l e g a c y p l anning gui d e - houston, texasin texas or in other states outside of texas. this...

L E G A C Y P L A N N I N G G U I D E

Our Business is Your Business

CONTENTS

I. WHAT IS LEGACY PLANNING? . . . . . . . . . . . . . . . . . . . . . . . . 1

II. COMMUNITY PROPERTY AND SEPARATE PROPERTY . . . . . . . . . . . . 1

III. INTESTACY – DYING WITHOUT A WILL . . . . . . . . . . . . . . . . . . . 2

IV. PROBATE AND NON-PROBATE ASSETS . . . . . . . . . . . . . . . . . . . 2

V. CARING FOR CHILDREN OR OTHER DEPENDENTS . . . . . . . . . . . . 2

VI. RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

VII. REVOCABLE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

VIII. PROBATING A WILL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

IX. GIFT TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

X. ESTATE TAX AND GENERATION-SKIPPING TRANSFER TAX . . . . . . . . 5

A. Estate Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

B. Generation-Skipping Transfer Tax . . . . . . . . . . . . . . . . . . . . 6

XI. LEGACY PLANNING FOR TAXES AND OTHER CONSIDERATIONS . . . . . 6

XII. EXECUTORS, TRUSTEES, AND GUARDIANS . . . . . . . . . . . . . . . . 6

A. Executors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

B. Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

C. Guardians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

XIII. ANCILLARY DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 7

A. Statutory Durable Power of Attorney . . . . . . . . . . . . . . . . . . . 7

B. Declaration of Guardian in the Event of Later Incapacity or Need

of Guardian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

C. Medical Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . 8

D. Directive to Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . 9

E. HIPAA Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

F. Appointment of Agent to Control Disposition of Remains . . . . . . . . 9

CONTENTS

I. WHAT IS LEGACY PLANNING? . . . . . . . . . . . . . . . . . . . . . . . . 1

II. COMMUNITY PROPERTY AND SEPARATE PROPERTY . . . . . . . . . . . . 1

III. INTESTACY – DYING WITHOUT A WILL . . . . . . . . . . . . . . . . . . . 2

IV. PROBATE AND NON-PROBATE ASSETS . . . . . . . . . . . . . . . . . . . 2

V. CARING FOR CHILDREN OR OTHER DEPENDENTS . . . . . . . . . . . . 2

VI. RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

VII. REVOCABLE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

VIII. PROBATING A WILL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

IX. GIFT TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

X. ESTATE TAX AND GENERATION-SKIPPING TRANSFER TAX . . . . . . . . 5

A. Estate Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

B. Generation-Skipping Transfer Tax . . . . . . . . . . . . . . . . . . . . 6

XI. LEGACY PLANNING FOR TAXES AND OTHER CONSIDERATIONS . . . . . 6

XII. EXECUTORS, TRUSTEES, AND GUARDIANS . . . . . . . . . . . . . . . . 6

A. Executors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

B. Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

C. Guardians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

XIII. ANCILLARY DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 7

A. Statutory Durable Power of Attorney . . . . . . . . . . . . . . . . . . . 7

B. Declaration of Guardian in the Event of Later Incapacity or Need

of Guardian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

C. Medical Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . 8

D. Directive to Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . 9

E. HIPAA Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

F. Appointment of Agent to Control Disposition of Remains . . . . . . . . 9

LEGACY PLANNING GUIDE 2015

1

I. What is Legacy Planning? If you don’t provide for what happens on your disability or death, a court will make those decisions for you. You may not like what the court decides. Also, there will be greater expense – sometimes much greater expense – than if you had provided a plan.

Legacy Planning is a comprehensive plan to ensure that what matters most to you will be taken care of if you become disabled and when you die. This guide contains a description of the various options and considerations for Legacy Planning. We are happy to discuss these options and considerations with you in order to design and implement your Legacy Plan.

II. Community Property and Separate Property Texas (along with several other states) has a community property system for purposes of marital property law. Texas law defines separate property as property owned by the spouse before marriage; property acquired by the spouse during the marriage by gift, devise, or inheritance; and a spouse’s recovery for personal injuries sustained during the marriage, except for any recovery for loss of earning capacity during the marriage. Community property is defined as all marital property, other than separate property, acquired by either spouse during marriage. Consequently, community property includes such items as personal earnings and income from separate property. In addition, borrowings during the marriage ordinarily are on community credit, and the loan proceeds (and assets acquired with them) are therefore community property.

