Wrapping Up the Estate Administration

EP - Dec 27Once the Inventory, Appraisement and List of Claims (the “Inventory”) has been approved by the court, you will be ready to move forward with wrapping up the decedent’s estate. In fact, the receipt of the order approving the inventory typically concludes matters with the probate court.

Before distributing the decedent’s estate, there are a few other items you will need to take care of first. One item of particular importance is the paying of the decedent’s final income taxes, which a CPA can help you complete.

You will also need to be sure that you pay any final debts owed by the decedent. Some examples of final debts include hospital bills and funeral bills.. Depending on the language of the decedent’s will, it might also include paying off any mortgages still attached to real property owned by the decedent.

It may also be necessary to file an Estate Tax Return if the decedent’s estate is in excess of the estate tax exemption (for individuals dying in 2017, the exemption amount is $5.49 million). Unless extended, the Estate Tax Return will be due 9 months after the date of the decedent’s death.

Finally, you will want to make sure that you pay any amounts owed to the CPA, attorney, and any other advisors that have been working with you on the estate administration. If the will provides for it, you may also be entitled to compensation for your work as the independent executor. If a specific amount is not specified in the will, then you should consult with your attorney to determine the appropriate amount to take as your compensation for serving as independent executor.

You can begin making distributions from the estate at any time after being appointed independent executor. However, take special care not to distribute too much as you will want to be sure the estate has enough funds to cover any final expenses (taxes, debts, bills, etc.). Once all of the final expenses have been paid, you can make a final distribution of any remaining, undistributed assets of the estate to the beneficiaries of the estate

Distributing the estate is not usually a complicated process. It will be completed through a series of Independent Executor Distribution Deeds, assignments of property (for personal property or entity interests), and cash distributions (usually accomplished by a check from the executor, a wire transfer, or an actual cash distribution). Please keep in mind that as the executor, you are entitled to receive receipts from the beneficiaries acknowledging that they have received their allotted distribution.

Once you have paid the bills and made the distributions to the beneficiaries, the estate administration process is effectively complete. Congratulations!

In our final post in this series, we will cover special circumstances in estate administration including intestacy, filing an estate tax return, and others.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

Important Deadlines After the Probate Hearing

EP - Nov 21Once you have completed the hearing, received letters testamentary, and have been appointed as independent executor, there are a few key, court-related deadlines you need to keep in mind.

Notice to Creditors & Notice to Beneficiaries

First, within 30 days of being appointed as the executor, you will be required to publish a Notice to Creditors in a newspaper of general circulation that advises creditors of your appointment as independent executor. Additionally, within two months of your being appointed as independent executor, you will need to mail a certified letter, return receipt requested to each secured creditor of the decedent’s estate. You are required to file proof of these two notices with the court.

Beneficiaries of the decedent’s estate (other than yourself since you are the executor) are required to receive notice within 60 days of your appointment as independent executor. The notice must include either a copy of the will that was admitted to probate with a copy of the Order, or a summary of the gifts made to the beneficiary under the will along with the name of the court that admitted the will to probate, the docket number assigned to the estate, the date the will was admitted to probate, and the date the court appointed the independent executor. All notices to beneficiaries must be sent certified mail, return receipt requested. Additionally, you must file, within 90 days of your appointment, an affidavit with the court stating that the notices to beneficiaries were given or explaining why they were not.

The Inventory

Perhaps the biggest deadline the independent executor needs to be aware of is the requirement that an Inventory, Appraisement and List of Claims (the “Inventory”) be filed with the court within 90 days of your being appointed as independent executor. The Inventory is best thought of as a “snap-shot” of the decedent’s estate at the time of the decedent’s death. Please note that the decedent’s liabilities are not included on the Inventory. Items that have a beneficiary designation (retirement accounts, life insurance payable to a designated beneficiary, etc.) and property owned with another person as joint tenants with a right of survivorship are also not included on the inventory.

