THE WHOLE STORY IN 3 DEEP BREATHS
or
ESTATE PLANNING & PROBATE
2nd Edition
1996
By
Jerry Frank Jones
of Counsel
Ikard & Golden, P. C.
832 Congress, Suite 910
Austin, TX 78701
512 476 2929
ALL RIGHTS RESERVED
TABLE OF CONTENTS
1. INTRODUCTION
2. WILLS
3. INTESTACY
4. DISCLAIMERS
5. TRUSTS
6. PROBATE
7. NON PROBATE ASSETS
8. LIVING TRUSTS
9. GUARDIANSHIPS
10. AVOIDING GUARDIANSHIPS
11. TAXES: Introduction12. INCOME TAX13. THE BASIC TAX TRICKS
a. The By Pass Trust
b. The Unlimited Marital Deduction
c. The Generation Skipping Trust
d. The Irrevocable Life Insurance Trust
e. Transfers to Minors
f. Qualified Personal Residence Trust
g. GRITS, GRATS & GRUTS
h. FAMILY LIMITED PARTNERSHIP
i. CHARITIES
1. INTRODUCTION
a. This area divided into two parts
i. Estate Planning
(1) Disposition: Who gets what.
(2) Creditor:
(a) Protecting against decedent's creditors
and
(b) Protecting against the beneficiary's
creditors
(3) Taxes: Minimizing the tax bite
(4) Asset co-ordination:
(a) Making sure the non probate assets pass
according to the plan, or
(b) If they pass in a different fashion,
making certain that it is done
consciously
(5) Old age: Durable Powers of Attorney etc.
ii. Probate
(1) Post Death Administration
(2) Post Mortem Planning
(3) Administration of the decedent's estate
b. Estate Planning is divided into two Parts
i. Tax
ii. Non Tax
c. Probate is divided into two Parts
i. Tax
ii. NonTax
d. Property passes in 3 ways
i. By intestacy (intestate succession)
ii. By Will
iii. By non-probate assets (3rd party arrangements)
2. WILLS
a. There are 4 types in Texas
i. Self-proving
ii. Attested
iii. Holographic
iv. Nuncupative
b. Self-proving Will (The Cadillac)
i. Requirements
(1) In writing
(2) Signed by the Testator
(a) 18 years old or older
(b) With testamentary intent
(c) In front of the witnesses
(3) Signed by 2 witnesses
(a) Over 14
(b) In presence of the testator
(4) Self Proving Affidavit attached signed by
(a) Testator
(b) 2 witnesses
(c) Notary
ii. Eliminates the need to find the witnesses
c. Attested Will
i. Same as above
ii. But with no affidavit
iii. Have to bring the witnesses to the courthouse to
prove up the will
d. Holographic
i. Wholly in the handwriting of the Testator
ii. Can be self proved
e. Nuncupative
i. Oral
ii. Must be
(1) During last illness
(2) At his home and
(3) 3 credible witnesses
3. INTESTACY
a. If a person dies without a will they have died
intestate
b. If you die intestate, Sections 38 and 45 of the Texas
Probate Code control the dispositon of your probate
estate.
c. Basic disposition
i. Community Property
(1) To your surviving spouse
(2) If you have kids by a prior marriage, then
your community « to all of your children.
ii. Separate property
(1) Descendants but no Spouse: All to your
descendants
(2) Descendants and Spouse
(a) Personal property
(i) 1/3 spouse
(ii) 2/3 descendants
(b) Real property
(i) Life estate in 1/3 to spouse
(ii) Balance to descendants
4. DISCLAIMERS
a. IRC Section 2518 &Texas Probate Code Section 37A
i. IRC Section 2518 says a "qualfied disclaimer" is
not a gift.
ii. Probate Code Section 37A sets out the Texas law
for complying with 2518
b. A disclaimer is a legal fiction
i. The disclaimant (typically the child of the
decedent) says for purposes of inheritance treat
me as if I died before the decedent.
ii. Thus what I would have inherited goes to
(typically the children of the disclaimant) those
who would have taken if disclaimant had in fact
died before the decedent.
