Wills and Trusts D J Thompson MSEE MBA

Wills and Trusts D. J. Thompson, MSEE, MBA, CPA

Agenda �Overview �The Basics: �The Will/Probate/Trusts �Preparing the Will �Probate in Texas �Useful Trusts �Bad Choices

Overview �This presentation is meant to give some basic understanding of the considerations of preparing a will in the State of Texas. �We will cover some common problems in setting up and administrating an estate. �This talk is NOT to be considered as a substitute for the advice of a lawyer and/or CPA in preparation of a will. �It is a talk about what you can do to make sure your property is distributed quickly and “correctly” to the right people, with minimum of time and effort to set up, and deliver.

Who is this for �The target audience for this is an older person with an “estate” valued at less than $11. 4 million, with no business interests included in the estate. � 11. 4 million (individual, 22. 4 married) is the “estate tax exemption” for 2019, estates at or below this level do not pay any federal estate taxes. �If your estate is valued at an amount larger than this, or you have a business, life’s been good to you so far. You need help from a good lawyer/CPA to make sure the money doesn’t get eaten in taxes. �The person making the will lives in Texas- the rules are different

The Basics

What is a Will? �At its simplest, a “will” is a document that describes how you want your property to be divided on your passing. �With a will, you have absolute discretion on how the property is distributed. �Without a will (you die “intestate”) the property will divided according to state law. Disputes are common, nasty and expensive. �A poorly prepared will, or a will that doesn’t use some of the advantages of Texas law, results in lots of legal fees and possible disputes.

Parties to the will �The Testator. The departed. �The Court: Approves the disposition of the property, provides monitoring of progress. �The Executor: Person who manages the disposition of the property. Can be paid or unpaid. �The Beneficiaries: The person, corporation, etc. , that receives the property. A “trust” can be set up to be a caretaker for a specific bequest.

Probate: �The process of “probate” is a court proceeding where the property of the deceased is divided according to the Will (if it exists) and/or State Law. �ALL estates go through probate of some sort. �Texas probate is inexpensive and quick, unless there is a dispute among the beneficiaries, or a problem with the will form. �Costs for splitting assets among kids: $319 court cost, $2000 for legal fees, such as transferring the house title.

Probate process: �Will is filed with the court, and notices are made. A hearing date is set for appointment of an Executor. �At hearing: �The court will use the Executor named in the will, if qualified. The court may appoint an executor if one not named. �“Letters testamentary” are issued, allowing executor access to assets. �Property is distributed. If Executor is independent, a report is filed with court, and case is closed.

Exceptions to Probate: �There are some assets that do not go through probate: �Life insurance payouts �IRA, 401 K, 403 B accounts with beneficiary designated �Accounts held in Joint Tenancy with Right of Survivorship �Vehicles owned jointly, household goods. �Trust assets, in a distribution from the Trustee �JTWROS is allowed as Texas is a “community property” state.

Executors Duties: �Executor pays debts and distributes property according to the will. �Using “letters testamentary” as proof, Executor will gain access to financial accounts, and pay off existing debt. (this may require liquidating some assets) �Executor will notify Social Security, pension plan, retirement plans of death. If beneficiaries are named, the transfer of assets will begin at once. If no beneficiaries named, the assets are distributed according to the will. �Executor arranges for the title (house, cars, boats) to be transferred to appropriate person(s). �Personal property is distributed. �Files final income tax statement.

Trusts: �Generally, a Trust is a right in property (real or personal) which is held in a fiduciary relationship by one party for the benefit of another. The trustee is the one who holds title to the trust property, and the beneficiary is the person who receives the benefits of the Trust. (Wex Legal Dictionary) �A Fiduciary is a person or organization that acts on behalf of another person or persons to manage assets. Essentially, a fiduciary owes to that other entity the duties of good faith and trust. The highest legal duty of one party to another, being a fiduciary requires being bound ethically to act in the other's best interests. There are civil penalties for violation of Fiduciary duties.

