not be considered as the rendering of legal advice. If you need advice about a particular legal matter, you should consult an attorney.
Although each person has different circumstances, persons in similar family and financial circumstances often implement similar plans for disposition of their estates. Following are description and discussions of some of the most common estate planning strategies we recommend and implement:
(1) Simple Wills. Under Simple Wills for a married couple, the first spouse to die leaves all of his assets (one-half of the community property and all of his separate property) to the surviving spouse. If there is no survivor, the property would pass outright to adult children or other beneficiaries. In the case of a single person, all property would pass outright to children or other beneficiaries.
- Simple Wills are relatively inexpensive and easy to understand.
- The surviving spouse has complete control over all community assets for the remainder of his or her life, and has the right to leave them by Will to anyone he or she desires.
- Even with a large estate, there will be no estate tax due at the death of the first spouse to die because of the unlimited marital deduction.
- If the children or other beneficiaries are minors, then a guardianship may be necessary. Even if the beneficiaries are adults, they may not be ready to receive a substantial inheritance.
- The surviving spouse can change his or her Will and dispose of the assets differently at his or her death. There is no assurance that the surviving spouse will leave any of the assets to the couple’s children or other intended heirs at his or her death. If there are children from a prior marriage, then there is no certainty that the survivor will leave any of the property to those children.
- If the total estates of the husband and wife exceed the estate tax exemption ($5,340,000 in 2014), total estate taxes may be significantly higher because all assets are taxed in the estate of the surviving spouse. Since there is no planning for the estate tax exemption on the first spouse’s death, the assets are “stacked” in the survivor’s estate and are taxed at the highest rate. Inflation may increase the amount subject to tax. Although new provisions provide for “portability” of unused estate tax exemption to the surviving spouse, the portability rules are complex and somewhat dependent on subsequent events.
Other Considerations. Simple Wills are generally recommended for couples who expect to have total estates (including non-probate assets, such as life insurance and retirement benefits) which do not exceed a total of $5,000,000 and who do not have minor children. If their total estates are larger than the current estate tax exemption ($5,340,000 in 2014), then they should consider Bypass Trust Wills or Bypass/QTIP Trust Wills . If either has children from a prior marriage, they should consider Wills with a trust for the survivor. If they have minor children, then they should consider Children’s Trust Wills.
(2) Children’s Trust Wills. Children’s Trust Wills are generally recommended for married couples or single persons with minor children. At the death of the first spouse to die, that spouse’s assets (one-half of the community property and all of his or her separate property) would pass outright to the survivor. However, if both spouses died in a common disaster or within a short period of time, all property would pass into one testamentary trust for the benefit of their children (sometimes referred to as a pot trust, since all the money for all the children is in one pot), until all children had reached a specified age.
- The surviving spouse has complete control over all the couple’s property for the remainder of his or her life, and has the right to leave them by Will to anyone he or she desires.
- There is no estate tax at the death of the first to die because of the unlimited marital deduction.
- The necessity of a court appointed guardian of the estate may be avoided for children under age 18, resulting in saving court costs and attorneys fees, and providing more flexibility in investment of assets.
- Distribution of assets to the children may be postponed until the children are older than age 18 (for example, at age 25 or older, after completing college, etc.).
- The surviving spouse can change his or her Will and dispose of the assets at his or her death. There is no assurance that the surviving spouse will leave any of the assets to the couple’s children or other intended heirs at his or her death. If the deceased spouse has children from a prior marriage, then there is no certainty that the survivor will leave any of the property to those children.
- If the total estates of the husband and wife exceed the estate tax exemption ($5,340,000 in 2014), total estate taxes may be significantly higher because all assets are taxed in the estate of the surviving spouse. Since there is no planning for use of the estate tax exemption on the first spouse’s death, the assets are “stacked” in the survivor’s estate and are taxed at the highest rate. Inflation may increase the amount subject to tax. Although new provisions provide for “portability” of unused estate tax exemption to the surviving spouse, the portability rules are complex and somewhat dependent on subsequent events.
Other Considerations. There are several variations which should be considered in appropriate circumstances. One variation is to have separate trusts for each child, rather than a pot trust for all the children. A second variation is to have one pot trust for all children until the youngest reaches a certain age (age 25, for example), and then divide the trust into separate trusts for each child. Using either of these variations, it is easier to provide for staggered pay-outs (for example, one-third at age 30, one-third at age 35, and one-third at age 40). If the total estate of a married couple (including non-probate assets, such as life insurance and retirement benefits) exceeds the current federal estate tax exemption ($5,340,000 in 2014), then they may wish to consider Bypass Trust Wills or Bypass/QTIP Trust Wills.
