No one wants to think about death – certainly not our own death, and especially not a premature death at a young age.  For the vast majority, there is no reason to do so as most folks will live a long and healthy life.  However, no one knows for sure how long they have and even though it is not a pleasant subject to think about, if you care about your family, you need to have an Estate plan.  This is the only way you can make sure that they are cared for in the best manner possible when you are gone.

Some people think that if they are young and do not have much or are single, they do not need to have an Estate Plan.  Most in that situation think – I don’t even have an Estate, so why would I need an Estate Plan?  However, everyone has an Estate.  Some have small estates with only a car and bank account, maybe a retirement account at work or a savings account.  Even with a small Estate, it is important to have an Estate Plan.

So what is an Estate Plan?  It is really just a set of documents that express your desires in the event you are incapacitated or die.  If you don’t have an estate plan, it just means someone else – usually a judge in a court will decide for you – and it will probably cost a lot more money than it would if you have a will and powers of attorney.  This is especially important if you have children, but it is best for everyone to make their own decisions about these important matters.

Most people have simple Estates and so all they need is a simple Estate Plan.  In a simple estate plan, there should be 4 documents:

1)      A simple will

2)      A directive to Physicians

3)      A Durable Power of Attorney for Healthcare

4)      A Durable Power of Attorney for Finances

This combination of documents allows you to express your desires for your Estate.  A simple will leaves all your Estate to your spouse or children if you have a family, or to whomever you specify otherwise.  It also designates who will become guardian of your minor children.  A directive to Physicians just tells the doctor whether you want to be kept alive on life support if you are in a terminal incurable condition.  Durable Powers of Attorney let you designate who can make health care and financial decisions for you if you are incapacitated.

If you do not have these documents, a judge in a court will make these decisions for you and it will be costly, time consuming and frustrating to your loved ones at a very difficult time.

It is possible to prepare these documents for yourself, but they must be done carefully or they may not be valid.  I will prepare the 4 basic documents for $350 for an individual or $600 for a couple.  This may seem like a lot of money to some, but if your loved ones have to go to court in the event you are incapacitated or to probate your estate with no will, the cost could be in the thousands or even the ten thousands before it is all over.

The bottom line is to take steps to make sure your Estate and your family will be taken care of according to your wishes.  Call me at 972-250-5877 or e-mail me at johnworley@johnworley.net to set up an appointment.

After years of waiting for answers about the future of the Federal Estate Tax, a last minute tax bill established new rates and exemptions for 2011 and 2012.  The new exemption amount is raised to $5 million for an individual and $10 million for a couple, and the tax rate on the excess has been lowered to 35%.  More good news comes in the form of a “portability” feature, which just means that for couples, no special bypass trust or other sophisticated estate planning is required to take full advantage of the $10 million exemption.  The gift tax (on gifts during lifetime) and the estate tax (on gifts at death) have once again been unified, so that lifetime gifts of up to $5 million will be tax free and if less than $5 million is given during life, the balance will remain as an estate tax exemption.  Furthermore, for a married couple, the surviving spouse will get to carry over any un-used credit that remains from the estate of the first spouse to die.  Since there is still an unlimited marital deduction, that means that most surviving spouses will have a $10 million exemption for their estate.

This is all very good news for the vast majority of people.  It means that a simple will or trust, along with Powers of Attorney for Healthcare and Finances, along with a Directive to Physicians is all they will need.

At least until 2013.

Unfortunately, these laws are only for 2011 and 2012.  Once again, no one knows how this will change in 2013 and we are left with uncertainty beyond the next two years.  The possibilities are:

-     Congress could allow the new law to sunset as it is scheduled to do on December 31, 2012, and then a $1,000,000 estate tax exemption and 55% estate tax rate will kick back in on January 1, 2013.

-     Congress could extend the 2010 law in 2013 and beyond and tax exemption would remain at $5,000,000 and the estate tax rate would remain at 35%.

-     Congress might pass some form of an estate tax compromise which will lower the estate tax exemption and increase the estate tax rate to something more in line with the 2009 numbers of $3,500,000 and 45%. This may also include repeal of portability of the estate tax exemption between spouses which is in effect for the 2011 and 2012 tax years.

-     Last but not least is for Congress to completely repeal the federal estate tax. Though not considered likely, there is an increasing number of republican congressmen who have indicated support for the complete repeal of the estate tax.

