Texas Estate Planning Essentials

McNair Dallas Law

Four Generations Estate Planning

There are many legal strategies involved in estate planning, including wills, revocable living trusts, irrevocable trusts, powers of attorney, and health care documents. 

Texas Estate Planning Essentials

There are many legal strategies involved in estate planning, including wills, revocable living trusts, irrevocable trusts, powers of attorney, and health care documents.

New clients often say that they do not have an estate plan. They are surprised to learn that they actually do have a plan. In the absence of legal planning otherwise, their estate will be distributed after death according to Texas’s Laws of Intestacy. Of course, this may not be the plan they would have chosen. A properly drafted estate plan will replace the terms of the State’s estate plan with your own.

Estate Planning answers two essential questions:  What happens if you become incapacitated?” and “What happens when you die?”

What Happens If You Become Incapacitated?

Legal Guardianship in Texas

Guardianship is a proceeding whereby a court determines whether an individual lacks capacity to manage their financial or personal affairs. Often guardianship can be avoided with proper legal planning.

If Guardianship proceedings are necessary to protect an individual, a hearing will be held before a judge in the probate court. The judge will determine whether or not the person is incapacitated to the extent that they require a Guardian of the Estate and/or a Guardian of the Person. The Judge will also select the individual or individuals who will serve as Guardian. Once a Guardian has been appointed, regular reports and accounting must be made to the court.

In order for someone to be judged incapacitated, evidence of poor decision making would need to be brought before a judge who specializes in determining capacity. If the judge rules that an individual is incapacitated, a guardian would be appointed. Often, less-restrictive alternatives to guardianship can be arranged with proper legal assistance.

Guardianship should be the last resort considered for someone with diminished capacity. The process is expensive, invasive, time consuming, and burdensome.  With proper estate planning, guardianship can often be avoided.

Advance Directives

A Directive to Physicians, or Living Will, is a document that specifies the type of medical and personal care you would want should you lose the ability to make and communicate your own decisions, and have a terminal diagnosis. Anyone over the age of 18 may execute an advance directive, and this document is legally binding in Texas. Your Living Will can set out the circumstances under which you would not like your life to be prolonged if, for example, you were in a coma with no reasonable chance of recovery.

A Power of Attorney for Healthcare appoints an Agent to make medical decisions for you if you are temporarily or permanently incapacitated.  Your Agent will make decisions based on their conversations with you, knowledge of your wishes, and the provisions of your Living Will.  Your physician will determine whether or not you have capacity to understand your medical condition and options for treatment.

A document that goes hand-in-hand with your Power of Attorney for Healthcare is an authorization to your medical providers to allow specified individuals to access your medical information. Without this General HIPAA Authorization, your doctor may be unable to communicate with your hand-picked decision maker.

Finally, it’s important that you talk with your Agent, and successor agents, frequently to ensure they understand your wishes for care.  A helpful guide to these conversations is TheConversationProject.org.  They provide guides to help you begin these conversations, as well as information you can share with your Agents about their role.

Financial Power of Attorney

A Power of Attorney is a legal document giving another person (the Agent) the legal right (powers) to do certain things for you. What those powers are depends on the terms of the document. A power of attorney may be very broad or very limited and specific. All powers of attorney terminate upon the death of the maker, and may terminate when the maker (principal) becomes incapacitated (unable to make or communicate decisions).

When the intent is to designate a back-up decision-maker in the event of incapacity, then a Durable Financial Power of Attorney should be used. The “durable” in the name ensures that the document is still valid, even if you become incapacitated.  Durable Powers of Attorney should be frequently updated because banks and other financial institutions may hesitate to honor a power of attorney that is more than a year old.

You will also want to ensure that you have chosen alternative Agents, in case your primary Agent is unable or unwilling to act.

Trusts: Revocable Living Trusts, Irrevocable Trusts, Testamentary Trusts, Special Needs Trusts, etc.

Trusts come in many “flavors,” they can be simple or complex, and serve a variety of legal, personal, investment or tax planning purposes.

