Texas Law
Texas Estate Planning, Wills & Trusts
- Estate Planning, Wills & Trusts
Estate Planning, Wills & Trusts
Although no one likes to think about dying, there are good reasons to prepare for this inevitable event by setting up a plan to distribute one's estate after death. A person's estate consists of all his or her property and possessions, including bank accounts, real estate, furniture, automobiles, stocks, bonds, life insurance policies, retirement funds, pensions, and death benefits. If a person plans well, his or her estate can be passed on after death quickly, easily, and subject to fewer taxes. This chapter discusses the most common estate planning tools--wills and trusts--and gives special attention to the interests of business owners.
Wills
A will is the most common document used to specify how an estate should be handled after death. Anyone designated to receive property under a will (or trust) is called a beneficiary. A will can be simple or elaborate, depending upon the size of the estate and the wishes of the person who makes it--the testator. Many types of post-death instructions may be included in a will. A will may dictate who should receive specific items of furniture, artwork, or jewelry. A will may name a guardian who will take care of minor children should there be no surviving parent. A will even may be used to disinherit a child if the testator does not want the child to receive any part of the estate. The options for what a person can do with a will are varied, but there are limitations.
Requirements for a Valid Will
Each state sets different formal requirements for the creation of a legal will. In Texas, any person who is at least 18 years old or is or has been lawfully married; or who is a member of the United States Armed forces, or the auxiliaries thereof, or the maritime service at the time the will is made can make a legal will. In addition, he or she must be of sound mind, which means that the individual has no mental disability that prevents him or her from understanding the full nature of the document he or she signs.
In Texas, a will must be in writing and must be signed by the testator in person or by another person for the testator at the testator's direction in the testator's presence. The will also must be witnessed, in the special manner provided by law, by at least two other people. A handwritten will, often called a holographic will, is valid in Texas provided that it is wholly in the handwriting of the testator. A will is valid until it is revoked or superseded by a new will. Individual provisions can be changed by a codicil, which is described in the section Changing and Updating Wills.
It is not necessary to hire an attorney to create a will. Anyone can create a will, as long as he or she pays close attention to the details outlined above. Smaller estates can be described simply, and making a will to disperse a smaller estate can be done by almost anyone. The simplest will in history ever to be declared valid by a court contained only three words: "All to wife." However, a lawyer's guidance is very helpful to deal with complicated property holdings or an estate with many assets, especially if they are located in several different places. A business owner, too, needs the advice of an experienced attorney to transfer his or her assets. An attorney can ensure that the transfer of property described in the will is done in a way that minimizes the survivor's tax liability. In addition, a complicated estate may require documents other than a will, such as a trust agreement, to ensure that all of a person's wishes are carried out.
Personal Representative
A will typically appoints someone called a personal representative or executor, to carry out the specific wishes of the decedent. The personal representative should be a trusted friend or family member who should be made fully aware of his or her duties before the decedent dies. Under state law, a personal representative may not be incapacitated, a convicted felon, a non- resident of Texas unless he or she appoints a resident agent to accept service of process in all actions or proceedings with respect to the estate and files such appointment with the court, a corporation not authorized to act as a fiduciary in Texas, or any other person the court finds unsuitable. A personal representative must do many things, including collect and manage the decedent's assets; collect any money owed at the time of death; sell any assets, if necessary, to pay estate taxes or expenses; and file all required tax returns. Because a personal representative is allowed to charge a fee for doing this work, choosing a friend or family member who is also a beneficiary to fill this role may be a good choice, because he or she may opt not to charge the full amount allowed by law. To ensure that the personal representative is someone chosen by the decedent, it is wise to name one or more contingent personal representatives who can take over the responsibilities of the primary personal representative if the primary personal representative is unable to assume the responsibilities of the position.
If a person does not name a personal representative in his or her will, state law establishes the order in which a probate court appoints relatives to act as personal representative. If none of these family members agrees to be the personal representative, the probate court may appoint a professional administrator to do the job.