The inventory will generally include the following items:

  • List of all real property interests (including mineral interests) – To value your real property interests, surface interests can be valued based on a realtor’s opinion letter, and mineral interests can be valued by averaging the royalties received over the previous three years. There usually is not a need to get a full appraisal of the property interests unless the decedent’s estate is going to be taxable and require the filing of an estate tax return.
  • Stocks and bonds – These will be given a date of death value, which is usually obtainable through an internet search or a computer program owned by your attorney.
  • Mortgages, notes and cash –This includes amounts owed to the decedent (e.g. notes receivable) and any cash or cash equivalents owned by the decedent (e.g. checking accounts, savings accounts, certificates of deposit, etc.). These will need to be given a date of death value, which is usually obtainable through a bank statement or, in the case of a promissory note, through a simple calculation.
  • Insurance payable to the estate – Life insurance that is payable to a decedent’s estate is included on the inventory in the amount of the death benefit received by the estate. Insurance that is payable to a specific beneficiary (e.g. a spouse) is not included on the inventory.
  • Miscellaneous property – This will include property not covered by the above categories including such items as vehicles and personal property (i.e. jewelry, furniture, other household furnishings, etc.). Vehicles are easily valued using something like Kelly Blue Book. Personal property and household furnishings are given a lump sum value, which should be based on the value you would receive for those items if they were sold as part of a garage sale. Items of personal property do not need to be listed individually unless they are of significant value (e.g. a Picasso painting, an extraordinarily fine piece of jewelry).

Finally, note that the inventory can be (and often is) extended to allow additional time to gather the information necessary to file the Inventory. Typically the extension is for 6 months from the end of the 90-day deadline, but if an Estate Tax Return is being filed, then the Inventory’s deadline can be extended to match that of the Estate Tax Return.

Once the inventory has been filed with and approved by the court, you will be ready to begin making distributions out of the estate. In our next post we will cover distributing and concluding matters involving the decedent’s estate.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

Preparing For and Attending the Probate Hearing

EP - Nov 14As we continue the series on the Probate Process, let’s discuss the process for having the decedent’s will admitted to probate including preparing for and attending probate hearing. The probate hearing is when the court admits the decedent’s will to probate and appoints an independent executor to administer the decedent’s estate.

Preparing for the Hearing

After meeting with your attorney to gather the necessary information and documents, your attorney will begin the process of preparing and filing the Application for Probate of Will and Issuance of Letters Testamentary (the “Application”). In this document, your attorney is essentially asking the court to find that the will is valid and, most importantly, that the independent executor named in the will (i.e. you) be appointed as such.

Once the Application, the original will, and the original death certificate have been filed with the court, your attorney can then set a court hearing to have the will admitted to probate and to have you appointed as independent executor.

Prior to the hearing, your attorney will also draft other pleadings to be submitted to the court, including these documents:

  • Proof of Death and Other Facts (the “Proof”): The Proof lays out the facts concerning the decedent (their date of death, marital status, county of residence, age, children, etc.) at the time of their death.
  • Order Admitting Will to Probate and Granting Letters Testamentary (the “Order”): The Order is simply the official document by which the court admits the will to probate and appoints you as independent executor.
  • Oath of Independent Executor (the “Oath”): The Oath is a document that you will sign in the presence of the court stating that you agree to faithfully execute and perform all the duties of an independent executor.

The Probate Hearing

The hearing itself is a relatively simple process. Generally speaking you will spend less than 5 minutes in front of the judge. Your attorney will ask you a series of “yes” or “no” questions that trace the facts presented in the Proof. After your attorney has concluded their line of questioning, the judge will generally admit the will to probate and appoint you as the independent executor (though they may have some additional questions they’d like to ask). After the hearing, the judge will sign the Order, and you will sign the Proof and the Oath.

As a result of admitting the will to probate, the court will grant you Letters Testamentary (you can request as many as you would like). Letters Testamentary are what identify the independent executor as the legal representative of the estate. They are a single page document that can be provided to those wishing to make sure that you have the proper authority to act on behalf of the estate. Letters Testamentary will be required in dealing with any banks or other financial institutions, credit card companies, and in the sale of any real property owned by the decedent. Once you have the Letters Testamentary, you are free to begin acting on behalf of the estate.

Assuming that the decedent’s will provided for independent administration (as opposed to dependent administration, which will be covered in a later post), the hearing will likely be the one and only time that you will be required to be at the court house and in front of a judge.