At the most basic level, a trust is a legal entity with at least three parties involved: the trust-maker (Grantor), the trust manager (Trustee), and the trust beneficiary. Oftentimes, all three parties are represented by one person or a married couple. In the case of a revocable living trust, for example, a person may create a trust (Grantor) and name themselves the current Trustee who manage the trust assets for their own benefit (Beneficiary).

A Living Trust can help protect a vulnerable adult from financial exploitation, and may be used to avoid guardianship.  For an individual who lacks capacity to handle their financial affairs, a Trustee may be able to step in, avoiding the need for a costly and time consuming guardianship.

Depending on the situation, there may also be many advantages to establishing a trust, including avoiding probate. In most cases, assets owned in a revocable living trust will pass to the trust beneficiaries (or heirs) immediately upon the death of the trust-maker(s) with no probate required. Certain trusts also may result in tax advantages both for the trust-maker and the beneficiary. Or they may be used to protect property from creditors, or simply to provide for someone else to manage and invest property for the trust-maker(s) and the named beneficiaries.

If well drafted, another advantage of trusts is their continuing effectiveness even if the trust-maker dies or becomes incapacitated. Reach out to our office in Dallas to find out if you and your family could benefit from establishing a trust.

What Happens When You Die?

As stated earlier, the State of Texas has a plan for your estate if you pass away without establishing your own plan.

Intestate Succession

The Texas Laws of Intestate Succession dictate that if a person dies without a spouse, their estate is distributed as follows:

  1. First, to the person’s children, and the children’s descendants;
  2. If no child or child’s descendant survives the person, the estate passes in equal portions to the person’s father and mother;
  3. If only one parent survives the child, the estate shall be divided into two equal portions with
    1. One portion passing to the surviving parent; and
    2. One portion passing to the person’s siblings and the sibling’s descendants; OR
  4. To be inherited entirely by the surviving parent if there is no sibling or sibling’s descendants.
  5. If neither parent survives, the entire estate passes to the siblings and siblings’ descendants.
  6. If none of the people named above survive the person, the estate shall be divided between their maternal and paternal family as described by the court.

Avoiding Intestate Succession

Last Will and Testament

The most common way to avoid Intestate Succession is by creating a legal will.  Your last will and testament is just one part of a comprehensive estate plan. Some things you should know about wills:

  • A will has no legal authority until after death. So, a will does not help manage a person’s affairs when they are incapacitated, whether by illness or injury.
  • A will does not help an estate avoid probate. A will is the legal document submitted to the probate court, so it is basically an “admission ticket” to probate.
  • Some types of assets are passed to heirs outside of a will.  These include accounts with Beneficiary Designations, and Payable on Death, or Joint Tenants with Right of Survivorship accounts.
  • A will is a good place to nominate the guardians (or back-up parents) of your minor children if they are orphaned.  All parents of minor children should document their choice of guardians.  If you leave this to chance, you could be setting up a family battle royal, and your children could end up with the wrong guardians.

Probate

Even though Probate is less onerous in Texas, there are still reasons that people want to avoid it.  Some drawbacks to Probate include a lack of privacy (wills are filed with the court and are a public record), a months-long delay in accessing accounts subject to the will, and the cost of the probate.  No one can probate a will without an attorney

The fundamental duties of an Executor (or personal representative) of an estate are the same as those of a trustee–protecting the assets and interests of the beneficiaries. One way to protect those assets and interests and, at the same time, help the probate process go smoothly, is to have all of your ducks in a row and prepare for court as best you can.

Read on for some essential reminders about the Texas probate process and how representatives can assist with the process.

What should I know about the Texas probate process?

In order to probate an estate, the individual who has been appointed as Executor must first appear before the court with their Attorney and file the will.  Once approved, and issued Letters Testamentary, an Executor is required to prepare and file an inventory of the estate and a list of claims against the estate. The timeframe for this important chore is set by statute. This inventory should detail all of the assets subject to probate (i.e., that did not pass outside of probate by operation of law or otherwise). The property must be valued and even appraised as necessary. The claims include debts due and owing to the estate (not debts the estate owes to another party). The inventory provides both potential beneficiaries and creditors of the estate an idea of the estate’s assets and claims. [Beneficiaries want to know what they might get and creditors want to know if there is enough money to get paid.] If the inventory is filed late, the representative could be fined or even removed, which would slow down the process (and raise tempers).