Appointing a Guardian for Children
A person with minor or dependent children may name in a will a guardian to care for those children should there be no surviving parent. If a person fails to name someone to assume the role of guardian, the probate court appoints someone. The person chosen by the court usually will be a close relative or friend, but it may not be the person the parent would have chosen. It is important that the potential guardian understand the provisions of the will and be willing to accept the responsibilities of being a guardian. Also, it is wise to name an alternate guardian should the primary guardian be unable to accept the responsibility. Of course, the selection of a guardian for children is likely to influence how the parent wants to distribute his or her property. The parent may want to give property to someone only if the recipient accepts guardianship of a child. In this way, the guardian is given the financial resources to care for the child.
Planning for Incapacity
People drafting wills often use the opportunity to plan for the possibility of their own incapacity. By preparing a document called a durable power of attorney, they can give another person of their choosing full legal authority to act on their behalf should they become unable to handle their personal and financial affairs. Without a durable power of attorney, a person's family might need to go to court to have someone appointed to handle the person's legal affairs. If a power of attorney is made part of the will, it is essential that the will be made known to family members before the testator becomes incapacitated. If a will is kept secret, locked away in a safe deposit box until a person dies, it will be too late for the durable power of attorney provisions to be useful.
Some people also use a document called a durable power of attorney for health care to make health care decisions in advance should they subsequently become incapacitated. Creating a durable power of attorney for health care is discussed in the Elder Law Chapter.
Restrictions on Wills
In order to protect spouses and dependent children, some states prevent a person from entirely disinheriting a spouse or child without the consent of the one who is disinherited. Under Texas law, however, a person may disinherit any heir, including a spouse or dependent child.
There are restrictions on wills in Texas. Anything owned in joint tenancy with another person passes under a will unless the joint tenants had earlier agreed in writing that the interest of a joint tenant would pass to the surviving joint tenants. No such agreement is inferred from the fact that the property is held in joint tenancy. Because there may be significant tax consequences, these agreements or lack thereof should be made only after consulting an attorney.
Other possessions are not considered part of the estate because they are already promised to someone else. For example, a testator may not specify in a will that someone other than the beneficiary of a life insurance policy gets the benefits described in that policy. However, a person may designate his or her estate as the beneficiary of a life insurance policy. In this case, the money from the policy will be added to other estate assets and will be distributed according to the will. Similarly, the money from a retirement plan goes to the persons named on the plan, regardless of whether they are beneficiaries in a will. Laws designed to uphold public policy also limit what can be done with a person's assets after death. For example, conditions in a will encouraging someone to do something illegal or immoral in order to inherit money or property would not be enforceable.
Changing and Updating Wills
The provisions of a will are valid until they are changed, revoked, destroyed, or invalidated by the writing of a new will. Changes or additions to a will may be included in a document called a codicil. A codicil must be written, signed, and witnessed in the same way as a will. Wills may not be changed legally simply by crossing out existing language or writing in new provisions. In order to avoid making a new will or codicil each time a person's possessions change, a will can specify that personal property is to be distributed according to instructions outlined in a separate document. A person then is free to revise the separate document as often as necessary, without observing all of the formalities required to change the will itself.
If someone dies with a will that is not up-to-date, people may not be provided for adequately. For example, a person chosen to be a personal representative or guardian may have died or fallen out of favor with the author of the will, or a favorite charity may no longer be in existence. A significant amount of case law has dealt with how a probate court is to proceed with a will that has become unenforceable because of changed circumstances. These headaches can be avoided if a will is reviewed at least every two years and revised for major changes in tax laws, for personal events such as births, deaths, marriages, divorces, or for significant changes in the size of the estate. It is also a good idea to review a will if its author moves to another state, because the new state of residency may have different inheritance and tax laws.
Dying Without a Will
If a person does not have a will or has not adequately planned for the distribution of his or her estate at death, survivors may face a complicated, time-consuming, and costly process. Often survivors wind up having to pay more taxes on their inheritance than they would have paid had there been a will or other estate planning tool. To provide for surviving friends and relatives, or to support favorite causes or charities, a person should plan for the distribution of his or her estate after death. With planning, an estate can be distributed as fairly as possible with as little tax burden as legally allowed.
When a decedent leaves no will or other comparable estate planning tool, he or she is said to have died intestate. Jurisdiction over wills and trusts is in the superior court sitting in probate. When a person dies intestate, the probate court steps in to divide the decedent's estate, according to a formula provided by the state inheritance laws. Under the state inheritance laws, the probate court uses formulas set by the legislature to divide a deceased person's possessions among any surviving relatives.