c. Example: Mom dies leaving her estate to her 3 boys;
further stating that if any of them predecease, their
share shall pass to their children. One of the boys is
a fairly old wealthy stock broker; he concludes that he
does not need his share and it would only cause more
tax in his estate on his death.
i. He executes a disclaimer
ii. His 1/3 passes to his children
d. You can pick and choose:
i. You do not have to disclaim everything
ii. For example: You can disclaim the Exxon stock but
take everything else
iii. You cannot do a horizonal disclaimer (a remainder
interest)
e. Consequences
i. There is
(1) No gift tax as a result of the disclaimer
(2) The property is not in son's estate when he
dies
ii. This is better than son receiving the inheritance
and then giving it to his children (that would be
a taxable gift)
f. Requirements
i. Must be in writing
ii. Must be filed in the probate record
iii. Copy must be delivered to the executor of the
estate
iv. Must be within 9 months of the date of death
v. Must not have accepted the property.
5. TRUSTS
a. A trust is
i. A legal entity
ii. Where legal title (that held by the trustee) is
separate from the equitable title (that held by
the beneficiary)
b. A trust has 3 actors
i. A grantor
ii. A trustee
iii. A beneficiary
c. Functions that trusts serve
i. Non-Tax
(1) Probate Avoidance (Living or Loving Trusts)
(2) Management
(3) Standby
(4) Spendthrift
(5) Creditor protection
(6) Medicaid eligibility
(7) Flexibility
(a) Timing
(b) Allocation (Spray)
ii. Tax
(1) Qualifying minor's trust
(2) Irrevocable life insurance trust
(3) By Pass Trust (aka redit equivalent, credit
shelter)
(4) Marital Dedution Trust
(a) Qualified Terminal Interest Property
(QTIP)
(b) Qualified Domestic Trust (QDOT)
(5) Generation Skipping trust (GST)
(6) Qualifying SubChapter S Trust (QSST)
6. PROBATE
a. "Probate" has 2 aspects which are sometimes confused
i. 1st: It is the process of proving a document is
the last will of the decedent
ii. 2nd: It is the process of administering the estate
b. Establishing the successors (the 1st aspect)
i. Establishing to the court (and the public at
large) that the document is the last will.
(1) This is sometimes referred to as "probating
the will."
(2) The public can look to the probate file to
learn who now owns the decedent's property
ii. If there is no will, then the successors are the
intestate takers
c. Administering the estate (the 2nd aspect): The court
appoints an executor or administrator who
i. Collects the assets
ii. Pays the debts
iii. Pays the taxes
iv. Distributes the remaining estate to the
beneficiaries
d. Probate is the wrapping up of the decedent's affairs,
determining who his successors are and turning the
assets over to them.
7. NON PROBATE ASSETS
a. Any asset that does not pass under the will is a non
probate asset
b. The typical examples are
i. Life insurance
ii. Annuities
iii. Joint Tenancies with Right of Survivorship
(JTWROS)
iv. Community Property with Right of Survivorship
(CPWROS)
v. MultiParty Bank accounts
(1) Pay on Death
(2) Trust bank accounts
(3) JTWROS
vi. Deferred compensation arrangements
(1) IRA's
(2) Pension Plans
(3) Keoghs
c. These assets should be carefully coordinated with the
will
i. In most instances the Recommended Change of
Beneficiary Form will track the will
ii. However, with deferred compensation this may not
be the case
(1) It is important, in most instances, to avoid
triggering recognition of the income upon
death.
(2) Quite often this means the beneficiary should
be an individual and not a trust.
(3) It can be a trust under very limited
circumstances
8. LIVING TRUSTS
a. Will or Trust: Which will best protect my estate?
