The Most Valuable Gift

by Maribeth Scott

It has often been said that the most valuable gift you can leave at your death is a sound estate plan. A “sound estate plan” involves organizing your financial and personal assets during your lifetime in order to provide maximum benefits to you and to your family, as well as planning in advance so that the assets remaining in your estate upon your death are distributed in accordance with your wishes. A well-executed estate plan can not only give you a sense of security in knowing that your assets will be distributed as you direct, but it can often produce income and estate tax savings, reduced legal fees, and lower costs in the management and distribution of your property.

There is a mistaken idea that only the wealthy need estate planning. In truth, all of us can benefit from some type of estate planning. It is particularly important if you own real property, have children, have strong feelings regarding the management and distribution of your assets, or have definite ideas about your health care. Without some type of written directions regarding the management of your assets and/or health care needs during your lifetime, or directions regarding the disposition of your assets and the guardianship of your minor children at your death, the laws of your domicile will for the most part control those decisions. For many people, the decisions made by the state are not the decisions they would have made for themselves.

Estate planning encompasses many areas and can be very complicated. This article will explore some of the estate planning options available in the State of Texas and provide an overview of the two areas that apply to most of us, planning for your incapacity (often referred to as “disability planning”) and the disposition of your estate on your death. Be advised that there are many options and alternatives that are not discussed in this article but that can be reviewed with a competent estate planner. 

During your lifetime, it is important to make plans for your incapacity. Most of us do not think about our incapacity, but in this time of longer life spans, many of us will face the possibility of having some kind of incapacity. If you have planned for your incapacity, you can generally avoid a court ordered guardianship, which can be draining both financially and emotionally on a family. Well drafted disability planning documents can allow your agents to carry on the management of your financial and personal affairs with little disruption of your life and of your family’s life. In addition, because your agents act without court supervision, you are able to retain your privacy and dignity.

The three key disability planning documents are the Statutory Durable Power of Attorney (provided for under Section 490 of the Texas Probate Code), the Medical Power of Attorney (provided for under Section 166.164 of the Texas Health and Safety Code), and the Directive to Physicians and Family or Surrogates (provided for under Section 166.033 of the Texas Health and Safety Code).  There are several other disability planning documents that you can discuss with your estate planner that may be applicable if you have special needs or requests. All disability planning documents can be changed or revoked during your lifetime, provided you have the capacity to do so.

Under a Statutory Durable Power of Attorney, you appoint an agent to perform certain tasks and to make certain decisions for you, most of them being related to the financial management of your assets. A Durable Power of Attorney can be effective immediately or upon proof of your disability and does not terminate if you become incapacitated (unless a guardianship is put in place for you).  Most persons grant very broad powers to their agent so that their agent will be able to function in much the same manner as that person could function if he or she were not incapacitated. A few of the key powers generally granted in a Durable Power of Attorney are the ability to pay bills, settle claims, prepare income tax returns, invest assets, sell or transfer real property and personal property, and make tax planning or charitable gifts. This document is very flexible and can be tailored to your specific needs.

The Medical Power of Attorney allows your agent to make health care decisions on your behalf. This power is effective only if your are unable to make health care decisions for yourself and your physician certifies in writing that your are unable to make such decisions. The powers granted under this document can be as broad as you wish or limited in accordance with your feelings regarding your health care needs. It should be noted that an agent under a Medical Power of Attorney can make decisions regarding the application or withdrawal of life sustaining treatments unless a Directive to Physicians and Family or Surrogates is in place.

A Directive to Physicians and Family or Surrogates is commonly known as an “Advanced Directive” or a “living will.”  An Advanced Directive is the most emotionally charged document of the disability planning documents because people often have very strong feelings about the application and/or withdrawal of life sustaining treatments. This document can be very important in giving your family members and doctors guidance regarding your feelings about being kept alive using life sustaining treatments, a topic that is not often discussed by family members. An Advanced Directive allows you to state your wishes regarding the application and/or withdrawal of life sustaining treatments if you would otherwise die within a specified amount of time from either a terminal condition or an irreversible condition.

