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Ronald Lipman is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization.

Maelissa Brauer Lipman’s practice areas include Estate and Tax Planning and Estate Administration and Probate.

By RONALD LIPMAN
HOUSTON CHRONICLE
June 27, 2010, 8:53PM

Q: I’d appre-ciate it, and I bet other readers would too, if you would devote some space to explaining in layman’s terms what probate is and what transpires.

A: Probate is the process of establishing in court that a person’s will is valid and must be recognized to transfer property.

Step one with probate is filing an application at the courthouse along with the original will. What the application needs to say is spelled out in Texas Probate Code Section 81, which you can find at www.capitol.state.tx.us. Click on statutes, then select the Probate Code, Chapter V, and Section 81.

Sometime after a 10-day mandatory waiting period, a probate hearing is held. Typically your lawyer schedules this hearing, although some courts assign a date and time. In larger counties, the hearings are held in a crowded courtroom. In smaller counties, the hearings are sometimes held right in the judge’s office.

At the hearing, a witness is required to give testimony regarding facts about the person who died. The testimony is typically written before the hearing by your lawyer, who then recites the facts to the witness. The witness’s job is to confirm that the facts are true. Usually, the judge will then sign an order admitting the will to probate. The order is a document your lawyer will have prepared before the hearing.

After the hearing, the executor must sign a document called an Oath stating that he or she will do everything required of an executor. Exactly what that entails, though, depends on what the estate owns. Once the Oath is filed, the executor can order Letters Testamentary, which authorize the executor to close bank accounts, sell estate properties and other- wise administer the estate’s assets.

The executor must publish a notice in a local newspaper telling creditors where they can file claims to recover money they may be owed by the estate. Texas law also requires the executor to provide a copy of the will to all beneficiaries named in it and then file a document with the court stating that notice was actually given.

Within 90 days, the executor also must file an inventory with the court listing the estate’s probate assets. The inventory won’t list everything — just the assets that passed under the will. Certain properties, such as life insurance, retirement plans, survivorship accounts, and payable on death accounts, may pass directly to a named beneficiary and don’t need to be listed on the inventory. After the inventory is filed, the judge will sign an order approving it.

Typically, the executor is required to file the decedent’s final income tax return as well. And for certain larger estates, there is the possibility that a federal estate tax return will be required – but not for people who die this year because there is no estate tax in 2010.

The executor’s job also includes distributing the assets as provided in the decedent’s will. It’s important to know, though, that the process described here is for fairly routine, uncontested wills. It can get much more complicated, possibly even involving a jury trial, if the will is contested.

What is a Statutory Durable Power of Attorney, and how can it help me?

“WHY DO I NEED A WILL? I DON’T HAVE ALL THAT MUCH. My husband and I are both 28 years old, and our son is almost two. We don’t have all that much property yet, but we did recently purchase a house and a couple of life insurance policies. We have been told by a number of people that we need wills. Why do two people as young as we are need wills?”

Everyone who owns property or who has minor children should have a will. There are at least six good reasons why.

1. First, you can direct who receives your property. Without a will, you leave the distribution of your estate up to the laws of the State of Texas as written by our legislators. The people who would inherit your property under Texas law may not be the same persons you would want name in your will. A will also allows you to make specific bequests to certain individuals and charities.
2. Second, you can name a guardian for your son and any future children. The guardian is the person who takes care of your children. If you do not name a guardian, you leave the decision up to a judge. It is best for you to state in writing who you want to take care of your children.
3. Third, you can create a trust for your son and any future children. Because your son is under age 18, he is not old enough to inherit property under Texas law. This trust is used to hold the property and any insurance which is left to him. Without this trust, his inheritance will most likely have to be held in a guardianship which is a time-consuming and expensive undertaking. Not only that, but when your son turns 18, he will be given all of the guardianship property, no matter how much it is worth at the time. With a trust you can postpone his receipt of the property until a later, more mature age.
4. Fourth, you can name the executor of your estate. If you fail to name one, you leave the decision to a judge. Most married couples name each other as the primary executors and then name one or more trusted family members or friends to serve as alternates.
5. Fifth, you can declare in your wills that you want the executor to serve independently of the court and without bond. Without a will, you run the chance that the court will supervise the entire administration and that the judge will require the administrator of your estate to post a bond.
6. Sixth, if you and your wife have purchased large insurance policies, it is possible that estate and inheritance taxes could be imposed upon the death of the survivor of you. Although life insurance is usually not subject to income tax, it is potentially subject to estate and inheritance taxes. A set of properly drafted wills could eliminate those taxes.

