WEALTH PRESERVATION & PROBATE - FAQ

What is the Generation Skipping Transfer Tax (GST)?

The GST is an additional transfer tax that applies when a transfer “skips” a generation. An example of when this might occur is when parents leave part of their estate to grandchildren. In the past, wealthy grandparents made use of trusts that left income and principal to their children for their lives. On the death of their children, the trust could leave income and principal to the grandchildren. On the death of the grandchildren, the principal could then be distributed to great grandchildren, avoiding Estate Taxes at the prior “skips” in generations. This allowed for the accumulation of wealth and appreciation of assets. Congress then added the GST to impose a transfer tax for individuals bypassing their children’s generation. The GST is in addition to the Estate Tax. Under current law, the GST Exemption is the same as the Federal Estate and Gift Tax Exemption. For example: if a $1,000,000 bequest was subject to both federal estate tax and the GST tax, the grandchildren would receive only $310,000.00

What is a Charitable Remainder Trust?

You can reduce your estate by establishing a Charitable Remainder Trust. By doing so, you can reduce your estate while donating to a charity of your choice. The Charitable Remainder Trust is useful for appreciated assets (stocks, real estate, etc.). The asset is transferred to an irrevocable trust, removing it from your estate and providing you with a charitable income tax deduction. The trust then sells the asset at fair market value, but is not required to pay capital gains tax. You retain a lifetime income stream from the trust that is higher than you would otherwise receive since the principal is not reduced by capital gains tax. At your death, your favorite charity receives the assets.

What is a Family Limited Partnership?

You can reduce your estate by transferring a family-owned business, real estate, stock, etc., to your children by establishing a Family Limited Partnership (FLP). The benefit of a FLP is that you and your spouse, either directly or through an entity such as a limited liability company, can maintain control over your assets as the general partners. Each of your children can be given limited partnership shares, which can be given annually to make use of the $14,000.00 annual gift exemption. The FLP allows both spouses or their entity that is the general partner to retain control no matter how much of the assets are transferred to the children. In fact, as limited partners, the children cannot sell or transfer their shares without the parents’ approval. The share of the limited partnership are discounted since there is no market value for them. Family limited partnerships are often used to keep family businesses, ranches, farms and vacation homes from being divided or sold.

What is a Qualified Personal Residence Trust?

You can establish a Qualified Personal Residence Trust to transfer your home out of your estate. This works by transferring your home into a trust for an established time period for the benefit of your children. You can continue to live in your home. When the period has expired, the home is transferred to your children and is not included in your estate. If you pass away before expiration of the period established in the trust, your home is included in your estate. At the time of transfer, the value of your home will be discounted for gift tax purposes since your children will not receive the home until a future period. The discounted value of the home will be used to determine the gift, allowing you to maximize your lifetime exemption.

What is an Irrevocable Life Insurance Trust?

The irrevocable life insurance trust is a trust that is created for the purpose of becoming the owner of your life insurance policy. However, you must live at least three years after the transfer of an existing policy. At death, the life insurance proceeds will not be in your estate. You can name the irrevocable life insurance trust as the beneficiary of the policy. When you pass away, the life insurance proceeds will be paid according to the provisions of the irrevocable life insurance trust (i.e. to your spouse, children, etc.)

How can I remove assets from my estate without being subject to estate or gift taxes?

You can give up to $14,000 annually to anyone you want tax-free. So, if you and your spouse each give $14,000 to three children and two grandchildren, you can give away $140,000 annually. This is a great way to reduce the size of your estate. Other ways to reduce your estate include use of the Irrevocable Life Insurance Trust, the Qualified Personal Residence Trust, the Grantor Retained Annuity Trust, the Grantor Retained Unitrust, the Family Limited Partnership, and the Charitable Remainder Trust.

What are Estate Taxes?

The Estate Tax is a Federal Transfer Tax. Congress allows each of us to pass a certain amount of assets tax-free during our lifetime or at death. This is known as the Federal Estate and Gift Tax Exemption. Currently, each individual can pass up to $5,000,000, indexed for inflation ($5,250,000 in 2013) tax-free in the form of lifetime gifts or at death. Any amount transferred in excess of this amount is subject to either a Gift or Estate Tax.

Can I avoid estate taxes if I have a revocable trust?

Having a revocable trust does not necessarily mean that you will not have to pay Estate Taxes. A revocable trust is a tool that can allow married couples, by effectively planning their estates, to prevent wasting one of their lifetime exemptions to reduce or eliminate Estate Taxes. Each spouse can leave an unlimited amount tax-free to a surviving spouse who is a U.S. Citizen. This is called the marital deduction. Use of the marital deduction defers Estate Taxes until the second spouse dies.

If I have a revocable trust, do I still need a Will?

Yes. A Will directs how a deceased person’s assets are to be distributed. When a revocable trust is created, it must be funded. Funding occurs when assets are transferred into the trust at the time of creation. What could happen is that future assets acquired by an individual or couple are left out of the trust. Having a “pour over Will” directs that any assets held in your name be transferred at your death to your living trust. These assets will have to pass through probate, but distribution will be according to the terms of the trust. A Will also permits a deceased person to nominate a guardian to care for and provide for minor children.