In the next part of this series, we will discuss the court-related deadlines that you will need to be aware of as the independent executor. We will also go over the preparation and filing of the Inventory, Appraisement and List of Claims.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

The First Steps in the Probate Process

EP - Oct 17When you find it’s time to begin administering the decedent’s estate, one of the first things you will need to do is engage an attorney who will represent you in your capacity as the independent executor of the decedent’s estate. Most likely, the attorney you engage will set up a meeting with you in order to discuss the estate administration process and to outline their representation of you.

The attorney will probably request that you bring a number of documents with you in order to facilitate the estate administration process. While different attorneys may ask for different items, here is a list we provide to clients to help them get prepared and organized at the beginning of the process:

  • Copies of deeds, surveys, and year-of-death notices of appraised value and title policies to any real property;
  • Copies of the 2 previous years income tax returns;
  • Copies of current statements for all bank accounts, CDs, retirement accounts (IRAs, 401(k)s, etc.), and brokerage accounts, including those in joint names along with copies of account agreements for all joint accounts;
  • Copies of life insurance policies and annuity contracts, if any;
  • Copies of all United States Gift Tax Returns (IRS Form 709), if any;
  • Copies of mineral leases and oil and gas division orders, if any;
  • Copies of notes receivable owed to the decedent, if any, and their date of death balances;
  • List of debts and liabilities as of date of death;
  • Copies of all stock or bond certificates, including savings bonds;
  • Copies of funeral bill and any other bills owed by the decedent, including utility, medical and credit card bills, as of date of death;
  • Copies or a list of all checks payable to the decedent as of date of death including the payor, amount and purpose of payment;
  • A list of contents of any safe deposit boxes;
  • Copies of jewelry and art appraisals with a general description and estimated lump sum value of household and personal effects; and
  • Copies of car titles.

As you can tell, the list is quite exhaustive, but very often a decedent will have only owned a few items on this list. The above list gives you a good idea, however, of the assets you will need to begin thinking about, gathering, and organizing.

You will also need to be sure that you bring the decedent’s original will with you to the meeting as well as an original death certificate. The attorney will be required to file both of these items with the court as a part of the initial application for probate. Additionally, the Texas Estates Code now requires that the last 3 digits of the decedent’s and the applicant’s social security numbers and driver’s license numbers be included in the application for probate. You will want to be sure you have this information available when you meet with your attorney.

Finally, during this time you should be sure that you are keeping track of any and all expenses the estate is accruing as well as expenses you are accruing in your representation of the estate. This may include things like funeral bills and hospital bills as well as travel and lodging expenses for the executor.

Check back soon for our next post in which we will discuss the process for having the decedent’s will admitted to probate, including the probate hearing itself, and the court-related deadlines that will need to be met after the hearing to have the will admitted to probate.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

 

An Overview of the Texas Probate Process, Part I

EP - Oct 3After someone dies, it is usually necessary to coordinate the organization and distribution of the decedent’s estate. Typically, but not always, this will involve having the decedent’s will admitted to probate. When a person dies with a valid will in place, they are said to have died “testate.” In that case, the terms of the decedent’s will is going to dictate the management and distribution of the decedent’s estate. On the other hand, if a person dies without a will, that person is said to have died “intestate,” and the distribution of that person’s estate is dictated by the terms of the Texas Estates Code.

Over the next several posts, we will take an in depth look at the Texas probate process including going through the various steps that comprise the Texas probate process. There will also be posts dedicated to discussing administering an intestate estate and other special circumstances an executor may encounter. Throughout the series, we will assume that the decedent died with a valid will in place, and that you have been named in the decedent’s will as the independent executor of the decedent’s estate. We will also refer to the deceased individual as the “decedent.”

To get started, this first post will discuss what attorneys really mean when they refer to “probate” and the “probate process.”

What is Probate?

Probate is defined in the dictionary as “the process of proving in a court of competent jurisdiction…that an instrument is the valid last will and testament of a deceased person….” While this definition is accurate it isn’t very encompassing. Probate is really about the process of winding up the decedent’s affairs.