For now, it is time for anyone who does not at least have a simple estate plan in place to call their attorney and complete the simple documents mentioned above.  A simple estate plan can cost as little as $300 for an individual and $500 for a couple and is very important for everyone to have, so don’t delay this important decision any longer.

Estate Planning is one of those topics that most people do not like to think about.  It makes them think about their mortality and what the future holds.  So individuals who either live in or own significant property are often surprised to discover that once they pass away their estates are usually subject to the probate process.  Probate is a court proceeding where the probate court essentially steps into the shoes of the deceased person, gathers up the assets in that person’s estate, and then distributes those assets to the persons who are supposed to receive them. Different rules apply to a person’s probate, depending on the level of planning a person engaged in prior to death.

Intestacy

If a person passes away without doing any estate planning, then that person’s estate will be subject to what are called the intestacy laws—a set of distribution rules designed to cover what the legislature believes most people would want to have happen to their estates. These default rules generally provide that any community property of a decedent will go to that decedent’s surviving spouse. If the person has no surviving spouse, then the person’s estate generally gets distributed to the person’s children (or grandchildren, if the children pass away before the parent).

The intestacy laws do a relatively good job of handling what people consider the traditional family—where there’s a mother and father who have children together. However, in this age of blended families and stepparent/stepchild relationships, these rules often create friction and discord. When a person passes away with significant separate property, this property is generally divided up between the surviving spouse and the surviving children. This can lead to acrimony if the parent and children are not related to each other, except through the now-deceased spouse/parent. A great deal of estate litigation arises from these kinds of situations.

Wills

Many people, when they think of estate planning, immediately think of wills. A will is basically a letter of instructions about what a person wishes to have done with his estate following his or her death.  Wills can be relatively simple, or they can be very complex, stretching over many pages of detailed instruction. Drafting a will allows a person to opt out of the default rules of the intestacy regime. A person can opt not to leave assets to a surviving spouse or child. A person can choose to leave gifts to persons and entities not covered in the intestacy rules, such as a close friend or a church or charity.

In addition, a person can put conditions on gifts in a will. Sometimes a person will have children who have substance abuse problems or mental or physical impairments. In cases like these, leaving a substantial inheritance that child might either enable the child’s substance abuse or cause the child to lose state or federal benefits. A carefully drafted will can help a parent to make sure that he or she doesn’t inadvertently create or exacerbate problems for his children by making unwarranted or ill-timed gifts.

Pitfalls of Probate

In either of the situations above, where a person dies intestate or with only a will in place, the person’s estate needs to be probated if it has property to which the title must legally be passed to someone else.  Probate serves a useful function in society, by providing an orderly system for notifying heirs of distributions and making sure that estate assets go to the people who are supposed to receive them. Probate in Texas is considered relatively easy and inexpensive compared to many states, but there are still reasons that cause many to avoid it:

1)      Probates, like almost all court proceedings, are public. Any interested person can stop by the probate court and ask to see a copy of a person’s probate file. The file will usually include the person’s will, a list of heirs, a list of assets and their approximate values, and a host of other information. Many people consider this a violation of their privacy.

2)      Probates can take a long time—usually somewhere between eight months and two years. Certain assets of the estate are frozen during this time. It is not unusual in a probate for a surviving spouse to have to petition the court for an allowance from the estate to provide for day-to-day living expenses.  In Texas, there are expedited probate processes for simple estates, so if you have a small estate with no debt, it will not take this long.

3)      Probates can be very expensive. Probate fees, which are the fees paid to the executor and the attorney for the estate, can easily run into the tens of thousands of dollars depending on the size of the estate.

4)     If you own property in more than one state, your heirs will have to go through probate in each state where own property, multiplying the time, expense and hassle of transferring your assets to your heirs.

Revocable Trusts

For these reasons, many people choose to avoid the probate process by setting up a revocable trust. A trust accomplishes the same goal as a probate: distributing assets to the people who should receive them. However, a trust is generally considered superior to a probate for several reasons.

A properly-drafted trust allows a person all the flexibility of a will, but with the added advantage of private, non-probate administration. A trust administration is private—the only people entitled to notice or accounting of trust assets are the beneficiaries of the trust. Distribution of trust assets can often be accomplished within a few weeks of the death of the person who set up the trust. In addition, a trust administration is usually fairly inexpensive compared to a probate. Where a probate might cost the estate thousands or even tens of thousands of dollars, a trust administration can often be completed for a small fraction of that amount – or nothing.

