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Houston Estate Planning and Probate Blog

Friday, December 27, 2013

Important Issues to Consider When Setting Up Your Estate Plan

Often estate planning focuses on the “big picture” issues, such as who gets what, whether a living trust should be created to avoid probate and tax planning to minimize gift and estate taxes. However, there are many smaller issues, which are just as critical to the success of your overall estate plan. Below are some of the issues that are often overlooked by clients and sometimes their attorneys.

Cash Flow
Is there sufficient cash? Estates incur operating expenses throughout the administration phase. Sometimes, the estate has to pay state or federal estate taxes, filing fees, living expenses for a surviving spouse or other dependents, cover regular expenses to maintain assets held in the estate, and various legal expenses associated with settling the estate.

Taxes
How will taxes be paid? Although the estate may be small enough to avoid federal estate taxes, there are other taxes which must be paid. Depending on jurisdiction, the state may impose an estate tax. If the estate is earning income, it must pay income taxes until the estate is fully settled. Income taxes are paid from the liquid assets held in the estate, however estate taxes could be paid by either the estate or from each beneficiary’s inheritance if the underlying assets are liquid.

Assets
What, exactly, is held in the estate? The owner of the estate certainly knows this information, but estate administrators, successor trustees and executors may not have certain information readily available. A notebook or list documenting what major items are owned by the estate should be left for the estate administrator. It should also include locations and identifying information, including serial numbers and account numbers.

Creditors
Your estate can’t be settled until all creditors have been paid. As with your assets, be sure to leave your estate administrator a document listing all creditors and account numbers. Be sure to also include information regarding where your records are kept, in the event there are disputes regarding the amount the creditor claims is owed.

Beneficiary Designations
Some assets are not subject to the terms of a will or living trust. Instead, they are transferred directly to a beneficiary according to the instruction made on a beneficiary designation form. Bank accounts, life insurance policies, annuities, retirement plans, IRAs and some motor vehicles departments allow you to designate a beneficiary to inherit the asset upon your death. By doing so, the asset is not included in the probate estate or trust estate and instead, simply passes to your designated beneficiary by operation of law.

Fund Your Living Trust
Your probate-avoidance living trust will not keep your estate out of the probate court unless you formally transfer your non-retirement assets into the trust. Only assets which are legally owned by the trust are subject to its terms. Title to your real property, vehicles, investments and other financial accounts should be transferred into the name of your living trust.


Monday, December 23, 2013

Protecting Your Legacy with Estate Tax Planning

You spend your whole life building your legacy but sadly, that is not always enough. Without careful estate tax planning, much of it could be lost to taxes or misdirected. While a will or living trust is essential for dividing your estate as you wish, an estate tax plan ensures you pass on as much of your legacy as possible.

Understanding estate tax laws

For the past decade, estate tax laws have been a sort of political football game with significant changes occurring every few years. The good news is that the 2013 tax act made the basic $5 million estate tax exemption “permanent,” but at a higher rate of 40%, though the law continues to upwardly adjust the exemption level for inflation. With this adjustment, the 2013 exclusion is $5.25 million per person ($10.5 million per married couple). The law also retained exclusion “portability” which means that if one spouse dies in 2013 or after, the surviving spouse may pass on the unused portion of the deceased spouse’s exclusion. This portability is not automatic, however. The unused portion needs to be transferred to the surviving spouse, and a special tax return (estate tax return) must be filed within nine months of the death of the first spouse. The surviving spouse does not have to pay estate taxes at this time, they only become due, (if at all), after both spouses have died.

Optimizing your estate plan

One way to maximize the amount you can pass on is through annual gifting while you are alive. For 2013, an individual is allowed to give $14,000 to another individual, tax-free. If you give more than that, it will reduce your basic lifetime exclusion. So, if you give a child $50,000 this year, your basic $5.25 million exclusion will be reduced by $36,000 at the time of your death. You can gift as much as your full $5.25 million exclusion before incurring taxes, although doing so would “exhaust” your estate tax exemption at death. Gift tax rates were raised to 40% in 2013 and are paid by the giver, not the recipient.