In Texas, property owned by either spouse during marriage is presumed to be community property unless it can be established that the property is separate property. Devices commonly used to trace separate property and overcome the community property presumption include the following:

• Pre-marital and post-marital property agreements.

• Maintaining detailed records that segregate separate property interests to ensure that income from separate property is not commingled with separate assets (unless there is a pre-marital or post-marital agreement which provides that income from separate property is separate property and not community property).

• Trusts designed to segregate and manage separate assets.

• Properly drafted loan agreements that ensure loan proceeds are treated as separate property and assets acquired with such proceeds are also treated as separate property.

For a variety of reasons, married couples may choose to partition all or part of their community property between themselves, thereby changing its status into separate property.

© 2015 Lee & Desenberg, PLLC – All Rights Reserved

Property or a property interest transferred to a spouse pursuant to a partition agreement becomes his or her separate property. Before a post-marital agreement may be enforced, it must be in writing, signed by both parties and must contain language of an agreement to partition. Also, if real estate is being partitioned, then in order to give notice to third parties, post-marital agreements should be recorded in the deed records of the county in which the party resides and in the county in which the real estate is located.

III. Intestacy – Dying Without a Will If you die without a Will, Texas intestacy laws will determine to whom your assets will pass. Some surprising and frequently undesirable results may occur. In addition, it is generally more expensive to administer the estate of a decedent who dies without a Will. Under the rules of intestacy, property may pass differently depending upon whether it is community property or separate property, whether you are survived by a spouse, children or other relatives, and whether there are any children from a prior marriage.

IV. Probate and Non-Probate Assets Probate assets are assets that pass pursuant to a Will or Texas intestacy law and not pursuant to a separate agreement or contract entered into by the decedent. Non-probate assets are assets that pass to a designated beneficiary pursuant to a separate agreement or contract entered into by the decedent.

Life insurance proceeds and retirement plan benefits are common non-probate assets, and therefore, each passes in accordance with the beneficiary designations you have made and not pursuant to the terms of your Will unless your estate is the designated beneficiary. Also, in general, assets held in trusts are non-probate assets and pass pursuant to the terms of the trust agreement. In addition, property held in a joint account with right of survivorship (for example, joint bank or brokerage accounts with right of survivorship) or property held in a P.O.D. (payable on death) account will pass to the surviving account holder upon your death if you signed a written agreement (for example, the account agreement with the bank or brokerage firm) which creates a valid survivorship designation. Therefore, it is important that you review your beneficiary designations and account agreements to ensure they are coordinated with your overall Legacy Plan.

V. Caring for Children or Other Dependents You can provide for the care of children or other dependents in the event of your death or incapacity. You can have a major say in who will take care of your children, who will manage the property on their behalf, and how the property will be used for their benefit.

2

LEGACY PLANNING GUIDE 2015© 2015 Lee & Desenberg, PLLC – All Rights Reserved

VI. Retirement Plans The beneficiary designation on your retirement plans has significant tax and non-tax implications. For example, payments from a retirement plan such as a 401(k) plan or an IRA may qualify for favorable tax treatment if the proceeds are paid to your spouse. On the other hand, a participant can forego some distribution possibilities by failing to make the appropriate designation. Also, payments made directly to beneficiaries rather than your estate may not be subject to the claims of your creditors.

VII. Revocable Trusts In some situations, it may be appropriate to consider using a revocable trust as part of your Legacy Plan. You can create a trust and retain the right to modify or terminate the trust. At your death, the trust would become irrevocable. The trust agreement can contain the primary dispositive provisions of your Legacy Plan, which would otherwise be contained in your Will. You would still have a Will, but your Will in most cases would be relatively short and would merely provide that at your death, assets you had not already transferred to the revocable trust would be transferred to the trust upon your death. Using a revocable trust does not in itself save estate taxes because any estate tax planning which can be accomplished in a revocable trust can also be done in a Will. In other words, the decision whether to use a revocable trust is not based on tax considerations. Instead, a decision to use a revocable trust is based on other factors, as discussed below.

Since the trust assets pass to your beneficiaries in accordance with the trust terms, the trust assets are non-probate assets and are not included in your probate estate and thus are not included in the inventory of your assets filed with the probate court after your death. Since the inventory filed with the probate court becomes public record, transferring assets to a revocable trust offers the benefit of privacy with regard to the assets held by the revocable trust. Note that assets held in a revocable trust are included in your estate for estate tax purposes, even though the revocable trust assets are not part of your probate estate.

