I routinely get asked the same questions when it comes to estate planning. I am providing some basic information on those common questions in an effort to help as many people as possible understand what estate planning is, why it is important, and why you must make a plan. Not all questions are answered but the following list of questions/answers will help familiarize you with estate planning.
What is estate planning?
Estate planning is the preparation for the distribution and management of a person’s estate at death through the use of wills, trusts, insurance policies, and other arrangements, especially to reduce administration costs and transfer-tax liability. Every person over the age of eighteen (18) should have an estate plan. Regardless of the size of your estate, failure to create an estate plan making your wishes known means that the State of Texas will make a plan for you. The State of Texas’ plan may or may not be what you would want regarding the disposition of your property. This is especially true in second marriage situations.
What documents should my estate plan include?
The starting point for every estate plan should be the following documents. Each document serves a different but vital purpose. These documents allow you to distribute your property to the people of your choosing and plan for your incapacity. These documents do not provide for tax planning, such as estate tax, gift tax, or the generation skipping tax.
- A Will enables you to distribute your assets to named individuals upon your death. Without a will, your assets will be distributed according to Texas law rather than to the beneficiaries of your choice.
- An advanced health care directive (a/k/a living will), is a legal document that allows you state your wishes for medical treatment in the event you are diagnosed with a terminal or irreversible condition. This document speaks for you when you are unable to communicate your wishes to your doctor. The default treatment option from your doctor is to provide you with ALL life-sustaining measures. If you want to do something different (and 99% of my clients do) you must have this document in place.
- A financial power of attorney is a legal document that allows you to name an agent to make financial decisions, cash checks, deposit money, deal with investment companies, etc. on your behalf. In other words, if it deals in any way with money the person of your choosing is granted the legal power to make these decisions when you are unable to make them for yourself. Keep in mind that a financial power of attorney expires at your death!
- A medical power of attorney is a legal document that allows you to name an agent to make medical decisions on your behalf, deal with hospitals and doctors, and consent to medical treatment. Failure to execute a medical power of attorney renders the state law “priority” list effective. This “priority” list may or may not be the person you would want to make your medical decisions.
- A HIPAA Release is a legal document that allows the persons you choose to access your medical records. It does not give anyone the ability to make medical decisions for you (that is the purpose of the medical power of attorney). However, sometimes it is necessary to access medical records at one doctor or hospital and take them to another doctor or hospital. This vital document ensures that those persons of your choosing have the ability to access the necessary information.
- A declaration of guardian is a legal document that allows you to name a legal guardian of your choosing if you were to be afflicted by an illness or injury that is so debilitating that you are unable to care for yourself physically or financially. This document is so very important because there is no legal requirement that the person seeking to become your guardian even be related to you. Any person may petition the court and, if they can show that you are incompetent, the court may appoint any individual as guardian. While there is a priority list per state law, failure to execute this document can cause costly and lengthy legal proceedings.
What if I don’t have a medical power of attorney or a durable power of attorney and I become incapacitated?
If you don’t have either a medical power of attorney or a durable power of attorney at the time you become incapacitated, it may be necessary to institute guardianship proceedings on your behalf. Guardianships are authorized by court order and necessarily involve a great deal of time, court costs, attorney’s fees, etc. The court will appoint an attorney to represent your interests throughout the proceedings. As you can imagine this can be very costly and significantly deplete your resources. The guardian is then vested with all legal rights over you. In essence, the guardian becomes your parent and has full and complete access to all of your finances, bank accounts, and investments. Additionally, all medical decisions will be made by the guardian.
What is an executor?
An executor is the person nominated in your last will and testament to handle your legal affairs upon your death. It is very important to understand that an executor has no legal power until appointed by the court. This means that your executor will have to file your will for probate proceedings in the county in which you resided at your death and have a hearing with the probate judge to prove the will valid. After the will has been proven valid, the court will issue the named executor Letters of Testamentary so long as the executor is not disqualified by law. The letters allow the executor to handle the legal affairs of your estate, pay your debts, and distribute your property to your heirs.
Who should I appoint as my executor?
You should always choose someone you trust implicitly. This may be your spouse, your parent, a sibling, your child, or your best friend. The role of an executor is a big job and you want someone you are comfortable with handling things. The executor is vested with the legal authority to do anything and everything on behalf of your estate. Because of this, the possibility for malfeasance and mismanagement is a very real possibility. So choose wisely your executor and make sure that you review your executor designations every year to ensure that the person you have named remains the person you want to serve as such.
