Law Offices of Will Morris

Law Offices of Will Morris


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Showing 4 entries categorized by Probate

What if I Die Without a Will? - Intestate Succession

A person who dies without a Will or has not provided for the disposition of their property by trust or other contractual means is said to have died “intestate”.  To fill the gaps created by those who have not voluntarily controlled a plan for themselves, the State of Texas essentially writes a Will and prepares a generic estate plan for them.  I call this the “Texas Plan”.

The Texas Plan can have particularly traumatic results for (i) blended families, (ii) couples living together in a committed relationship but not married, (iii) unmarried couples owning real property in just one person’s name, (iv) married couples owning both community and separate property, (iv) children with special needs, and (iv) single persons with no children. 

The Texas Plan assumes strict statutory preferences, taking into consideration - a person’s marital status, children of current and prior marriages, and characterization of property as community or separate.  The Texas plan does not include any tax considerations or benefits that may have been intended a spouse or significant others.

Since a house is often the most personal and significant asset, the following situations illustrate how the Texas Plan created dramatic unintended consequences.

  • A couple is married and owns their house as community property and have children by a previous marriage- Very few houses in Texas are owned “with right of survivorship” – even if community property.  Upon the death of one spouse, the surviving spouse will own one-half of the house and the deceased spouse’s children will own the other one-half of the house.  
  • A couple is married, but one spouse owned the house before the marriage (separate property).  If the spouse owning the house is the first to die and has children by a prior marriage, the surviving spouse is only guaranteed a 1/3 life estate in the house, but the children from the deceased spouse’s prior marriage would own 100% the house upon the surviving spouse’s death.  If the deceased spouse has no children, the surviving spouse will own 50% of the house and the deceased spouse’s parents and/or siblings will own the other 50%. 
  • An unmarried couple live together and one person buys a home in their name only (separate property).  If the person owning the house is the first to die, the house will pass to that person’s parents and/or brothers and sisters.  The other person will own no interest in the house.  This is a common situation when one person in a relationship has better credit or greater income. 
  • An unmarried couple purchases a home as joint tenants (50-50 ownership) Upon the death of one person the survivor only owns 50% of the house and the deceased person’s parents and/or brothers and sisters will own the other 50%.

Even in a traditional family setting the Texas Plan will not achieve the goals that most people would craft for themselves to (i) ensure privacy, (ii) minimize or avoid probate, (iii) select guardians for their children; (iv) designate agents to make health care decisions or end of life decisions (v) select guardians for themselves during any periods of incapacity, (vii) plan for the disposition of bodily remains (vii) ensure asset distribution in line with personal intentions, (viii) minimize or avoid family disputes, (ix) minimize or avoid the risk of unintended consequences, and (x) to the extent possible or necessary, to minimize or avoid Federal Estate Taxes.  

If you currently have the generic Texas Plan and are still alive, you should consider opting out and have a custom plan prepared for you that preserves your legacy and meets the unique needs of your family.

 

© Will Morris, JD, LLM 2014


Independent Administration in Texas - Don’t Be Afraid of Probate

Over the years the idea of Probate has gained a reputation as a blood sucking administrative process that delays and depletes the rightful inheritance of widows and orphans.  As a result, a culture of probate avoidance has arisen, which is often ill advised fostering sometimes tragic results as noted in a series of companion articles “Avoiding Probate – Getting Bad Advice”.

However, there is good news in Texas – under the proper circumstances “Independent Administration” creates one of the most family friendly and inexpensive probate processes in the country.  Although there are justifiable planning strategies that may include bypassing the probate process, one should not seek to avoid probate simply out of a fear of expense and delays caused by old courts, old judges, and old lawyers. 

Texas Probate Code Section 145 permits “Independent Administration” of an estate without court supervision, if a person provides for this streamlined process in their Will, or in some circumstances if agreed to by the beneficiaries of the estateThe most common and preferred method is a clear statement within the Will that expresses the intent of the following statutory language:

“Any person capable of making a will may provide in his will that no other action shall be had in the county court in relation to the settlement of his estate than the probating and recording of his will, and the return of an inventory, appraisement, and list of claims of his estate.”

