The End of the Blog

This is the last post for the Texas Estate Planning and Probate Law blog. I did my best to try and keep it up, but just found it too difficult to update on a regular basis. In addition, I am leaving the practice of law as of the end of December to join Merrill Lynch in their Family Office working with their high net worth clients. It is an exciting opportunity for me and I look forward to this challenge.

Although I will not be posting here in the future, I will leave the site up for awhile so that you might be able to look at the archived information.

I wish you all well and the best of luck in the future.

Unlimited Charitable Gifts Through the End of 2005

The Hurricane Katrina Emergency Tax Relief Act (KETRA) allows unlimited gifts to charity up to a donor's total income until the end of 2005. This provision also permits unlimited IRA withdrawals and gifts to charity. Under Sec. 301(b)(1)(A), a "qualified contribution shall be allowed only to the extent that the aggregate of such contributions does not exceed the excess of the taxpayer's contribution base (as defined in subparagraph (F) of section 170(b)(1) of such Code) over the amount of all other charitable contributions allowed under such section 170(b)(1)”. Therefore, a donor may usually make gifts up to 100% of adjusted gross income (AGI). You should consult with your tax advisors to determine the actual effect.

Here are some questions and answers regarding the new act:

When is this 100% gift deduction rule applicable?
Qualifying cash gifts must be made between August 28, 2005 and December 31, 2005.

Which charities qualify for the 100% deduction?
Public charities generally will qualify.

Must the 2005 End of Year Gift be for Katrina relief?
No, if the gift is by an individual, but yes if it is by a corporation. A corporation may give up to 100% of taxable income for Katrina relief. An individual may make a 2005 end of year gift to public charities for any purpose.

Which charities or gifts will not qualify?
With the new 100% gifts rule, there are several exceptions - no private foundation gifts, no supporting organization gifts, no donor advised fund gifts and no gifts of property such as stock or land.

How does this affect IRA gifts?
When a person over age 59½ withdraws funds from his or her IRA, the withdrawal will be included in the IRA owner's taxable income. Under the new 100% of income charitable gifts option, the withdrawn funds may be given in full to charity. The full gift will then be deductible. In addition, since the 100% deduction applies regardless of the gift source, withdrawals and gifts may also be made from 401(k) plans, 403(b) plans or other qualified retirement plans.

Is the 2005 End of Year Gift different from the IRA Tax-free Rollover?
Yes. During the negotiations between the House and Senate, the decision was made to delete the IRA Tax-free Rollover from the Katrina Relief bill. The IRA Tax-free Rollover did not pass. However, as an alternative, the IRA 2005 Gifts provision for cash gifts was then added to the Katrina Relief bill.

Is there a dollar limit?
Good news - the IRA withdrawal and gift option is unlimited. A person can withdraw and give $1,000 or $1,000,000. The gift is limited only by the donor's adjusted gross income.

How should a donor make an IRA Withdrawal-gift?
The IRA owner should withdraw the desired amount this year and make the gift by December 31, 2005. Warning - some IRA custodians take two to three weeks to process withdrawal requests! IRA owners should make the withdrawal request by early December to allow time for processing by the IRA custodian. Donors must have the cash available and complete the cash charitable gift by December 31 to qualify.

With a large IRA withdrawal and then gift, will the donor receive a full deduction?
Yes, the withdrawal increases taxable income, and the gift reduces taxable income.

Are other income tax limits affected?
Usually, for higher income taxpayers, 3% of itemized deductions are not allowed. For cash gifts to charity between August 28 and December 31 of 2005, the 3% reduction does not apply to the charitable gift. 100% of the charitable gift is deductible. It appears that the IRS will treat these cash charitable deductions as itemized deductions not subject to the 3% rule.

Will state income taxes be a factor?
Some states do not have income tax, some conform to the federal 50% AGI deduction limit with a five year carry-forward, and some states have less favorable rules for charitable deductions. Most donors will be able to take a state charitable deduction for 50% or more of the IRA gift, and then take the balance on the deduction over the next five years. However, donors should check with their tax advisors to determine the actual effect.

