GADDY WELLS
Texas Lawyer
Texas Estate Planning
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THE CONTENT OF THIS WEB PAGE IS NOT INTENDED TO BE AND SHOULD NOT BE RELIED UPON OR USED AS LEGAL ADVICE OR AS A SUBSTITUTE FOR PERSONAL CONSULTATION WITH A LICENSED ATTORNEY.


THE BASICS OF ESTATE PLANNING IN TEXAS


   
By  Gaddy Wells

This paper includes portions of and is adapted from “TO WILL OR NOT TO WILL” published by Texas Young Lawyers Association and the State Bar of Texas


CONTENTS

I.    What Is Estate Planning?   

II.   Why Is Estate Planning Important?    

III. What Happens To Your Estate If You Become Incapacitated Without Any Estate Planning For Such Event?
  

IV.  What Happens To Your Estate If You Die Without Any Estate Planning For Death?


V. What Are Some Of The Estate Planning Techniques?   

 

VI.   Tax Considerations    

_________________________________________________

I.     What Is Estate Planning?

    Estate planning is simply a person’s orderly arrangement for the management, control and ownership of all of the person’s estate now and/or in the future.  It includes planning for how the estate is to be managed, controlled or disposed of upon the person’s incapacity or death and upon the incapacity or death of a proposed beneficiary of the person’s estate.

    To understand what estate planning is, you must first understand what a person’s estate includes.  A person’s estate includes all property in which a person has any interest, whether legal or equitable.  Besides the obvious property of a home, an automobile, and stocks or bonds, a person’s estate could include such things as rights in a retirement plan, rights to receive payment under a contract, and equitable rights as beneficiary of an estate.  All of a person’s rights in any property make up that person’s estate.  
                    
    In Texas, the marital property rights are somewhat more complex because Texas is a community property state.  In Texas, property is characterized as being separate property or community property.  Separate  property is that which is owned before marriage or acquired during marriage by gift or inheritance.  Damages awarded during marriage from a personal injury lawsuit, except damages representing the loss of earning capacity, are also separate property. Community property is all property, other than separate property that is acquired by either spouse during their marriage.  Thus, there can be separate real property, separate personal property, community real property and community personal property.  Spouses can alter the statutory characterization by either pre-marital or post-marital agreements. Unless otherwise agreed by the spouses, the statutory characterization of property owned by spouses as being separate or community property applies.  

    The community property aspect of a person’s estate makes estate planning more important in Texas than in states that do not have community property laws, especially for spouses that have community property and also have children by prior marriages.  For example, a person can only dispose of his one-half interest in community property.  So, if a person, through a will, trust or other estate planning technique, tries to dispose of both his and his spouse’s interest in an item of community property, the surviving spouse might go to court to prevent the transfer of her one-half interest in the item that the deceased spouse had no right to give away.

 
II.     Why Is Estate Planning Important?

    Most people care deeply about who will manage and control their property during their lifetimes, especially if they become incapacitated, and who will inherit their property when they die.  For those who do not care about these matters, estate planning is not important.  For all those who do care about these matters, estate planning is very important. 

    If a person becomes incapacitated without any estate planning, the laws of the State of Texas control how the person’s estate will be controlled and managed.  Likewise, if a person dies without any estate planning, the laws of the State of Texas determine who will inherit that person’s estate.  The result of a person’s incapacity or death without estate planning could be dramatically different from what the person wanted for his or her estate.

    Every person has the right to alter the statutory scheme for control and inheritance of his estate in the event of his incapacity or death, respectively, by signing applicable estate planning documents.  Planning for one’s estate allows a person to decide for himself who will manage and control his estate upon his incapacity and who will inherit his property upon his death.  Estate planning is important to allow a person to document how his estate should be managed, controlled and inherited in the event of incapacity or death and to avoid being restricted to the statutory plan for managing and inheriting his estate.  


III.     What Happens To Your Estate If You Become Incapacitated Without Any Estate Planning For Such Event?

    A.    When is a person legally incapacitated.

    The Texas Probate Code defines an adult “incapacitated person" as being “an adult individual who, because of a physical or mental condition, is substantially unable to provide food, clothing, or shelter for himself or herself, to care for the individual's own physical health, or to manage the individual's own financial affairs.”  Under Texas law, an incapacitated person cannot  legally enter into a contract.  Therefore, an incapacitated person is legally unable to buy or sell a home, car, stocks and bonds or any other type of property.