A probate court applying the state inheritance laws first deducts from the estate the funeral expenses and any unpaid medical bills up to five thousand dollars, allowances made to the surviving spouse and children, estate administration expenses, taxes, and other debts owed.
After all the claims against the estate are paid, and if the decedent has a surviving spouse and no children, the surviving spouse is entitled to all of the personal estate (all possessions other than land) and one-half of the decedent's real estate. The other half of the real property goes to the decedent's parents or siblings and their descendants. If there are no surviving parents, siblings, or their descendants, then the surviving spouse receives the entire estate.
In addition, the community property of the deceased spouse passes to the surviving spouse if there are no other descendants or if all of the surviving children and descendants of the deceased spouse are also children or descendants of the surviving spouse. Otherwise, one-half of the community property goes to the surviving spouse and one-half goes to the children or descendants of the deceased spouse.
If there are children and no surviving spouse, the entire estate is divided among the children and their descendants. If all of the children are living, they share in the estate equally. If one or more of the children are deceased, their descendants split a share equal to the share their parent would have received if alive.
If there is both a surviving spouse and children, or their descendants, the surviving spouse receives one-third of the personal estate and the balance of the personal estate goes to the children of the deceased and their descendants. The surviving spouse also receives an estate for life in one-third of the land of the deceased, with remainder to the children and their descendants.
If the decedent leaves neither a spouse nor children, the estate goes to the decedent's father and mother equally. If only one parent survives, then one-half goes to the surviving parent and the other half goes to the brothers and sisters of the deceased and to their descendants. If there are no siblings or their descendants, then the entire estate goes to the surviving parent. If neither parent survives, then the entire estate goes to the brothers and sisters and their descendants. If there are no siblings or their descendants, then the estate goes to grandparents and their decendants. The line of inheritance continues in an attempt to locate the decedent's nearest kin. Anyone entitled to inherit a portion of an intestate decedent's estate is known as an heir.
Texas law distinguishes between kin of whole or half-blood. If an estate passes to descendants of both whole and half blood, each of those of half blood inherit only half as much as each of those of whole blood. If all of the descendants are of half blood, they inherit whole portions.
One problem with relying on a probate court applying state inheritance laws to distribute an estate is that it may not distribute the estate in the manner the decedent would have wanted. State inheritance laws only recognize relatives. The inheritance laws never permit the probate court to support a decedent's close friend, lover, or favorite charities. If no relatives are found, the estate goes to the state. Clearly, for most people writing a will or creating a trust is advisable.
Trusts
A trust is another estate-planning device frequently used to manage the distribution of a person's estate.
Mechanics of a Trust
To create a trust, the owner of property (grantor) transfers the property to a person or institution (trustee) who holds legal title to the property and manages it for the benefit of a third party (beneficiary). The grantor can name himself or herself or another person as the trustee. A trust can be either a testamentary trust or a living trust. A testamentary trust transfers the property to the trust only after the death of the grantor. A living trust, sometimes called an inter vivos trust, is created during the life of the grantor and can be set up to continue after the grantor's death or to terminate and be distributed upon the grantor's death.
Unlike a will, which in some cases can be drafted without the help of an attorney, a trust should never be drafted without the aid of a lawyer. Many complex laws regulate trusts. Trusts must be carefully structured if they are to take into account the size and composition of the estate and take advantage of beneficial tax laws. An experienced attorney always should assist in drafting a trust so that it is valid, meets the needs of the estate, and does not conflict with any previously drafted will.
Advantages and Disadvantages of a Trust
Trusts have many advantages over wills. The advantages depend on whether a living trust or testamentary trust is chosen. All trusts have the advantage of allowing the grantor to determine who receives the benefit of the money, when it is received, and what conditions must be met. If a spouse is unable or unwilling to manage assets, if children are minors or are unable to handle money responsibly, or if a beneficiary is disabled, creating a trust can be a better way of passing on assets. Living and testamentary trusts are an especially popular way of providing for beneficiaries' future educational or medical costs.
