WILLS, PROBATE & TRUSTS
by
JERRY FRANK JONES
Attorney, Board Certified
Estate Planning & Probate
Copyright 1995
Of Counsel
IKARD & GOLDEN
512 476 2929
Austin
INTRODUCTION
The field of estate planning and probate is about efficiently
and effectively transmitting your assets to (typically) the next
generation. By efficiently, it is meant getting the most assets to
the beneficiaries. That means with the least cost (taxes,
lawyers, accountants, appraisers, administrators' fees and court
expenses). Generally this is where the bulk of the efforts are
placed. However, by effectively, it is meant getting the assets to
the intended beneficiaries in an appropriate form. This is a
problem more often than might be expected. A good estate plan
minimizes the costs and ensures the property getting into the
correct hands under the proper circumstances.
WILLS
A will is the legal expression of how a person wants her
property distributed at her death. It is said that a will is
"ambulatory." That merely means that it can be changed (is
revocable) as long as a person is living; that it has no legal
effect until it is probated. If you do not have a will, you are
intestate. Without a will, Texas has rules about how your property
passes, the statutes of intestate succession.
In Texas, a will can be wholly in the decedent's own
handwriting (a holographic will) or it can be typed (an attested or
self proved will). In fact a testator can write out on the back of
a laundry ticket his last will and testament. However, it may be
very expensive. All too often a person writing their own will uses
a word that means something significant to the legal system and
very different from what the testator intended. Also, a layman
may not consider a particular set of facts that actually occur.
For example, a holographic will may say I want everything to go to
my brother Harvey, but does not explain what happens if Harvey
predeceases.
Probate lawyers are often heard to paraphrase the Framm oil
filter man: "Pay me a little bit now (to prepare the will) or pay
me a lot later (to clean up the problems created by the holographic
will)."
The holographic will is different from the typed (attested)
will in that it does not require witnesses. You still must meet
the basic requirements:
1. The testator must have testamentary capacity; and,
2. It must be executed by the testator of her free will and
act (no duress or undue influence)
An attested will is a typed will witnesses by two witnesses.
Typically these have been prepared in an attorney's office,
although there are numerous forms around. Some forms are quite
good. But even then the testator has to make certain that it is
properly adapted for his or her circumstances.
The Cadillac is a self proved will. In addition to having two
witnesses, the testator and the witnesses signed an affidavit which
is attached to the will. That affidavit "proves up the will:" The
affidavit is used, when the will is offered for probate, to prove
all of the necessary execution requirements. This eliminates the
need to find the witnesses and to bring them to court. Even if the
witnesses are dead, the will can be proved up without fuss or muss.
If a will is not self proved, there can be substantial
expense, and delay, in locating the witnesses. If they cannot be
found, or if they are dead, then alternate procedures must be used
to prove up the will and get it admitted to probate.
Finally, there is a nuncupative will. It is an oral death bed
will. However, it is limited to personal property and it requires
three witnesses.
A current, well thought out will is the cornerstone to any
successful Texas probate. As you will see below, there are several
factors that effect how easy the probate process will be, but the
first step in avoiding a problem probate is a good will.
PROBATE
The public fears and loathes probate to mythical proportions.
When asked to explain what probate is, an otherwise knowledgeable
businessman said, "It's a dragon: It is ugly, breathes fire and
thinks of you only as its next meal." While this description is
not accurate or fair, most people would agree wholeheartedly.
Unfortunately, there are businesses that pray on this
ignorance and fear. People all over the United States are selling
plans to avoid probate. Quite often these salespersons do not know
any more about the realities of probate than the general public.
Texas has a very streamlined and efficient probate system.
For the simplest of estates, the total probate cost can be under
$1,000. Years ago Texas did not have such a good system: It was
cumbersome and inefficient. In addition the courts abused their
authority to supervise everything concerning the probate
proceeding. Judges appointed their cronies to act as appraisers
and administrators. Further, attorneys charged a percentage of the
estate as their fees (today, no responsible attorney charges a
percentage).
Texas's probate system was reformed in 1954. Nevertheless the
legacy from that period continues to this day. The fear of probate
is validated by the problems and expense of probate in other
states.
Today a person can go through Texas probate without any great
fear or expense, if there has been property planning and they have
a knowledgeable attorney.
Probate is simply the process of winding up the financial
affairs of a person and passing the assets on to his (or her)
beneficiaries. Generally it is said that probate has 4 parts:
1. Collect the assets;
2. Pay the debts;
3. Pay the taxes; and
4. Distribute the balance to the heirs or beneficiaries.
Probate also includes "admitting a will to probate."
Unfortunately, that explanation uses probate in its definition and
does not teach us much. To admit a will to probate means that a
probate judge (by written order) has determined that the document
is the last will of the decedent and the property should be
distributed accordingly. From that day forward anyone wanting to
know who now owns the decedent's property can go to the probate
records and find out. "To admit a will to probate" is the
mechanism used to evidence the transfer of property to the next
generation (in fact, under Texas law, a will is of no force and
effect until it has been admitted to probate).
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?
In most instances, the goal is an independent executor serving
without a bond. This means that after the will is admitted to
probate and an inventory is filed, the executor is free of court
supervision and control. Further, that the requirement of a bond
has been waived by the testator. All of this results in
substantial savings to the estate.