This winding-up process can involve a number of different tasks including, but not limited to, having the decedent’s will declared as valid and admitted to probate, gathering the decedent’s property (real property and personal property), closing up the decedent’s bank (checking, savings) and/or investment (i.e. brokerage) accounts, paying any final debts owed by the decedent (e.g. credit card bills, hospital bills, etc.), and paying any final taxes of the decedent (will include the filing of a final income tax return and, if necessary, an estate and gift tax return). The probate process may also involve selling some of the decedent’s property (liquidating the estate), collecting any insurance proceeds on the life of the decedent, dealing with retirement assets, IRAs, etc. owned by the decedent, and making distributions to beneficiaries and/or heirs.

As should be obvious by now, being an executor is very much a job. The probate process itself may seem overwhelming at times, but your estate planning attorney will play an important role in guiding you. Come back next week as we break down the first steps of the Texas probate process including meeting with an engaging an attorney to represent you as the independent executor.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

Estate Planning Necessities: The Will

EP - Sep 26What is a will?

A “will” is legally defined as “a written document which leaves the estate of the person who signed the will to a named persons or entities…including portions or percentages of the estate, specific gifts, creation of trusts for management, and future distribution of all or a portion of the estate.” In short, a will is a legal document that disposes of the assets of a person’s estate upon their death. A will also appoints the person who will be in charge of administering and distributing the decedent’s estate.

What goes into a will?

A will can be summarized by 3 simple questions:

1. Who gets what?

This should cover any specific gifts a person would like to make (perhaps a gift of a particular piece of personal property or a lump sum of cash) to any number of beneficiaries. A person will also want to be sure to cover any gifts to charities that the person would like to make. Any assets not specifically gifted to a person or entity will become a part of the person’s “residuary estate.” Any gifts made in a person’s will (either specific gifts or a gift of a portion or all of the residuary estate) can be made either outright or in trust.

2. How much are they getting?

After determining who the beneficiaries of their estate will be, the person should then determine how much (i.e. what specific assets or what portion of the residuary estate) each beneficiary will get. It is important to understand that there is no right or wrong answer to this question.

3. Who is in charge?

Finally, a person will need to appoint an executor—the person in charge of administering the person’s estate after the person dies. This should be someone the person knows and trusts, and who is aware of the person’s wishes in matters concerning their estate. The executor will be responsible for collecting the assets of the estate, paying the expenses of the estate (including any debts owed by the decedent), handling matters with the probate court, and finally, distributing assets to the beneficiaries of the decedent’s estate. Depending on the terms of a persons’ will, a person may also need to appoint a trustee who will be in charge of administering any trusts created by the decedent under the terms of their will.

What are the requirements for a legally valid will?

In order for a will to be effective, there are certain requirements that must be met. First, the person executing the will must have “legal capacity,” meaning they are at least 18 years of age or older. They also need to have “testamentary capacity” which requires that the person understand they are executing a will, the effects of executing a will, and the nature and extent of the property comprising their estate. Additionally, testamentary capacity requires that the person know the “natural objects of their bounty” (i.e. they must know their family members, heirs, relatives, etc.), the fact that the will is disposing of the person’s assets, and how all of these elements relate to distributing the person’s estate. Additionally, the person needs to have the testamentary intent of making a will (i.e. of making a revocable distribution of assets that will be effective at the time of their death).

There are also a number of legal formalities that are required to have a valid will: the will needs to be “written” (note that this does not necessarily mean handwritten), signed by the person making the will, and attested to by two witnesses who are at least 14 years of age. The signatures of the testator and the witnesses need to be notarized, and the will should be self-proved in the manner provided for in the Texas Estates Code.

Finally, please note a will that is wholly (i.e. 100%) in the handwriting of the testator is a valid and effective will per the Texas Estates Code.

Do I really need a will?

The short answer to this often asked question is yes, but the full answer is perhaps a bit more complex. In truth, each person already has an estate plan in place—the plan put in place by the Texas legislature in the Texas Estates Code. If a person dies without a will (or “dies intestate”), then a series of provisions in the Texas Estates Code spell out who gets the assets and in what proportions.

