Houston Estate Planning and Probate Blog

Monday, April 16, 2012

Retirement Accounts and Estate Planning

For many Americans, retirement accounts comprise a substantial portion of their wealth. When planning your estate, it is important to consider the ramifications of tax-deferred retirement accounts, such as 401(k) and 403(b) accounts and traditional IRAs. (Roth IRAs are not tax-deferred accounts and are therefore treated differently). One of the primary goals of any estate plan is to pass your assets to your beneficiaries in a way that enables them to pay the lowest possible tax.

Generally, receiving inherited property is not a transaction that is subject to income tax. However, that is not the case with tax-deferred retirement accounts, which represent income for which the government has not previously collected income tax. Money cannot be kept in an IRA indefinitely; it must be distributed according to federal regulations. The amount that must be distributed annually is known as the required minimum distribution (RMD). If the distributions do not equal the RMD, beneficiaries may be forced to pay a 50% excise tax on the amount that was not distributed as required.

After death, the beneficiaries typically will owe income tax on the amount withdrawn from the decedent’s retirement account. Beneficiaries must take distributions from the account based on the IRS’s life expectancy tables, and these distributions are taxed as ordinary income. If there is more than one beneficiary, the one with the shortest life expectancy is the designated beneficiary for distribution purposes. Proper estate planning techniques should afford the beneficiaries a way to defer this income tax for as long as possible by delaying withdrawals from the tax-deferred retirement account.

The most tax-favorable situation occurs when the decedent’s spouse is the named beneficiary of the account. The spouse is the only person who has the option to roll over the account into his or her own IRA. In doing so, the surviving spouse can defer withdrawals until he or she turns 70 ½; whereas any other beneficiary must start withdrawing money the year after the decedent’s death.

Generally, a revocable trust should not be the primary beneficiary of a tax-deferred retirement account, as this situation normally limits the potential for income tax deferral. However, a trust may be the preferred option under certain circumstances, such as if a life expectancy payout option or spousal rollover are unimportant or unavailable, or when it’s used as a contingent beneficiary designation after the surviving spouse’s death, but this should be discussed in detail with an experienced estate planning attorney. Additionally, there are situations where income tax deferral is not a consideration, such as when an IRA or 401(k) requires a lump-sum distribution upon death, when a beneficiary will liquidate the account upon the decedent’s death for an immediate need, or if the amount is so small that it will not result in a substantial amount of additional income tax.

The bottom line is that this is a complex area of law involving inheritance and tax implications that should be fully considered with the aid of an experienced estate planning lawyer.

Monday, March 26, 2012

Issues to Consider When Gifting to Grandchildren

Many grandparents who are financially stable love the idea of making gifts to their grandchildren. However, they are usually not aware of the myriad of issues that surround what they may consider to be a simple gift. If you are considering making a significant gift to a grandchild, you should consult with a qualified attorney to guide you through the myriad of legal and tax issues that are involved in making such gifts.

Making a Lifetime Gift or a Bequest:  Before making a gift, you should consider whether you want to make the gift during your lifetime or leave the gift to your grandchild in your will or living trust.  If you make the gift as a bequest in your will or living trust you will not experience the joy of seeing your grandchild’s appreciation and use of the gift. However, if you make the gift now, while you are still around to share in their joy, you are depleting your assets and there’s always the possibility that you will need the money to live on during your lifetime, and in reality, once a gift is made it cannot be taken back. Also, if you anticipate needing Medicaid or other government programs to pay for a nursing home or other benefits at some point in your life, if you have not done the proper planning ahead of time, any gifts you make in the prior five years can be considered as part of your assets when determining your eligibility.

What Form Should the Gift Take:  You may consider making a gift outright to a grandchild. However, once such a gift is made, you give up control over how the funds can be used. If your grandchild decides to purchase a brand-new sports car or take an extravagant vacation, you will have no legal right to stop the grandchild. The grandchild’s parents could also in some cases access the money without your approval.

You could consider making a gift under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA), depending on which state you live in. The accounts are easy to open, but once the grandchild reaches the age of majority, he or she will have unfettered access to the funds. You could also consider depositing money into a 529 plan, which is specifically designed for education purposes. Finally, you could consider establishing a trust with an estate planning attorney, which can be more expensive to set up, but can be customized to fit your needs. Such a trust can provide for spendthrift, divorce and creditor protection while allowing for more flexibility for expenditures such as education or purchase of a first home.