b. Trusts: Greatest invention since sliced bread
i. Great Flexibility
ii. Excellent vehicle to accomplish many chores
c. Caveat
i. Living Trusts cannot solve all problems
ii. Living Trusts have been oversold
iii. Living Trusts do not save any types of taxes
d. What are They
i. Dacey Trusts: Lawyer avoidance
ii. Living Trusts: Lawyer Control
iii. Loving Trusts: Marketing
iv. Legally: Typically they are trusts that are
(1) Revocable
(2) Intervivos (created during life)
e. Advantages and Uses
i. Avoids Probate
ii. Provides Privacy (No inventory filed at the
courthouse)
iii. Provides management of some or all Assets
iv. Provides Standby Management of Assets (When the
Trust is coupled with a Durable Power of attorney)
v. Avoids the Possibility of Guardianship of the
Estate
vi. Avoids second probate in another state where real
estate is owned
vii. Can reduce risk of will contests [not avoid will
contests completely]
viii. Segregates certain assets from probate
administration
ix. May Defeat Elective Rights
f. Disadvantages
i. More expensive to set up
ii. Some expense to maintain during life
iii. Some headache to maintain during life
iv. Transferring title: "Like going through probate
twice"
v. Maintaining extra set of books on trust assets
vi. Filing second tax return on trust income &
expenses
(Possible exception if "Self-Trusteed")
vii. Homestead: Risk of loss
(1) Home possibly subject to creditors
(2) Possible loss of ad valorem homestead
exemptions
g. Myths
i. Saves taxes
ii. Cheaper than a will and probate
iii. Lawyers charge up to 11% of the estate for probate
9. GUARDIANSHIPS. Guardianships are established for minors and
for incapacitated adults.
a. Generally guardianships are to be avoided. They
require greater lawyer and court involvement. There
are annual accountings and there are bonds. There are
also restrictions on how the money may be spent as well
as how it can be invested.
b. Minors
i. Until a person reaches age 18 their parents are
their natural guardians.
ii. However, if a child directly receives an asset,
neither the child nor the parent can sell or
manage it until they are 18. If it needs to be
sold or otherwise managed, the parent will have to
take out a guardianship of the estate.
iii. The best way to avoid a guardianship for a minor
is to never name a minor as a direct beneficiary.
Not in a will, not on a life insurance policy, not
on a bank account.
iv. Instead, provide that any asset passing to a
minor shall instead pass to a trust or to a
custodian.
c. Incapacitated Adults
i. The same issue can occur with incapacitated
adults.
ii. If an adult, who cannot care for his own affairs
is to be a beneficiary, a trust should be
established instead.
d. Is a Guardianship Ever the Right Answer
i. Yes, if there is no trustworthy person available
to act as trustee or guardian (and the amount
involved is not large enough to justify a
corporate trustee), a guardianship may be the best
solution.
ii. The guardian and the assets will be bonded. The
activities are subject to court control. The
guardians activities will be monitored and
reviewed annually.
10. AVOIDING GUARDIANSHIPS
a. Testamentary Trusts:
i. Any asset left to a minor in a will can be left to
a trustee of a trust established in that will
ii. Any non-probate asset left to a minor can likewise
be left to the trustee of a trust created in a
will
b. Uniform Transfers to Minors (Section 141.001 et seq ,
Texas Property Code)
i. Any transfer to a minor can instead be made to:
"...Grandpa as custodian for Wee
Will Minor under the Texas Uniform
Transfers to Minors Act."
ii. Such a provision can be
(1) In a life insurance beneficiary designation
(2) As owner of a life insurance policy
(3) On a bank account
(4) On a stock certificate
(5) On a deed to real estate
(6) In a will providing that any bequest to a
minor shall pass to a custodian under the
uniform transfers to minors act.
iii. Now custodianships last until age 21
c. Section 142 trust. Section 142 of the Texas Property
Code allows property of a minor collected by a court
proceeding to be placed in a court created trust
(1) The trustee must be a corporate trust
(2) The trust must end at age 25 (unless the
person is incapacitated)
d. Guardianship Trust. Section 867 of the Guardianship
Code allows a probate court in a guardianship
proceeding to create a trust for the benefit of a minor
i. The trustee must be a corporate trust
ii. The trust can continue until age 25
iii. The trustee must make annual reports to the
probate court.
e. Payment into the court registry
i. The probate code allows payment of liquidated
claims into the registry of the court (the clerk's
office)
ii. By this mechanism
(1) A creditor can have his discharge, and
(2) The funds can be held without the need for
the costs of a guardianship
iii. Someone can apply on behalf of the minor, to have
the funds invested.
iv. At age 18 the minor can present his birth
certificate to the court and collect the funds
11. TAXES: Introduction
a. There are 7 deadly taxes
i. Estate
ii. Texas Inheritance
iii. Gift
iv. Generation Skipping
v. Income
vi. Capital Gains
vii. Excess accumulations
b. There is a unified estate and gift tax system
c. 3 numbers and a Spouse.
i. Unlimited Marital Deduction
(1) You can give to your spouse as much as you
want, during your life or on your death
(2) Donald Trump could have given Ivana during
their marriage $50,000,000 and there would
have been no tax.