While the Texas Estates Code does detail how a person’s estate should be distributed in the event they die without a will, the process is more time consuming and costly for the estate and its beneficiaries than simply probating the will of a deceased person. By having a will in place, a person can ensure the process remains as efficient and inexpensive as possible, which means there will be more available for the benefit of the decedent’s beneficiaries.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

Estate Planning for Expecting Parents

EP - Sep 19First, let me begin by offering my most sincere congratulations to you and your spouse on the upcoming addition to your family. As a new parent myself, I am well acquainted with the joy and worry that comes with the news that your little family is beginning, or continuing, to grow.

At a time when you are worrying about fending off your in-laws, color schemes, and baby proofing, it’s important not to forget about your estate planning documents. A new baby is a great time to update your current estate planning documents or to finally have them drafted and executed. If you haven’t already, you should be sure to get in touch with your estate planning attorney as soon as possible to arrange a meeting to discuss updating or creating your estate plan.

While the complexity of your estate plan will vary depending on your income and accumulated wealth, you will want to make sure you have the following documents in place before you meet your bundle of joy:

Last Will and Testament – Both you and your spouse will want to make sure your wills are updated before your child arrives. While you won’t specifically list your child yet, that portion of your will can be easily updated after your baby arrives. Your will should take care of determining how your assets are distributed and make any necessary fiduciary appointments (e.g. executor and/or trustee). A few questions you may want to discuss with your estate planning attorney: 1) Who is getting my assets, and how much are they getting; 2) Do I need or want to include trusts for my spouse and/or my children and descendants; 3) Who do I want as my executor and who do I want to serve as their successor, if necessary; 4) Who will serve as the trustee of any trust created for my spouse and/or my children and descendants; and 5) Do I want my children and descendants to be able to become co-trustees or sole trustees of their trusts (perhaps at specified ages)?

Ancillary Documents – You and your spouse will also want to be sure that you execute power of attorney documents. The documents you should discuss with your estate planning attorney include the Statutory Durable Power of Attorney, the Medical Power of Attorney, the HIPAA Authorization, the Directive to Physicians, and the Declaration of Guardian. These documents can act as a sort of incapacity planning in the event one (or both) of you becomes incapacitated such that the other will be needed to access certain accounts, pay bills, and to make medical decisions related to personal care.

If you are going to be giving birth in a hospital, the Medical Power of Attorney and HIPAA Authorization will be of particular importance. The Medical Power of Attorney makes it clear to the doctor which individual has the power to make medical decisions for an incapacitated person (fathers, this could be important if your spouse becomes incapacitated during the course of delivery and an important medical decision needs to be made). The HIPAA Authorization goes hand-in-hand with the Medical Power of Attorney and directs to the doctors that they can provide the medical agent with any and all information necessary for the agent to make an informed decision.

Beneficiary Designations – Finally, you will want to be sure that any of your assets that pass by beneficiary designation (i.e. IRA’s, 401(k)’s and life insurance policies to name a few) are up to date. Failing to update your beneficiary designations can lead to adverse income tax consequences for your beneficiaries (particularly for IRA’s, 401(k)’s and other retirement assets). Not having a proper beneficiary designation can also cause a large portion of your estate (and for many people their retirement accounts and life insurance policies make up the single biggest portion of their estate) to not pass as you originally intended.

Whether you have weeks or months to go, I encourage you to meet with an estate planning attorney and discuss these documents before you hear or say that famous three letter phrase: “Honey, it’s time.”

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

Estate Planning for Newlyweds

EP - Sep 12After the the champagne has been drunk, the gifts have been opened, and you’ve returned from your honeymoon, one item you and your spouse should have on the top of your list should be discussing and executing a few simple estate planning documents in order to protect yourself from the uncertainties of life. Who wants to write thank you notes anyways?

Last Will and Testament

When spouses discuss their estate plan, a primary concern is typically ensuring that the surviving spouse is financially taken are of for the remainder of the surviving spouse’s life. Without a will, it is possible that the surviving spouse could be, for lack of a better word, disinherited under the terms of the Texas Estates Code. However, by having a will executed, you and your spouse can ensure that any assets of the estate of the first spouse to die are used for the continued benefit of the surviving spouse.

Your will should take care of determining how your assets are distributed and make any necessary fiduciary appointments (e.g. executor and/or trustee). A few questions you will want to be sure to discuss with your estate planning attorney: 1) Who is getting my assets, and how much are they getting? ; 2) Do I need or want to include trusts for my spouse and/or any future children and descendants?; 3) Who do I want as my executor and who do I want to serve as their successor, if necessary?; 4) Who will serve as the trustee of any trust created for my spouse and/or my future children and descendants?