Tax Consequences: If you have a large estate, giving gifts to grandchildren and other loved ones may be a great way to get money out of your estate in order to reduce your future estate tax liability. In 2012, a single person can pass $5 million at death free of estate tax, and a couple can pass a combined $10 million without paying estate taxes, if they should both pass away in 2012. In addition, a person can give up to $13,000 in 2012 to any number of individuals without incurring any gift taxes or need to file a gift tax return. A grandparent with 10 grandchildren could give $130,000 per year total to all grandchildren (and a married couple could give $260,000), thereby removing that property from his or her estate. There are some unique gifting options available in 2012 that may not be around in years to come. If this may be of interest to you, contact your attorney or this firm to discuss your options.



Tuesday, March 13, 2012

Family Business: Preserving Your Legacy for Generations to Come

Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.

More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.

  • Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
  • Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
  • Make sure your succession plan includes:  who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
  • Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
  • Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
  • Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
  • Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
  • Add independent professionals to your board of directors.

You’ve worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.



Friday, March 2, 2012

Do I Really Need Advance Directives for Health Care?

Many people are confused by advance directives. They are unsure what type of directives are out there, which ones are suitable for them, and whether they even need directives at all, especially if they are young. There are several types of advance directives. One is a living will, (which in Texas is called a Directive to Physicians and Family or Surrogates) which communicates your wishes about end of life choices and treatment and informs your doctors whether or not you want extraordinary medical measures taken under certain situations. Another type is called a health care or medical power of attorney. In a medical power of attorney, you give someone the power to make health care decisions for you in the event you are unable to do so for yourself. A third type of advance directive for health care is a do not resuscitate order. A DNR order is a request that you not receive CPR if your heart stops beating or you stop breathing. Depending on the laws in your state, the health care form you execute could include all three types of health care directives, but more typically, each document is prepared independently. Another important medical document is the HIPAA Authorization which allows certain persons to access your protected medical information and discuss your care with medical providers.

If you are 18 or over, it’s time to establish your health care directives. Although no one thinks they will be in a medical situation requiring a directive at such a young age, it happens every day in the United States. People of all ages are involved in tragic accidents that couldn’t be foreseen and could result in life support being used. If you plan in advance, you can make sure you receive the type of medical care you wish, and you can avoid a lot of heartache to your family, who may be forced to guess what you would want done.

Many people do not want to sign health care directives because they may believe some of the common misconceptions that exist about them. People are often frightened to name someone to make health care decisions for them, because they fear they will give up the right to make decisions for themselves. However, an individual always has the right, if he or she is competent, to revoke the directive or make his or her own decisions.  Some also fear they will not be treated if they have a health care directive. This is also a common myth – the medical power of attorney simply informs caregivers of the person you designate to make health care decisions and the type of treatment you’d like to receive in various situations.  Planning ahead can ensure that your treatment preferences are carried out while providing some peace of mind to your loved ones who are in a position to direct them.

Thursday, December 8, 2011

This Holiday Season an Estate Plan is the Perfect Gift

The holiday season is upon us, and as others rush about the malls and the internet looking for gifts, we can recommend a unique, useful and memorable gift that will be perfect for any loved one: An Estate Plan!

Before you roll your eyes at the idea, consider this: An estate plan is something every person needs, whether it’s your single younger nephew, your older sister with her two young children, or your retired, aging parents. Furthermore, although everyone needs an estate plan, many people (wrongly) consider it a luxury, and put off creating one—often until it’s too late.

You may be thinking, No, an estate plan is too personal (too expensive, too morbid) to give as a gift. But we can safely say that not one of these excuses is true. If you feel an estate plan is too personal a gift, we recommend giving a gift certificate good for the cost of a basic plan, which the recipient can then design and add to according to his or her needs. If you feel an entire estate plan is too expensive a gift, you may want to consider paying for a portion of the plan, or for the first consultation with an attorney, just to get your loved one started. And if it’s morbidity that you’re worried about, perhaps giving a “Loving Family Legacy Plan” sounds more appealing.

This year, don’t give a gift that will impress for a moment but be forgotten within a week; instead, give the gift that will protect your loved one—and their loved ones!—and will last for years to come. Give the gift of an estate plan.



Monday, November 28, 2011

How to Cope After the Death of a Spouse

Losing a spouse may be one of the most difficult life events that any of us have to deal with. A spouse is a parenting partner, a co-CFO, a best friend and a beloved soul mate. Losing the person who supports you in so many ways can create an emptiness which can be almost paralyzing.

This is why it’s so important after the death of a loved one to have the support you need to get through the detail-oriented and often emotionally draining probate process, which includes tasks such as sorting through a financial history, submitting legal documents to the probate court, contacting creditors and family members, and more. Some people have family or friends to help with these time-consuming tasks, others enlist the help of an estate planning or probate attorney, but one thing is clear: no one should do it alone.