There are other reasons you may wish to consider establishing a revocable trust. For example, revocable trusts are often established to provide for management of assets in the event of incapacity. You can serve as the trustee of the trust until you are unable to handle your affairs. At that time, the person you have designated as your successor trustee will step in and take over management of assets held by the trust. Revocable trusts are also used in situations in which a person owns real estate or oil and gas interests located in various counties in Texas or in other states outside of Texas. This can avoid having ancillary probate proceedings in other states. We can discuss with you these and other reasons for considering using a revocable trust as part of your Legacy Plan.

3


VIII. Probating a Will The term “probate” generally refers to the process by which a Will is proved to be valid or invalid. The first step in probating a Will in Texas is to file the original Will and an Application for Probate in the appropriate court in the county in which the decedent resided on his or her death. Thereafter, the Judge will admit the Will to probate at a hearing and appoint the executor of the estate.

If the Will is not self-proved (meaning that it has a self-proving affidavit), one or more of the subscribing witnesses to the Will must testify in court at the hearing. If the Will is self-proved, no further proof of its execution is required. The person named as executor in the Will and/or an attorney may appear before the Judge and testify under oath as to certain facts relating to the decedent and the Will.

Subsequent to the hearing, the executor appointed by the court must sign an Oath in order to qualify as the executor of the estate. Once the Oath has been filed with the court, the executor may obtain letters testamentary, which evidence the fact that the executor has qualified before the court to act as the personal representative of the estate. Within one month after receiving letters testamentary, the executor of the estate must publish a notice to creditors in a newspaper printed in the county where the letters were issued.

Within 60 days, the executor must also notify each beneficiary under the Will of his or her status as a beneficiary and furnish a copy of the Will to such beneficiary. The executor must also file an affidavit with a sworn statement indicating that notice has been given to all beneficiaries within 90 days.

Within 90 days after qualifying as executor, the executor must file an inventory of all the probate property of such estate, including all real property located in the State of Texas and all personal property of the estate wherever located, and the respective values of such property. Real property located outside the State of Texas and all non-probate assets need not be listed on the inventory. Extensions of time for the filing of the inventory can be granted by the court. Also it is possible in some situations to file an affidavit with the court that the executor has prepared an inventory and not have to file the detailed inventory in public records.

Once the inventory has been approved by the court, the probate process is nearly complete, and all that remains to be done is to pay all debts of the estate and distribute the assets in accordance with the Will.

IX. Gift Tax You may make gifts of $14,000 to each of your children and to any other person each year without incurring a gift tax. This $14,000 amount is called the annual exclusion, and is indexed annually for inflation, subject to certain rules. You may also pay for a person’s educational or

4


medical expenses without incurring a gift tax, provided such expenditures are paid directly to the educational or medical institution and not to the person directly. These gift tax exclusions for payments for educational or medical expenses are available every year and are not included in the computation of the annual gift tax exclusion amount for gift tax purposes. Taxable gifts in excess of the annual gift tax exclusion amounts reduce the donor’s lifetime gift tax exclusion amount, which under current law for 2015 is $5,430,000. Use of the lifetime gift tax exclusion amount reduces the estate tax exclusion amount available at death.

Gifts may be placed in trusts for the benefit of children or other beneficiaries. The gifts may be of money, insurance policies, stocks, land, or other assets. These trusts may be set up in a number of different ways and for different purposes. Such gifts may also be placed in custodial accounts for the beneficiary under the Uniform Transfers to Minors Act until the beneficiary attains twenty-one (21) years of age.

X. Estate Tax and Generation-Skipping Transfer Tax Your estate may be subject to the federal estate tax and/or the federal generation-skipping transfer tax. If you own property located outside of Texas, other states may impose a state inheritance tax.

A. Estate Tax

The federal estate tax is based on the fair market value of your gross estate at the time of your death. At the option of your executor, an alternate value date of six months from the date of your death can be used. Thus, if your estate decreases in value in the six months following your death, your executor may elect to pay estate taxes based on the decreased value of your estate. The federal estate tax is due nine months from the date of death.

Your gross estate will include all of your separate property as well as one-half of all community property. Additionally, your gross estate may include property that you do not currently own, but over which you retained or received certain rights or powers.