Ancillary Documents

Even if you aren’t ready to go through the process of having a will prepared, you and your spouse will want to be sure that you execute power of attorney documents as soon as possible. The documents you will want to discuss with your estate planning attorney include the Statutory Durable Power of Attorney, the Medical Power of Attorney, the HIPAA Authorization, the Directive to Physicians, and the Declaration of Guardian. These documents can act as a sort of incapacity planning in the event one (or both) of you becomes incapacitated, such that the other will be needed to access certain accounts, pay bills, and make medical or other decisions related to personal care.

Beneficiary Designations

Finally, you will want to be sure that any of your assets that pass by beneficiary designation (i.e. IRA’s, 401(k)’s and life insurance policies to name a few) are up to date. Failing to have these up to date can lead to adverse income tax consequences for your beneficiaries (particularly for IRA’s, 401(k)’s and other retirement assets). Not having a proper beneficiary designation can also cause a large portion of your estate (and for many people their retirement accounts and life insurance policies make up the single biggest portion of their estate) to not pass as you originally intended.

The above listed documents are relatively inexpensive, but the cost (both financially and emotionally) of not having them prepared can become incredibly burdensome by your loved ones. Contact a GDHM estate planning attorney today and begin taking steps to prepare for your new future together.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

IRS Granting Some Relief to Victims of Hurricane Harvey

EP - Sep6

As victims of Hurricane Harvey begin the process of rebuilding their lives and homes, many will need access to money in order to facilitate their recovery. The IRS has stepped in and announced that “401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Harvey and members of their families.”

Generally speaking, retirement plan participants are prohibited or, at the very least, strongly discouraged from taking any money out of their retirement accounts prior to reaching age 59 1/2. However, the IRS released a statement last week declaring that participants in employer-sponsored plans (401(k), 403(b), etc.) and individual retirement accounts (IRAs) will be able to access and make use of the funds in their retirement accounts either as a loan or as a hardship distribution. Furthermore, even though IRA participants are barred from receiving a loan from their plans, they too may be eligible for a hardship distribution. Essentially, the IRS will allow (for a limited time) a “victim of Hurricane Harvey to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan.”

Even if a plan does not permit a hardship distribution, the IRS will allow plan participants to access the funds in their retirement accounts (either as a hardship withdrawal or as a loan) before the terms of the retirement plan are amended to allow for hardship withdrawals or loans. Additionally, it is not a requirement that the need for which the employee is taking a distribution meet the definition of a “hardship” under the employer’s plan. Any hardship caused by Hurricane Harvey will be treated by the IRS as an “unforeseeable emergency.”

It should be noted that these special, relaxed rules and procedures do not apply on a nationwide basis. The IRS is clear this only applies to those persons residing in one of the counties in Texas that was identified by the Federal Emergency Management Agency (“FEMA”). The counties include, among others, Aransas, Bee, Brazoria, Calhoun, Chambers, Colorado, Fayette, Fort Bend, Galveston, Goliad, Hardin, Harris, Jackson, Jasper, Jefferson, Kleberg, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tyler, Victoria, Walker, Waller, and Wharton Counties. For a complete and up-to-date list of the counties affected by Hurricane Harvey please visit FEMA online. Please note that a person living outside of the FEMA-designated disaster areas can still receive a retirement plan loan or a hardship distribution in order to assist a family member that is currently living in a disaster area.

There are a few final things to keep in mind. While the red-tape to access the funds has been reduced, the IRS has made it clear that there will be no change in the tax consequences for receiving the distribution. This means that distributions received as a hardship distribution will be included on your income tax return and may be subject to a 10% early-withdrawal penalty. Additionally, loans from retirement plans will still need to be repaid (with interest) over a period of 5 years or less. However, so long as the five-year repayment period is met, there are generally no tax consequences for a person receiving a loan from their retirement plan. Finally, this relief is not permanent, as the IRS is requiring that to qualify for relief, any distributions must be made between August 23, 2017 and January 31, 2018.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

Do I Need a Revocable Living Trust?