Some advantages are particular to living trusts. First, a living trust can give its grantor substantial tax advantages. Second, possessions held in a living trust are not subject to estate administration by the probate court after the grantor dies. Survivors do not have to reveal the details of any possessions held in trust through the public filing process that takes place during probate. In addition, if the grantor owns real estate in another state, establishing a living trust for the title to that property may allow survivors to avoid probate in the other state. A living trust can free the grantor from the burden of overseeing his or her financial affairs because a trustee manages all the assets of a living trust. More importantly, a living trust allows a trustee to manage the trust funds in the event that its creator becomes incapacitated or mentally or physically unable to oversee his or her possessions. If a living trust contains all of a person's assets, then he or she may not need a will, and his or her survivors may be able to avoid probate. If only part of a person's possessions are held in living trust, then a will is necessary to distribute those items in the estate not placed into a trust. However, a "pour-over provision" in a will can place any possessions remaining upon death into a pre-existing living trust.
The primary disadvantage of a living trust is that it involves the loss of some flexibility and control over one's assets. Unlike a will, which becomes effective only at death, a living trust becomes effective immediately upon its creation. For the person who wants to retain unrestricted control over his or her estate, a will or a testamentary trust is a better estate-planning tool because it can be changed at any time prior to death.
The primary advantage of a testamentary trust is that it allows the grantor to retain unrestricted control over his or her estate. A testamentary trust becomes effective only upon the death of its grantor. Like a will, a testamentary trust can be changed at any time prior to death.
The primary disadvantage to testamentary trusts is that they do not take advantage of the beneficial tax treatment given to living trusts. Because a testamentary trust only takes effect when the grantor dies, the grantor cannot enjoy any tax advantage during his or her life. Also, most testamentary trusts must go through probate.
Revocable and Irrevocable Trusts
A living trust can be either revocable or irrevocable. As implied by their names, a revocable trust can be changed or revoked after its creation, while a person signing an irrevocable trust gives up the right to change or revoke the trust. A revocable trust quite often is devised to supplement a will and/or to name someone to handle the grantor's affairs should the grantor become incapacitated. A trust usually must be made irrevocable if the grantor wants to avoid income or estate taxes. Tax authorities consider the grantor of a revocable trust to be the owner of the property because he or she still controls the property. For this reason, income from assets held in a revocable trust must be reported as income to the grantor for income tax purposes. At the death of the grantor, property in a revocable trust is included in the estate for calculating estate taxes.
An irrevocable trust often is designed to be the beneficiary of a life insurance policy. Such a life insurance trust also may spell out how the policy's money is distributed to survivors. In addition, irrevocable trusts often are set up to manage money given to minors and to charities. Finally, an irrevocable trust can be used to transfer assets to another person in the event that the grantor requires expensive medical care. Although doing so may protect the grantor's family by ensuring that the cost of medical care does not wipe out the family fortune, it may make the grantor ineligible to receive federal and state medical assistance.
Probate
With few exceptions, the estate of a person who dies owning property in his or her name cannot be legally distributed without first going through probate. Only if all of a decedent's property is held in joint tenancy with right of survivorship (pursuant to a written agreement) or in trust, can the survivors avoid probate. Probate can operate with court supervision, called supervised administration, or without court supervision, called independent administration. Informal probate also is available. Some simple, small estates may be collected upon affidavit.
Regardless of the type of administration, the first duty of the probate court is to determine whether the decedent left a valid will. The person in possession of a decedent's will must deliver it to the clerk of the court that has jurisdiction of the estate. If the decedent left a valid will, the probate court oversees the process of settling the estate according to the terms of the will. If the decedent did not leave a will or if the probate court determines the will is invalid, the probate court applies the state inheritance laws, described earlier, to the estate.
Collection of a small estate upon affidavit is available if the estate, not including the homestead and exempt property, is $50,000 or less, no petition for the appointment of a personal representative is pending or has been granted, and 30 days have elapsed since the death of the decedent. The assets of the estate, not including the homestead and exempt property, must exceed the known liabilities of the estate. An affidavit containing the information required by law is filed with the clerk of court and it is approved by a judge.
If the value of the assets of an estate, excluding homestead and exempt property, does not exceed the amount to which a surviving spouse and minor children are entitled as a family allowance, an application may be filed by or on behalf of the spouse and children requesting the court to make a family allowance and to enter an order that no administration of the estate is necessary. A family allowance is that amount sufficient for the maintenance of a surviving spouse and children for one year from the time of the decedent's death.