Once you have considered your disability planning needs, you should then consider the disposition and management of your estate upon your death.  This is generally accomplished under a will and through the use of beneficiary designations on certain assets. A will disposes of your probate assets only.  “Probate assets” are assets that are subject to the jurisdiction of the court having jurisdiction over probate matters, and include such items as real property, royalty interests in oil and gas properties, stocks, bonds, cash accounts, and tangible personal property.  On the other hand, assets that pass outside the will (such as life insurance policies and employee benefit and retirement plans) are referred to as “nonprobate assets.”  The disposition of such assets are usually governed by beneficiary designations. Certain types of  jointly-owned property may also pass to the surviving joint owner outside of probate if owned “with survivorship” rights. However, due to our community property laws, survivorship rights must be properly structured in Texas to be effective. The coordination of the disposition of your probate assets and nonprobate assets is very important and should be reviewed by a professional who is familiar with their interrelation and your goals in disposing of your estate. An improper beneficiary designation could leave some assets open to creditor claims or pass assets to minor children which may not be the desired result.

The cornerstone of a good estate plan is a validly executed will. In general, a will is a legal expression or declaration of your intentions as to the disposition of your property which takes effect at your death. By its very nature, a will can be amended or revoked by you at any time during your lifetime.

There are many advantages to having a will, the most important being the avoidance of an intestate succession. If you die intestate (meaning without a valid will), state law governs the disposition of your assets. In Texas, you have virtually unlimited ability to leave your assets to whomever you choose in a will, but the laws of Descent and Distribution for an intestate estate are very specific and narrow in determining who receives your property. This can be very important in determining who receives your property if you are married and/or have children. Texas is a community property state, whereby all property acquired by a married couple during their marriage is deemed to be owned one-half by each spouse, unless any such property can be proven to be the separate property of a spouse. If you are married at the time of your death and if you die intestate, your surviving spouse receives his or her one-half of the community estate outright. If all of your children are children from your marriage to your surviving spouse, your surviving spouse will also receive your share of the community estate. However, if at least one of your children is not a child of your surviving spouse, your community one-half of the estate will pass to your descendants and not to your spouse. With respect to your separate property (generally property acquired by gift, devise, or inheritance) the bulk of such property will probably be distributed to your children and other descendants or to your parents or their descendants instead of to your surviving spouse.  Distributions to your descendants can be especially problematic if you have minor children. For a detailed chart showing the disposition of property under an intestate succession, see the charts labeled Exhibit 1 and Exhibit 2 in this article.

Another advantage of having a will is to avoid a costly administration of your estate. Unlike many states, Texas has a very simplified system of probate known as “independent administration.”  For the most part, if an independent administration is created, the independent executor or administrator can act with minimum court supervision in managing and distributing an estate, resulting in lower attorney’s fees and court costs. An independent administration is generally less expensive to administer and can result in the assets of the estate being distributed in a more timely manner. The most efficient way to create an independent administration is by naming an independent executor under your will and directing that the administration of your estate be independent. Additionally, a personal representative of any estate who is not a corporate fiduciary will usually be required to post a bond. This requirement can be waived in your will.

A major advantage to having a will is that it can allow you to create trusts for the beneficiaries of your estate. Your will can control the distributions from the trust and name the persons who will serve as trustees and successor trustees of the trusts. There are several specific circumstances where trusts may be desirable.

1. Minor Beneficiaries. If minor beneficiaries inherit property and this property passes directly to them rather than to a trust created for their benefit, the court usually requires that a guardian of the child’s estate be appointed. The guardian will manage the minor’s property under close court supervision until the minor attains age eighteen, when he or she is entitled to all of the property. In order to avoid the costs and difficulties associated with a guardianship, you can establish a trust in your will for any minor beneficiary, and permit more flexible and much less costly management of the beneficiary’s assets. In addition, by creating a trust, you can postpone the distributions to a beneficiary until the ages of your choice.

2. Incapacitated Beneficiaries. If an incapacitated beneficiary receives property outright, the court may require that a guardianship be established to manage such assets. If an incapacitated beneficiary is receiving government benefits, the inherited assets may cause the beneficiary to loose his or her benefits or to have his or her benefits reduced. When properly structured, the assets in trusts created for incapacitated beneficiaries will be available to the beneficiary for certain purposes, but generally will not cause the beneficiary to loose his or her benefits.

3. Spendthrift Beneficiaries. A trust can be created for the benefit of a beneficiary who has difficulties with creditors, a beneficiary who simply cannot manage personal finances, or a beneficiary who may have difficulties with creditors in the future (known as a “spendthrift” beneficiary).  Provisions can be included in these trusts that will allow the trust assets to be used for the benefit of the beneficiary, but will prohibit the assets from being reached by creditors or spouses in divorce proceedings.