(3) Bypass Trust Wills. A Bypass Trust Will provides that upon the first spouse’s death, the first spouse’s assets (one-half of the community property and all of his or her separate property), up to the current estate tax exemption ($5,340,000 in 2014), are placed in a bypass trust for the benefit of the surviving spouse. The trust is called a bypass trust, because the assets in the trust “bypass” the estate of the survivor and pass free of federal estate taxes at the death of the survivor. (The terms “credit shelter trust” and “exemption equivalent trust” are other names for the same type of trust.) At the death of the surviving spouse, the remaining assets in the bypass trust would then pass to the children or other heirs. Any assets of the decedent in excess of the current estate tax exemption amount would pass outright to the surviving spouse.
- Bypass Trust Wills may reduce estate taxes by taking advantage of the federal estate tax exemption ($5,340,000 in 2014) at the death of the first spouse to die. The assets placed in the trust and any appreciation in value are not subject to estate tax at the death of either spouse.
- The first spouse can control the ultimate distribution of the assets placed in the bypass trust by specifying who receives the assets at the death of the survivor. This can be important when spouses have children from prior marriages or if there is a possibility that the surviving spouse will remarry.
- The assets in the Bypass Trust Will have increased protection from creditors of the surviving spouse.
- This type of Will is significantly longer, more complex, and more confusing than a simple will.
- Administration of the decedent’s estate may be more complex if decisions must be made regarding assets used to fund the bypass trust.
- Separate record keeping and tax returns are required for the bypass trust.
- The surviving spouse does not have complete and unrestricted power to dispose of the assets in the trust, and he or she cannot give them away or leave them to other persons. (Note that this is a disadvantage for the surviving spouse, but may be considered to be an advantage by the deceased spouse.)
- There will be no step-up in basis for true assets in the bypass trust at the death of the survivor, which could result in high capital gains taxes for appreciated assets.
Other Considerations. Bypass Trust Wills are recommended in most cases where the total estate of the husband and wife (including non-probate assets, such as life insurance and retirement benefits) exceeds $5,340,000, since the federal estate tax rate will be 45% for the excess. Bypass Trust Wills may also include trusts for minor children and other beneficiaries who are not ready to receive an inheritance (similar to the trusts in Children’s Trust Wills), as well as generation-skipping trusts.
(4) Bypass/QTIP Trust Will . Under a Bypass/QTIP Trust Will, upon the death of the first spouse, that spouse’s assets (one-half of the community property and all of his or her separate property) up to the current estate tax exemption ($5,340,000 in 2014), are placed in a bypass trust for the benefit of the surviving spouse. The assets in the bypass trust pass to children or other heirs free of federal estate taxes at the death of the survivor. Any assets of the deceased spouse in excess of the current estate tax exemption amount are placed into a QTIP trust which distributes all income to the surviving spouse for life and prohibits principal invasions for other beneficiaries. “QTIP” is short for “qualified terminable interest property,” and a QTIP trust takes advantage of special marital deduction rules. After the survivor’s death, the assets in the QTIP trust, after reduction for any federal estate taxes due at the death of the survivor, are distributed to the children (or other beneficiaries).
- With a Bypass/QTIP Trust Will, the first spouse to die may control the ultimate disposition of all of his or her assets without incurring estate taxes at his death. The marital deduction applies to the QTIP trust assets, even though the surviving spouse does not receive the assets outright.
- Assets held in the bypass trust and the QTIP trust may be managed for the benefit of the survivor.
- A Bypass/QTIP Trust Will provides more assurance that all assets belonging to the first spouse to die will ultimately pass to his or her children, instead of to the survivor’s subsequent spouse, if the survivor remarries, or to the surviving spouse’s children from prior marriages.
- A Bypass/QTIP Trust Will may provide increased protection from a surviving spouse’s creditors or future estranged spouse.
- A Bypass/QTIP Trust Will is more complex and confusing than the preceding alternatives.
- Administration of the decedent’s estate will likely be more complex since decisions must be made regarding assets used to fund the bypass trust and the QTIP trust.