The estate tax system provides a marital deduction for bequests of property to your surviving spouse. As a result of the marital deduction, one spouse may pass his or her entire estate, regard-less of size, to the surviving spouse without incurring federal estate taxes. In effect, the marital deduction postpones the imposition of the estate tax on the property transferred until the death of the surviving spouse. In order to qualify for the marital deduction, property must be transferred to the surviving spouse in a fashion that satisfies the technical requirements of the Internal Revenue Code, such as an outright transfer or a transfer to certain types of trusts. There are special rules if the surviving spouse is not a U.S. citizen. It is important that you let us know if either you or your spouse is not a U.S. citizen.

In 2015, each person may give away property worth up to $5,430,000 without an estate tax. This amount is indexed for inflation and changes annually. With a married couple, in some

5


situations the last spouse to die may also be able to use the estate tax exclusion of the first spouse to die. This means that the first spouse to die could leave an unlimited amount of property to the surviving spouse. In some situations the surviving spouse could combine his or her lifetime exclusion with his or her spouse’s lifetime exclusion to transfer property worth up to $10,860,000 without estate tax.

B. Generation-Skipping Transfer Tax

The generation-skipping transfer (“GST”) tax is a federal transfer tax that is separate from and in addition to the estate tax. In general, a “skip” person is a person who is more than one generation removed from the person making the transfer (e.g., a grandchild). The GST tax rate is a flat rate generally equal to the highest possible estate tax rate.

The GST tax exemption for 2015 is approximately $5,430,000. Each person can transfer (during lifetime or at death) an amount up to the GST tax exemption to grandchildren or other skip persons, either outright or in trust, and exempt that transfer (and future appreciation of the transferred assets) from the GST tax.

XI. Legacy Planning for Taxes and Other Considerations There are techniques that individuals may utilize to reduce or eliminate any gift, estate, or GST tax. In addition, there may be techniques to minimize some of the income tax that your beneficiaries will pay. Issues other than taxes can also be very important, such as how to provide for minor or disabled beneficiaries. We will be happy to discuss these options with you.

XII. Executors, Trustees, and Guardians A. Executors

An executor is the person appointed in your Will to administer your estate. Under Texas law, you can make your executor “independent” and we generally recommend that you do so. An independent executor can handle your estate virtually free from court supervision, except for a few essential matters. Without this independence, virtually all of the executor’s actions will be subject to prior approval by the court, which is time consuming and expensive.

Your executor will be responsible for administering your estate. This includes determining your assets and your liabilities. Your executor must prepare an inventory of what you own on your date of death. After debts have been paid (including estate and inheritance taxes), or provided for, the executor will distribute your assets as set forth in your Will. We recommend that you name one or two successor executors to minimize the costs of having the court appoint a successor executor in the event the initial executor fails or ceases to act.

6


B. Trustees

A trustee is the person appointed to manage a trust for the benefit of the trust’s beneficiaries. A trust can be designed to produce almost any result you desire. A trust can be used for many purposes, including attempting to preserve assets for a spendthrift beneficiary, or to protect assets in the event of a beneficiary’s divorce. A trust can also be used to reduce estate taxes and generation-skipping transfer taxes in the estates of the surviving spouse and your descendants.

You have discretion to construct the dispositive terms of the trust in the manner you desire. You can require the trustee to distribute all or a portion of the income or the principal, or both, or you can leave such distributions to the discretion of the trustee. The trust may last for a lifetime, may terminate when a beneficiary attains a certain age, or may terminate in installments as a beneficiary attains certain ages. We usually recommend that trustees be given very broad powers to provide flexibility for future events.

You will name the initial trustee of any trusts to be created by your Will. Usually, the surviving spouse is named as trustee. You may also name successor trustees. You should also consider whether a trustee should be permitted to appoint his or her successor. If a corporate trustee appears appropriate, we suggest that you have a conference with the representative of the proposed bank or trust company to discuss matters such as fees. In addition, you should consider giving someone (possibly the beneficiaries) the power to remove and replace a corporate trustee.

C. Guardians

You may name a person to serve as guardian of your minor children, in the event of your death. While the court will determine the guardian based on what it considers the best interest of the child or children, the court will be strongly influenced by whom you said would be an appropriate guardian.

