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Texas Probate Code Section 57 outlines who may execute a valid Will and Section 59 outlines the formal requirements of a Will. A person (i) who is eighteen (18) years old, or (ii) who is or has been lawfully married, or (iii) who is a member of the armed forces of the United States, auxiliaries thereof, or of the maritime service – may execute a Will. A person must also be of “sound mind” and capacity.
Every State has specific laws or statutes that provide for the distribution of a person’s assets if they die without a Will. This is called dying intestate. In effect the State writes a Will for you and sets out an expensive and cumbersome process (probate) to put the State plan into effect. The State’s plan and your plan may not be the same, particularly in (i) blended families, (ii) couples living together but not legally married, (iii) couples owning a real property in just one person’s name, (iv) children with special needs, and (iv) single persons with no children.
Here is a summary of possible results dictated by Texas Probate Code Section 38 (Persons Who Take Upon Intestacy) and Section 45 (Community Property).
Here are a few situations in which dying without a Will in Texas would have dramatic unintended consequences after applying the above statutes.
A valid Texas Will (i) shall be in writing, (ii) signed by the testator in person or by another person for him by his direction and in his presence, (ii) if not wholly in the handwriting of the testator, be attested by two or more credible witnesses above the age of fourteen, and in the presence of the testator.
A witness must be over the age of 14. A witness should not have any pecuniary benefit under the terms of the Will, with some exceptions. A witness may be competent for the purposes of establishing the validity of the will, BUT any bequest to that witness will be void (Texas Probate Code Section 61), except to the extent that witness would have inherited an “intestate” statutory share if the testator had died without a Will.
WARNING: If you are a beneficiary or potential beneficiary of the testator’s Will,you SHOULD NEVER be a witness.
A handwritten Will is referred to as a “Holographic Will” and must be wholly in the handwriting of the testator and signed by the testator in order to be valid in Texas. If these strict requirements are met then it is not necessary that the Will be witnessed by two witnesses at the time of execution. Texas Probate Code Section 60. If in the handwriting of another person or typewritten, the Will must meet all formal requirements, including the two witnesses.
NO, NO, NO. An oral or “nuncupative” will is NOT valid in Texas. Prior to the 2007 repeal of Texas Probate Code Section 65, an oral will was valid in Texas for the disposition of personal property in very restricted situations. The historical basis of an oral will or “deathbed will” was to permit a dying person an emergency method of transferring personal property. A minority of states may permit some limited application of an oral will.
Every adult should review the current status of the management and disposition of their real and personal property, life insurance proceeds, and retirement accounts as well as the care and custody of their minor children if they die, become disabled, or are incapacitated for any period of time. Every parent of a child over the age of eighteen (18) should consult with them regarding basic planning needs, particularly with regard to their health care decisions. They are ADULTS and all privacy rules apply.
For those that want a schedule, one rule of thumb might be at least every five years. I suggest that clients give thought to their estate planning documents each year when they complete their income tax returns. This is a time when you have all of your family and financial information together. However, there are key life events which should prompt a review of your current plan or the creation of a first plan.
Providing for the care and custody of minor children is often the key reason for generational planning and has nothing to do with the size of one’s estate. If both of the natural parents are deceased and have not named a guardian for their minor children, then the State of Texas, has a process for the appointment of a guardian of the person and a court supervision of the guardianship of the estate. (Texas Probate Code Section 676). You do not want to see grandparents and siblings fighting over who should be guardians of your children.
If you do not have a Will or Trust that specifies a schedule for distribution of your assets to your children (Ex. Ages 25, 30, 35) and a guardian for their estate is established, your children will receive all of your assets when they turn 18.
TIP: Do NOT name siblings or parents as beneficiaries of your life insurance policies, even if they will be the guardians for your children. If they die, get divorced, file bankruptcy, etc. your children may completely lose the benefit of the money. A trust or other planning strategy would protect the proceeds.
Consider this tragic situation - A young couple was killed in a car accident, prior to any planning for a guardian of their minor children. The five adult siblings of the young couple urged the Probate Court to appoint each of them as guardians of the children, while aggressively questioning the competency of each of the other siblings to serve.
“My house is bigger. – We go to church more often. – You drink too much. – We have more money:”
The court proceedings were destructive of both families, although each person believed they were fulfilling their moral obligation to their deceased brother or sister. The couple could have avoided the family discord simply by appointing a guardian for the children either in their Wills or by a separate document authorized by the Texas Probate Code Section 677A. When a guardian is named by the parents, the other siblings will accept that designation without controversy.
In many families the selection of a guardian will be a close family member and APPEAR to be an obvious choice for both spouses. However, you may need to make an informed decision (as opposed to an emotional decision) among family members (parents, siblings, older brothers and sisters, aunts or uncles, etc.) or close family friend. Once you have agreed, I suggest the following conversation:
“We are working with our attorney regarding our estate plan and the selection of a guardian for Larry and Moe. We do NOT want you to give us an answer now, but would appreciate you giving consideration to being their guardian. This would be a big commitment and would like for you to consider your personal goals, lifestyle choices, and other obligations before making a decision. Can we visit about this later after you have discussed it privately between yourselves?”