Setting Up a Trust

Drafting a trust or a will may appear to be relatively simple, and many people use inexpensive forms or computer programs to set them up themselves. However, there are numerous pitfalls that can cause problems for the unwary. Oftentimes people will be unaware of important provisions in the law that may lead to unintended consequences. Sometimes individuals inadvertently disinherit someone they intended as a beneficiary, and sometimes, as mentioned above, individuals cause significant problems for beneficiaries who are receiving state or federal disability or other benefits. An improperly drafted trust can also cause significant tax headaches for a surviving spouse or child.

For these and many other reasons, it is always good practice to consult with an attorney who specializes in trust and estate law.  Consider it a wise investment in the future for your heirs.

A Living Trust is a revocable trust set up during your lifetime.  “Revocable” means that you can change your mind and revoke the trust anytime before your death.  Just like a will, a revocable living trust is a written document that lets you direct how your property will be distributed or held after your death.  Unlike a will, it also directs how you want your property managed during any disability or incapacity during your lifetime.  This can save a lot of time and expense by not requiring the legal proceeding necessary to set up a guardianship.

To establish a trust, the person creating it (called the grantor or settlor) has an attorney create a trust document and then transfer property into the trust by deeding or transferring title to property held by the individual setting up the trust. The trust does not take effect until the transfer of ownership of property to the trust. This transfer is known as “funding” the trust.  Many people have set up trusts as result of trust marketing programs, but never funded them.  If the trust is not funded, it has no effect.

A living trust takes effect during the creator’s lifetime. Grantors usually name themselves as the initial trustee responsible for managing the trust. This allows the grantor to keep control over the trust property during his or her lifetime, then upon death or incapacity, the children or another responsible party is named as the successor trustee.

A properly created living trust can be helpful if you become disabled or incapacitated, you have children or grandchildren with special needs, or if you own real estate in more than one state.  It will also eliminate the need to go through probate, the legal process to prove that a will is valid – - if the trust has been properly set up and funded.

Living trusts are not the right estate planning tool for everyone, but can be very helpful if you have property in more than one state.  Although probate is not very difficult or expensive in Texas, in can be very difficult and expensive in other states, and a properly funded trust can save a lot of time and expense for those who have property in other states or who just want to avoid probate and the listing of assets in the public record.

Estate planning has been uncertain for the last few years as the time drew near for the expiration of the current estate tax structure. The federal estate tax expired at the end of 2009, so in 2010 there has been no tax – so far, anyway. The majority of Americans won’t notice the change because their estates are too small to be affected. But this failure by by congress to act is causing some degree of confusion for estate planners and their clients with estate of more than $1 million.  Most people assumed Congress would enact legislation to reinstate the tax by the end of 2009. But they didn’t. Many think Congress will restore the tax to the previous level – the exemption hit $3.5 million in 2009 – and make it retroactive.  If they don’t act before the end of 2010, it will come back on its own in 2011 at $1 million.

We’re now in this Alice in Wonderland world where we have no estate tax in 2010 and no real idea when and if congress will act to put a new estate tax structure in place.  It’s hard to do planning for people now.   It would have never occurred to anyone that Congress would fail to act.  Most think that they’ll repair that, but we don’t know how or when.

Most estate planners draft documents with a tax formula provision based the estate tax exemption in place under tax law in the year of death. With no estate tax in 2010, the exemption amount is thought to be zero.  In a year of estate tax repeal, this formula may have unanticipated results because the calculation based on the exemption amount does not operate properly.   Depending on how the will or trust document is written, assets could conceivably go all to one beneficiary or another — a result that may not have been intended by the property owner.

The current situation is a mess, and it would be wise for everyone who drew up a will after 2001 (the last major estate tax bill)  to review them.  You probably shouldn’t change them until there’s more clarity from Congress about what will happen next, but in certain circumstances, the outcome of current formulas could have very unexpected results and they may need to be modified.

Stayed tuned for more…

What Is a ‘Power of Attorney’?

A “power of attorney” is a written document in which you (the “principal”) appoint someone else (called the “agent” or “attorney-in-fact”) to act for on your behalf. Your agent can do any legal act you ask him or her to perform.

Why Is a Power of Attorney Important?

Everyone should think about having a power of attorney. This can be more important to your personal well being than a will. The power of attorney allows you to pick someone you trust to handle your affairs if you cannot do so yourself. It gives you peace of mind, reassuring you that in an emergency, someone you choose will have the authority to act for you. If you don’t have a power of attorney and you become incapacitated, your family may have to go through an expensive and time-consuming court action to appoint a guardian or conservator to make decisions for you.