In Texas, probate is a relatively straightforward process, and is much less expensive and time consuming than in other states.  The Executor must hire an attorney to complete the probate, but Texas allows “Independent Administration” of a Will, as long as the proper wording is used to appoint an Independent Executor.  Any will written outside of Texas is unlikely to have this wording, so it’s best to create a new will after moving to the state.

Independent Estate Administration allows the Independent Executor to carry out their duties without direct court supervision.  These duties include:

  • Gathering or collecting the assets of the Estate;
  • Notifying the beneficiaries of the Estate;
  • Notifying the creditors of the decedent;
  • Filing an inventory with the Court;
  • Filing an affidavit or certificate that beneficiaries have been notified;
  • Paying the debts of the decedent;
  • Paying the attorney’s fees and other administrative expenses; and
  • Distributing the remaining assets to the beneficiaries.

The Independent Executor must keep the beneficiaries in the loop, including providing each with notice via certified mail that the will has been admitted to probate and a copy of the will. In addition, the representative must inform the beneficiaries regarding any information that might affect their rights. For instance, beneficiaries have the right to ask for a formal accounting by the Independent Executor.

The Independent Executor is responsible for the care and maintenance of estate property, treating it with even greater care than his or her own property. The Independent Executor is able to sell any property that is perishable or would deteriorate in value during the Texas probate process.

One thing to realize if you are a beneficiary is that the will may be “read” a few days after the funeral, but the gifts and bequests are not given out at that time. Yes, you may be entitled to the assets, but the inheritance is subject to the estate’s administration. The Independent Executor must settle the decedent’s debts and claims before he or she can make any distribution of the assets. So, beneficiaries, do not go to Grandma’s house with a moving truck and start taking whatever you want. Most likely, the Independent Executor is doing his or her job and making sure everything stays where it is until probate is closed.

As you can see, being an Independent Executor is a big, big job. Consequently, he or she can be removed if proven to have been guilty of any gross misconduct or mismanagement in the role of Executor. The Executor can also be subject to a suit for breach of fiduciary duty. Along the way, there are taxes to be paid and returns to be filed, along with many other details.

We are here to help.

The Executor can not probate a will without legal representation. But not all attorneys have experience in this area.  As a result, it is essential that the Executor work in concert with an attorney who is board certified in Probate & Estate Planning by the Texas Board of Legal Specialization like Attorney John McNair.  With over 35 years of experience, John can help you navigate and streamline this difficult process.  Contact our office to get started today.

Trusts

Depending on the situation, there may be many advantages to establishing a trust, including avoiding probate.

A trust is a legal contract that allows an individual or entity (Trustee) to control assets on behalf of another person (Beneficiary).  Many types of assets can be held in a trust including cash, investment accounts, real estate, business interests and more.

When you set up a trust, you are called the Grantor.  The Grantor specifies how they want the Trustee to manage the investment and dispersal of funds.  This includes who benefits, how they benefit, and when those benefits are distributed.

There are three main types of trusts:  revocable, irrevocable, and testamentary.

Revocable Trusts

With a Revocable Trust, the Grantor can change the terms or even dissolve the trust as they choose.  Since the assets are controlled by the Grantor, they are still considered part of his or her estate, but they are not subject to Probate.  A Revocable Living Trust is often used to prepare in case of incapacity, divorce, or financial mismanagement. If well drafted, another advantage of trusts is their continuing effectiveness even when the trust-maker dies. This means that there is no delay in accessing funds needed to pay debts, funeral expenses, attorney fees, and other expenses.  Trust planning also allows you to keep the assets of the estate private.

Irrevocable Trusts

An Irrevocable Trust removes assets from the Grantor’s estate.  The Grantor places certain assets into the trust and appoints a Trustee.  The Grantor has no ability to change the terms of the trust, including the list of Beneficiaries.  An Irrevocable Trust is often used in Medicaid planning to reduce the individual’s countable assets.

Testamentary Trusts

A Testamentary Trust is created through the terms of a Last Will & Testament.  Once the Will is probated, a Testamentary Trust can protect assets for your heirs.  The Trustee would distribute funds according to your wishes, and can help ensure that the inheritance is not squandered.