Every family or couple will have a different experience with the probate process, but our firm would like to offer a basic list of universal “to-do” items to remember after the death of a spouse. We hope this will help give our readers a little bit of security during a very emotional and stressful time.

* Obtain multiple copies of the death certificate
* Gather any and all estate planning documents
* Contact an estate planning/probate attorney. Even if you don’t plan to retain an attorney, a brief initial consultation can help you understand the task ahead and prevent you from skipping important steps
* Notify the person named as executor or trustee
* Notify the necessary institutions or agencies (the deceased’s employer, social security administration, insurance company, creditors, post office, etc.)
* Discuss with your attorney before you remove spouse’s name from all joint accounts or ventures, such as bank accounts, utility companies, credit card accounts, etc.
* Discuss with your attorney before you pay final bills, and cancel accounts, subscriptions, etc.

Depending on your situation and location, there may be many more tasks to be done. Additionally, if you are serving as executor or trustee (as many spouse’s do) there will be a great number of administrative tasks to be performed in addition to the ones on this list. Under these circumstances even the strongest and most capable people can feel overwhelmed. Remember that you don’t have to go through the process alone.



Tuesday, November 22, 2011

When “Equal” is not Always “Fair”

Every parent wants to be fair to their children; avoid showing favoritism, give each the same advantages, and eventually leaving each a fair and equal inheritance. But every parent also knows that there are times when equal is not always fair—a dilemma that is often faced by parents drawing up their will or estate plan. This is exactly the issue that is addressed in this recent article in the Wall Street Journal entitled Wills: How to Give One Child Less.

The article mentions that there are a number of different reasons why parents may want to give seemingly unequal financial distributions in their wills, “Many parents want to support children who need more financial help, while others want to repay children who have provided important support or caregiving. Some parents already may have helped one child considerably more than another during his or her lifetime, such as paying for a pricey graduate-school education or providing money for a down payment for a house. Other parents are reluctant to reward a particularly difficult or problematic child.”

There is absolutely nothing wrong with choosing to leave more to one child than another, but problems may arise when children are caught by surprise and feel neglected or betrayed; this happens most often when children don’t understand the reasons for their parents’ seeming favoritism, and can result in one child choosing to contest your will in court.

The WSJ article recommends a few strategies to avoid these hurt feelings and expensive court proceedings, but the first and best strategy is to talk to your children about it ahead of time, if possible. Hearing the news (and the reasons behind it) from mom and dad themselves can be much less hurtful than hearing about it from an attorney. Furthermore, telling your children yourself gives you the opportunity to explain your decision in a sensitive and loving manner.

If you still worry that your decision might be contested there are a number of precautions you can take to help ensure your planning documents will hold, including taking steps to prove your mental capacity is sound, creating what the WSJ calls “serial wills,” including a no-contest clause in your will, and more. Which method you may choose to employ will depend completely on your unique situation, and your estate planning attorney will be able to help you decide which is best.

We all know logically that “equal” is not always “fair,” but the heart does not always understand what seems logical to the head. Breaking the news gently to your kids ahead of time can go a long way toward avoiding hurt feelings later.



Tuesday, November 15, 2011

Estate Planning with a Chronic or Terminal Disease

We mention often on our blog that each family will have unique circumstances and unique estate planning needs—this is especially true of families in which one member has a chronic or terminal disease such as cancer, diabetes, or, as mentioned in this article in Forbes Magazine, multiple sclerosis.

For most people, the documents in their estate plan constitute a “someday” or a “what if” scenario, but for those people with chronic or terminal diseases the documents in their estate plan address issues that are much more immediate and certain. For this reason, the advice in the article mentioned above focuses mainly on doing whatever you can to take control of your estate planning, health care, and financial affairs right now. Some of the suggestions include:

* Finding financial and estate advisors who are comfortable discussing your situation, and can help you customize your plans to fit your needs.

* Customizing your estate planning documents, including your will, trust, or living will.

* Signing important forms right now, while you still can.

* Making use of your temporary or limited powers options in your healthcare and financial documents, giving your chosen agents the limited power while you are temporarily incapacitated to “pay your bills and file your taxes but not sell your house or make gifts of your assets.”

Living with a chronic or terminal disease is a unique situation and requires unique planning and preparation—planning that is best done right away, for the good of your family and for yourself. If you have questions about estate planning with a chronic or terminal disease please don’t hesitate to contact our office—we can help.



Monday, October 10, 2011

How To Give An Inheritance To A Child Who Might Squander Or Abuse It

Giving your children an inheritance can be one of the most generous, most loving things a parent can do... Unfortunately, under certain circumstances it can also be the most dangerous. A recent article in the New York Times addresses a question asked by many parents in estate planning offices all over the country: How to give an inheritance to a problem child who might squander or abuse it?