“I want to begin giving away money to my three grandchildren for their college educations. How much can I give away each year without having to pay gift taxes? Do they have to pay income tax on the amounts they receive?”

Each year you can give $11,000 to each of your three grandchildren, for a total of $33,000, without tax consequences. Your children will not be required to report these gifts to the IRS or pay Federal income tax on amounts received. Of course, any gifts you make are from after-tax dollars.

This $11,000 amount is known as the “annual exclusion.” Married couples may each give away $11,000, so the annual exclusion effectively doubles to $22,000 for each recipient.
Even if your gifts to any one person exceed $11,000, you should not owe a gift tax because each person may also give away $1,000,000 during lifetime or at death. This $1,000,000 is in addition to the $11,000 annual exclusion.

Be sure to account for birthday gifts and other holiday gifts when you calculate the $11,000. If the total of all gifts to any one person exceeds that amount, you will be required to file a gift tax return (IRS Form 709) with the Internal Revenue Service.

Also, if you pay for school tuition and or for medical care for one of your children or grandchildren, these amounts will not be subject to gift taxes regardless of the amount. This exclusion from taxation is available as long as you pay the provider of the services directly. Unfortunately, this educational exclusion applies only to tuition, so if you pay for books, supplies, dormitory fees, food or other similar expenses, you will be making a gift to your grandson.

If you want to pay for more than just the tuition, you still should not owe a gift tax because you can give away up to $1,000,000 during your lifetime in addition to the $11,000 annual exclusion and the tuition exclusion.

If your son has already made the tuition payment and you decide to reimburse him, even if your check is for the exact same dollar amount, you will be treated as making a gift which does not fall under the educational exclusion because it was not paid directly to the college.

Yes there is a tax, and you can avoid it completely with a life insurance trust.

While it is true that the life insurance proceeds will not be subject to income tax when you die, the cash proceeds will be considered to be part of your taxable estate. As far as the Internal Revenue Service is concerned, the life insurance proceeds are just like cash in the bank.

And the estate tax is a more severe tax than the income tax. Whereas the highest income bracket is 38.6%, the estate tax can reach as high as 50%, depending on how wealthy you are on the date of your death.

If your wife survives you and the proceeds are paid to her, no tax will be owed because you can leave her an unlimited amount of money or property under the current estate tax laws (assuming she is a US citizen). However, when she dies, her estate will include the $750,000 in cash plus all of your other investments and possessions, and she can only leave $1,000,000 estate tax free (under present law). Fortunately, you and your wife can give away the ownership of the policy. This is a perfectly legal way to avoid the estate tax on the life insurance. If you and your wife do not own the policy, then the proceeds will not be included in either of your estates.

Note, though, you must outlive the gift of the policy by three years. If you do not make it that long, the IRS treats you as the owner for estate tax purposes. The rationale is that a person who is near death should not be able to give away an asset with relatively little value (generally, the cash value of the policy) even though it would be worth $750,000 at death.
There are two ways to give away the policy. You can either give it directly to your sons in equal shares, or you can create a life insurance trust to own the policy.

Giving away the policy to your sons will save estate taxes, and it is the simpler of the two choices, but it also has a few disadvantages. First, when you die, the proceeds should be paid to your four sons, not your wife. She may not think that is such a good idea. Second, all four of your sons will own the policy in equal shares. They may disagree on who should pay the premiums or who should be allowed to borrow against the policy. They may even decide to surrender the policy and split the cash value.