(3) On his death, Bill Gates can leave his entire
estate to his wife and their will be no tax.
(4) These spousal gifts can be outright or in
special trusts (QTIP and QDOT)
ii. $600,000 ($192,800 credit equivalent)
(1) Using the tax tables, a taxable estate of
$600,000 will generate a tentative tax of
$192,800. However, each United States
citizen has a credit of $192,800. Thus -0-
tax is owed on such an estate.
(2) Or, a person can give away $600,000 of
taxable gifts and after using the credit will
have a -0- tax.
(3) Or a person can give away taxable gifts and
have a taxable estate, totaling $600,000
without incurring any tax. For example, a
person gives away $200,000 of taxable gifts
during their life and dies with a taxable
estate of a$400,000. There combination is
$600,000 and there is no tax.
iii. $10,000: The present interest exclusion
(1) Each person can give away $10,000 each year
to as many persons as they wish.
(2) This is often expressed as $10,000 per donor,
per donee, per year.
(3) But it has to be a present interest. It
cannot be a gift of a future right of
enjoyment. It must be the present right to
enjoy a piece of property. Not the right to
take possession after someone else dies.
(4) These gifts are not deducted from the
$600,000 amount set out in I above.
(5) For example, a husband and wife can give
$20,000 to each of their 3 children in 1995
($60,000) and another $60,000 to their 3
children in 1996.
iv. $1,000,000
(1) Each person can give directly to their
grandchildren (or put into a generation
skipping trust) $1,000,000.
(2) Above that the maximum estate tax rate
(currently 55%) applies.
(3) This is on top of any estate tax that is
owed.
(4) As a result, generation skipping trusts never
exceed $1,000,000.
d. Turning $600,000 into a $1,200,000
i. Pop can have $600,000 at his death and incur no
tax
ii. Mom can have $600,000 at her death and incur no
tax
iii. But, what happens if Pop has $600,000 and gives it
all to Mom?
No tax on Pop's death: Pop leaves his entire estate
($600,000) to his wife.
i. He gets a marital deduction for his entire
$600,000
ii. His Taxable estate is -0-
(1) Gross Estate $600,000
(2) Marital Deduction (600,000)
(3) Taxable Estate -0-
(4) Tentative Estate Tax -0-
(5) Unified Credit (192,800)
(6) Estate Tax -0-
iii. When his wife dies her taxable estate is
$1,200,000.
(1) Gross Estate $1,200,000
(a) Husband's 600,000
(b) Wife's +600,000
(2) Marital Deduction -0-
(no surviving spouse)
(3) Taxable Est 1,200,000
(4) Tentative Estate Tax 427,800
(5) Unified Credit (192,800)
(6) Estate Tax $235,000
iv. If instead the Pop would leave his first $600,000
in a bypass trust for his wife the following would
occur:
(1) Gross Estate $600,000
(2) Marital Deduction -0-
(3) Taxable Estate 600,000
(4) Tentative Estate Tax 192,800
(5) Unified Credit (192,800)
(6) Estate Tax -0-
v. When his wife dies her taxable estate is $600,000.
The other $600,000 is in a trust which bypasses
her estate for tax purposes:
(1) Gross Estate $600,000
(2) Husband -0-
(a) Wife's 600,000
(3) Marital Deduction (no surviving spouse) -0-
(4) Taxable Estate 600,000
(5) Tentative Tax 192,800
(6) Unified Credit (192,800)
(7) Estate Tax -0-
e. Characteristics of the By Pass Trust (aka Credit
Equivalent Trust or Credit Shelter Trust)
vi. The Surviving Spouse can be the Trustee.
vii. The beneficiary during the life of the surviving
spouse will be the surviving spouse
(1) She can receive all of the income;
(2) She can also be entitled to receive principal
for her health, education, maintenance and
support;
(3) The trustee need not consider any other
resources she has available (She can live
out of this trust and save her own estate if
she wants to);
viii. The trust is beyond the reach of creditors;
ix. On her death the balance can pass to their
children or any other person or persons they
select;
x. She can have a special power of appointment
allowing her to redirect who gets the property on
her death.