It is not unusual for estate planners to hear concerns from parents or families about one child or sibling who is not quite as mature, not quite as responsible as the others. In some cases the concern is not with a child or sibling, but with an untrustworthy spouse of a child or sibling. In both cases the estate planning challenge is the same—how to provide for the one you love without feeding any dangerous habits or predatory relationships.

There are actually a great number of ways parents can use estate planning to either protect or motivate an irresponsible child. The one your family chooses will depend on your unique circumstances. The article mentions a few of these strategies, including:

Eliminate temptation by restricting access to large sums of money. “Money does not cause problems, but it can sure accelerate them. The simplest strategy is to choke off that fuel.” Parents can do this through annuities, through specific instructions in trusts, or through a trusted and like-minded trustee. What is not recommended is putting another sibling in charge of the estate and asking that sibling to “parent” the less responsible one. This is a recipe for disaster.

Use your estate plan to give your child incentives to improve. “Incentive trusts can set hurdles for children to receive money or make payments only for set reasons. Pretty much anything can be a trigger, from being admitted to a certain college or matching money children earn on their own to being clean from drugs for a certain number of years.” Your estate planner can tell you how to best set this up.

Keep something in reserve for future years and generations. If your goal is to encourage children and grandchildren to lead productive lives and contribute to future generations then your estate planner can help you design a plan that will last for decades or generations. Recent tax developments have made this an especially good time to create a lasting legacy. “People with substantial wealth may want to take advantage of the $5 million exemption from taxes and 35 percent tax rate over that amount.”

Friday, September 23, 2011

Make Your Estate Plan a Masterpiece

A recent article in Forbes has shed light on a fact that estate planners have always known: There is far more to creating a good estate plan than just drafting the documents.  In fact, according to the article, there is a fine art to putting together a good estate plan. “Estates are often shrouded in some mystery even for the people who plan and manage them. It is logical that an estate plan should offer a clear map of what a person owns, but this isn't always the case.”

The point is made in the article that very few estate plans contain an accurate accounting of what the estate entails. There may be any number of reasons for this; in some cases a person “doesn't have an accurate balance sheet to start with, and chooses not to update it or to share every detail.” In other cases “people may withhold information because they do not entirely trust an adviser, or because they are embarrassed to talk about money.”

The job of an estate planner is to draft a plan solid enough to offer security, but flexible enough to hold up to unexpected surprises—and how to achieve this will be different for every client. “A big part of the job is to value assets properly, and that task is an art, not a science.”

Of course, the clients who come back every few years for an update and review have a much better chance of their estate plan remaining accurate and secure, but not every client will be willing or able to do this, and estate planners do take this into account. However, “even a plan that starts out based on a complete accounting will be thrown out of whack if the estate owner doesn't come in to update it after a big life event like marriage or the sale of a business.”

Whether you are considering creating a new estate plan, or looking for someone to help you update an existing one, contact our office for help. We can help you make sure your plan is a masterpiece.

Friday, September 9, 2011

Executors of 2010 Estates Have Until Nov. 15 to Make Estate Tax Decisions

Everyone will remember the “wonderful boon” that was the 2010 estate tax repeal, which (in theory) allowed decedents to pass on their assets free of any estate taxes.  However, the situation was complicated in December of 2010 when, as this article in Bloomberg puts it, “Congress extended the tax retroactively [giving] executors of estates of people who died that year a choice. They could decide to skip the estate tax or pay the tax with a $5 million per-person exemption and a 35 percent top rate, the same as in 2011.”

Executors have had almost a year to consider their options, but now it is just about time to make the decision, because “the Internal Revenue Service is giving executors of estates of people who died in 2010 until Nov. 15 to opt out of the estate tax.” According to the IRS the forms and instructions for 2010 estate tax returns will be made available early this fall.

But executors don’t have to wait until the forms are available to consider which tax option might be the most profitable one. Many financial planners and estate planning attorneys have already done their research, and they’ve found that opting not to pay estate taxes may end up costing you more in the long run. This article in Forbes explains: “Opting out of the estate tax regime means opting out of stepped-up basis (for income tax purposes)… and opting into the modified carryover basis rule…  One of the main plusses about estate tax is that it is paired with a stepped-up income tax basis.  You should not be paying both estate tax and income tax on the same assets.”

Of course, each estate will be different depending on a number of factors, including the size of the estate, the nature of the assets, the preferences of the beneficiaries, and any previous planning the decedent may have done. Executors should consider their options carefully, and consult with an experienced estate planning attorney and CPA before deciding whether opting out of the estate tax is really in their best interest.

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