An experienced estate tax planning attorney can help minimize potential gift and estate taxes by:

  • Identifying taxable assets
  • Transforming your wishes into a will or living trust
  • Keeping you apprised of federal and state tax law changes
  • Establishing an annual gifting plan
  • Creating family and charitable trusts
  • Setting up IRA charitable rollovers
  • Setting up 529 education savings plans
  • Helping you create a succession plan for your family business

It’s never pleasant to consider the end of your life, but planning for it will help ensure that the things you care about are cared for. It is one of the greatest gifts you can give your loved ones.


Friday, November 29, 2013

Overview of Life Estates

Establishing a Life Estate is a relatively simple process in which you transfer your property to your children, while retaining your right to use and live in the property. Life Estates are used to avoid probate, maximize tax benefits and protect the real property from potential long-term care expenses you may incur in your later years. Transferring property into a Life Estate avoids some of the disadvantages of making an outright gift of property to your heirs. However, it is not right for everyone and comes with its own set of advantages and disadvantages.

Life Estates establish two different categories of property owners: the Life Tenant Owner and the Remainder Owner. The Life Tenant Owner maintains the absolute and exclusive right to use the property during his or her lifetime. This can be a sole owner or joint Life Tenants. Life Tenant(s) maintain responsibility for property taxes, insurance and maintenance. Life Tenant(s) are also entitled to rent out the property and to receive all income generated by the property.

Remainder Owner(s) automatically take legal ownership of the property immediately upon the death of the last Life Tenant. Remainder Owners have no right to use the property or collect income generated by the property, and are not responsible for taxes, insurance or maintenance, as long as the Life Tenant is still alive.

Advantages

  • Life Estates are simple and inexpensive to establish; merely requiring that a new Deed be recorded.
  • Life Estates avoid probate for the property in question; the property automatically transfers to your heirs upon the death of the last surviving Life Tenant.
  • Transferring title following your death is a simple, quick process.
  • Life Tenant’s right to use and occupy property is protected; a Remainder Owner’s problems (financial or otherwise) do not affect the Life Tenant’s absolute right to the property during your lifetime.
  • Favorable tax treatment upon the death of a Life Tenant; when property is titled this way, your heirs enjoy a stepped-up tax basis, as of the date of death, for capital gains purposes.
  • Property owned via a Life Estate is typically protected from Medicaid claims once 60 months have elapsed after the date of transfer into the Life Estate. After that five-year period, the property is protected against Medicaid liens to pay for end-of-life care. In some situations, there may be other planning options with Life Estate Deeds, such as utilization of a Lady Bird Deed, that may avoid Medicaid Recovery as well, but they have different issues and ramifications than a simple Life Estate Deed.

Disadvantages

  • Medicaid; that 60-month waiting period referenced above also means that the Life Tenants are subject to a 60-month disqualification period for Medicaid purposes. This period begins on the date the property is transferred into the Life Estate.
  • Potential income tax consequences if the property is sold while the Life Tenant is still alive; Life Tenants do not receive the full income tax exemption normally available when a personal residence is sold. Remainder Owners receive no such exemption, so any capital gains tax would likely be due from the Remainder Owner’s proportionate share of proceeds from the sale.
  • In order to sell the property, all owners must agree and sign the Deed, including Life Tenants and Remainder Owners; Life Tenant’s lose the right of sole control over the property.
  • Transfer into a Life Estate is irrevocable; however if all Life Tenants and Remainder Owners agree, a change can be made but may be subject to negative tax or Medicaid consequences.

 


Thursday, November 21, 2013

Making Your Home Senior-Proof

Let’s face it – it’s tough getting old. The aches, pains, and pills often associated with aging are things that many members of the baby-boomer generation know all too well by now. Though you might not be able to turn back time, you can help an aging loved one enjoy their golden years by giving them a safe, affordable place to call home. If an aging parent is moving in with you and your family, there are many quick fixes for the home that will create a safe environment for seniors.