12. INCOME TAX
a. Basic Rule: All income is taxed all the time
i. While a person is living, that person reports his
income and pays tax on it
ii. When a person dies, his estate reports all of the
income from the date of death until the estate is
closed (and pays tax on it)
iii. When property is distributed from the estate, the
beneficiary begins paying income tax on the income
the property generates from the date it is turned
over to the beneficiary.
(1) As a general rule, the property distriubted
to the beneficiary is not counted as income
(2) There is a limited exception that is beyond
the scope of this outline
b. Life insurance proceeds
i. Are not income
ii. But may be a part of the decedent's gross estate
c. Basis
i. When you sell a capital asset, you pay tax on the
difference between your basis and the net sales
price.
ii. Basis is generally the purchase price
iii. When an asset is given to you, you take your
donor's basis
iv. On the other hand, if you inherit an asset, you
get a step up in basis to date of death value.
v. Example
(1) Gift: Dad gives 100 shares of Exxon stock to
his son, it is worth $8,000 on the date of
gift but dad only paid $2,000 several years
ago. Son sells the stock for $8,000. The
gain (and reportable income) is $6,000
(2) Bequest: In his will, Dad leaves his Exxon
stock to his son. On the date of dad's death
the stock is worth $8,000. Son sells it for
$8,000. As a result son has a gain of -0-
and a tax of -0-.
vi. Moral: Don't give your appreciated property away
during your life
13. THE BASIC TAX TRICKS
a. The By Pass Trust (illustrated above)
b. The Unlimited Marital Deduction (also explained above)
c. The Generation Skipping Trust
i. On your death you leave $1,000,000 in trust for
your son and his children
ii. An estate tax is paid on your death
iii. On son's death the generation skipping trust is
not a part of his estate.
iv. There is no tax on the generation skipping trust
v. It does not matter that the trust has grown to
$5,000,000 at son's death
vi. The trust assets are not subject to estate taxes
again until your grandchildren die.
d. The Irrevocable Life Insurance Trust
i. Life insurance on the decedent's life is subject
to estate taxes if
(1) the decedent had any incidents of ownership
at the time of his death. Examples of
incidents of ownership are:
(a) the right to name the beneficiary
(b) the right to withdraw the cash surrender
value
(c) the right to borrow against the policy
(d) the right to assign the policy
Or
(2) The policy is payable to the estate of the
decedent
ii. If you avoid these two characteristics the
insurance proceeds pass estate tax free to the
intended beneficiaries
iii. The usual methods are:
(1) have your children purchase the policy
(a) This often does not work
(b) Typical Problems
(i) A child fails to make the payment
(ii) Only one child makes his share of
the payment
(iii) A child dies and his children
are minors
(2) You establish an irrevocable life insurance
trust
(a) you make a gift to the trust
(b) typically the beneficiaries have the
right to withdraw their share of the
gift
(i) This is a Crummy power
(ii) it allows the gift to qualify for
the $10,000 present interest
exclusion
(c) if all goes well they do not exercise
their withdrawal rights
(d) the trust buys life insurance
(e) the trust pays the premiums with the
gifts
(f) When you die the proceeds are paid to
the trust
(g) The trust is then authorized to purchase
assets from your estate.
(h) This gives the estate cash to pay taxes.