Assuming you and your wife have a sizable estate, in addition to the life insurance, the better choice for you will be to create a life insurance trust. This trust can name your wife to be in charge as the trustee of the trust, and she can be the primary beneficiary of the trust after your death. She will be able to invest the $750,000 as she wants and make distributions to herself, your four sons and any of their children. Even with this control, the proceeds will pass to your sons upon her death without being included in her estate. The trust can grow in value over your wife’s lifetime, and it will all pass estate-tax-free at her death. There are other advantages to a life insurance trust. First, the trust insulates the policy and the proceeds from creditors. Second, your wife will not be able to give the $750,000 to a new husband, as the trust is only for her and descendants in your bloodline. Third, after your wife’s death, the trust can continue for the lifetimes of your sons and then pass to your grandchildren estate-tax-free. And for the duration of their lives, the trust property will continue to be protected from creditors. If one of your sons gets a divorce, the ex-wife will not be entitled to any part of the trust.

There are a few disadvantages to creating a life insurance trust. You will have to read a complicated trust agreement, sign papers on an annual basis, possibly file gift and income tax returns (although no tax should be due) and pay lawyer’s and accountant’s fees. And the life insurance trust is an irrevocable document, meaning you can never change it. If one of your sons wins the lottery, he still gets to share one-fourth of the trust with his brothers.

A bypass trust (often called a “credit shelter” trust) is usually created at death as a way to save estate taxes.

In order to explain the concept behind a bypass trust, two general estate planning principles must be understood. First, on the death of a spouse, property left to the surviving spouse passes estate tax free, regardless of the amount transferred (called the “unlimited marital deduction”). Second, everyone can give away up to $1,000,000 (in 2002) estate tax free.

The purpose of a bypass trust can best be explained by use of an example. If a husband and wife from Texas together have $2,000,000 in assets, each of them will be treated under our community property laws as owning half, or $1,000,000. If the husband were to leave his $1,000,000 directly to his wife, there would be no estate tax because of the unlimited marital deduction. However, his ability to leave $1,00,000 estate tax free would have been wasted, and when the wife dies, her estate would be valued at $2,000,000 (assuming no change in value).

A bypass trust can sharply reduce this tax. The husband, instead of transferring his $1,000,000 to his wife outright, would instead transfer the $1,000,000 to a bypass trust for the benefit of his wife and children. The husband’s will or revocable trust can create the bypass trust. Since the husband is not leaving the $1,000,000 to his wife, he does not receive the benefit of the unlimited marital deduction, but there will still be no estate tax generated because he can leave $1,000,000 worth of property tax free, even if it is given to a trust.

Now, instead of having a $2,000,000 estate, the wife has only a $1,000,000 estate. The tax on a $1,000,000 estate in 2002 is $0.00.

The estate tax savings in this example is considerable. In effect, the husband and wife are able to pass the full $2,000,000 to their children.

Even though the wife is the primary beneficiary of the bypass trust, and under some circumstances also serves as the trustee, the property in the trust will not be taxed as a part of her estate. During the remainder of the wife’s lifetime, the income and the principal of the trust can be used for her health, education, maintenance and support. On her death, the trust will terminate, and the assets will be distributed according to the terms of her will. Not only that, but the trust can grow in size during the wife’s lifetime, and all the appreciation will pass without taxes as well.

Sometimes, people are wealthy enough to give away $1,000,000 to a trust while they are alive, rather than waiting to make the gift at death. A married couple can give away $2,000,000. The trust that is used is typically irrevocable, and it usually benefits the same people as the bypass trust created by a person’s will. The advantage of acting early is that any growth on the transferred property which accrues after the date of the gift up to the person’s date of death will be excluded from that person’s taxable estate. In essence, it is a way to freeze the value of the transferred property.