Sometimes an independent executor is not desired. If the
estate is insolvent or nearly so, it is generally prudent to have
a dependent administration. This protects the personal
representative by having all actions validated before they are
taken. Occasionally, the testator does not have anyone they trust
completely. In those cases, the beneficiaries might be better off
to have the executor watched closely by the court. The
beneficiaries would also be protected by a bond.
There are other alternative probate procedures to the
independent executor. They are appropriate in various
circumstances:
1. Independent administration
2. Muniment of Title
3. Dependent administration
4. Dependent administration with will annexed
5. Proceeding to Declare Heirship
6. Administration of community property
7. Community Survivor (without court authority)
8. Temporary Administration
9. Finding of no need for administration
10. Affidavit of Heirship
11. Establishing title through foreign wills
TAXES
1. Tax Planning: The Concepts
a. Types of Taxes
i. Estate Tax
ii. Gift Tax
iii. Generation Skipping Tax
iv. Inheritance Tax (State of Texas)
v. Income Tax
vi. Capital Gains Tax
vii. Chapter XIV (Anti-Freeze) Tax
viii. Excess Accumulations Tax
b. Tax Numbers
i. $10,000 Present Interest Exclusion: Each person
can give $10,000 of gifts to each person they wish
each year of a present interest without any gift
tax charges (nor use of the $600,000 unified credit
equivalent).
ii. $600,000 Unified Credit Equivalent: Each person
can give during their life or transfer at death (or
any combination of the 2) a total of $600,000.
This is in addition to the $10,000 present interest
exclusion set out in 1. above. Sometimes described
as a $192,800 unified credit.
iii. $1,000,000 Generation Skipping Exemption: Each
person can transfer in trust or outright $1,000,000
to a generation beyond their children
(grandchildren etc), without any generation
skipping tax (they may still be liable for estate
or gift taxes). The tax virtually eliminates
transfers to grandchildren in excess of $1,000,000.
c. Unlimited Marital Deduction. A person can transfer as
much to a spouse as they wish without any tax
consequences.
d. Gifts to minors
i. Outright
ii. In trust
iii. Custodianship
(1) UTMAs [Uniform Transfers to Gifts to Minor's
Act]
(2) TTGMAs [Texas Uniform Transfers to Minor's
Act]
e. The problem with intervivos (during life) gifting
i. Loss of basis
ii. Makes the wrong person rich (Big Momma Syndrome)
iii. You don't know what you will need
2. Tax Planning: The Basic example [The $1,200,000 combined
Estate]
a. How to save at least $235,000
b. Typically Husband 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
c. If instead the Husband 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-
d. 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 -0-
(no surviving spouse)
(4) Taxable Estate 600,000
(5) Tentative Tax 192,800
(6) Unified Credit (192,800)
(7) Estate Tax -0-
3. Characteristics of the ByPass Trust (aka Credit Equivalent
Trust or Credit Shelter Trust)
a. The Surviving Spouse can be the Trustee.
b. The beneficiary during the life of the surviving spouse
will be the surviving spouse
i. She can receive all of the income;
ii. She can also be entitled to receive principal for
her health, education, maintenance and support;
iii. 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);
c. The trust is beyond the reach of creditors;
d. On her death the balance can pass to their children or
any other person or persons they select;
e. She can have a special power of appointment allowing her
to redirect who gets the property on her death.
LIVING TRUSTS
1. Will or Trust: Which will best protect my estate?
2. Trusts: Greatest invention since sliced bread
a. Great Flexibility
b. Excellent vehicle to accomplish many chores
3. Caveat
a. Living Trusts cannot solve all problems
b. Living Trusts have been oversold
c. Living Trusts do not save any types of taxes
4. What are They
a. Dacey Trusts: Lawyer avoidance
b. Living Trusts: Lawyer Control
c. Loving Trusts: Marketing
5. Advantages and Uses
a. Avoids Probate
b. Provides Privacy (No inventory filed at the courthouse)
c. Provides management of some or all Assets
d. Provides Standby Management of Assets (When the Trust is
coupled with a Durable Power of attorney)
e. Avoids the Possibility of Guardianship of the Estate
f. Avoids second probate in an other state where real estate
is owned
g. Can reduce risk of will contests [not avoid will contests
completely]
h. Segregates certain assets from probate administration
i. May Defeat Elective Rights
6. Disadvantages
a. More expensive to set up
b. Some expense to maintain during life
c. Some headache to maintain during life
d. Transferring title: "Like going through probate twice"
e. Maintaining extra set of books on trust assets
f. Filing second set of tax returns on trust income
(Possible exception if "Self-Trusteed")
g. Homestead: Risk of loss
i. Home possibly subject to creditors
ii. Possible loss of ad valorem homestead exemptions
7. Myths
a. Saves taxes
b. Cheaper than a will and probate
c. Lawyers charge up to 11% of the estate for probate
8. 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 for life
insurance, employee benefits and IRAs.
h. Anatomical Gifts Form
i. Burial Instructions
Copyright 1998 by Glenn M. Karisch Last Revised May 15, 1998