Can I appoint a corporate executor?
Yes you can for a fee. Many banks/trust companies will serve as the executor of your estate. They typically charge a percentage fee based upon the size of your estate. This fee can be up to 1.5% of your estate value (i.e., $1 million estate costs $15,000). Is it a good plan to choose a corporate trustee? Maybe. Maybe not. While corporate executors are generally good at the financial side of handling estates, they are often ignorant of the family dynamics, needs of the beneficiaries, etc. You should carefully consider whether it is worth the expense to hire a corporate executor especially when the corporate executor has no knowledge of your familial history.
What is the estate tax?
The estate tax is a tax imposed by the government on the transfer of wealth. If your estate is too large, the estate tax system kicks in and you will be required to pay Uncle Sam a portion of your money. This portion can be 40%-50% of your estate value. In 2016, the estate tax exemption amount is scheduled to be $5.45 million dollars per individual. For estates under that amount, no tax is due. For estates over that amount taxes will be due unless proper planning takes place.
While these number seem large (and they are), there are several assets that are considered to be a part of your estate for estate tax purposes. The biggest one is life insurance. If you own a life insurance policy with a death benefit of $1 million, the full $1 million dollars is included in your gross estate. Add that amount to everything else you own and you may find that $5.45 million is not that large of a number.
Also, keep in mind that the exemption amount is tied to the whims of Congress and can always be changed. Just a few years ago, the exemption amount was $600,000. As such, your estate plan must have estate tax savings provisions in the event that they are needed.
Do I owe inheritance tax?
Not if you are a resident of Texas. Texas has no state inheritance tax.
What is a trust?
A trust is a legal arrangement that is utilized to hold title your assets. Trusts must be in writing to be enforceable. There are numerous types of trusts each with a different purpose. However, generally speaking, trusts are used so that the trust property is not held in your individual name. This has important legal and tax implications that you should be aware of. Some trusts are created to avoid probate; some are created to provide protection from creditors, predators, and divorcing spouses; some are created to save potential estate taxes; and some are created to hold title to insurance policies.
What is a revocable trust?
A revocable trust is a type of trust that is used to avoid probate court at your death. These trusts are fully “revocable” and can be amended or changed at any time prior to your incapacity or death. The reason these trusts avoid probate is that the law deems the trust to own the trust property at your death and not you individually. It is important to note that the revocable trust only controls the things that are placed inside of it. If you fail to put all of your assets inside the trust, then some of those assets may have to go through the probate process at your death.
Another benefit to revocable trusts is that they maintain your privacy. All probate proceedings are public record once they are filed. Since revocable trusts do not go through probate, you and your beneficiaries’ privacy is preserved. To learn more about the specifics of revocable trusts, make sure you read our blog article entitled “Revocable Living Trusts”.
Should everyone create a revocable trust?
No. Revocable trusts are not for everyone. On the other hand, they are perfect for certain types of people: those that value their privacy; those that want to avoid lengthy delays, court costs, and attorney’s fees at their death; those that own property in multiple states; and those that want a seamless transition of wealth to their beneficiaries.
There is nothing wrong with using a will to pass on your wealth. Just know that wills necessarily require probate court. You are required to have an attorney for all probate proceedings in Texas. This is because the named executor must pay your debts and distribute the remaining assets to your beneficiaries. Case law has made it clear that an executor representing himself or herself is the unauthorized practice of law. Hence the need for an attorney in ALL probate proceedings.
What is the difference between a Will and a living will?
This is a common question that I encounter. A will is the document that we use to pass on your estate at your death. It does not and cannot take effect or have any legal significance prior to your death.
A living will is the document that communicates your wishes to your doctors about what kinds/levels of treatment you want in the event you are diagnosed with a terminal condition or an irreversible condition. The living will only has effect and legal significance while you are alive. At your death, the living will is no longer valid.
Are Wills prepared in other states valid in Texas?
Texas law makes clear that wills properly prepared, signed, executed, and notarized in other states are valid. So long as the will was prepared correctly and legally in another state, Texas will recognize and enforce the will.
Do I need to update my Will?
You should review your will at least annually to ensure that it is still what you want. If you have had a major life event, like the birth of a child, death of a family member, a divorce, etc., then you should have your will reviewed (and probably amended).