Start by taking a good look at your floor plan. Are all the bedrooms upstairs? You may want to think about turning a living area on the main floor into a bedroom. Stairs grow difficult with age, especially for seniors with canes or walkers. Try to have everything they need accessible on one floor, including a bed, full bathroom, and kitchen. If the one-floor plan isn’t possible, make sure you have railings installed on both sides of staircases for support. A chair lift is another option for seniors who require walkers or wheelchairs.

Be sure to remove all hazards in hallways and on floors. Get rid of throw rugs – they can pose a serious tripping hazard. Make sure all child or pet toys are kept off the floor. Add nightlights to dark hallways for easy movement during the night when necessary. Also install handrails for support near doorframes and most importantly, in bathrooms.

Handlebars next to toilets and in showers are essential for senior safety. Use traction strips in the shower, which should also be equipped with a seat and removable showerhead. To avoid accidental scalding, set your hot water heater so that temperatures can’t reach boiling. You may also want to consider a raised seat with armrests to place over your toilet, to make sitting and standing easier.

This applies to all other chairs in the house as well. Big, puffy chairs and couches can make it very difficult for seniors to sit and stand. Have living and dining room chairs with stable armrests, and consider an electronic recliner for easy relaxation.

To keep everyone comfortable and help avoid accidents, store all frequently used items in easily accessible places. Keep heavy kitchen items between waist and chest height.

Even with appropriate precautions, not all accidents can be avoided. Purchasing a personal alarm system like Life Alert can be the most important preparation you make for a senior family member. If they are ever left alone, Life Alert provides instant medical attention with the push of a button that they wear at all times.

Amidst all the safety preparations, remember that it’s important to keep the brain healthy, too. Have puzzles, cards, large-print books and magazines, computer games, and simple exercises available to keep seniors of healthy body and mind.

These simple preparations can not only help extend the life of your loved one, but help to make sure their remaining years are happy and healthy.


Monday, November 18, 2013

Don’t Disinherit with a Dollar

There are a lot of myths and misconceptions surrounding estate planning. Many people think that a last will and testament is the only estate planning document you really need. This of course is false. Others assume that you only need to have an estate plan in place if you’re a millionaire. This too is false. Another popular myth in the world of estate planning is that the best way to disinherit a relative (particularly a child) is to leave him or her a single dollar in your will. You probably guessed it - this too is entirely false.

The truth of the matter is that you must be very careful with leaving someone you really want to disinherit a token gift of $1 or some other small amount. By doing so, you have now made that person a beneficiary of your estate. It is possible, if not likely, that state law will require your executor to provide all beneficiaries with copies of all pleadings, an accounting, and notice of various administration activities. This may make it easier for this "beneficiary" to now complain about things and may cause problems for your executor which could cost your estate money.

Instead of leaving a token amount, you might consider mentioning the person by name so it is clear that you have not simply overlooked them. Then, you would specifically state you are intentionally disinheriting them from your estate. Also, consider if you wish to disinherit that person's children or more remote descendants and if so specifically state that as well in your will. You should consult with an estate planning lawyer to assist you in the proper wording as you will want to make sure there is as little likelihood of a will contest as possible.


Monday, October 28, 2013

Guardianships and How to Avoid Them

If a person becomes mentally or physically handicapped to a point where they can no longer make rational decisions about their person or their finances, their loved ones may consider a guardianship. In Texas, there are two types of guardians - a guardian of the person would make decisions concerning the physical person of the disabled individual, and a guardian of the estate would make decisions about the finances.

Typically, a loved one who is seeking a guardianship will petition the appropriate court to be appointed guardian. The court will require a medical doctor to make an examination of the disabled individual, also referred to as the ward, and appoint an attorney to represent the ward’s interests. The court will then typically hold a hearing to determine whether a guardianship should be established. If so, the ward would no longer have the ability to make his or her own medical or financial decisions. The guardian must file annual reports on the status of the ward and his finances.

Guardianships can be an expensive legal process, and in many cases they are not necessary or could be avoided with a little advance planning. One way is with a financial power of attorney, and advance directives for healthcare such as living wills and medical powers of attorney. With those documents, a mentally competent adult can appoint one or more individuals to handle his or her finances and healthcare decisions in the event that he or she can no longer take care of those things. A living trust is also a good way to allow someone to handle your financial affairs – you can create the trust while you are alive, and if you become incapacitated someone else can manage your trust property on your behalf.