- Separate record keeping and tax returns are required for the bypass trust and the QTIP trust.
- All income from the QTIP trust must be distributed annually to the surviving spouse. It cannot be accumulated in the trust if not needed. The principal of the trust may not be invaded for distribution to anyone other than the surviving spouse.
Other Considerations. Bypass/QTIP Trust Will have all of the federal estate tax savings available to Bypass Trust Wills. However, Bypass/QTIP Trust Will allow the first spouse to die to control ultimate disposition of all of his or her assets, including assets in excess of the $5,340,000 passing into a bypass trust. The first spouse to die cannot control disposition of the survivor’s assets (the survivor’s one-half of the community property and the survivor’s separate property). QTIP trust provisions are recommended when a spouse wants to provide the surviving spouse with an income interest in all of his or her property for life, and provide that all of the deceased spouse’s property remaining after the death of the surviving spouse will pass in accordance with the deceased spouse’s wishes, instead of the survivor’s wishes. This may be desirable if either spouse has children from a prior marriage or if there is a possibility that the survivor will remarry. Note: These strategies can be implemented either in your Will or in a Revocable Living Trust.
A Revocable Living Trust is an estate planning tool which has become very popular in states in which the probate process is expensive and time consuming, because a Revocable Living Trust can reduce the costs associated with administering an estate. It is also frequently used in Texas, although the financial advantages in Texas are often not as great. [See Is a Revocable Living Trust better than a Will?] The best way to understand a Revocable Living Trust is to look more closely at the words in the name:
- A trust is the legal relationship created when one person conveys assets to a second person with instructions to hold the assets in a special relationship of trust for the benefit of a third person. The first person, the creator of the trust, is referred to as the “grantor,” the “settlor,” or the “trustor.” The second person is referred to as the trustee. The third person is referred to as a beneficiary. The instructions to the trustee are set out in a written document known as a trust agreement or declaration of trust.
- In the case of a Revocable Living Trust, the creator, the trustee, and the initial beneficiary are usually the same person. In the case of a married couple, the husband and wife may be the creators, trustees, and initial beneficiaries of the same Revocable Living Trust.
- A living trust is a trust created during the lifetime of the creator of the trust, as opposed to a “testamentary” trust, which is created under the provisions of a Will.
- A revocable living trust is a living trust in which the creator of the trust has reserved the right to amend or revoke the trust agreement or declaration of trust during his lifetime. (On the other hand, an irrevocable trust is one which the creator cannot revoke the trust.)
Often, the primary purpose for using a Revocable Living Trust is to avoid the probate process by using the Revocable Living Trust as a substitute for a Will. Here is how a Revocable Living Trust generally works:
- A trust agreement is prepared which provides that the creator of the trust will be the beneficiary of the trust while he or she is living. The trust agreement will also provide for disposition of the property in the trust at the creator’s death. The terms for disposition of the property at the creator’s death are similar to those which would be included in a Will.
- The creator of the trust is usually named as the initial trustee of the trust, so the creator retains complete control of the assets in the trust during his lifetime.
- The creator of the trust then “funds” the trust by transferring title to his or her assets to the trust.
- At the death of the creator of the trust, the assets remaining in the trust are distributed to the persons named in the trust as beneficiaries.
- If all of the property belonging to the creator of the trust has been transferred into the trust during his or her lifetime, then there may be no need to probate the creator’s Will and go through the probate process.
In short, the Revocable Living Trust is intended to preserve the creator’s control of the trust property during lifetime and serve as a “Will substitute” at the creator’s death with respect to assets owned by the trust. A married couple can establish a Revocable Living Trust in which both are the creators of the trust and both serve as trustees of the trust.
The usual motive for using a Revocable Living Trust is to avoid the probate process. In many states, the probate process is very expensive and time consuming, and a Revocable Living Trust is often a far better estate planning tool than a Will. In Texas, however, the probate process can be very streamlined if an independent administration is available. [See Is it really important to avoid probate?] Following are potential reasons to use a Revocable Living Trust as the primary dispositive document in your estate plan:
- Avoiding Probate. Probate may be avoided with respect to assets which have been transferred to the trust during the creator’s lifetime. This may result in savings in time, effort, and expense at death, particularly if assets are located outside of Texas.