4. Tax Planning Purposes. In certain circumstances, trusts can be used to hold assets for the benefit of family members for tax planning purposes. A trust created for this purpose usually provides for the beneficiary’s needs (and possibly the needs of his or her descendants) during his or her lifetime, but is excluded as a part of the beneficiary’s estate upon his or her death. If a beneficiary takes minimal distributions from his or her trust, the assets can grow and appreciate in value, resulting in substantial savings and assets being passed on to the beneficiary’s descendants.

If you have minor children, one of the most important reasons for having a will is to designate the individuals you would like appointed as guardians of the person and/or estate of your minor children.  (Note that the State of Texas now allows a person to appoint guardians for his or her minor children in a separate document, but this appointment is usually done in a will.)  If guardians are not designated in your will (or in a separate document), the court will appoint guardians for your minor children based on a list of eligible individuals detailed in Section 676 of the Texas Probate Code. The persons listed may not be the persons you would wish to name as guardians for your children.

Current law imposes an estate tax on estates valued in excess of $675,000 (rising to $1,000,000 in 2006) with rates ranging from 37%–55%, depending on the size of the estate. If your estate (including probate assets, nonprobate assets, and any anticipated inheritances) is valued close to or more than $675,000, you may wish to take advantage of certain estate tax deductions and exemptions allowed under the federal tax laws. The easiest and most efficient way to take advantage of these exemptions and deductions is through a well drafted will and beneficiary designations that are coordinated with the dispositive provisions in your will.

It should be noted that a revocable management trust can be used as an alternative to a will. You may wish to use a revocable management trust if privacy issues are important or if you own certain types of assets. Once your will is admitted to probate, it becomes public record. If you would prefer that the disposition of your estate be kept private, a revocable trust plan can be used. In that event, a simple “pour over” will is prepared in which all of your probate assets are “poured over” to the trustee of a revocable management trust that was created during your lifetime. The trustee of the revocable management trust then controls the disposition of the probate assets. The will is filed in the probate records but the revocable management trust is not filed of record. If you decide to use a revocable management trust, you should be aware that it can provide privacy regarding the assets held in the trust just prior to your death but may not provide privacy regarding the assets that pass under the pourover will because those assets were not contributed to the trust during your lifetime. In some circumstances, your executor may be required to prepare a full inventory listing the assets passing under your will. 

If you own real property outside the Sate of Texas, or if you have some assets that may be difficult to manage, you should consider using a revocable management trust. During your lifetime, you can transfer the real property or specific assets to the trust. On your death, these assets will not be subject to probate or to the control of the court. This is especially cost effective where out of state real property is involved because you can avoid the cost of an ancillary probate in the state where the property is located. A revocable management trust can also provide for continuous management of assts that need immediate attention upon your death and that cannot be subjected to a break in management while the will is probated and an executor appointed.

Lastly, once you have an estate plan in place, you should review it every three to five years, or at any time that your financial or personal situation changes or changes are made to the estate tax laws. If you are contemplating preparing an estate plan, you should consult with experts in developing an estate plan tailored to your needs and have your documents prepared by a professional who has training in this area. Preparing your own documents (or using documents in kits or computer programs) can often cost your family and heirs more in legal fees and frustration than would have occurred with a properly executed estate plan.   

Preparing a sound estate plan involves some thought and time, but in the long run, it is time well spent, and can result in substantial savings and minimal emotional adjustment for your family and heirs. By not having a will and disability planning documents, you give up all of your right to say how your assets will be managed and distributed on your death and how your financial and medical affairs will be handled in the event you become incapable of managing your affairs. You will leave your family and friends with many problems that could have easily been avoided. Your will is your last chance to leave a legacy and final word to your beneficiaries. They will be grateful that you cared enough to leave them the security provided with a good estate plan.

Maribeth Scott is a graduate of Stephen F. Austin State University and is a paralegal with the law firm of Giordani, Schurig, Beckett & Tackett, L.L.P., in Austin, Texas. She has approximately 20 years experience in the estate planning field, having worked for law firms in El Paso, Dallas, and Austin. She is a member of the Legal Assistants Division of the State Bar of Texas and a frequent speaker on topics related to estate planning. 

1. How to Live—and Die With Texas Probate, 7th Edition, Charles A. Saunders, Editor  (I have found this book in standard book stores such as Barnes and Noble. I am sure it would also be available in book stores connected to colleges with law schools.)

2. To Will or No to Will, a pamphlet prepared by the Texas Young Lawyers Association and distributed by the State Bar of Texas. You can order copies from Tammi Sweet at the Communications Department of the State Bar of Texas, 1-800-204-2222, ext. 2610, or through her e-mail at tsweet@texasbar.com. The pamphlet can also be accessed through the state bar website at http://www.texasbar.com.