Are there any disadvantages to having a revocable trust?

In some cases, yes. A revocable trust is not subject to court supervision. As a result, a trustee may be able to take advantage of the trust to a greater extent than if the court is supervising the actions of the trustee. In addition, a living trust is generally more expensive than a standard Will, although the difference in cost is nominal when compared to the alternatives of probate and Estate Taxes. A revocable trust may not be extremely helpful if one is a young, single individual without kids and little or no assets. However, one must keep in mind that assets accumulate over time and circumstances change for people. A revocable trust may also still be important in directing how a deceased person is to be cared for in the event of incapacity or disability. Finally, certain individuals may find their dealings with third parties, such as banks and title companies, in connection with real estate may be difficult when title to property is owned in a trust.

What is a revocable trust?

A revocable trust, also known as a revocable inter-vivos trust or a living trust, is a legal document that allows you to direct how you want your assets to be distributed when you die while allowing you to maintain control of those assets during your lifetime. When a revocable trust is combined with a comprehensive estate plan, some of the benefits it can provide are the care of disabled and handicapped children (special needs trust), the prevention of taxation of life insurance proceeds (irrevocable life insurance trust), the private administration of a deceased person’s estate after death, the nomination of a successor by the deceased person to manage estate assets in the event the deceased person becomes incapacitated, the benefit of directing how estate assets are to be distributed at death and to whom, the benefit of allowing married couples to take full advantage of their lifetime exemptions to reduce or eliminate Estate Taxes, the option to pass property with limitations established by the deceased person, the option to establish educational funds for children, the option to distribute property to children in trust for the benefit of grandchildren, for the purpose of avoiding the Estate and Gift Tax at the death of the children, to the extent authorized under the generation skipping transfer tax rules, and the benefit of avoiding probate. An estate planning attorney can help you plan and select the appropriate options tailored to your estate planning needs.

Can probate be avoided?

Yes. Certain property will not have to pass through probate before it is distributed. Such property includes jointly held property (joint bank accounts, real estate held as joint tenants, etc.), life insurance proceeds (as long as they are not payable to the estate or a deceased person), IRA’s, 401k’s, retirement accounts, and assets held in a living trust.

What is probate?

Probate is a process that oversees the administration of a deceased person’s estate. Its purpose is to assure that the deceased person’s debts are paid, the beneficiaries described in the Will ascertained, the income and estate taxes are paid, and the assets of the estate are distributed according to the deceased person’s Will. In Texas, most probate proceedings are completed with independent administration. Independent administration is significantly different than dependent administration, which is the process used under the probate laws of many other states. In Texas, certain executors and administrators may serve independently of the court’s supervision, which streamlines the probate process and allows it to move much more quickly and efficiently than in dependent administration.

Independent probate administration has several advantages. The executor is not dependent upon the court for approval of all of his or her actions, the executor is not required to post a bond if bond is waived in the Will. This can avoid a significant amount of time and expense.

An executor can be independent if the decedent left a will that specifically states that the executor should be independent, or if all of the heirs or beneficiaries can agree to it.

If I have a Will, will I avoid probate?

No. In fact, having a Will assures that your estate will pass through probate. Probate is necessary to ensure that a Will is valid so your assets can pass to loved ones named in the Will. A Will cannot pass title to your property until it is admitted to probate.

Can I dispose of all of my assets using a Will?

No. Although a Will can dispose of most of your assets, assets such as life insurance proceeds, retirement benefits, joint bank accounts, payable on death accounts, realty held as joint tenants with rights of survivorship, assets held in a living trust, and your spouse’s one-half community property interest in any assets cannot be disposed of by your Will.

What are the requirements for a valid Will?

In Texas, for a Will to be valid, the person must have legal capacity, testamentary capacity, and testamentary intent. A person has legal capacity if he or she is at least 18 years of age, has been lawfully married, or is a member of the United States armed forces. Testamentary capacity refers to being of “sound mind.” A person has testamentary capacity if her or she has the mental capacity to understand that he or she is making a Will, the effect of a Will, the nature and extent of his or her property, who the natural objects of his or her bounty (relatives) are, the fact that assets are disposed of through a Will, and has the ability to plan for an orderly disposition of his or her property. A person has testamentary intent if, at the moment the Will is signed, he or she has the intention to make a disposition of property that will take effect at death.

Additionally, certain formalities must be met in the actual documentation process of creating a Will.   The State of Texas recognizes two types of Wills: (1) an attested will, and (2) a holographic will. Each of these documents has its own separate requirements. For an attested will to be valid, it must be in writing, signed by the testator or another person at the direction of the testator while in the testator’s presence, and witnessed by at least two witnesses over the age of fourteen. For a holographic will to be valid, it must be written completely in the testator’s own handwriting, and signed by the testator. It does not have to be signed by any witness.

In Texas, a person may also add a self-proving affidavit to the will. A self-proving affidavit substitutes for in-court testimony of witnesses regarding the validity of the will.