In addition to establishing durable powers of attorney and advanced healthcare directives and living trusts, it is often beneficial to apply for representative payee status for government benefits. If a person gets VA benefits, Social Security or Supplemental Security Income, the Social Security Administration or the Veterans’ Administration can appoint a representative payee for the benefits without requiring a conservatorship or guardianship. This can be especially helpful in situations in which the ward owns no assets and the only income is from Social Security or the VA.

When a loved one becomes mentally or physically handicapped to the point of no longer being able to take care of his or her own affairs, it can be tough for loved ones to know what to do. Fortunately, the law provides many options for people in this situation. As with most things, thoughtful planning in advance can prevent many problems down the road.

 


Tuesday, October 22, 2013

Should you withdraw your Social Security benefits early?

You don’t have to be retired to dip into your Social Security benefits which are available to you as early as age 62. But is the early withdrawal worth the costs?

A quick visit to the U.S. Social Security Administration Retirement Planner website can help you figure out just how much money you’ll receive if you withdraw early. The benefits you will collect before reaching the full retirement age of 66 will be less than your full potential amount.

The reduction of benefits in early withdrawal is based upon the amount of time you currently are from full retirement age. If you withdraw at the earliest point of age 62, you will receive 25% less than your full benefits. If you were born after 1960, that amount is 30%. At 63, the reduction is around 20%, and it continues to decrease as you approach the age of 66.

Withdrawing early also presents a risk if you think there is a chance you may go back to work. Excess earnings may be cause for the Social Security Administration to withhold some benefits. Though a special rule is in existence that withholding cannot be applied for one year during retired months, regardless of yearly earnings, extended working periods can result in decreased benefits. The withheld benefits, however, will be taken into consideration and recalculated once you reach full retirement age.

If you are considering withdrawing early from your retirement accounts, it is important to consider both age and your particular benefits. If you are unsure of how much you will receive, you can look to your yearly statement from Social Security. Social Security Statements are sent out to everyone over the age of 25 once a year, and should come in the mail about three months before your birthday. You can also request a copy of the form by phone or the web, or calculate your benefits yourself through programs that are available online at www.ssa.gov/retire.

The more you know about your benefits, the easier it will be to make a well-educated decision about when to withdraw. If you can afford to, it may be worth it to wait. Ideally, if you have enough savings from other sources of income to put off withdrawing until age 66 or after, you will be rewarded with your full eligible benefits.


Monday, October 14, 2013

A Simple Will Is Not Enough

A basic last will and testament cannot accomplish every goal of estate planning; in fact, it often cannot even accomplish the most common goals. This fact often surprises people who are going through the estate planning process for the first time. In addition to a last will and testament, there are other important planning tools which are necessary to ensure your estate planning wishes are honored.

Beneficiary Designations
Do you have a pension plan, 401(k), life insurance, a bank account with a pay-on-death directive, or investments in transfer-on-death (TOD) form?
When you established each of these accounts, you designated at least one beneficiary of the account in the event of your death. You cannot use your will to change or override the beneficiary designations of such accounts. Instead, you must change them directly with the bank or company that holds the account.

Special Needs Trusts
Do you have a child or other beneficiary with special needs?
Leaving money directly to a beneficiary who has long-term special medical needs may threaten his or her ability to qualify for government benefits and may also create an unnecessary tax burden. A simple vehicle called a special needs trust or supplemental needs trust is a more effective way to care for an a child with special needs after your death.

Conditional Giving with Living or Testamentary Trusts
Do you want to place conditions on some of your bequests?
If you want your children or other beneficiaries to receive an inheritance only if they meet or continually meet certain prerequisites, you must utilize a trust, either one established during your lifetime (living trust) or one created through instructions provided in a will (testamentary trust).

Estate Tax Planning
Do you expect your estate to owe estate taxes?
A basic will cannot help you lower the estate tax burden on your assets after death. If you think your estate will be liable to pay taxes, you can take steps during your lifetime to minimize that burden on your beneficiaries. Certain trusts operate to minimize estate taxes, and you may choose to make some gifts during your lifetime for tax-related reasons.

