The Estate Planning Process
Earning money and spending it are two great pleasures of life. Deciding who gets it when you are gone is a task most people would rather ignore.
In fact, only 30% of American adults have taken the time to plan their estates. Unfortunately, many of those who have are led to believe that a simple will is all they need.
Estate planning is made up of four areas:
- accumulating assets (earnings)
- preserving assets (from predators)
- managing assets upon a disability and
- distributing assets when you die.
Although it may sound simple, there are challenges that may prevent your estate from being managed and distributed according to your wishes. These challenges can be broken down into three categories: probate, death taxes, and guardianship.
Each section below provides an explanation of the highlighted topics. The Greening Law Firm PC can also answer your estate planning questions in person. Contact us today for a complimentary consultation or call 512-476-0888 to schedule an appointment.
Durable Power of Attorney
Virtually everyone needs a durable power of attorney to safeguard their assets during periods of incapacity. This document allows you to authorize another individual to manage your property and finances when you cannot yourself. In this document, you are considered to be the "principal" and the individual to whom you assign the power is your "agent" or "attorney-in-fact." Your attorney-in-fact does not have to be a lawyer, but it should be someone you trust a great deal. While a durable power of attorney enables your agent to take care of your responsibilities for you, it does not restrict you from doing these things on your own.
The word "durable" means that your power of attorney remains valid even if you become incompetent or incapacitated. This is a very important point because without a durable power of attorney for finances, a court proceeding for guardianship or conservatorship is probably inescapable. A costly and largely unnecessary exercise.
You may revoke your durable power of attorney at any time (as long as you are competent). If you do not revoke it, your durable power of attorney ends at your death.
Virtually everyone needs a durable power of attorney to safeguard their assets during periods of incapacity
Extreme care should be taken when drafting a durable power of attorney. If it's not drafted right, you could end up in court or be subjected to financial exploitation.
Health Care Directives
A Health Care Directive allows you to: (1) appoint a person known as an agent who can make health care decisions for you; and (2) clearly inform others of your health care wishes. Traditionally in Texas, two separate documents are used to accomplish this: a Living Will and Medical Power of Attorney.
Your Medical Power of Attorney allows you to appoint anyone over 18 that you trust as your agent to make medical decisions for you and tell your physicians, family, and friends what kind of care you wish to receive. In your Living Will, you may state whether you should receive life-sustaining treatment if you are in an irreversible coma, persistent vegetative state, or have a terminal condition.
Your health care directive guides your loved ones during difficult times. While it may seem as though you are placing a significant responsibility on the person you chose as your "agent," not having a health care directive can be much worse. Without your guidance, there may be dissension among your family members as to "who is in charge," and "what treatment you would want."
NOTE: You should have an attorney review any older health care documents to make sure they are still valid.
Understanding your Estate
Your "estate" is, quite simply, everything you own. Real estate, personal property, stocks, bonds, mutual funds, retirement accounts, and even life insurance death benefits comprise your estate. The size and nature of your estate will often dictate what type of planning is right for you.
The "size" of your estate is important from a tax perspective. Estates in excess of $11,580,000 are subject to federal estate taxes upon the owner's death. Texas has no death tax.
The "nature" of the assets comprising your estate is also important to consider. This is because different types of assets will transfer on death in different ways. Some of your assets may pass by "beneficiary designation." In other words, certain types of accounts enable you to state who will receive the proceeds at your death. Typically, these would include assets like: life insurance death benefits; retirement accounts; and annuities. You may also hold certain assets jointly with another individual, with "rights of survivorship." In these cases, the jointly held assets would pass to the remaining joint owner of the asset. The most common example would be real estate held by spouses as "joint tenants." Finally, many of your assets may be held in your name individually, without beneficiary designations. If so, these assets will need to go through a process called "probate" in order to pass to the next generation.
What is Probate?
Probate is essentially a lawsuit filed in court after you pass away. In Latin, the word "probate" means "proving the Will." Simply stated, it is the legal process of settling your estate under the jurisdiction of the Probate Court.
Upon your death, your Will is admitted to the Probate Court, and becomes a public document. Your property is gathered and inventoried, your debts are paid, and everything left over is divided among your heirs. While your personal representative is responsible for "probating" your Will, the process is generally controlled by the court and probate attorneys.
Certain delays are built into the probate process. It can be cumbersome, time-consuming, expensive, and distressing during a family's time of anguish and exposure. As a result, many individuals desire to avoid this process.
Yes. Probate can be avoided with careful planning. There are several techniques available that enable your estate to avoid the time, expense, and public nature of a probate. But the most comprehensive and streamlined way to avoid probate is by placing your assets in a carefully drafted Revocable Living Trust, because trust assets, in most situations can be distributed by your chosen successor trustee privately and without the supervision of the probate court.
Revocable Living Trust - Is it right for me?
A majority of our clients utilize a Revocable Living Trust ("Living Trust") as the cornerstone of their estate plans. Properly drafted, a Living Trust offers complete asset control to clients during their lifetime; provides for them and their loved ones in the event of their incapacity; and on death allows them to pass their assets to their loved ones without the costs, delays, and publicity associated with probate.
Mr. Greening was extremely understanding and helpful. I came in with a long list of questions and he answered every one. L Hughes
Living Trust vs Will
In order to understand the benefits of a Living Trust, we must contrast it with a Will.