- Management in the Event of Incapacity. A Revocable Living Trust may be used to manage the creator’s property in the event the creator becomes incapacitated on account of accident, illness, or advanced age. If the Revocable Living Trust was fully funded (that is, all of the creator’s assets are in the trust), appointment of a guardian of the estate may be avoided. Please note that a Durable Power of Attorney can also be used for this purpose, but it may be easier to manage assets which have previously been transferred into the trust.
- Privacy. Unlike a Will, which becomes a matter of public record when probated, a Revocable Living Trust is a private document which need not be made a public record upon the creator’s death. Further, while an executor of a Will may be required to file an inventory of the estate’s probate assets as a public record in some cases, no public disclosure of the assets in a living Revocable Living Trust is required.
- Avoiding Multiple Probates. If you own real property in more than one state, conveying all of the real property into a Revocable Living Trust may eliminate the need for probate in multiple jurisdictions.
- More Acceptable Beneficiary. Life insurance companies and retirement benefit providers are very familiar with naming a Revocable Living Trust as the beneficiary, since Revocable Living Trusts are widely used in many states. Some life insurance companies and retirement benefit providers are less familiar with testamentary trusts as beneficiaries.
- Prevent Will Contest. Under some fact situations, the risk of a contest may be reduced if a Revocable Living Trust is used as a substitute for a Will.
Please note that Revocable Living Trusts are sometimes credited with advantages which they do not have. Sometimes those attributing advantages to Revocable Living Trusts are trying to either sell a Revocable Living Trust or are trying to sell another product, and using the Revocable Living Trust as a “hook”. If you create a Revocable Living Trust, you will have no additional protection from creditors. There are no tax advantages with a Revocable Living Trust. A Revocable Living Trust is invisible for income tax purposes, and the estate tax savings which can be achieved with a Revocable Living Trust can also be achieved using a Will.
There are several issues which must be considered when using a Revocable Living Trust instead of a Will. These factors must be considered as part of the decision-making process.
- Additional Cost. Because additional documents must be prepared and because assets may need to be transferred into the trust, the cost of an estate plan using a Revocable Living Trust as the primary dispositive vehicle may be greater than the current cost of an estate plan using Wills. To a certain extent, the initial cost may negate the potential savings from avoiding the probate process.
- Initially Funding the Trust. If you desire to avoid the probate process upon your death, you must transfer all of your probate assets to the trust prior to that time. A Revocable Living Trust is effective to avoid probate only to the extent that it is “fully funded”; that is, to the extent that all of your assets which would have been probate assets are transferred into the trust. In order to fully fund your Revocable Living Trust, you may need to change your bank accounts and brokerage accounts, re-register securities, and deed real estate to the trust, for example. Note: Restyling your bank accounts into the name of a Revocable Living Trust may change the amount of FDIC deposit insurance available.
- Acquiring Additional Assets. When you acquire additional assets in the future, you must be diligent to acquire them in the name of the Revocable Living Trust, rather than your individual name. If you acquire assets in your individual name, then the assets may well be subject to the probate process.
- Residential Homestead. Because of the favorable status granted to a homestead under Texas law, transferring a residence to the trust used to be problematic, but most issues have been resolved.
- The property tax benefits available to a homestead can be preserved even if the homestead is transferred into a Revocable Living Trust, if the trust includes provisions required by the Texas Tax Code.
- A new statute effective for transfers on or after September 1, 2009, provides that protection from creditors continues if a homestead is conveyed to a revocable trust meeting certain requirements.
- Special steps may be necessary if the homestead is subject to a mortgage.
- Transferring a homestead into a Revocable Living Trust may adversely impact eligibility for Medicaid.
- Administration of the Revocable Living Trust. The trustee of the living trust must manage assets in the trust in his capacity as trustee, rather than as an individual. Dealing with third parties may be somewhat more complicated, and explanations that a trust entity is the legal owner of the assets (rather than you individually) may be required. Some third parties may request a copy of the trust agreement prior to transactions, thus reducing privacy.
- You May Still Need a Will. You will probably still want a Will, just in case you own or acquire any property which has not been transferred into the trust (although it may not be necessary to probate the Will if the trust has been fully funded).
The bottom line is that sometimes a Revocable Living Trust makes sense, and sometimes it doesn’t. It all depends on your specific facts and circumstances and estate planning objectives.