EP - Aug 29.pngThe above question is among the most common that estate planners get. The answer, unfortunately, is not a simple “yes” or “no.” In typical lawyer fashion, the answer is really, “it depends.”

When a Revocable Living Trust is Appropriate:

Privacy Concerns – For a multitude of reasons, a client might find themselves in a situation where they do not want the general public aware of the assets they own whenever they die. Probate records are public and can be searched, viewed and printed by the general public. These probate records typically include a filing known as an “Inventory, Appraisement and List of Claims,” which is effectively a snapshot of the decedent’s estate at the time of their death.

Assets held in a Revocable Living Trust, however, that do not revert back to the estate of the trust maker (often referred to as the settlor or grantor), are not included on the Inventory, Appraisement and List of Claims. This is because assets in the revocable living trust are owned by the trust and not by the decedent or the decedent’s estate. The assets held in the revocable living trust will not pass pursuant to the terms of the settlor’s will. Instead, the assets will pass pursuant to the terms of the Revocable Living Trust.

Probate Avoidance – As mentioned above, assets held in a Revocable Living Trust are not part of the settlor’s estate for estate administration purposes. This means that the assets held in the trust pass per the terms of the trust (i.e. not pursuant to the terms of the settlors will).

It is conceivable that a person could transfer all of their assets to the trust (i.e. their house, their cars, bank accounts, other personal property, etc.) and thereby avoid the need to go through the probate process.

Incapacity Planning – For certain clients, Revocable Living Trusts can be a useful way to ensure that their assets continue to be managed and used for their benefit in the event they become incapacitated. This is especially useful where one spouse is suffering from an illness (e.g. dementia) and relies on the other spouse for care and support.

By setting up and funding a Revocable Living Trust, the settlors can put a trustee succession in place so that in the event one or both of them becomes incapacitated, the trustee (or successor trustee as the case may be) can continue to make the assets of the trust available for their care and benefit (i.e. paying bills, paying caregivers, etc.).

When a Revocable Living Trust May Not Be Appropriate:

Probate Avoidance – Yes, it is true that Revocable Living Trusts can be a useful tool for avoiding probate, but if this is your only concern and/or reason for creating such a trust, then this may not be an appropriate estate planning tool for your situation.

Probate in Texas, as compared to many other states, is relatively inexpensive. So much so, in fact, that the cost of creating and then properly operating the trust (it is not as simple as simply signing the trust agreement and bringing the trust into existence) can be more expensive than simply going through the probate process itself.

Creditor Protection – Perhaps the single biggest misconception about Revocable Living Trusts is that they will protect you and your assets from the claims of creditors. Unfortunately, this is not the case.

Because Revocable Living Trusts are, as their name implies, “revocable,” the law treats the assets for creditor protection purposes as if you still owned them outright. This means that creditors can still make claims against the assets of the trust. If creditor protection is a concern of yours, then you would be better suited using an irrevocable trust or an entity (limited partnership, LLC, etc.), as opposed to a Revocable Living Trust.

Avoiding Estate Taxes – Another common misconception about Revocable Living Trusts is that they will help you avoid estate taxes. The problem with this is that the value of the assets of a Revocable Living Trust are still included in your estate for federal estate tax purposes. Of course, certain terms and provisions can be included to maximize your tax savings (perhaps even eliminating taxes all together), but this can also be accomplished through your will for virtually the same cost and without the additional expenses for maintenance and upkeep moving forward.

Additionally, it is important to understand that the current exemption for federal estate and gift tax purposes is $5.49 million (and this amount is indexed for inflation each year). Moreover, married couples can combine their estate and gift tax exemption giving them almost $11 million they can pass free of estate and gift tax. These thresholds being as high as they are means that most people do not have to worry about having taxable estates and/or making gifts in excess of the estate and gift tax. Thus, a heavily tax planned Revocable Living Trust might be an inappropriate estate planning tool for their circumstances.

For some, Revocable Living Trusts can be a useful and powerful estate planning tool. Before considering the use of such a trust, however, it is important to first discuss your circumstances with your estate planning attorney. In the end, you may find other more cost effective tools to better suit your needs.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.pacity