Trusts: �In wills, Testamentary trusts are used as vehicles to pass assets to a beneficiary, while maintaining some control over how the bequest is used. �Other trusts are used for tax avoidance.

Preparing the Will Goal: • Reduce cost and time in preparing the will, and in probate. • Avoid disputes in probate.

Probate in Texas: �The legal side of Probate in Texas (for a will based on Texas Laws) is, by comparison, very easy, quick, and cheap. We are not California. �Self Proving: If the proper form is attached to the will, the witnesses to the signing do not have to appear in court. �Independent Executor: Will can allow the Executor to be independent of the court, i. e. , there is no requirement for supervision or control by the court. �If there are no disputes, or errors of form, the you get the “letters testamentary” in a week or so after hearing. �Cheap: Probate fee for a Texas will, $319. (Travis County Probate Court)

Why an attorney? �Engineers have a tendency to want to “do it yourself”. There are some ways to create a cheap will: �Don’t do a will at all, die intestate. � Are you really that mad at the world? �The holographic will: � Written in your own handwriting and signed. � This is usually an emergency situation. �Will software, e. g. Willmaker plus. � Usually non compliant to Texas law. �Online will prep from a lawyer.

Why an attorney? (con’t) �Don’t be stupid. You don’t get a second shot, and anyone mad can tie up the estate in probate till the money is gone. �Get a Texas lawyer to do the will, using Texas law. If you have some special circumstance get one who is Board Certified in Estate Planning and Probate Law. Listen and question. �The lawyer can help you through probate, also. �The attorney will provide other useful documents, e. g. power of attorney, directive to physicians, etc.

Too much attorney? (the Living Trust) �There are many people who are afraid of probate, fearing a long and expensive process. Recall that some financial assets (Trusts) can be transferred without probate. From that, came the idea of a “living trust”. �A Living Trust is a revocable trust structured so that: �All of a person A’s assets are transferred into a trust, where A is the Trustee. �Trust documents have provisions that state that on the death of A, a new trustee B is appointed, and B becomes the owner of the Trust. �The trust is taxed at A’s rates �While A lives, she is able use her financial assets as before. Upon

The Living Trust (con’t) �Drawbacks: �Trust is expensive to set up, and adds some complexity to life. �Still have to go through most probate tasks, like opening new accounts, title changes, etc. to finalize. �Most Living Trusts require a “failover will” �Note that many assets can transfer without probate: �IRA’s, 401 K, 401 B (to beneficiary) �Financial Accounts with JTWROS �Life Insurance proceeds (Texas)

The Living Trust (con’t) �The Living Trust is a great idea in California, not so great in Texas �Example cost of probate: Court Fees California Texas 1% of estate $319 Attorney Fee ($1 M estate) $23, 000 $400/hour +/- Executor Commission ($1 M) $23, 000 Can be set in will, usually 0 Life Insurance Included in estate Excluded from estate Time to Complete Probate 8 -12 months Perhaps 6 months.

Aside: A good reason for a Trust �Suppose your mother in law has Alzheimer's, or another disability. She is failing fast, but is still “competent”. You need to find a way to take care of her. �You could set up a guardianship, but guardianship hearings can take a few months, and its complicated with older people with real assets. �A good “work around” is to set up a “living trust” for MIL. All of her assets are moved to the trust, and one of the family acts as trustee. You might want to separate duties, have one family member be trustee, another the SS representative payee, etc.

Will Planning- Before lawyer visit �Prepare yourself before you go. �Select Beneficiaries (primary and secondary) �Select Executor, Trustees, and secondaries. �Identify Property for special handling �When you go, tell the lawyer everything, don’t be shy. Be very open about ex-family, financial problems, etc. You don’t want a contested will. �All the lawyer has to sell is her time- don’t waste his time, and your money.