Are There Different Types of Powers of Attorney?

Yes. Powers of attorney can differ depending on when you want the powers to begin and end and on what or how much responsibility you want to give your agent.

Time

A conventional power of attorney begins when you sign it and continues until you become mentally incapacitated. But most people want someone to make decisions for them when they are unable to do so. If so, you have to say so in your document.

A durable power of attorney also begins when you sign it, but it stays in effect for your lifetime unless you cancel it. You must put specific words in the document stating that you want your agent’s power to stay in effect even if you become incapacitated. If you want this feature, it’s very important that you have these words in your document.

A springing power of attorney begins only when a specific event happens, such as when you become incapacitated. Your attorney must carefully draft a springing power of attorney to avoid any difficulty in determining exactly when the “springing” event has happened.

All powers of attorney come to an end at your death. Your agent will have no power to make any decisions after you die.

Responsibility

You can select the responsibilities, or powers, you want your agent to have. You can authorize your agent to do one thing, such as sell your car. Or you can give your agent the authority to do any legal act you could do yourself. You can give the agent a wide range of powers, such as having access to bank accounts, selling stocks, and managing real estate.  Often, powers of attorney are given to make healthcare decisions when you are not able to do so for yourself . Design your power of attorney to fit your anticipated needs.

Can a Bank or Other Institution Refuse to Honor a Valid Power of Attorney?

State laws vary as to whether they penalize a third party, such as a bank or brokerage, for refusing to honor a power of attorney. The best answer to the question is to avoid the problem by being prepared. Once you’ve signed a power of attorney, contact any financial institutions where you have accounts, safe-deposit boxes, securities, and the like. Give the firms copies of the document and ask whether they have any questions or whether you have to sign other documents, such as authorizations or signature cards. Taking these actions, you can generally avoid any difficulty.

Whom Should I Choose as My Agent?

No one can tell you whom to choose as your agent. The person you choose needs to be someone you trust and someone who can do the job. It is best to avoid someone who is ill, inexperienced in financial matters, has a hard time managing their own money, or for some other reason wouldn’t be able to handle the responsibilities. Between two equally qualified persons, the one who lives closer to you is generally the better choice.

Can I Name My Two Children as Co-Agents?

The law permits you to appoint co-agents. However, that may not be a good idea. To make decisions, the two must agree. If they disagree, they may have to go to court. This is really expensive, time-consuming, and defeats the major reason for having a power of attorney. If you have two equally qualified persons to choose between, you may want to name one as your agent and the other as a substitute to step in if your first choice cannot serve. You could also appoint one to make financial decisions and the other to make health care decisions. This is your choice. Do not allow yourself to be talked into selecting anyone other than the person you want.

I Already Have a Will. Can’t My Executor Handle My Affairs?

No! Your will determines how your property will be distributed after you die. Your executor has no authority to act before your death. Your power of attorney deals with how to manage your property during your lifetime. On the other hand, your agent has no authority to act after you die.

Can I Still Manage My Own Affairs If I Sign a Power of Attorney?

Even if you sign a power of attorney, you can still manage your own affairs. You are not giving up anything. Instead, you are taking steps today so that your agent will be able to act when and how you have directed, if or when it becomes necessary.

Can I Cancel a Power of Attorney After I Sign It?

Yes. You can cancel, or revoke, a power of attorney at any time by tearing it up, by signing a new one, or by writing that you want to cancel it. You don’t have to give any reason. If you do cancel, it’s important to let your agent and anyone your agent has been dealing with know that you have canceled the agent’s authority.

If I Give a Power of Attorney to Another, Do I Give Up the Right to Manage My Own Affairs?

No. As long as you remain legally competent, you retain full control over your affairs. Think of your agent under your durable power of attorney as an understudy waiting in the wings to help you. You don’t hand over top billing until you want your agent to perform. You can change your mind.

What Happens if you die without a will in Texas?

If you die without a will (“intestate”), in Texas, the state will ‘write one for you’. That is known as the law of descent and distribution. Contrary to popular belief, your estate will not go to the state (“escheat”), unless no heirs can be found. Your estate will be responsible for the costs of searching for your heirs, and for the legal costs of an ‘attorney ad litem’ whom the court will appoint to represent unknown and missing heirs.