 Family Business Estate Planning

If you own a business, planning for the future of that business is an essential part of your estate plan.

The family element in every family business can mean the difference between its success or failure during the transfer process. The retirement, disability or death of the business owner are all common events that can trigger a business transfer.

Tough questions must be asked and answered. Otherwise, a business that took decades to build can be destroyed overnight.

For example, who will run the business after you? Will it be your spouse, one of your children or a non-family member key employee? If your spouse will not run the business, will he or she still be financially dependent on it… or can you make arrangements to ensure they are financially independent of it?

What arrangements have you made for the inheritance of your children who are not active in the business? Are you worried your in-laws will have an unearned influence over the direction your business takes?

Thinking ahead to the second-generation transfer of your business, what provisions have you made to encourage thrift and industry among your grandchildren?

Estate Tax Uncertainty

The only certainty about the federal estate tax is its uncertainty with each change in Congress and the White House. Additionally, some states now impose their own estate taxes, independent of any federal estate taxes.

Accordingly, careful monitoring of the economic, political and legal climate is required. Why? Without proper estate-liquidity planning, your family may have to sell the business just to meet an estate tax cash call.

Coordinating Financial and Estate Plans

If your financial and estate plans are not carefully coordinated, there may not be enough cash to fund your objectives. An appropriately-funded estate plan can meet all of your people-planning objectives and provide liquidity for estate taxes (and business debts). Life insurance, owned in the proper amount, type and manner, may be effectively used to fund such money matters.

The Business Buy-Sell Agreement (BSA)

A BSA is a lifetime contract providing for the transfer of a business interest upon the occurrence of one or more triggering events as defined in the contract itself. For example, common triggering events include the retirement, disability or death of the business owner. An interest in any form of business entity can be transferred under a BSA, to include a corporation, a partnership or a limited liability company. Also, a BSA is effective whether the business has one owner or multiple owners. As a contract, a BSA is binding on third parties such as the estate representatives and heirs of the business owner. This feature can be invaluable when the business owner wants to ensure a smooth transition of complete control and ownership to the party that will keep the business going. Subject to certain Family Attribution Rules under Internal Revenue Code § 318, a BSA can help establish a value for the business that is binding on the IRS for federal estate tax purposes as provided under Internal Revenue Code § 2703.

Entity Buy-Sell, Cross-Purchase Buy-Sell and Wait-and-See Buy-Sell Agreements

A BSA is commonly structured in one of three general formats: An Entity BSA, a Cross-Purchase BSA or a Wait-And-See BSA. Under an Entity BSA, the business entity itself agrees to purchase the interest of a business owner. Conversely, under a Cross-Purchase BSA, the business owners agree to purchase one another’s interests. The Wait-And-See BSA gives the entity a first option to purchase the interest before the remaining business owner(s).

In addition to these three general formats, a One-Way BSA may be used when there is one business owner and the purchaser is a third party. The selection of the appropriate BSA format is critical for a variety of tax and non-tax reasons beyond the scope of this discussion. However, no BSA is complete without a proper funding plan. Like a beautiful automobile without fuel in the tank, a BSA without cash to fund the purchase is going nowhere.

Funding a Buy-Sell Agreement

Some common options to fund the purchase obligation under a BSA include the use of personal funds, creating a sinking fund in the business itself, borrowing funds, installment payments and insurance. Of these options, only the insured option can guarantee complete financing of the purchase from the beginning. Accordingly, a proper BSA will include both disability buy-out insurance and life insurance. Since the health of the business owner determines their insurability, any delay in acquiring appropriate coverage could be fatal to the success of the BSA and, with it, the survival of the business itself.

 Next Steps

Estate Planning is a complex, individualized process that can have an impact on your family for generations.  It’s important that your plan takes into account all of the factors that make your situation unique.  A handwritten will or generic form downloaded from the internet won’t cut it.  If you want to be sure your plan is complete, you need to work with an Estate Planning Attorney who is Board Certified in Estate Planning and Probate.

Contact our office today to talk with John and schedule an initial consultation.  This one-hour meeting is free.  At its conclusion you will be quoted one flat fee for the necessary legal work.  This means you will know the total cost before the work even begins.

Book a call today.

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