Is Repeal of the Estate Tax a Dead Issue?

Sometime shortly, the Senate is expected to vote on the fate of the estate tax. The House has already voted to repeal the tax; however, several Senators have found it difficult to vote for total repeal. One Senator, Ron Wyden (D-Ore.), who has voted to repeal the estate tax in the past, recently noted, “The deficit picture is different today and the choices are pretty darn hard.”

The budget deficit has been dramatically increased in the past year, with two major hurricanes costing hundreds of billions in recovery costs, and a war in Iraq that continues to demand billions of dollars to prosecute. Further, Congress will be facing votes this fall on measures to institute cuts in a range of domestic programs. The trade-offs associated with repealing or dramatically curtailing the estate tax are becoming more evident than they were in the recent past.

The Senate voted on legislation to repeal the estate tax every year from 1999 through 2002. At the time of each of those votes, the Congressional Budget Office was projecting sizeable surpluses over the coming ten-year budget period. The current fiscal picture is very different. CBO now forecasts large deficits over the next 10 years and beyond.It is particularly telling to compare the present outlook with the outlook at the time that Congress debated the 2001 tax-cut package, which included the measure that repeals the estate tax in 2010. In 2001, CBO was projecting a surplus of $5.6 trillion over the 2002-2011 period. Today, deficits of $3.7 trillion are projected over that period.

The coming estate tax vote also differs from earlier votes in that it is occurring amidst a debate on how to restore long-term solvency to Social Security. Eliminating or dramatically shrinking the estate tax would take “off the table” a source of revenue that could be used to help close the Social Security shortfall. Some Social Security proposals, such as a plan developed by former Social Security Commissioner Robert Ball, would help restore solvency by maintaining a moderate-size estate tax and dedicating the revenues it collects to Social Security. (The Ball plan combines this measure with changes in Social Security benefits and taxes.) Eliminating most or all of the estate tax would eliminate this option, however, and thereby increase the depth of the Social Security benefit cuts or payroll tax increases that ultimately will be needed to restore solvency.

As you are probably aware, the current exemption against estate tax is $1.5 million per person. That exemption, unless the law is changed, will increase to $2 million per person over the next three years, then go to $3.5 million in 2009, disappear entirely in 2010, and drop back to $1 million per person in 2011. It is my personal belief, based on information coming out of Congress, the most likely scenario will be that with increased pressure on Congress to maintain revenue, at least presently, that estate tax repeal is dead in the water for the next few years. Instead, I anticipate that Congress will ultimately raise the exemption to around $4 - $5 million per person and lower the effective tax rate from a top rate of around 50% to something in the 25% range.

The bottom line is that your estate planning should be based on the assumption that the estate tax will not be repealed. Better to plan for the tax and be wrong than to plan for the repeal and be wrong.

Waiting Out Hurricane Rita

As you know, the Houston and Southeast Texas area are hunkering down for what is right now a Category 3 hurricane. In light of that, my office has been closed for the last two days so that families could evacute out of Houston (which, if you have watched news reports, was probably the single largest evacuation in U.S. history).

While my wife and children have left for the Austin area, I am staying in Houston, trying to secure property and keep an eye on my property and my in-law's property. Keep all of Houston and the area east of us to Beaumont in your thoughts and prayers.

Once things are back to normal, we hope to be posting again. Godspeed to everyone.

Answers to Readers' Questions

I apologize for not having updated the blog earlier, but I hit an extremely busy stretch there for three weeks and so I had no real free time to update the site. In the meantime, I have received some emails from various persons that I thought I would share with you. If you have a question you would like to see answered here, send me an email by clicking here.


My father recently died in California. He was a resident there but also had some real estate and a bank account in South Texas. He did not have a Will. Do we have to do anything in a Texas court regarding probate?