Joint Tenancy with Right of Survivorship
Do you own a house or other bank accounts or investment accounts with someone “in joint tenancy with rights of survivorship”?
“Joint tenants with rights of survivorship” is a common form of asset ownership with a spouse. This form of ownership is known as “joint tenancy with right of survivorship,” “tenancy in the entirety,” or “community property with right of survivorship.” With this type of ownership, when you die, your ownership share in the property passes directly to your spouse (or the other co-owner). A provision in your will bequeathing your ownership share to a third party will not have any effect.

Pet Trusts
Do you want to leave money for the care of your pets or companion animals?
Pets are generally considered property, and you cannot use your will or living trust to leave property (money) to other property (pets). Instead, you can use your will or living trust to name a caretaker for your animals and to leave a sum of money to a Trustee to pay to the caretaker provided the caretaker takes proper care of the animal pursuant to your instructions in your will or trust. 


Thursday, September 26, 2013

Preserving and Protecting Documents Is Part of Healthy Estate Planning

In the unsettled time after a loved one’s death, imagine the added stress on the family if the loved one died without a will or any instructions on distributing his or her assets. Now, imagine the even greater stress to grieving survivors if they know a will exists but they cannot find it! It is not enough to prepare a will and other estate planning documents like trusts, health care directives and powers of attorney. To ensure that your family clearly understands your wishes after death, you must also take good care to preserve and protect all of your estate planning documents.

Did you know that the original, signed version of your will is the only valid version? If your original signed will cannot be found, the probate court may assume that you intended to revoke your will. If the probate court makes that decision, then your assets will be distributed as if you never had a will in the first place.

Where should you keep your original signed will? There are several safe options – the best choice for you depends on your personal circumstances.

You can keep your will at home, in a fireproof safe. This is the lowest-cost option, since all you need to do is purchase a well-constructed fireproof document safe. Also, keeping your will at home gives you easy access in case you want to make changes to the document. There are two main disadvantages to keeping your will at home:

  • You may neglect to return your will to the safe after reviewing it at home, which increases the risk it will be destroyed by fire, flood, or someone’s intentional or accidental actions.
  • Your will could be difficult to find in the event of your death, unless you give clear instructions to several people on how to find it, which then creates a risk of privacy invasion.

You can keep your will in a safety deposit box. Most banks have safety deposit boxes of various sizes available to rent for a monthly fee. Banks, of course, tend to be more secure than private homes, which is one primary advantage. Also, if you keep your will in a safety deposit box, then after your death, only the Executor of your estate should be able to access the original will. Thus, unless other family members have ownership/access to the safety deposit box, the original will is protected against alteration or destruction, because only the Executor should have access to the original.

If you do keep your will and other estate planning documents in a safety deposit box, try to do so at the same bank where you keep your accounts and inform your Executor of its location and make sure he or she can access the box. This will streamline the financial accounting process.

You can also keep your original will and other estate planning documents at your lawyer’s office. Law firms often have systems for long-term document storage. However, keep in mind that the law firm may dissolve before the willmaker’s death, which can make it difficult to track down your will.

Additionally, you may file your original will at the courthouse for safekeeping. That way, after your death, your Executor can access the will at the time he or she files the probate proceeding.

You may also be able to store your will and other documents online. Many large financial institutions have begun offering long-term digital storage of important documents. However, any electronic version of your original will is – by definition – a copy, not the original. So, you still must find a safe place to store the original, signed and witnessed will. Online storage “safes” may be an excellent back-up, but you must still find a secure place to store the paper originals.


Thursday, September 19, 2013

How to Keep Your Affluent Children From Turning Into … Well, … Brats

Congratulations are in order—you have accumulated enough wealth to be concerned about eventually passing it along to your children and grandchildren in a manner that will encourage them to lead positive and productive lives. Like many, your objective is to allow your children to enjoy the rewards of wealth without becoming irresponsible, overindulgent or feeling entitled to anything money can buy.