    B.    What happens to the estate of an incapacitated person?

    If a person becomes incapacitated without any estate planning for controlling and managing his estate, the State of Texas has laws that will control.  Generally a guardianship must be established for that person.  There are two types of guardianship - guardianship of the person and guardianship of the person’s estate.  The guardian can be a different person or entity for each type.

    For a person judicially declared to be incapacitated, the person’s non-incapacitated spouse is (a) legally authorized to manage and dispose of the incapacitated person’s interest in community property without a court-supervised administration and (b) first in line of eligible persons to be appointed guardian of the estate for the incapacitated person’s separate property.  A guardian of the estate must be appointed for an incapacitated person who is not married.  Many organizations, such as a title insurance company, may require that a guardian of the estate be appointed for an incapacitated person before they will deal with the property of the incapacitated person, even when there is a non-incapacitated spouse. This is so because such organizations want to make sure that they are dealing with a properly authorized person who is not disqualified under the law or who is not the proper representative for any other legal reason.

    When no estate planning tools are in place, a guardian of the person’s estate is usually required to legally buy and sell property for the incapacitated person.  A court must appoint the guardian and approve any purchase or sale by the guardian of property owned by the incapacitated person.  Also, the guardian of the estate must file and the court must approve an annual accounting of all income and expenses of the incapacitated person’s estate.  Clearly, lack of estate planning for incapacity can have a very negative effect on the incapacitated person and his or her family.


IV.   What Happens To Your Estate If You Die Without Any Estate Planning For Death?
    
    If a Texas resident dies without a will or trust, if the will or trust is declared invalid or if the person makes no use of other estate planning tools for inheritance, the person’s estate will be distributed to his or her heirs as determined under Texas law. Those heirs may not be the persons to whom the person wished for his or her property to pass.  

    How does property in Texas pass upon a person’s death if there is no estate plan?  It depends on several factors.  These factors include whether the property owned at death was real or personal property; whether the person was married or single; whether the property was characterized as community property or separate property; and whether the person had children or other family.

    A.    Inheritance of community property.

    When a person dies without a will, trust or other estate planning tool, his or her community property, whether real or personal, is distributed in this manner:

   1.     If the deceased person is survived by a spouse and children (or descendants of deceased children):

      a.    If all surviving children and descendants of the deceased spouse are also children or descendants of the surviving spouse (if no child[ren] outside of the marriage to the surviving spouse), all of the community property passes to the surviving spouse.

      b.    If any surviving child or descendant of the deceased spouse is not also a child or descendant of the surviving spouse (if child[ren] outside marriage to surviving spouse), the deceased spouse's one-half of the community property passes to his or her children, and the surviving spouse retains the  one-half of the community property he or she owned prior to the person’s death. However, the surviving spouse has the right under Texas law to use and occupy the homestead during his or her life and may have the  right to use or own certain items of personal property that are exempt from creditors' claims.

            Example 1:     Husband (H) dies without a will or trust. H is survived by Wife (W)  and by his three children (A, B, and C). A, B, and C also are the children  of W.

In this case, all of the community property passes to W.

            Example 2:      Same as Example 1, except H is survived by a child (D) who is not also a child of W. Now, A, B, C, and D share equally in H's one-half of the community property, and W simply keeps the one-half of the community  property that she owned prior to H's death. To illustrate, let's apply  this rule to a community bank account with $1,000 in it. The $1,000 is distributed as follows:

W:  $500 (Many people incorrectly think that W gets the entire $1,000.)

A, B, C, and D:  Each receives $125  (1/4 of $500)

            Example 3:      Same as Example 1, except W has a child (E) by a prior marriage. E is alive at H's death.

All of the community property still passes to W. It does not matter that W has children who are not also H's children.

     2.   If the deceased person is survived by a spouse but not by any children or  descendants, all of the community property passes to the surviving spouse.

     3.    If the deceased is not survived by a spouse, all property is separate property because the community estate terminates at the death of the first spouse.

    B.    Inheritance of separate property.

    The inheritance of separate property of a person who dies without a will depends on whether it is real or personal property.

Separate property of a person who dies without a will or trust is inherited as follows:

    1.     If the person is survived by a spouse and children (or descendants  of deceased children), then, subject to the surviving spouse's rights with respect to the homestead and exempt personal property:

-  Separate personal property passes one-third to the spouse and two-thirds to the children (and the descendants of deceased children).
-  Separate real property passes to the children (and the descendants of  deceased children) subject to a life estate in one-third of the property in favor of the surviving spouse. This means that the surviving spouse is entitled to use one-third of the real property during his or her lifetime, and upon his or her death, the children (or descendants) will have full  title to the separate real property of the decedent.