(i) The assets sold to the trust can be
distributed to the beneficiaries.
e. Transfers to Minors
i. Qualified Minor's Trust
(1) Despite the requirement that the $10,000
annual gift exclusion must be a present
interest, if it goes to a qualified minor's
trust, it will qualify for the $10,000 annual
exclusion
(2) The trust must
(a) Have 1 beneficiary
(b) The assets must be turned over to the
beneficiary at age 21
(c) Be payable to the beneficiary's estate
if they die before age 21
ii. Custodial Accounts
(1) Texas has a new uniform transfers to minors
act
(2) It allows custodial accounts to continue to
age 21.
f. Qualified Personal Residence Trust
i. Transfer your home to a qualified personal
residence trust
ii. Retain the right to live there for a fixed number
of years
iii. Then have it pass to your kids
iv. The tax charge is a fraction of the home's real
value. For Example
(1) The house is worth $400,000
(2) You retain the right to live there for 20
years
(3) But you give the remainder interest to your
kids
(4) The remainder interest, since it is 20 years
away is only worth about 12.5% of the total
value or $50,000
(5) $50,000 is the amount of the gift for tax
purposes
v. On your death, there is no additional tax; even if
the house is now worth $1,000,000.
vi. The downside
(1) You have to out live the primary term
(2) And, unless you can work something out; at
the end of the primary term, you will have to
move out.
(a) You no longer own any interest in the
house
(b) But you can rent the house or buy it
back
g. GRITS, GRATS & GRUTS
i. In all of these, the grantor retains an income
right for a period of years. At the end of that
term of years the trust passes to the
remaindermen. As with the qualified personal
residence trust, the gift is the value of the
remainder.
ii. GRITS are out. This is a grantor retained income
trust. It allowed the grantor to retain the
income for a certain number of years. These are
no longer permitted. It was too easy to
manipulate the numbers with the result that the
gift tax values were meaningless.
iii. GRATS & GRUTS are in. We can still use grantor
retained annuity trusts and grantor retained
uni-trusts.
(1) GRATS allow the grantor to retain for a
specific number of years a fixed amount from
the trust each year (an annuity).
(2) GRUTS allow you to receive for a specific
number of years a percentage of the value of
the trust. The value of the trust is
recomputed each year.
(3) As with Qualified Personal Residence Trusts.
For these to work, you must outlive the term
certain. Therein lies the crap shoot: The
longer the primary term, the less the gift
and its tax burdens. However, the grantor
has to outlive the primary term or the
benefits are lost.
h. FAMILY LIMITED PARTNERSHIP
i. Without question the hottest estate planning
technique of 1995 is FLPs. In all likelihood that
will continue into the foreseeable future.
ii. How it works. Interests in a FLP enjoy
substantial discounts.
(1) Commentators regularly and with confidence
report 20% to 40% discounts. Some report
successes with IRS of up to 65%.
(2) The primary factors
(a) The business is worth more liquidated
than as a going business
(b) A critical factor is the amount of funds
that are periodically paid out to the
partners. The more paid to partners,
the less the discounts that are
available.
(3) The other discount factors are
(a) Lack of marketability, and
(b) Minority
iii. Advantages. Satisfies the primary motivations of
most clients
(1) A way to make gifts while retaining control.
(2) An arrangement that can be changed (amended);
versus an irrevocable trust.
(3) It is a relatively simple arrangement for
holding various family assets.
(4) There are no adverse income tax consequences
(5) There are estate and gift tax advantages as a
result of discounting (minority,
fragmentation and lack of marketability). But
it cannot be created for the purpose of
transferring property to family members at
less than FMV, Section 2703(b)(2).
(6) Limited Creditor Protection. Creditors
cannot force the sale of the partnership or
its underlying assets; they can only obtain
a charging order.
iv. Disadvantages
(1) Complexity: Because of Chapter 14. The
rules for FLPs are complicated and detailed.
(2) Cost: Not only are the attorneys' fees the
typical source of grousing, but also
appraisers are generally needed. And, in
some instances 2 appraisers are needed. One
for the underlying assets, and then another
to appraise the FLP itself.
(3) Nothings for sure. Although the current
climate is very favorable for these
arrangements. The pendulum may swing in
another direction before the "plan matures."
See Attacks in 6(f) below.
v. Important Mechanics
(1) The partnership should be for a term of
years. To avoid a dissolution and winding
up, the partnership should be for a term of
years. By selecting a term of years, a
dissolution can be avoided without including
any "applicable restrictions."