If you have a very large estate, federal estate taxes can be significant. Under present law, federal estate taxes will not be applicable unless your taxable estate exceeds $5,340,000 (in 2014). However, once you exceed the exemption amount, taxes will be assessed at a rate up to 45%. So an estate of $5,340,000 or less will not be subject to federal estate taxes, but a taxable estate valued at $7,000,000 would owe taxes in the amount of about $660,000 (in 2014). There are several strategies which can be used to reduce or eliminate federal estate taxes. The following are some of the basic strategies frequently used.
- Bypass Trusts. The basic estate planning strategy most commonly used to reduce estate taxes owed at the death of the surviving spouse is to have Wills or a Revocable Living Trust which provides for creation of a bypass trust at the death of the first spouse to die. [See Bypass Trust Wills and Bypass/QTIP Trust Wills ] This enables both spouses to use the estate tax exemption. In many cases, federal estate taxes can be eliminated when the total estate of a married couple does not exceed $10,680,000 (in 2014).
In some cases, the new “portability” rules will allow the same result without using Bypass Trusts.
- Annual Exclusion Gifts. If you make a gift to another person in an amount which does not exceed the present annual exclusion amount, the gift will not be counted against your $5,340,000 (in 2014) lifetime gift tax exemption, and will not be counted as taxable gifts for federal estate tax purposes. The annual exclusion amount is currently $14,000 (for 2014) per donor per donee per year. So a married couple could make total annual gifts to their three children in the amount of $84,000 in 2014 without any gift or estate tax consequences. These gifts can be made outright or in a special trust which provides for withdrawal rights for a period of time after the gift.
- Irrevocable Life Insurance Trust. If your estate will include significant amounts of life insurance, then you may wish to consider establishing an irrevocable life insurance trust to be the owner of life insurance policies on your life. If properly structured and administered, the life insurance proceeds payable to an irrevocable life insurance trust are not subject to federal estate taxes. Because of the large estate tax exemption, life insurance trusts are not used as frequently now.
- Using Lifetime Exemption to Make Gifts. Under the gift tax laws, you can make taxable gifts totaling up to $5,340,000 (in 2014) during your lifetime without incurring gift tax liability. If you make gifts of appreciating assets, then you may be able to reduce the estate taxes which would be payable with respect to your estate.
- Charitable Gifts. Gifts to charitable organizations are deductible for purposes of computing federal estate taxes. Following are several types of charitable gifts:
- Outright Gifts. Your Will or revocable living trust may provide for a gift of money or property to one or more charitable beneficiaries after your death (or the death of the survivor). The gift may be a specific asset, a specific dollar amount, or even a specific percentage of your estate. Your estate (if large enough to need it) will be entitled to an estate tax deduction for an outright gift to a qualifying charitable organization. This is the simplest type of charitable giving.
- Charitable Remainder Trusts. Under this technique, you transfer assets into a trust for the future benefit of a charitable organization. You (or someone designated by you) will receive income from the trust for a specified period of time (for example, as long you are living, or for a fixed period of years). Then the remaining assets will be distributed to the charitable organization. A charitable remainder trust may be created and funded while you are living by transferring property into the trust. In the alternative, a charitable remainder trust may be provided for in your will (or under your revocable living trust). The greatest benefits are often achieved by making lifetime transfers.
- Charitable Lead Trusts. Under this technique, you transfer assets into a trust for the present benefit of a charitable organization. The charitable organization will receive income from the trust for a specified period of time (for a fixed period of years or as long as certain people are living). When the trust period is over, the remaining assets will be returned to you or your family. This technique is the opposite of the charitable remainder trust. A charitable lead trust may be established during your lifetime (a living, or inter vivos, lead trust) or through your will (a testamentary lead trust). Depending on the type of trust established, you may be able to obtain income tax, gift tax, or estate tax savings, as well as transfer assets (in many cases, with tax free appreciation) to your family.
Other strategies to reduce federal estate taxes may be appropriate, depending on the size and nature of your estate and your specific estate planning objectives.
Executor. An executor is an individual or bank or trust company selected by the decedent and named in his Will to carry out (or “execute”) the terms of the Will. The executor will probate the Will in the probate court, collect the decedent’s assets, arrange for payment of the decedent’s debts, including taxes, arrange for preparation and filing of any required income, estate, gift, and inheritance tax returns, and then distribute any remaining property to the person or persons named in the Will to receive it. In many states, the executor is under the strict control of the probate court, resulting in a long and expensive period of estate administration. Well-drafted Texas Wills, however, take advantage of the Texas “independent administration” procedures, in which the decedent can provide that the executor will be an “independent” executor. “Independent” means independent of probate court control. In a Texas independent administration, the independent executor merely appears in probate court to establish the fact of death, enter the Will of record, and file an inventory of the assets of the estate. Usually the work of the independent executor is completed in a relatively short period of time, but in complicated estates several months (or even years) may be required.