You can name a different person to serve as a guardian from the person who will serve as a trustee and manage assets for the minor’s benefit.

XIII. Ancillary DocumentsA. Statutory Durable Power of Attorney

A statutory durable power of attorney is an instrument in writing by which you, as principal, ap-point another as your agent and give your agent the authority to perform any and all acts which you could perform on your own behalf. Such a power of attorney may be limited to certain specified acts or kinds of acts. The person holding a power of attorney is known as an “attorney in fact” or “agent.” This document could prove to be very beneficial in the event you should become incapacitated.

7


Generally, a power of attorney terminates on the disability of the principal. However, Texas law provides that a power of attorney will be effective during the principal’s disability provided that the instrument is signed by an adult principal, contains the words “This power of attorney is not affected by subsequent disability or incapacity of the principal,” or “This power of attorney becomes effective on the disability or incapacity of the principal,” and is acknowledged by the principal before a notary public. This document can be drafted either to become effective immediately upon its execution or to become effective only in the event the principal becomes incapacitated. This latter version is often referred to as a “springing” power of attorney. Under current Texas law, this document does not need to be filed of public record unless it is being used in regard to a real property transaction requiring the execution and delivery of an instrument that is to be recorded.

Who should be your agent? In view of the authority and discretion conferred by such a document, your agent must be someone in whom you have complete trust and confidence.

This document terminates and is no longer effective upon the appointment of a guardian of your estate or upon your death. You may revoke this document at any time, however, such revocation should be in writing and delivered to your agent.

B. Declaration of Guardian in the Event of Later Incapacity or Need of Guardian

A declaration of guardian is a document in which you designate a person to serve as guardian of your person or estate in the event you become incompetent. In the event of incompetency, the guardian of your person would take charge of your care while the guardian of your estate would manage your property and financial affairs. Due to these different functions, you may wish to appoint different persons as guardian of your person and guardian of your estate. However, spouses frequently appoint each other in both capacities. You may, in the declaration, also disqualify named persons from serving as guardian of your person or estate.

We do not see many guardianships for adult persons because of the widespread use of statutory durable powers of attorney. However, the need for a guardianship could arise, and therefore, we recommend that you designate a guardian of your person and of your estate to prevent the court from making that determination for you. Although the court is not required to appoint the person you have named, it will give considerable weight to your selection.

C. Medical Power of Attorney

A medical power of attorney is an instrument in writing by which you, as principal, appoint one or more persons as your agent to make health care decisions for you when you are incapable of communicating with your physician.

8


D. Directive to Physicians

A directive to physicians (also known as a Living Will) is a document which provides instructions to an attending physician to withhold or withdraw life sustaining procedures in the event of a terminal condition where the application of such life sustaining procedures would serve only to artificially prolong the moment of death and where the attending physician determines that death is imminent or will result within a relatively short time without application of such life sustaining procedures.

You may designate another person to make the decision to withhold or withdraw life sustaining procedures in the event you become comatose, incompetent, or otherwise mentally or physically incapable of communication. However, it is not mandatory that you designate another person to make such a decision.

E. HIPAA Authorization

The Health Insurance Portability and Accountability Act (HIPAA) was enacted by Congress in 1996. The HIPAA Privacy Rule includes several provisions intended to keep patient records confidential. We recommend that a HIPAA Authorization be executed allowing the agents you have named under your Medical Power of Attorney to have access to your medical records so that they may make informed decisions regarding your treatment if you cannot communicate with your physicians.

F. Appointment of Agent to Control Disposition of Remains

A funeral home, cemetery or crematorium may be unwilling to accept burial instructions without the appointment of an agent to direct funeral arrangements. This may be a problem particularly for persons who are not survived by a spouse or immediate family members. These persons may want to clarify in writing who may make funeral decisions for them and any wishes that they have for their funerals or final arrangements.

9


440 Louisiana Street Suite 2200 Houston, TX 77002(713) 275-8440

DISCLAIMER: The information contained

in this guide is provided for informational

purposes only and is not intended to be

a comprehensive statement of the law or

legal advice. Laws are subject to change,

which could affect the information

contained in this guide. If you have

questions regarding any information

contained in this guide, you should

consult an attorney who can investigate

the particular circumstances of your

situation. Use of and access to this

guide does not create an attorney-client

relationship between Lee & Desenberg,

PLLC and the user.

ldbusinesslaw.com/legacyplan