I.Non-Probate Methods Of Disposing Of Assets Upon Death. Several ways exist to pass property upon one’s death other than through a Will or a Trust.The following are the most common examples:
- Beneficiary Designations (Insurance; Annuities; IRAs, etc.)
- Payable on Death or Transfer on Death Accounts;
- Joint Tenants With Rights of Survivorship;
- Transfer on Death Deed; or
- Revocable Living Trusts.
II.The Probate Process And Property Ownership. “Probate” is the legal name given to the process of transferring titled property that does not transfer by a method in Article I above. The probate process, although complicated and confusing to many, can be reduced to the following:
- understand the Will and ascertain heirs/beneficiaries;
- locate and value all property;
- pay the agent, attorneys, and creditors of the estate
- resolve controversies between the beneficiaries;
- file all tax returns; and
- distribute the property.
III.Wills, Trusts, And Estate Tax Planning. A Will is a document of written instructions that directs how to dispose of a person’s property upon death.When a person dies without a Will, he or she is said to have died “intestate”.The attached Exhibit A illustrates how Texas law directs distribution of property when a person dies without a Will.
One important estate tax planning tool is a trust.Trusts have valuable non-estate tax planning attributes. A trust is a set of written instructions directing a person or institution (the “Trustee”) how to distribute and manage property for the benefit of one or more persons (the “beneficiaries”). The most common types of trusts in estate planning are:
- Testamentary Trusts:Drafted in a Will and funded at death;
- Living Trust: Created during life and typically used as a Will substitute;
- Life Insurance Trusts: owns life insurance to provide liquidity for estate taxes or spousal/children support without increasing the gross estate; and
- Gift Trusts: Designed to receive and manage assets transferred irrevocably to one or more beneficiaries.
IV.Estate Tax. The 2016 Estate Tax Exemption is $5,45,000 with a maximum 40% rate on amounts over $5,450,000. The Annual Gift Tax Exclusion is $14,000 with the Lifetime Gift Tax Exemption equal to $5,450,000.See Exhibit B for an outline of basic estate tax planning.
V.Transferring Real Estate at Death.Often real estate is the only titled asset that an estate must transfer at death.For this reason, many people overlook probate or delay post death transfer until much later.The following are the most common methods of transferring real estate after death:
- Full Probate with Independent Administration (with a Will or Without a Will);
- Full Probate with Dependent Administration (with a Will or Without a Will);
- Probate as Muniment of Title (only is there IS A WILL);
- Small Estate Affidavit (only if there IS NO WILL);
- Affidavit of Heirship (with a Will or Without a Will); or
- Revocable Living Trust (see below).
VI.Will vs. Revocable Living Trust.Clients may implement an estate plan either by utilizing a Will or a Revocable Living Trust.
Will: A Will is easy to implement because nothing occurs until death. We simply coordinate beneficiary designations, and the client goes on living. When the client passes away, we probate the client’s estate. Probate is a public record and takes about 5 weeks. The probate fees are approximately $3,000. After probate, we implement any planning set forth in the Will (e.g. fund the trusts referenced in the estate plan for the surviving spouse, then children).
Revocable Living Trust: A Revocable Living Trust contains the same concepts that you can find in a Will, but it adds three benefits that a Will does not provide, which are:
(1) Privacy. The client names the Revocable Living Trust anything he/she would like (the XYZ Living Trust). Then we transfer property such as the homestead, other real estate, brokerage accounts, checking accounts, savings accounts, and ownership interest in businesses to the Revocable Living Trust. As a result, no one ever knows what assets the client owns.
(2) Centralizes Management and Control of Assets. If a client becomes incapacitated, we do not need to utilize powers of attorney. Instead, we have a successor Trustee to handle the client’s financial matters.
(3) Avoids Probate. A Revocable Living Trust should own all of a client’s titled, non-beneficiary-designated assets. We prepare Deeds to transfer real property. We work with the financial advisor, banker, and the client to transfer the bank accounts and investments. When the client passes away, the Revocable Living Trust dictates where the property transfers pursuant to the estate plan. We avoid probate of $3,000 upon the first spouse’s death and the surviving spouse’s death. Furthermore, we avoid probate in every state in which the client owns real property!
Courtesy of, and with the permission of:
Nicholas A. Dupre
Knighton & Stone, PLLC
202 Timberloch Place, Ste. 250
The Woodlands TX 77380