    2.     If the person is survived by a spouse but not by any children or descendants, then, subject to the surviving spouse's rights with respect to the homestead and exempt personal property:

-  All separate personal property passes to the spouse.

-  Separate real property passes one-half to the spouse and one-half to  the decedent's parents or collateral relatives, such as brothers and  sisters or their descendants. If no parents, brothers, sisters, or their descendants survive, then all separate real property passes to the surviving spouse.

    3.     If only children or their descendants survive, all separate personal and real property passes to the children or their descendants.

    4.     If both parents survive, but not the spouse or children or children's  descendants, all separate personal and real property passes one-half to  each parent.

    5.   If only one parent and brothers or sisters survive, separate personal  and real property passes one-half to the surviving parent and the remaining one-half is divided equally among the brothers and sisters or their descendants. However, if no brothers or sisters or their descendants survive, then all separate property passes to the surviving parent.

    6.    If no spouse, children or children's descendants, or parents of the decedent survive, all separate property is divided equally among the  decedent's brothers and sisters or their descendants.

    7.     If none of the above relatives survive, then all separate property  passes generally to the decedent's grandparents. If no grandparents  survive, the law provides for distribution of separate property to more distant relatives.

In Texas, no matter how remotely related one is to a person who dies without a will or trust, potentially he or she is an heir-at-law.  The deceased person’s property passes to the State of Texas only if none of his or her heirs, including very remote heirs (such as uncles, aunts, or cousins), are living.


V.   What Are Some Of The Estate Planning Techniques?

    Estate planning techniques include transfers of property before incapacity or death as well as transfers at death. Only property owned by a person at death can be disposed of by a will.  A will cannot dispose of "nonprobate assets," which are those that pass at death other than by will or by law in absence of a will.  The principal types of nonprobate assets include property passing by contract, property passing by survivorship, and property held in trust. These assets are transferred directly to the person’s designated beneficiaries outside his or her will.  It is important to periodically review the  beneficiary designations with respect to these types of assets and to update  them as necessary.

    A.    Gift transfers of property before incapacity or death.

    One way for a person to plan the disposition of his estate and to avoid the necessity of probate is to transfer some or all of the interest in property as an outright gift before the person becomes incapacitated or dies.  The method of transfer depends on the type of property being transferred.  Real property is transferred by a deed. Tangible personal property can be transferred by bill of sale or assignment of title.  Intangible personal property is usually transferred by a written assignment.

    B.    Retirement plans with post-death designated beneficiaries.

    A person may dispose of the benefits or proceeds of his retirement plan(s) by making a written designation of one or more beneficiaries to receive such benefits upon his death.  Each retirement plan will have its own procedures for making such beneficiary designations.  Such benefits or proceeds will pass to the beneficiaries without any other process, i.e., probate of will or implementation of trust provisions.

    C.    Contracts with post-death designated beneficiaries.

    A person can use contracts to dispose of his or her estate.  Contracts such as life insurance policies and annuities allow a person to specify one or more beneficiaries to receive the proceeds of the policy or annuity upon the person’s death.  The company is obligated by the contract to pay the specified beneficiaries certain amounts of money according to the terms of the contract.  These payments to beneficiaries are part of the person’s gross estate for federal estate tax purposes but are not subject to federal income tax and are not included in assets subject to probate.

    It is better to name a person as beneficiary in the contract rather than the person’s “estate.”  If the proceeds are payable to the person’s estate, the proceeds become subject to the person’s creditors.  The proceeds are not subject to the person’s creditors if payable to an individual or entity.

    D.    Payable On Death (POD) bank accounts.

    A specialized contract is a "POD account" between a depositor and a bank. This type of account is payable by the bank on request to one or more persons during their lifetimes and on the death of one or more of them to one or more persons designated on the POD account as one to whom the account is payable on request after the death of designated person(s).  This account would not need to be probated for the bank to be obligated to pay the account to the persons designated in the account agreement.

    Joint bank accounts can have different legal statuses, depending on the account agreement.  Check your bank account agreement to determine how your account would be paid upon your death.

    E.    Property held as joint tenants with a right of survivorship.

    Property held in the names of two persons as joint tenants with right of survivorship passes outside the will directly to the survivor.  Survivorship assets typically include title to real property, certain types of bank accounts, certificates of deposit, stocks and bonds, and certain savings bonds issued by the United States Government, such as Series EE savings  bonds. Title to property can also be held jointly between two or more persons with the right of the last survivor of the persons to have full ownership of the property.