Guardian. A guardian is a person appointed to look after the affairs of a person who is legally incompetent to look after his own affairs (who is referred to as the “ward”), such as a minor or a person who is mentally incompetent. There are two types of guardians in Texas.
- A guardian of the person looks after the personal care and custody of the ward, including his education. The guardian of the person is the individual with whom your children would live. Since the guardian of the person will be raising your children in your absence, it is very important that the guardian share your personal and spiritual values, and have a compatible philosophy of child-raising. Normally, the last surviving natural parent names a family member or close friend as guardian of the person of the minor children in his Will or in a separate written declaration. In the absence of an appointment by the survivor, the Probate Court will select the guardian. Since it is uncertain which parent will die first, it is desirable for both parents to separately name guardians of the person.
- A guardian of the estate administers the ward’s financial estate under very strict rules and costly court procedures. It is usually desirable to avoid a guardianship of the estate. If proper planning is done, the need for a guardian of the estate can be avoided, usually by providing for a trust which will administer the assets passing to the child. (See Children’s Trust Wills.) If a guardian of the estate is necessary, an individual, bank, or trust company can serve as guardian of the estate of a ward.
The responsibilities of a guardian of the person or estate will end when the child legally becomes an adult, usually by attaining age 18.
Trustee. In order to understand the term trustee, it is first necessary to under stand the term trust. A trust is the legal relationship created when one person (who is variously referred to as the “grantor,” “settlor,” or “trustor”) conveys assets to another person (known as the “trustee”) with instructions to hold the assets in a special relationship of trust for the benefit of others (the “beneficiaries”). The document creating the trust relationship may be a Will (in which case the trust is known as a testamentary trust) or a separate trust agreement signed while the creator of the trust is living (known as a living or inter vivos trust). The trustee may be one or more individuals, a bank or trust company, or a combination of one or more individuals and bank or trust company. Legal title to the property in the trust is in the name of the trustee and the trust. In other words, the assets are registered in trustee’s name, as trustee of the trust. However, the beneficiaries own beneficial title to the assets — in other words, the assets must be used for the benefit of the beneficiaries specified by the creator of the trust. The trustee is responsible for carrying out the terms of the trust. Typically, the trustee is responsible for making decisions involving investment of the trust assets and decisions as to appropriate distributions to be made to or for the beneficiaries. A trust can last as long as the creator wants it to (subject to some limitations imposed by law) and can be drawn in such a way as to provide a wide variety of benefits to the people selected as the beneficiaries. Anyone of any age may be a trust beneficiary. Trusts are useful in a number of situations. They are especially appropriate to provide management of the financial affairs for a minor child or grandchild, or any other beneficiary who may need assistance. In some cases, trusts can be used effectively to achieve estate tax savings.
Additional Considerations. You can name the same person to be executor, trustee, and guardian, or you can divide the positions among several people on the basis of their qualifications. You may appoint co-executors and co-trustees, and you may appoint a married couple as guardians of your children. You should give careful consideration to the physical and mental demands which will be made on the people who hold these positions. You should also select alternates for each position, in case your first or second choice dies, becomes incapacitated, or is unable or unwilling to serve for any other reason.
The following documents (each of which is discussed in a separate FAQ) are often used to plan for your possible incapacity by authorizing someone else to handle or assist you in handling your finances and health care:
A power of attorney is a written document which you can use to give someone else authority to act on your behalf when you are unable to do so yourself. You would be known as the principal, and the other person would be known as the agent or the attorney-in-fact. A durable power of attorney is one which will continue even after you become unable to handle your affairs. A general power of attorney grants the agent broad authority to act on your behalf, but a special power of attorney grants the agent authority to act only with respect to some transactions. If you have signed a Durable Power of Attorney granting your agent sufficient authority, you may be able to avoid having a probate court appoint a guardian to handle your financial affairs if you become unable to do so on account of advanced age, illness, injury, or other incapacity. Because guardianship proceedings are expensive and time-consuming, a Durable Power of Attorney can be a very important estate planning document.