Keep in mind that the person whom you select as a guardian of your minor children may change as you get older and circumstances and “life events” change. A natural evolution of guardian appointments might be as follows:
It is OK if you DO NOT select a family member. Relatives may be geographically distant, don’t know your children well, have different values, have health concerns, or simply not be ready to raise your children. Although relatives may feel a moral obligation to take on the role of guardian, it may not always be in the best interest of your children or may be a burden on the relative.
Are they geographically close to you? As your children get older it may be better for them to stay in the same school, keep the same friends, and be in a familiar and nurturing social environment. Sending a 10 year old child to live on Uncle Ned’s farm in Nebraska might be an emotional shock to someone who has lived in Dallas all of their life.
Do your children and the prospective guardian know each other well? For younger children the emphasis may be more on how well the guardian knows and interacts with your children. The association may be through school, church, athletics, or long time friends. For older children you may wish to seek their input. (It should also be noted that a child over the age of twelve (12) may choose their own guardian in some circumstances.(Texas Probate Code Section 680). Both husband and wife should “pre-think” the conversation so that either one of you can bring up the topic when the circumstances are relaxed and appropriate. The conversation can start simply by stating:
“Your mom and I (or “your dad and I”) are doing some long range planning with our attorney and financial planner. They asked us who would take care of our children in the remote possibility that something would happen to both of us before you graduate from high school. We have provided a secure financial plan for all of us, but we want your input. We can talk about it later, but give it some thought. We have been thinking about either your Uncle Bob and Aunt Mary or Mr. and Mrs. Smith because….”
Do they have other children the same age? Selecting a guardian who has never had children or is single, can create an enormous burden or life style change for that person. If your children have cousins that are close in age, then you might consider an Aunt or Uncle that otherwise meet your approval. Your children may have grown up with and attend school with close friends who could accept your children into their family very easily.
Do they share your same world view, education values, religious preferences, interests in sports, or other lifestyle considerations? When possible, you want to minimize the cultural, emotional, and lifestyle changes for your children. If your son or daughter is active in sports or music, or if raising your children in a particular faith tradition is important, you may want to select a guardian who will support those interests.
Would your guardian need to purchase a larger house? The financial responsibility of supporting your children is primarily yours, but you may want to consider the immediate impact on your guardian in your overall plan. You may wish to have the guardian move into your home or assist in purchasing a larger home for the guardian, to accommodate their expanded family. Life insurance is often a good bridge to the financial security.
The traditional Will or Last Will and Testament provides for the disposition of your property upon your death. It may also provide the appointment of a guardian for your minor children. This process is administered through the Probate Court.
In Texas a “Living Will” is called a Directive to Physicians and provides instruction to your physician regarding your end of life decisions if you are diagnosed with a terminal or irreversible condition. Your Generational Planning System should include both a Will and a Directive to Physicians. Your system should also include these documents for your parents and adult children.
Texas is one of nine states that are considered “community property” states. The other states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin – with some variation among the states. Wisconsin is new to the game and Alaska permits a person to opt in to community property for tax purposes.
WARNING: It is absolutely necessary that married couples living in Texas or moving to Texas have an understanding of community property and separate property. A mistaken assumption could have dramatic unintended consequences. Blended Families Beware
Community property is a matter of marital law - it is equally owned by both spouses - and it is equally divided in the event of a divorce or when dying without a Will (intestate).
WARNING: Real property owned as community property will usually NOT have a “right of survivorship provision” in the title to the property. A surviving spouse does NOT always inherit 100% of the homestead or other real property.
All property (including real estate, personal property, bank accounts, investment accounts and business interests) acquired during a marriage is considered "community property," with certain exceptions. Property acquired by a spouse as a gift or inheritance will remain that spouse’s “separate property” as well as property acquired before marriage.
Spouses may take specific action to convert separate property to community property or to convert or partition community property to separate property. This must be done in writing and with specific intention. Just adding a spouses name to a title, does not convert the property to community property.
The following is generally considered community property. An actual determination between community property and separate property is fact sensitive and should be discussed with an attorney.
The simple answer is YES. Without further planning, life insurance proceeds are added to a person’s total assets to determine the gross estate and any potential estate tax liability. There are two characteristics of life insurance proceeds that can cause confusion. (1) The receipt of life insurance proceeds are NOT subject to income tax, and; (2) life insurance proceeds are often paid directly to an individual or trust and therefore NOT part of the “Probate Estate” that is distributed pursuant to a Will or intestacy. Much more sophisticated planning may include an Irrevocable Life Insurance Trust which is designed to remove the value of the proceeds from the taxable estate.
A complete review of life insurance policies and beneficiary designations is part of a Generational Planning System.
The simple answer is NO. Neither the beneficiary nor the decedent’s estate will incur an income tax liability when life insurance proceeds are paid. However, there are two points of caution: (1) If the decedent’s estate has an estate tax liability there is a possibility that a pro-rata share of the estate taxes will be allocated to the life insurance proceeds. (2) Even though the life insurance proceeds are not subject to income tax, any income earned off of the investment of the proceeds will incur the appropriate income tax in the future.