    F.    Power of attorney.

    A general power of attorney is an instrument by which one person (the principal) grants to another person (the agent) the power to perform certain acts on his or her behalf.  The principal can either grant the agent one or more specific powers (limited or specific power of attorney) or grant the agent the power to do whatever the principal could do (general power of attorney).  In addition, the principal can elect to have the power of attorney become  effective immediately upon signing it or only upon the principal's future  disability or incapacity.  If the power of attorney is effective immediately and continues in effect even if the principal becomes incapacitated, it is called a durable power of attorney.  The durable power of attorney must be notarized, but it need not be witnessed.  

    A power of attorney terminates and is no longer effective upon the principal’s death, the appointment and qualification of a guardian of the estate of the principal and the revocation of the power of attorney by the principal.  However, a revocation of a power of attorney is not effective as to a third party relying on the power of attorney until the third party receives actual notice of the revocation. If the agent is the principal’s spouse, the power of attorney terminates on the date on which the divorce or annulment of the principal’s marriage is granted by a court, unless otherwise expressly provided by the durable power of attorney.

    After execution of a durable power of attorney, the filing of a voluntary or involuntary petition in bankruptcy in connection with the principal's debts does not revoke or terminate the agency as to the principal's attorney in fact or agent.  However, any act the attorney in fact or agent may undertake with respect to the principal's property is subject to the limitations and requirements of the United States Bankruptcy Code until a final determination is made in the bankruptcy proceeding.

    G.    Trust.

    A trust is a legal relationship in which one party, the trustee, has legal  title to property in order to manage that property for the benefit of one or more designated persons, the beneficiaries.  The person who establishes the trust is called the grantor, settlor or trustor.  

    A person may not legally be the trustee for the benefit of himself as the sole beneficiary.  However, a person may serve as the trustee for the benefit of himself and at least one other person besides the grantor is a beneficiary.

    The grantor may establish the trust during his lifetime by transferring the property to himself or some other person as trustee.  This is called an inter vivos or living trust because it is established while the grantor is alive.  A living trust may be revocable or irrevocable.  A trust is presumed to be revocable unless the trust agreement specifically states that the trust is irrevocable.  A revocable trust may be revoked at any time before the grantor dies or becomes incapacitated.

    The grantor may also establish a trust through his will.  This is called a testamentary trust because it is established after the death of the grantor and the probate of his will.

    A trust is perhaps the most effective way of managing property for the benefit of minor or incapacitated persons or persons who are either unable or unwilling to manage their own financial affairs.  There is normally no court supervision of a trustee’s management and administration of the trust assets. A trust also is useful to prevent a spendthrift person from immediately spending his or her inheritance by preserving the funds for the child's education or other important needs. Further, a trust may be used to protect a beneficiary's inheritance from the claims of his or her creditors because property placed in a trust generally may not be reached by a beneficiary's creditors until it is distributed to the beneficiary.

    A popular tool for estate planning is a revocable living trust established by a person as the grantor with the grantor serving as the trustee while alive,  competent and willing to serve.  The trust is revocable while the person is alive and competent.  The trust appoints a successor trustee to administer the trust assets upon the grantor’s death, incapacity or unwillingness to serve as trustee.  To establish such a trust, property previously held in the grantor’s name is transferred to the grantor as trustee of the trust.  If the grantor becomes incapacitated, the successor trustee takes over to manage the trust assets. Upon the grantor’s death, the successor trustee can either transfer the trust assets to the designated beneficiaries or continue to hold the trust assets for the benefit of others, depending on the wishes of the grantor as specified in the trust agreement.

    H.    Will.

    A will is a legal instrument which states how the testator's property is to  be distributed at death. A valid will avoids many of the problems that may  arise from dying without a will and allows a person to leave property to  the persons he or she desires. In addition to naming the recipients of the testator's property, the will also designates the individual(s) who will manage the property and care for  minor children. In larger estates, the will often contains provisions that  minimize estate taxes.  A will can also set up a trust.

    For a person’s will to be effective, the person must meet the following  requirements:

1. be at least 18 years of age, married, or serving in the armed forces;
2. be of sound mind at the time of execution;
3. not  be  unduly  or  fraudulently induced (forced or deceived) to make  the will; and
4. have testamentary intent (present intent to bequeath property at death).

    For a formal or typewritten will to be valid, its execution must meet the following  requirements:

1.  be signed by the person making the will or another person at his or her direction and in his or her presence;
2. be attested by two credible witnesses above the age of 14; and
3. be signed by the witnesses in the presence of the testator.