The bypass trust has three other important benefits worth noting.

1. First, if the trust is drafted properly, the property which is owned by the trust will be insulated from the claims of creditors. In other words, if the wife or any of her children lose a lawsuit, the assets of the trust will be protected.
2. Second, the trust is a way to make sure the property stays in the family. In the example above, if the wife remarries, she will not be able to give trust property to the new husband. The trust is earmarked for her, her children and, eventually, her grandchildren.
3. Third, the trust can be written in such a way that it avoids estate taxes for several generations. This type of trust is often called a “generation skipping trust.” When the children from the above example receive the $2,000,000, it would be unfortunate for that inheritance to be taxed again at their deaths. If the trusts are written properly, after both parents have passed away, the children can control the trusts, make distributions to themselves or to their own children and still pass along the trust property (no matter how much it has appreciated) estate tax free when they die.

Not all types of property are appropriate for a bypass trust, and not all bypass trusts are written the same. Also, different rules may apply to non-United States citizens.

What exactly is the purpose of setting up a living trust? What are the pros and cons? Is there a minimum amount of property where it make sense?

A Living Trust is an ownership arrangement where property is held in the name of a “trustee” rather than in the name of the person who really owns the property (called the “Grantor” or “Settlor” of the trust).

As the legal owner, the trustee generally has the right to manage, administer and dispose of the property. The beneficiary is typically entitled to all the benefits of the property, including its income, appreciation and use. The trustee can be, and often is, the same person as the beneficiary of the trust. Setting up a Living Trust is like incorporating an existing business. Incorporating requires you to sign papers, contribute property, keep records and file various tax forms. After incorporating, the operation of the business would likely change very little, but you would be operating under the name of a new corporation. Similarly, after creating the Living Trust, your properties would be held in the name of a trustee, but they would still be available to you at any time.

While corporations are set up primarily to limit liability, Living Trusts are created for other reasons, some of which include the following.

1. First, some people really want to avoid probate, even though probate is usually very simple in Texas (assuming there is a valid will). Generally, any assets that have been transferred to a Living Trust will pass directly to the named beneficiaries of the trust, without the need for probate. Living Trusts are popular in states where probate costs and attorney fees are high and where probate is always supervised by the courts.
2. Second, Living Trusts address the issue of disability. The Grantor can name a person or trust company to serve as trustee to take over management of the financial affairs of the Grantor should the Grantor become incapacitated. Some wealthier people turn over management of their investments to a trust company before they are incapacitated because doing so greatly simplifies their lives.
3. Third, if you own property outside Texas, a Living Trust is a good way to avoid probate in that state. By deeding the out of state property to the revocable Living Trust, the necessity of hiring an out-of-state attorney can be avoided. Unlike Texas, some states allow attorneys to charge a probate fee equal to a percentage of the estate.
4. Fourth, property owned by the Living Trust will not become commingled with other property. For example, you may have inherited property that you do not want to become commingled with your spouse’s property. This inheritance can be placed in a Living Trust. But don’t forget, income earned on the property is still community property, even if it is in the Living Trust, unless there is an agreement to the contrary.
5. Fifth, if you are very wealthy, and you do not want your property to be listed on a probate inventory, then you can place all or a portion of it in a Living Trust. Upon your death, the trust property will pass to the beneficiaries of the trust without public scrutiny.

Living Trusts can accomplish many things. However, most people still choose to have wills, and there are a number of reasons why.