When it comes to sharing one’s wealth with adult children, there are some general principles that may help you guide your children as they shape their values. Two quotes about sharing wealth with children are an excellent starting point:

"I wanted my children to have “enough money so that they would feel they could do anything, but not so much that they could do nothing.” – Warren Buffett

It’s better to give with warm hands than with cold ones.” – Unknown

Establish Inter Vivos Trusts for Your Children, And Use Restrictions Creatively

You can establish inter vivos trusts (trusts that go into effect during your lifetime) and appoint professional or independent trustees during your lifetime. Consider some combination of the following restrictions on the trust funds to help your children develop into competent, capable adults:

  • Make receipt of funds dependent on employment
  • Use trust funds to match income from employment
  • Prohibit distribution of trust earnings until the child reaches a certain age
  • Make attaining a certain level of education a prerequisite to distribution of trust income
  • Consider establishing a charitable trust or family foundation, with room for employment of your adult child in the foundation’s management
  • Consider a generation-skipping trust, so that your wealth is shared directly with grandchildren

Make Gifts or Loans During Your Lifetime—And Not Just Gifts of Money

This is the meaning behind the quotation above regarding warm hands and cold ones. It is better, in so many ways, to give gifts during your lifetime rather than after your death. In addition to gifts, consider making strategic, interest-free loans to your children to help them achieve certain goals without losing a lot of their own income to interest payments:

  • Interest-free loans for higher education
  • Interest-free loans for private education for grandchildren
  • Interest-free loans for home purchases

In addition to giving gifts of money or making strategic loans, there are other “gifts” you can give your children to help them learn to live with wealth. Consider the following suggestions:

  • Hire a professional to teach your children how to manage their money, instead of banking on your children listening to your own lessons.
  • Pay for family vacations that serve a philanthropic purpose, such as travel to Africa to deliver medical equipment to a remote town or travel to South America to help clean a national park.
  • Begin or continue a family tradition of local volunteer work with disadvantaged people in your own community to ensure that your children get firsthand knowledge of how fortunate they are to have the resources your family has accrued.

In general, experts agree that families fare better when their wealth is used to enrich their lives and to help others less fortunate. Give your children opportunities to learn to use money in responsible ways, from as early in their lives as possible. Show them the difference between buying a new sports car and donating the same amount of money to a program that sends food to people in need. That isn’t to say a new sports car shouldn’t be on the shopping list – but perhaps it shouldn’t be the only thing on the shopping list.

 


Thursday, September 12, 2013

Planning Pitfall: Probate vs. Non-Probate Property

Transfer of property at death can be rather complex. Many are under the impression that instructions provided in a valid will are sufficient to transfer their assets to the individuals named in the will. However, there are a myriad of rules that affect how different types of assets transfer to heirs and beneficiaries, often in direct contradiction of what may be clearly stated in one’s will.

The legal process of administering property owned by someone who has passed away with a will is called probate. Prior to his passing, a deceased person, or decedent, usually names an executor to oversee the process by which his wishes, outlined in his Will, are to be carried out. Probate property, generally consists of everything in a decedent’s estate that was directly in his name. For example, a house, vehicle, monies, stocks or any other asset in the decedent’s name is probate property. Any real or personal property that was in the decedent’s name can be defined as probate property.

The difference between non-probate property and probate centers around whose name is listed as owner. Non-probate property consists of property that lists both the decedent and another as the joint owner (with right of survivorship) or where someone else has already been designated as a beneficiary, such as life insurance or a retirement account. In these cases, the joint owners and designated beneficiaries supersede conflicting instructions in one’s will. Other examples of non-probate property include property owned by trusts, which also have beneficiaries designated. At the decedent’s passing, the non-probate items pass automatically to whoever is the joint owner or designated beneficiary.

Why do you need to know the difference? Simply put, the categories of probate and non-probate property will have a serious effect on how plan your estate. If you own property jointly with right of survivorship with another individual, that individual will inherit your share, regardless of what it states in your will. Estate and probate law can be different from state-to-state, so it’s best to have an attorney handle your estate plan and property ownership records to ensure that your assets go to the intended beneficiaries.


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