    The validity of a person’s will must be  proved in court. This procedure is known as probate, and it generally must  take place within four years after death.  A will that is not probated has no legal effect, and the person’s property passes to his or her heirs as if he or she died without a will.  This further emphasizes how important it is to execute a will that meets all legal requirements so that a person’s property will  pass as he or she wishes.

    To probate a will, it must be established in court that the person and the execution of the will meet the requirements stated above and that the will was not canceled or revoked. Additionally, unless the will is "self-proved," proof of a will requires the testimony of one of the attesting witnesses or the testimony of two witnesses to the testator's handwriting.

    A self-proved will is one that has attached a specific form of affidavit containing certain required statements.  The affidavit must be executed before a notary  public at the time the will is signed or anytime thereafter but before the testator dies. A standard notary acknowledgment alone is not sufficient to make the will "self-proved." A self-proved will is admitted to probate on the basis of the self-proving affidavit and there is no need  to call witnesses.

    I.    Divorce

    Divorce revokes the appointment of a spouse as an agent and attorney-in-fact under a medical power of attorney, unless otherwise expressly provided by the durable power of attorney.  Texas Health &Safety Code Sec. 166.155. 

    Divorce revokes the appointment of a spouse as an agent and attorney-in-fact under a general power of attorney, including a statutory power of attorney, unless otherwise expressly provided by the durable power of attorney. Texas Probate Code 485A. 

    Divorce revokes a beneficiary designation of a spouse for a life insurance policy.  Texas Family Code Sec. 9.301.  Divorce revokes a beneficiary designation of a spouse for an IRA.  Texas Family Code Sec. 9.302.  

   However, divorce does not revoke the beneficiary designation of a spouse for a 401(k) or any other benefit covered by ERISA (Egelhoff v. Egelhoff, 121 SCt 1322).  For such plans, a person must change the beneficiary designation to remove the former spouse as a designated beneficiary.

    If, after making a will, a person is divorced or his or her marriage is annulled, all provisions in the will in favor of the person’s former spouse, or provisions appointing such spouse to any fiduciary capacity under the will or with respect to the estate or person of the person's children, must be read as if the former spouse failed to survive the person, and shall be null and void and of no effect unless the will expressly provides otherwise. Texas Probate Code Sec. 69(b).

   A former spouse of a person making a will is not a surviving spouse unless they remarry and the former spouse person is married to the person at the time of death. Texas Probate Code Sec. 69(b).

    BEWARE!  There is no statutory provision for a divorce or annulment to void provisions of a trust instrument in favor of a spouse or provisions appointing the spouse to any fiduciary capacity.  To void the provisions regarding a spouse in a trust instrument, there must be specific provisions in the instrument to void such provisions upon a divorce or annulment of a marriage. 

VI.     Tax Considerations

    Depending upon the value of the person’s estate, estate planning techniques may  be necessary to avoid, minimize, or defer federal estate and state inheritance taxes. These taxes generally are imposed if the value of the decedent's property exceeds the estate tax exemption in effect at the time of the person’s death, less the amount of any lifetime taxable gifts by that person.

    The federal estate tax exemption is $2,000,000 from 2006 until 2009; and $3,500,000 in 2009. Current law states that the estate tax will be repealed in the year 2010 but reinstated in the year 2011, when the estate tax exemption will be only $1,000,000. For estate tax purposes, a person’s estate includes his or her separate property and one-half of all community property. Life insurance and other nonprobate assets are considered in  determining the value of the decedent's property unless certain steps were taken during life to prevent such assets from being subject to estate tax at death (e.g., placing life insurance in a trust).

    The highest federal estate tax rate is 50% in 2002 and declines 1% each year until 2007 when it becomes 45%. It is possible that the estate tax rate could become 55% in 2011. If a person’s estate for estate tax purposes exceeds the applicable estate tax exemption at the time of the person’s death and there has no been proper planning, a significant portion of the person’s estate may go toward the payment of estate and inheritance taxes rather than to the person’s intended beneficiaries. Estate planning techniques are  available to minimize death taxes and, in the case of a married individual, to defer payment of any taxes until after the death of his or her spouse.  The ability to take full advantage of such techniques is not possible without a will or trust.

    This paper includes portions of and is adapted from “TO WILL OR NOT TO WILL” published by Texas Young Lawyers Association and the State Bar of Texas



Contact me at
Downs & Stanford, P.C.
2001 Bryan St, Ste 4000
Dallas, Texas  75201
(214) 748-7900
(214) 748-4530 Fax
gwells@downsstanford.com

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