ESTATE PLANNING FAQs

ESTATE PLANNING FAQs

 

Why should you have a Will? Why should you have an attorney prepare your Will? What property is covered in you Will? Read on for answers to our frequently asked questions:

 Q. What is community property and what is separate property?

A. Texas (along with other states) has a community property system as its basic marital property law. This is in contrast to other states that derive their property systems from the English common law. Texas property laws are traceable to the Spanish concept of a marital partnership between husband and wife.

Texas law defines community property as that which is not separate property. Separate property is that which was owned by a spouse before the marriage, as well as property received after marriage by gift or inheritance. Everything else is community property. For example, the earnings of both spouses are community property. Income from separate property is also community property.

The foregoing rules may be changed if there is a gift or an agreement between spouses, which agreements have to be done with certain formalities.

Q. What happens if I die without a will?

A. If you fail to plan your estate and die without a will, the law will create a plan for you. The entire system—which is set forth by statute—is too complex for a discussion here, but some surprising and frequently undesirable results can occur.

One example is a client who lost his wife and was left with his wife’s children of a prior marriage who were ages 8 and 10. Because his wife died without a will, her community one-half of his unincorporated retail business passed to her two children. He then found himself in a partnership with his wife’s two minor children. Moreover, he must now, as guardian, post a bond and make a detailed periodic accounting to a court for everything he does in his business.

Q. Is a handwritten will legal?

A. A holographic will is one which is solely in the maker’s handwriting. If it meets the other requirements for a will, a holographic will can be valid.

Holographic wills are a fruitful source of litigation, usually because they have been composed by someone who has had no legal training.

Q. Why should my will be more than one page long?

A. Your will need not be any longer than one page. The problem, however, is that such a will may not accomplish your objectives for your beneficiaries. We prefer to draft wills to cover the various factual and legal situations that reasonably may arise. The alternative is to hope that, by coincidence, the will may fit the facts at your death.

Accordingly, we may present you with a lengthy instrument. This “burden” to you may be a possible blessing to your family when they later find that you have anticipated and planned for what might have been cumbersome problems.

Q. What property will not pass under my will?

A. Proceeds from life insurance policies and retirement benefits will pass in accordance with the beneficiary designations and not under your will (unless your beneficiary designation is your estate). In addition, property held as joint tenants with right of survivorship accounts (e.g., joint bank or brokerage accounts with right of survivorship) will pass to the surviving account holder and not under your will. Therefore, you should review your beneficiary designations and account agreements to be sure they are coordinated with your will.

Q. What is community property with right of survivorship?

A. A husband and wife may agree that the survivor will own the property. The agreement must be in writing and signed by both spouses. The agreement is revocable until the death of the first spouse to die. As a result of such an agreement, the property will pass by the agreement and not by the will.

Many banks and brokerage firms have this type of agreement in their standard joint account applications. Thus, many couples may have survivorship accounts without even realizing it. In the case of a spouse who desires to leave all or part of his estate in trust (either for tax planning or for other reasons) or to beneficiaries other than the surviving spouse, these types of survivorship agreements can frustrate his or her wishes.

We will rely on you to review your joint accounts to determine if they are survivorship accounts. Then let us know about them, so we can advise you whether they should be changed.

Q. What is an Independent Executor?

A. An executor is the person appointed in your will to settle your estate. Your executor will be responsible for administering your estate. This includes ascertaining your assets and your liabilities. Your executor must prepare an inventory of what you own and, in most cases, submit that inventory to the Probate Court. After debts have been paid,  the executor makes distributions to the beneficiaries in your will.

Texas law permits you to appoint an “independent” executor. An independent executor can act free of control by a court, except for only a few essential matters. In certain situations, the probate court may grant independent administration where your will fails to provide it. Without this independence, virtually all of the executor’s actions will be subject to prior approval by the court, and such a “dependent” administration can be cumbersome and expensive.

Q. What is a trustee?

A. A trustee is one to whom property is transferred for the benefit of someone else (the beneficiary).

We find that our new estate planning clients frequently misunderstand trusts. Many of our clients have heard a horror story about a trust, such as an impoverished widow-beneficiary who cannot extract enough money from the well-funded trust to maintain herself.

Present law, along with well drafted trustees’ powers and professional trustees, make this concept of trusts obsolete. A trust can be designed to produce almost any result you desire, if you fund the trust with sufficient assets. We usually recommend that trustees be given very broad and adaptable powers to provide flexibility for future events. The trustee should be empowered to do what is best for the beneficiary, without being hampered by inappropriate restrictions.

If a trust appears suitable for your estate plan, you will want to select the trustee carefully. The family member or friend who comes to mind as a logical first choice may not really want to deal with the management of your assets. If a corporate trustee appears appropriate, we will suggest that you have a conference with a trust officer of the proposed bank or trust company.

Q. What is a living trust?

A. A “living trust” is a trust that a person (the “Grantor”) establishes during his or her lifetime. A living trust may be for the Grantor’s own benefit or for the benefit of others. The trust may be funded either during the Grantor’s lifetime or at the Grantor’s death. Revocable living trusts for the Grantor’s own benefit can be appropriate in some circumstances, including where the Grantor owns real property in another state.

Some clients have the misconception that the primary advantage of a revocable management trust is that it will reduce or eliminate probate costs. It is true that property transferred to a revocable management trust during the Grantor’s lifetime is not subject to probate. Therefore, if all of a client’s assets are transferred to a revocable management trust, probate can be avoided. Unlike other states, however, Texas has a relatively inexpensive probate process. As discussed above, if an independent executor is appointed, the executor can act without having to obtain court approval. Therefore, avoiding probate in Texas may involve less economic advantage than in other states.

Q. How will my estate be taxed at my death?

A. Your estate may be subject to at least two taxes: the federal estate tax and a state inheritance tax. This discussion will be confined to the federal estate tax. In Texas, there is no state inheritance tax at this time.

The federal estate tax is based on the fair market value of your “gross estate” at the time of your death. At the election of your executor, an alternate valuation date of six months from the date of your death may be used.

Your gross estate will include all of your separate property as well as your one-half of all community property. Additionally, your gross estate may include property which you do not own, but over which you retained or received certain rights or powers.

Federal estate tax law allows a “marital deduction” for bequests of property to your surviving spouse. The marital deduction permits interspousal transfers to pass tax free and defers payment of estate taxes on the property transferred until the death of the surviving spouse. In order to qualify for the marital deduction, property must be transferred to the surviving spouse in a fashion that satisfies the technical requirements of the Internal Revenue Code, such as an outright transfer or a transfer to certain types of trusts. There are special rules where the surviving spouse is not a U.S. citizen.

The maximum estate and gift-tax rates are 40%.

The “applicable exclusion from estate tax” amount permits each person to make transfers that are not subject to federal estate tax. The cumulative applicable exclusion amount currently (2015) is $5,340,000, plus the deceased spousal unused exclusion amount.