Select Beneficiaries �Need to select contingency beneficiaries: �Primary: Spouse � If Spouse not alive, then children (per stripes? ) � If no children, perhaps nephews and nieces � Finally, a long lived entity, such as a Church, University, or Charity �Might want to limit how far down the descendants chain you want to go. What if one son has ten kids, the other has none?

Per Stripes Adam Mann y Ann Moe Jack Jill Adam dies, leaving estate to Manny, Moe, and Jack. Manny, Moe and Jack get 33% each.

Per Stripes (2) Adam Mann y Ann Moe Jack Jill Manny dies before Adam. (predeceases Adam). Manny, Moe and Jack get 33% each. Ann and Jill get 17%. (“issue per stripes” defined as only the next generation gets a share. )

Per Capita Adam Mann y Ann Moe Jack Jill Adam dies, leaving estate to Manny, Moe, and Jack, per capita. Manny predeceases Adam. Moe and Jack get 50% each.

Considerations on beneficiaries �You may not want to split property evenly. You might specify that Jill gets the house in town, Jack the beach house and 46’ Hunter sloop. Make sure everyone knows the split BEFORE the funeral. �Be sure have a contingency for an “incompetent” heir. This is a very good place to look at trusts. �Two trusts are common: �A trust to provide the care and support for a minor child. �A trust to help a heir that might squander the inheritance.

The Spendthrift Trust �Suppose you have two children, Anne and William. Anne is doing pretty well as a lead programmer at Google. William, not so wellhe has a gambling problem, and has declared bankruptcy. �There is a “Spendthrift Trust” that can be set up. �A “Spendthrift Trust” prohibits the beneficiary from selling, giving, or otherwise transferring her interest in the trust. Creditors also can not reach the assets. The trustee controls the assets. �These are quite easy to set up in Texas.

Executors and Trustees �Executor and Trustees are fiduciaries. You have to be able to trust them. �The executor or trustee can be a person or a “corporation”. �Usually, executor is a relative/friend, unless the estate is very complex. The executor has to be over 18, of sound mind, and not a felon. The executor can be a beneficiary. Preferably, they should live close to you. �In many cases, it is better that the trustee be a fiduciary corporation. They will outlast you, and don’t take things personally. Think spendthrift trust.

Considerations for Property �Financial Assets: �Bank Accounts and Investment Accounts: � If primary beneficiary is spouse, consider putting everything in a joint account with right of survivorship. (JTWROS) Avoids probate. �IRA, 401 K, Roth IRA: � To avoid probate, you can have beneficiaries for these. However, primary is spouse, unless spouse agrees in writing. � If divorced, you might want to consider the status of the beneficiaries.

Considerations for Property �Real Estate: �Houses and fields are hard to divide, and illiquid. Make sure the heirs know what you want to do in the will. �Mineral rights are easy to divide. �Business interests: �Stock in public company is easy. �Privately held company and partnerships are incredibly complex. You need good advice from a specialists in probate law, a lawyer and CPA. �Look into key man insurance.

Example of Bad Planning: �Suppose you have a grand kid who was born permanently handicapped, and want to help take care of him in your will. Your will, prepared long ago, has a provision that each grandchild is to receive a $10 K savings bond. You pass when the child is over 18. �It’s a lovely gesture, and you are to be commended, but you just made a big mistake. �If the parents have gotten good advice, the child had been declared incompetent, the parents have guardianship of him, and he receives Medicaid, and SSI or SS dependent benefits.

Bad Planning (con’t) �Medicaid (which provides the support services, such as group home staff) has an asset limitation of $2000. �When the bond from the bank shows up at the guardians door it will be followed closely by a letter from the Medicaid people. �The result is that the Social Security check is reduced by 10%, and the 10% is applied to paying off the 10 K.

The fix �There is a better way to leave a permanently disabled person money: a Special Needs Trust. �Assets in the Trust can be used for anything but basic support. This can be clothes, furniture, telephone, internet services, etc. �You can set one up for yourself, or there are several public trusts, such as the ARC of Texas special needs trust.