(2) The partnership should avoid a dissolution
for lack of a general partner. That can be
done by
(a) Multiple general partners
(b) Successor general partners
(c) Or an entity as a general partner
(corporation, trust, LLC or even a
limited partnership)
(3) No partner can liquidate until the term ends.
vi. Areas of Possible Attack. At the present time,
the reports of success are plentiful. FLPs appear
to be working very well. However, IRS may
successfully assert challenges to FLPs in the
future. The likely challenges are
(1) That the FLP was formed for Non-business
purposes
(2) That a term of Years is an applicable
restriction in and of itself
(3) That an all family member partnership cannot
avoid 2704. That merely electing a term of
years is a restriction to be disregarded
under 2704(b)
(4) That allowing the remaining partners to
continue is an applicable restriction
(5) That a gift of a limited partnership interest
does not qualify for the annual gift tax
exclusion
The client should be cautioned that, as always, there
is no guarantee that the hoped for discounts will
occur. But, because of the arrangements flexibility
and revocability, if these devices fall out of favor
the can always be changed.
i. CHARITIES
i. If someone has charitable inclinations there are
excellent opportunities
ii. If they do not have independent charitable wishes,
they are not a particular useful device
iii. The most common are
(1) Charitable annuity: You get a sum of money
each month for your life; on your death the
remainder passes to the charity.
(2) Charitable Remainder Trust: Like the
annuity, you get a sum of money each month
for your life. On your death the remainder
passes to the charity.
(3) Charitable Lead Trust: The charity gets a
monthly sum each month for a specified number
of years. At the end of that term, the
remainder passes to your beneficiaries (your
children or grandchildren for example)
iv. The advantages are
(1) a current income tax deduction for the value
of the charitable component of the transfer
(2) sale of appreciated assets are capital gains
tax free.
v. The problems. At the forceful behest of the
charities, Texas now has 2 new laws.
(1) Charities can now sell charitable annuities
(Tex. Insur. Code Art. 1.14-1A). They are
completely free of any regulation or
supervision. They do not have to tell the
parishioner that the annuity is unsecured.
They do not have to have any reserves such as
are required by insurance companies. Their
salesmen do not have to have any training or
education. Their money managers do not have
to have any training or credentials.
(2) Charities can act as trustees of charitable
trusts (Tex. Banking Code, Art. 13, Chapter
XI; VATS 342-1113). They likewise are not
subject to any regulations. They do not have
any reserve or minimum capitalization
requirements such as regular trust companies
have to have. They are not subject to review
or inspection by the Texas Banking Commission
as are regular trust companies.
(3) To be a charity under these new laws, the
organization merely has to obtain a 501c3
designation from IRS. That is nothing more
than the filing of certain forms. There is
little supervision or review as long as the
tax returns are properly filed. The Texas
Attorney General has authority over
charities, but has no means of reviewing all
of the charities in Texas. In fact, it is
unlikely that the AG's office will even be
aware that a charity exists until a problem
arises.
(4) We have already seen an increase in
activities in the charitable area. The
suspicious believe that the same people who
were selling living trusts recently will now
move into the charitable area.
TESTING YOUR PROBATE SENSITIVITY
Prepared by
JERRY FRANK JONES
The more of the following questions you can answer with yes,
the less your probate procedure will cost you:
1. Has the estate been planned?
2. Is the will up to date?
3. Is the will self-proving?
4. Is the fair market value of all of your assets less
than $600,000?
5. Is there only one beneficiary of the will?
6. Are all of the surviving children also the children of
the surviving spouse?
7. Are the bequests to the family made in the predictable
and natural manner?
8. Did the decedent discuss and explain his estate plans
to his family before his death?
9. Can the debts be resolved without delay or controversy?
DOCUMENTS TO LOOK FOR IN A GOOD ESTATE PLAN
a. Will
b. Trust
c. Durable Power of Attorney
d. Health Care Durable Power of Attorney
e. Designation of Guardian In Case of Later Need
f. Living Will (aka Directive to Physician or Natural
Death Act Document)
g. Recommended Change of Beneficiary Designation
h. Anatomical Gifts Form
i. Burial Instructions
Copyright 1998 by Glenn M. Karisch Last Revised May 15, 1998