More likely than not, the court will also appoint an Administrator to handle your estate, and the administration most likely will be a dependent administration; i.e. the Administrator is subject to court supervision in the administration of your estate. The Administrator must apply to the court for every action the Administrator wishes to take, the court may grant permission after a hearing, then the Administrator has to report back to the court on the actions taken, and the court then may approve the actions after a hearing. All those costs of administration are borne by your estate before any distribution is made.

Distribution is based upon marital status, presence or absence of children, whether the children are of the decedent and/or of the marriage, if parents or siblings survive, and the type of property in the estate.  Note that adopted children are considered as natural-born, and sometimes may inherit from their natural parents as well as their adoptive parents. Children of the surviving spouse, but not the decedent’s natural children, are not heirs at law unless adopted by the decedent.  Only children of the decedent, and of the surviving spouse, are “children only of the marriage”

The following chart shows intestate distribution in Texas (click link below to open a printable PDF):

Texas Intestate Succession

Texas Intestate Succession chart (printable PDF)

Probate is one of the most common and least understood legal proceedings. It basically comprises the settlement of all financial matters pertaining to the estate of an individual after their death. This includes paying any outstanding debts or tax liability, collecting any amounts due to the estate and, where necessary, determining the validity of the decedent’s last will and testament. If no will is found, the probate process typically includes a fair and equitable division of assets among the heirs of the deceased person; in community property states, the entirety of the estate passes to the spouse and no probate proceedings are required. Typically an administrator is appointed to handle the legal and financial concerns of the deceased; this individual is known as the executor, and deals with all administrative concerns relating to the disposition of the estate.  When there is no will, the probate process is much more difficult and expensive.

Normal Probate – The probate process is generally lengthy (see below for exceptions) - lasting up to a year or more, and typically begins with the appointment of an executor or administrator. Executors are usually specified in the will of the deceased. The executor’s first act is usually to file a Petition for Probate of Will and Appointment of Executor; a hearing is then scheduled to review the will and to approve the selection of executor. Once the will has been certified as genuine, the executor is usually approved to begin the probate process. If no will exists, then an administrator is appointed by the probate court to handle the financial affairs; usually this is a family member or close friend. Both executors and administrators are paid an hourly fee for their services.

The initial stages of the probate process involve itemization, inventory, and appraisal of all assets belonging to the estate. This includes real estate, bank accounts, investments, life insurance policies, and all other items of value that constitute a financial asset. Some assets, including antiques, motor vehicles, and real estate holdings, require a professional appraisal of their value before they are added to the total worth of the estate.

Debts and liabilities are also assessed; typically, these financial responsibilities are dealt with in a predetermined order. A small allowance is sometimes paid to the immediate survivors, including the spouse and children of the deceased. After that, administrative costs are paid first, including the fees due to the executor or administrator. Funeral expenses and burial costs are dealt with next, followed by all other debts and claims. Pending lawsuits against the estate are typically paid after they are decided in court, although a settlement may be offered at any time during the probate process.

Once all outstanding and pending debts have been paid and a legally-required waiting period has elapsed, a final settlement is approved by the probate court and the remainder of the estate is distributed by the executor in accordance with the will or, if there is no will, the administrator makes distribution in accordance with the applicable state law. At this point, the assets of the estate may be directly provided to the heirs in their original form as real estate, financial securities, or other assets, or those same assets may be sold and the proceeds distributed as required by the provisions of the will or state law. This final disposition concludes the probate process and dissolves the estate as a legal entity, allowing the survivors of the deceased closure on the inheritance process.

Expedited Probate -There are expedited processes for going through Probate in Texas which are available to Estates that have a will and do not have any debts or other reasons that necessitate administration.  Many small estates can qualify for this type of probate and even large estates which don’t have debt or other complications.  These expedited probates can be completed in a much shorter period of time – sometimes in as little as a month with only one court appearance.

No Probate – To avoid Probate altogether, you can establish a Trust during your life and move your assets into the Trust before your death.  This is especially helpful if you own real property in more that one state – thus requiring probates in two different states when you die.  If you establish a trust during your lifetime and put the properties in the trust, you will not have to go through probate in multiple estates.  This can save significant money to your estate as the cost of setting of a trust is usually less than the cost of even one probate proceeding.

Free consultation – If you have questions about Probate or Trusts – or would like to know if your estate or one you are handling qualifies for expedited probate proceedings, call me to set up an appointment for a free consultation to discuss your situation.