1. First, probate is not so horrible in Texas that it must be avoided at all costs. The only contact with the probate court is, in most instances, the hearing to probate the will and the filing of an inventory of the estate’s assets. The cost of probate in Texas is typically much lower than in other states.
2. Second, if you do create a Living Trust, and you fail to transfer all of your probate assets to the trust, then probate, and most of the associated costs, will still be required.
3. Third, regardless of whether you have a living trust or a will, if your estate exceeds $1,000,000 in 2002 (increasing to $3,500,000 by 2009), then a Federal estate tax return and Texas inheritance tax return must be filed within nine months of your death. Preparation of these forms is usually more complicated, and therefore more expensive, than the probate proceedings in the courts.
4. Fourth, it can be very difficult to transfer all of your property to the Living Trust, especially if you own lots of property. Every asset you own or purchase for the rest of your life must be titled in the name of the Living Trust. Also, some banks will not allow you to change the name on a certificate of deposit to the trustee without incurring a surrender charge.
5. Fifth, a separate legal document called a Power of Attorney can address the issue of disability. However, it may not be accepted by all banks, brokerage houses, title companies, etc. If a Power of Attorney is not accepted, usually the only way to free the assets is to seek a guardianship, which can be time-consuming and expensive.
6. Sixth, Living Trusts do not protect the trust property from creditors, and they do not save any more estate taxes than can be saved with tax-planned wills. There is no dollar amount of net worth that triggers a need for a Living Trust. Whether or not a Living Trust is appropriate for you depends on your particular estate planning needs and concerns. Before creating a Living Trust, meet with an attorney who specializes in this field.

By RONALD LIPMAN
Houston Chronicle

July 4, 2010, 8:33PM

The information in this column is not intended as legal advice but to provide a general understanding of the law. Readers with legal problems, including those whose questions are addressed here, should consult attorneys for advice on their particular circumstances.

Q: My adult sons will inherit half the estate of my deceased husband’s mother when she dies. The problem is that the other beneficiary is my deceased husband’s sister, and she is named as the executor. I don’t trust her to give my sons their rightful share. What can they do to make sure they get their half? Does any court oversee the distribution? All of them live in Texas.

A: If your former mother-in-law’s will is probated like most other wills in Texas, then your sister-in-law will be serving as an “independent” executor, meaning she will serve without court supervision. The court will not be watching over her actions as executor.

Your sons would need to stay after her to make sure she does her job within a reasonable time.

If your sister-in-law neglects her duties as executor or acts improperly, then your sons should hire an attorney to represent their interests.

Keep in mind that your sister-in-law may already be taking steps to increase her inheritance. She may have had her mother change bank accounts, retirement accounts, and life insurance so that they pass directly to her, not under the will. Actions like these will make it very hard for your sons to claim what you refer to as their rightful share.

Q: My brother-in-law died suddenly and didn’t leave a will. What is the process for getting money from his bank accounts?

A: If your brother-in-law owned nothing more than a home, personal property, and accounts valued under $50,000, there’s a good chance you can get to the bank accounts and other assets by filing a Small Estate Affidavit with the local probate court.

If his estate was larger, a more complicated probate proceeding will be needed. Without more information, however, it’s impossible to say for certain what you should do.

It would be best to meet with an attorney to determine your best course of action.

Q: My wife and I are 62 and 65 years old, respectively, and have wondered whether or not a living trust would be suitable for us. Our total assets are just under $1 million, about one-third of it in real property and two-thirds in stock market investments. I have health issues and can’t qualify for long-term care insurance, and I am concerned that, without protection, any long-term care would seriously erode our net worth. Is a living trust a good way to protect our assets in the event of long-term care needs?

A: A living trust is not the way to protect your assets.

If you want to set up your estate in order to qualify for all the government benefits possible, you should meet with an elder law attorney to discuss the options that are available to you.

You can locate an elder lawyer by typing “elder lawyer Houston” into the search field of your preferred Web browser, or you can find one at www.nelf.org or www.naela.com.

You should also consider meeting with a financial planner to discuss other insurance options aside from the standard long-term care policy.

Ronald Lipman is an attorney with the Houston law firm of Lipman & Associates. He is board certified in estate planning and probate law by the Texas Board of Legal Specialization.

Mail: State Your Case; Houston Chronicle; P.O. Box 4260; Houston; 77210

E-mail: stateyourcase@lipmanpc.com