In essence, once these administrative items are filed and the executor is appointed, the court says, “go take care of business and tell us when you are done”.  In 2011 the Texas Legislature simplified the process even further by permitting an Independent Executor to file an affidavit in lieu of the inventory, appraisement, and list of claims if there are “no unpaid debts, except for secured debts, taxes, and administrative expenses, at the time the inventory is due”. Texas Probate Code Section 250(c)  An inventory is generally due ninety (90) days after the executor is appointed, giving the executor sufficient time to pay unsecured debts and take advantage of this additional administrative benefit.

Notwithstanding this administratively simple and cost savings approach to probate there are circumstances when the more traditionally burdensome and expensive “Dependent Administration, must be undertaken.  I call this the “mother may I administration” because the court closely supervises the probate process and court approval is required for virtually every action to be taken, thereby greatly increasing the costs and delays.  “May I sell the house” – “Yes you may sell the house” – “May I sell it for this price” – “Yes you may sell it for that price” – “May I sell it to this person” – “Yes you may sell it to that person” – “May I fix the roof” – “Yes you may fix the roof” - “I sold it to that person, will you approve” – “Yes I will approve”-

While most executors and beneficiaries appreciate the freedom afforded by Independent Administration, in some instances an executor may actually prefer the specific court approval of every action taken by the executor as a protection from the heirs, beneficiaries, and creditors of the estate.  This is particularly true when the beneficiaries are hostile to each other, there are difficult and conflicting claims of creditors, there is a risk that the estate could become insolvent, or there are disputes among beneficiaries or creditors about certain property. 

It should also be noted that although a Will executed in another State will be admitted to Probate in Texas, it usually lacks the magic language providing for Independent Administration, and may therefore be burdened by the “mother may I” process.  A new Texas resident should have their Will reviewed by a Texas attorney and discuss the advantages of Independent Administration.

Texas wants to make things simple for families who have lost a loved one, so the loved one should not screw it up by falling prey to the mantra of avoiding probate.  A close friend recently bragged of his self created probate avoidance strategy, to which I commented - “John, your plan could result in you losing everything you have during your lifetime, and/or disinheriting your grandchildren forever – BUT you will successfully avoid probate”.  His plan has been revised to include Independent Administration.

If you don’t know the law – know a lawyer.

© Will Morris, JD, LLM 2014


Avoiding Probate: Bad Advice - Bad Results: Outright Transfers to Children

Last spring I discussed the risks of using a joint tenancy with right of survivorship account (JTWROS) as a probate avoidance strategy between generations.  This article focuses on the risks associated with making outright transfers to a child or children, particularly with regard to one’s home.  The discussion of these topics will continue in future articles with the caveat that there is no substitution for a consultation with an estate planning attorney.

WARNING- Any planning strategy that starts with the primary purpose of avoiding probate is froth with risks that are not immediately apparent to the individuals involved.  Although such plans may work out perfectly in some instances, I have found that most people would not have undertaken such strategies had they been fully aware of the risks.  I can tell you scores of horror stories where the risks matured into dramatic financial losses.

Bad Fact Situation – A 78 year old widowed father transferred title to his home to his only daughter, with the understanding that he will live in the house for the rest of his life.  His intent was to avoid probate “since my daughter will get everything anyway.”  Here are the  

  • Gift Tax - This is a completed gift the father should file a gift tax return to the extent the value of the home exceeds the $14,000 annual gift tax exclusion.
  • Over 65 Homestead Exemption - Since the father no longer owns the home, the over 65 homestead exemption will be removed, resulting in higher property taxes.  Since the home is not the daughters homestead, she will not be able to claim even the regular homestead exemption.
  • Homestead Exemption Regarding Creditors - The father will lose his constitutionally protected homestead protection from claims of creditors.  The house will now be subject to the claims of creditors for both the father and daughter - including judgment liens, tax liens, and bankruptcy.  The home could be at risk of foreclosure if the daughter subsequently mortgages the home as security for a loan
  • InsuranceOnce the home ceases to be an owner occupied residence, and is disqualified from maintaining a traditional homeowner’s insurance policy.  The daughters will need to purchase a landlord’s policy, fire policy, or other third party ownership policy with new underwriting.  These policies will usually have much less coverage and a higher premium and may not be available in some high risk areas or because of the age of the home.  In Texas, many companies have restrictions in the gulf coast, homes outside the city limits, and high fire risk areas.
  • Capital Gains Tax The daughter will lose the step up in basis that could result in unexpected capital gains.  If the parents paid $100,000 for their home their income tax basis is $100,000.  Upon the transfer to the daughter her basis will also be $100,000.  If the daughter sells the home for $210,000 immediately after her father’s death, she will have a realized capital gain of $110,000.  However, If the father had owned the home at his death, the daughter would receive a step up in basis to $210,000 and could sell the home with no capital gain or tax liability.
  • Daughter’s Death or DisabilityIf the daughter dies before her father, the ownership of the property will be transferred through probate to those designated in the daughter’s Will or to her descendants by intestate succession, without any guarantee that the father could continue to live in the home.  The daughter’s disability could result is a guardianship for the daughter.
  • Medicaid The rules and qualifications for Medicaid are beyond the scope of this article.  However, it should be noted that a transfer of ownership of the homestead could result in a period of disqualification that might not result from the continued ownership by the father.