There also are summary proceedings for small estates after a personal representative has been appointed. Summary proceedings only are allowed if the value of the estate does not exceed the amount required to pay the claims against the estate.
Independent administration permits the personal representative to administer the estate without most court orders or filings. Unless disputes arise between the beneficiaries or with third parties, or unless requested to intervene by the personal representative or an interested party, or unless the law explicitly provides for some action by the court, the court is involved only to open the estate; enter an order granting independent administration; approve the inventory, appraisement, and list of claims against the estate; and close the estate. The process reduces the time involved in probate. If the will so specifies or if any of the distributees of the decedent do not agree on independent administration, the court must supervise the administration.
An executor, or personal representative, or any person named as a devisee or legatee in a will may apply for the informal probate of a will. The application may be filed with the court 30 days after the testator's death. Specific requirements must exist in order to apply for informal probate. For example, all of the estate's known debts must have been satisfied. A judge may deny the application for informal probate if the requirements are not satisfied or if he or she determines that formal probate is necessary.
Supervised administration requires the personal representative to make required filings with the court, such as an estate inventory and periodic accountings. The personal representative also must obtain court approval to perform certain duties such as purchasing, exchanging, selling or leasing estate property.
Making a will does not guarantee that survivors avoid all distribution problems, but a carefully drafted will can minimize their time in court.
Avoiding Death Taxes
A carefully created estate plan can considerably reduce the tax burden on an estate. Under Texas and federal law a decedent with an estate worth more than $600,000 must file an estate tax return and may be liable for payment of federal and Texas estate or inheritance taxes. The federal government's inheritance tax scheme is quite complicated. Under federal tax law a person is allowed to leave $600,000 tax-free to one or more individuals, other than a surviving spouse. The surviving spouse is entitled to receive an unlimited amount tax-free. If the estate is a very large one, however, and the entire estate is left to the surviving spouse, the surviving spouse may lose the option of giving $600,000 tax-free to individuals of his or her own choosing. An experienced tax attorney can create trusts that will allow both spouses to pass on a total of $1,200,000 free of unnecessary estate taxes.
Concerns for Owners of Closely Held Businesses
Closely held businesses present unique challenges to the person planning for distribution of his or her estate. Often a businessperson's interest in a closely held business is his or her primary source of income and constitutes the bulk of his or her wealth. Because interests in a closely held business often lack liquidity and are difficult to value, transferring them before or after death can be difficult and determining the taxes owed can be time consuming.
Only an attorney experienced in estate planning for owners of closely held businesses can adequately advise on all aspects of treating closely held business assets. Before an attorney prepares a will or trust, however, the person with an interest in a closely held business must consider his or her own need for income until death, the likelihood that someone in the family will want to continue playing an active role in the business, and the ability of a recipient to pay death taxes and administration costs if the business is going to continue after the owner's death.
Some common options chosen by small business owners include partner buyout agreements, gift-leaseback arrangements, life insurance policies, incorporation, or selling the business. In a partner buyout agreement, partners can agree that a surviving partner will buy the interest of a decedent at a price agreed upon in advance. Partner buyout agreements are common but they need to be updated periodically as the value of the business changes. Under a gift-leaseback arrangement, substantial assets are put in trust for the benefit of one or more beneficiaries, then leased back to the business. The primary benefit of a gift-leaseback arrangement is that the beneficiary receives financial support but business operations are not disrupted. Life insurance policies provide a recipient with sufficient cash to pay taxes and administration costs without having to sell the business. Incorporating often makes it easier to value the business.
Selling the business may seem drastic, but it may mean the recipient receives more money. Many small business owners feel strong emotional attachment to businesses they have grown from scratch. Often emotional attachments lead an owner to refuse to sell a business and the family has to sell it later in order to pay off bills or because no one is capable of managing the business. Accepting the need to sell a business while its owner still is alive and has time to find a suitable buyer may be wise. In addition, the business is likely to fetch a higher price because its current owner may be able to oversee the transition to new ownership.
Resources
National Senior Citizens Law Center, 1815 H Street N.W. #700, Washington, DC 20006, (202) 887-5280.