In Texas, a Durable Power of Attorney can be drafted so that it becomes effective either immediately when it is signed or at a later date when you become incapacitated. We have found that some third parties are reluctant to recognize a power of attorney if it is not immediately effective, so a power of attorney which becomes effective in event of incapacity can be less useful than a power of attorney which is effective immediately. When selecting an agent or an alternate agent, it is important to select someone whom you can trust to act in your best interests.
Under Texas law, you may designate a health care agent to make health care decisions for you by signing a Medical Power of Attorney. The agent’s authority to make decisions on your behalf does not begin until your doctor certifies that you lack capacity to make your own health care decisions. It makes a great deal of sense to specify in advance who you would like to make your health care decisions in the event you are unable to make your own.
Under complex regulations adopted to implement the federal Health Insurance Portability and Accountability Act (which often is referred to by the acronym “HIPAA”), your personal health care records may be released only to persons you have authorized or to representatives who are authorized by law to make your health care decisions. While it would seem logical that your agent under a Medical Power of Attorney should be able to obtain access to health care records, the Medical Power of Attorney is not effective until your incapacity and may not be helpful in that respect. While a Durable Power of Attorney sometimes contains provisions authorizing release of health care information to your agent, it is not clear under Texas law and the federal regulation whether the language in a Durable Power of Attorney will be effective. Therefore, we recommend that you sign a separate “HIPAA Authorization” to specify in advance those persons to whom your personal health care records may be released. We usually recommend that you authorize the persons you have named as your health care agents under your Medical Power of Attorney to obtain access to your personal health care information.
The Directive to Physicians, Family or Surrogates is the statutory form used in Texas to make your wishes known concerning the use of machines which artificially prolong your life. This type of document is sometimes referred to as a Living Will. The Directive allows you to express your wishes regarding the following:
- If you have a terminal condition and are expected to die within 6 months, do you wish to have available life-sustaining treatment withdrawn?
- If you have an irreversible condition so that you cannot care for yourself or make decisions for yourself, do you wish to have available life-sustaining treatment withdrawn?
- Do you have any special requests for your treatment?
If you answer “yes” to these questions, then if you are unable to make your own health care decisions, and you have a terminal condition or irreversible condition as determined by your physician, your physician is required to withhold or withdraw life-sustaining treatment. Even though the terms terminal condition and irreversible condition are defined in the Directive, these terms still seem vague and subjective. Since the Directive is mandatory in nature and delegates the decision-making authority to your physician, it may or may not be a desirable advance healthcare directive. Please note that while some of our clients choose to sign a Directive, many others prefer to use only a Medical Power of Attorney, since the agent under a Medical Power of Attorney has the authority to make the health care decisions contemplated by the Directive. The agent under a Medical Power of Attorney is usually a family member or close personal friend.
Under Texas law, you may designate by written declaration a person to serve as the guardian of your person or of your estate in the event of your subsequent incompetency. The declaration may designate one or more alternates, in the event the first person named fails to serve. In addition, your declaration may name specific persons to be disqualified from serving. If you sign a Durable Power of Attorney, a Medical Power of Attorney, and a HIPAA Authorization, it may be unnecessary for a Court to appoint a guardian of the person or guardian of the estate. However, it can be helpful to make known your preferences, and it is often desirable to name the person you have named as agent under your Durable Power of Attorney as the first choice for guardian of your estate.
If you would like us to assist you with estate planning, then it would be helpful if you completed our estate planning questionnaires prior to our initial conference. The Confidential Personal Information for Estate Planning Questionnaire will provide us with basic information necessary to prepare your Wills, Revocable Living Trust, and other estate planning documents. Completing the questionnaire will give you an opportunity to consider some of the issues to be addressed. As you answer the questions, you may think of additional questions which might not have occurred to you before. The Confidential Financial Information Questionnaires are used to provide the financial information necessary for estate planning purposes. The primary purpose of the financial information is to determine whether planning for federal estate taxes is necessary or desirable. The two-page summary questionnaire will be sufficient to make this evaluation. However, if planning to reduce federal estate taxes is undertaken, then the detailed listing of assets may be very helpful in determining the appropriate steps to take to implement your estate plan. With respect to financial data, it is not necessary to be precise; you may estimate values whenever it is more convenient for you to do so. Of course, any information you provide us will be kept in strictest confidence, as in any other attorney-client relationship.