Strategies that in fact avoid the probate process may appropriately become an integral part of an overall plan.  However, proper generational planning requires a comprehensive consideration of every possible variable in reaching one’s objectives. 

© Will Morris, JD, LLM 2014


Avoiding Probate: Bad Advice – Bad Results: Joint Tenancy With Right of Survivorship

Probate is the court supervised legal process by which the assets of a decedent are collected, managed, and distributed to beneficiaries, after the payment of claims.  In many States probate has a very negative reputation as an expensive and cumbersome process that may adversely impact families and delay asset distribution.  This stigma often results in bad probate avoidance strategies offered by online sources, hair dressers, bartenders and neighbors.  Even professionals such as bank employees, investment managers, accountants, and attorneys not specializing in estate planning can offer poor suggestions regarding probate avoidance. 

Any strategy designed to avoid probate MUST be carefully examined in the context of an overall management and distribution plan.  Although the following assets may have a proper distributive purpose AND “pass outside of probate” their uninformed use can also result in dramatic unintended consequences - (i) life insurance proceeds, (ii) IRA’s, (ii) 401(k)’s, (iii) joint tenancy with right of survivorship accounts, (iv) life estates, and (iv) those transferred outright to a beneficiary prior to death.

This article is narrowly focused on the risks associated with the improper and ill advised use of joint tenancy with right of survivorship accounts to avoid probate.  Risks surrounding other probate avoidance strategies will be addressed in subsequent articles.

Joint Tenancy with Right of Survivorship (JTWROS)-  This is a method in which financial accounts or real property are titled in the name of two or more owners.  At the death of one owner, the ownership automatically passes to the surviving owners.

Potential Unintended Consequences- An 85 year old widow is advised that she can avoid probate of her $4M brokerage account if she simply changes her account to include her three adult sons (Larry, Moe, and Curly) on a JTWROS account.  She is told that when she dies, the account assets will pass automatically to her sons.  Although technically true, this strategy failed to consider the following:

  • Survivorship is the key to ownership.  If Curly dies before the mother, then upon the mother’s death only Larry and Moe become owners of the assets as the survivors.  Curly’s children would be disinherited and receive NONE of the assets. 
  • Upon the creation of the joint tenancy the mother may be deemed to have made a $1M gift to each of her sons.  The Mother should file a gift tax return to the extent each gifts exceeds the $13,000 (changed to $14,000 in 2013) annual gift tax exclusion for each son.  The sons would be responsible for their share of the income tax each year.  
  • Each son has immediate access to the jointly owned assets and can withdraw the assets without approval of other joint tenants at anytime.  Larry would have the legal contractual ability to withdraw all or a substantial portion of the assets without the knowledge or approval of the other joint tenant.
  • The assets may be subject to the claims of creditors, bankruptcy, tax liens, and judgment creditors of the sons.  A spouse may pressure husband to access funds for personal use or be subject to a spouse’s claim in the event of divorce.
  • The sons are now current owners of the assets and upon the mother’s death the sons will lose the step up in basis for income tax purposes – which may result in unexpected capital gains taxes.  This is a very serious problem if title to real property is changed to JTWROS. 
  • Upon the mother’s death, it still may be necessary to probate other assets not owned as JTWROS.  Because the $4M is paid directly to the sons, the mother’s probate estate may lack liquidity to pay debts and/or taxes.

The mother could have avoided probate AND avoided the risks above by creating a Living Trust for which she was the beneficiary during her lifetime.  Upon her death, the assets would be divided into three equal shares for the benefit of her sons and/or the children of any deceased son.  A Trust would also provide for the management of her assets during any period of incapacity.  

© Will Morris, JD, LLM 2014

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