A Will is a "testamentary instrument." In other words, a Will takes effect only upon your death. A Living Trust, on the other hand, takes effect as soon as it is signed and assets are transferred to it. Both a Will and a Living Trust set forth your directions for the distribution of your assets upon your death. But unlike a Will, a Living Trust also directs the management of your assets during life. Consequently, if you have a properly funded Living Trust, your "successor trustee" can simply continue to manage the assets in your trust without court intervention or supervision.
At death, assets held by you "inside" your Living Trust do not have to go through the probate process. All of your assets will simply pass according to the instructions you left in your Living Trust and, although an administration process is still necessary, it does not involve the time, expense, and publicity of probate court intervention.
Simply put, by transferring your assets to your Living Trust, you maintain control of the assets during your life but have removed those assets from the probate process after your death.
Upon your death, the trust may terminate or may continue for the benefit of your family, depending upon your instructions. Most often, the trust includes instructions specifying that upon your death or upon the death of your surviving spouse, your children or other loved ones will become the "remainder beneficiaries" -- the persons who enjoy the trust assets remaining after your death.
Revocable Living Trust
A revocable living trust provides flexibility, enabling you to control how and when your assets will be distributed to loved ones or charity after your death. You may, for example, pass assets with "strings attached." Many practitioners believe that clients should never leave anything of any consequence to their loved ones outright, or "free of trust." They believe that everything should be left in trust for the heirs' benefit in order to protect the heirs in a way they cannot do for themselves. If you chose to follow this philosophy, you could, for example, specify in your trust that each of your children is to serve as his or her own trustee (or along with co-trustees) for his or her lifetime and that the trust provide for your children's needs as they arise. In this way, you have allowed each child to manage his or her own funds in the way he or she desires; yet, by retaining everything in trust, you have to some degree protected each child's assets from the claims of creditors, which could easily arise from a failed business venture, an overzealous litigant (e.g., as a result of an auto accident), or even an ex-spouse in a divorce. You may also avoid a possible second estate tax when your child dies and the assets pass to your grandchildren.
By leaving assets in trust, you may be concerned that you will be overly controlling your children after your death. But you can provide as much latitude to your children as you like; your attorney drafts the terms of the trust in accordance with your wishes. Thus, the terms can be as restrictive or as nonrestrictive as you choose, on the basis of your knowledge of each child's situation.
Assets held inside your Living Trust do not have to go through the probate process
Some of the more common problems that arise when you own property or accounts as joint tenants with another individual are:
- you lose some control over your property
- you subject your property to the creditors of the other joint tenant
- you may create unintentional gift tax problems
- you could increase your exposure to unnecessary capital gain and estate tax liability
In the simplest of terms, the "estate tax" is a tax on the amount of wealth you possess upon your death. Each person receives an exemption on the first $11,580 in their estate.
Avoiding Estate Taxes
There are effective ways of reducing your estate tax liability. They vary in complexity and require advice from qualified legal and tax counsel. Below are some options that might have relevance in your particular situation:
- Create a plan that protects both spouse's applicable estate tax exemptions
- Establish an appropriate lifetime gifting program
- Consider special charitable giving trusts
- Remove life insurance from your taxable estate by creating a special life insurance trust
- Remove the value of your home from your taxable estate by creating a qualified personal residence trust and
- Form a family holding company to hold certain assets and use the company as a gifting vehicle
Protecting your Children's Inheritance from "Creditors and Predators"
As is the case with most wills, the majority of people who set up revocable and irrevocable trusts leave their assets outright to their children in equal shares when they die. But, instead of leaving your assets equally to your children, why not leave it to your children in "Lifetime Inheritance Protection Trusts" - sometimes called "Heritage Trusts."
Lifetime Inheritance Protection Trusts can be created by you, today, naming your child as a trustee and beneficiary when you die. These trusts, if properly drafted, can provide the following benefits:
- The assets will be protected from their spouse in the event of divorce.
- The assets will be protected from their creditors in the event of a financial hardship.
- On your child's death, the unused assets can be directed to go to your blood relatives (usually grandchildren) of in-laws or others.
During your children's lifetimes, they have significant access to the income and the principal of their trusts -- so that you're not giving them a "gift with strings attached" or "ruling from the grave". The purpose of a Heritage Trust is not to govern or control the life of a beneficiary, but to protect the trust from creditors and predators.
The Best Time to Review your Estate Plan
Creating an estate plan is a process, and not just a single, isolated event. The only constant in life is change. So as your assets and family matures, your estate plan may need to adjust to those changed circumstances. It is important to maintain your estate plan to ensure it is keeping up with the changes going on in your life.
Below are just a few circumstances that would necessitate a plan review:
- Birth or death of a family member or potential beneficiary;
- Divorce - whether it's yours or someone identified in your estate plan;
- Change in your distribution plan;
- Change in your financial circumstances;
- Change in your property ownership;
- When you have a desire to change one of your named "fiduciaries" or alternate fiduciaries (e.g., personal representative, successor trustee, financial power of attorney; health care agent, etc.) in your legal documents.
You should initiate a review under any of these circumstances. Even if you perceive none of these circumstances have changed, it is generally advisable to review your plan with your estate planning attorney every 2-3 years.