This determination is a matter of State Law and you should have a careful planning discussion with your attorney. Generally speaking, life insurance paid to an individual, the trustee of a revocable or irrevocable trust, or a testamentary trust, would not be subject to claims of creditors.
WARNING: Life insurance proceeds payable to the insured’s estate either directly or by default
may be subject to the claims of creditors with adverse consequences.
A father of two children owned a $2M life insurance policy with his wife named as the beneficiary and his estate as the contingent beneficiary. The father was the at-fault party in an automobile accident that resulted in three deaths: his wife, the driver of another car, and his own death three weeks later. Since his wife died before him, the $2M policy was paid to his estate. A wrongful death law suit was filed against his estate by the family of the other driver, who ultimately received all of the life insurance proceeds in satisfaction of a large judgment. His two children received ZERO. Had the father named a trust as the primary or contingent beneficiary, his children would have received the benefit instead of the other family.
The IRS permits individuals to make gifts to other persons on an annual basis of a designated amount (now $14,000) without a requirement to file a gift tax return, pay a gift tax, or to use any portion of the $5M (indexed for inflation) combined estate and gift tax exclusion amount. The American Taxpayer Relief Act of 2012 (it was effective 12/31/12) increased this annual exclusion amount from $13,000 to $14,000.
Although the amount of the annual gift to any one recipient is capped at $14,000 there is no limit to the number of gifts that an individual can make to different recipients. For example, an individual can make gifts to 10 different family members or friends in the amount of $14,000 each (total of $140,000) without filing a gift tax return or incurring any estate or gift tax liability.
TIP: A husband and wife can each make a $14,000 annual gift to the same recipient (total $28,000). These annual exclusion gifts can be repeated every year. A husband and wife could make 10 gifts per year for 20 years (total $2.8M) without filing a gift tax return or paying any gift tax.
WARNING/SUGGESTION: The annual exclusion gift is a common method of reducing a person’s gross estate over a period of time and involves a long term strategy of reducing one’s estate tax liability. One should be careful to document the gifts (even though no filing is required) and limit the gifts to $14,000. For example, a $15,000 annual gift would require the filing of a gift tax return and the use of $1,000 of the combined estate and gift tax exclusion amount.
Annual exclusion gifts are commonly used for funding Irrevocable Life Insurance Trusts or other irrevocable trusts as part of a lifetime giving program to reduce one’s estate subject to estate tax. An annual exclusion gift of property that may appreciate in future years will leverage the amount of the gift and keeps the appreciation out of the estate of the person making the gift. This is a sophisticated planning strategy and one must consult with an attorney and tax professional.
Hooray! On January 2, 2013 (beyond the last minute) Congress passed The American Taxpayer Relief Act of 2012 (it was effective 12/31/12). It provides that individuals with estates valued under $5M (indexed for inflation) would not have an estate tax liability. This would entitle a married couple to pass their combined estates of $10M without an estate tax liability. In 2013 it is estimated that the index would increase this threshold to $5.25M and $10.5 respectively. I informally refer to these threshold limits as the “tax free amount”. Estates in excess of the tax free amount could incur estate taxes at a maximum rate of forty percent (40%).
TIP: This is a very simple explanation for illustrative purposes only. These comments do not include a discussion of the unlimited marital deduction, generation skipping transfer tax, or annual exclusion gifts. Please contact your attorney or tax professional for a complete understanding of your estate, gift, and income tax planning.
The change is significant because these threshold levels were scheduled to automatically revert to $1M per person and $2M for a married couple on December 31, 2012. This would have impacted most of the middle class.
Here are a few more key factors to consider:
The law is considered permanent because it does not contain an automatic sunset provision causing the law to expire at a future date. By contrast, the so called “Bush Tax Cuts” were scheduled to sunset (expire) on 12/31/2010. In 2010 these were extended until 12/31/12. Although Congress can change the law in the future, the current law will not automatically change, thereby making them “permanent” for now.
The “tax free amount” is portable. This means that if the first spouse to die does not use up their full $5M tax free amount (indexed) then the second spouse to die can apply the first spouses unused tax free amount at their death.
WARNING: In order for the second spouse to take advantage for this portability option there MUST be an election made on an estate tax return when the first spouse dies. The failure to make this election will result in the loss of the unused tax free amount. This is a potential trap for the uninformed.
The estate tax exclusion amount and rates are unified with the gift tax exclusion and rates. This means that the gift “tax free amount” and the estate “tax free amount” are a combined $5M (indexed). When a person dies, if their total remaining estate plus the total of their life time gifts are less than $5M, then no estate or gift tax will be incurred. Caveat: This is a very simple explanation and does not take into consideration annual exclusion gifts, appreciation, depreciation, the marital deduction and many other timing and valuation issues. For a full understanding contact an attorney.
The generation-skipping transfer tax rate is 40% for estates valued over $5M (indexed). The generation skipping tax is very complicated with specific rules and elections. For a full understanding contact an attorney.