Unfortunately not only will you have to have a determination as to heirship in California, you will also have to initiate an heirship determination proceeding in the Texas county where the real property is located. California law will govern all the real estate in that state, plus all the non-real estate assets in other states, but Texas law governs as to any real property located here. If he had a Will, you could have just filed an “exemplified copy” of the Will and the Order Admitting the Will to Probate in the deed records of Texas county where the property is located. An exemplified copy is similar to a certified copy, except that the clerk of the court has to verify and attest that the signature of the Judge on the probate order is true and correct.

Since there is no Will, an heirship determination must be held in Texas. The court will appoint an attorney ad litem to represent any minor or missing/unknown heirs. Testimony will have to be given as to the family history of your father by two disinterested witnesses who were familiar with the family history. If there is no one in Texas who can give that testimony, you will likely have to get the written deposition of two witnesses in California who can provide this testimony. Once the heirship is complete, title in the Texas property will vest in the proper heirs. Texas Probate Code Section 38 lists the persons who would receive this property on the death of someone without a Will.

I have family who is coming over from Louisiana following Hurricane Katrina, and they plan on staying in Texas permanently. I was wondering whether they needed to execute a new Will, or whether their current Wills were sufficient.

First of all, let me just say that we all wish all the best to your family and all others who are suffering the effects of this devastating storm. Normally I would say that it is not usually necessary for someone who is moving from another state to Texas to have to change their Wills, because Texas probate courts give full credit to any Will executed in another state. However, Louisiana uses the old Napoleonic Code when it comes to estates, and while certain changes have been made recently that eases some of the unusual provisions that are not found in a lot of other states, the way Wills are still required to be written (especially those written prior to some of the recent law revisions) seem to baffle many non-Louisiana probate attorneys. Thus, it might be best to suggest to them that they make the change whenever they get settled in and adjusted to their new life here in Texas. Best of luck to them.

My husband is in the hospital and wants a new Will. He has lost use of his arms, though, and can’t sign anything. Can I sign the Will for him?

Although you don’t say it specifically, I assume that your husband is mentally competent and has the ability to understand what is being put into his new Will. If that is the case, then he can direct that someone else sign for him, but it must be done in his presence and at his direction, and in the presence of the witnesses. Note that you cannot guide his hand in signing if he did not ask you to do that. Make sure that in the presence of the witnesses, he clearly states his desire for you to sign the Will for him. Section 59 of the Texas Probate Code provides the requirements for the execution of a Will.

The Living Trust Fallacy in Texas

I constantly receive calls from existing and potential clients about “living trusts” and how they have heard someone talking about how much they need one. My response to most of these people is to ask them a simple question: Why do YOU need one? It is almost inevitable that I get the same answer—“to avoid probate.” When I hear that, I almost have to cringe, because the reality is that in Texas, there is not the need to avoid probate.

Texas has an administration process that is probably the simplest in the nation. It is known as "independent administration", and it means that other than proving the Will is valid, the appointment of an executor, and the filing with the probate court of an inventory of the assets that actually pass under the Will, there is no court involvement in the administration of the estate. The executor handles all matters independent of court supervision, and needs no approval from the Court to sell property, distribute assets, pay expenses, or do anything else that might arise in the regular administration of an estate. This saves time and money, since there is no necessity to go to the Court (incurring legal expenses) for approval of anything the executor needs to get done. Therefore, in Texas, delays or prohibitive costs of probate are not as much of a concern as they are in many states, the way they might be in California, New York or Florida.

Here are some other fallacies about living trusts in Texas:

1. The Estate Tax Savings Fallacy. One of the “big lies” that I often hear about revocable living trusts is that it will help the Grantor (i.e., the person creating the trust) save on taxes. How does it do that? The living trust contains a “bypass trust” to hold the Grantor’s exemption against estate tax upon the Grantor’s death for the benefit of the Grantor’s surviving spouse. This “bypass trust” is the same type of trust that is utilized in Wills all the time. In other words, it is not saving any additional taxes that you would not have saved by using the same type of trust in the Last Will and Testament. Further, if the Grantor is not married, a living trust cannot save anything from an estate tax standpoint. Every asset held by the living trust will be subject to inclusion in the estate of the Grantor, so there is no “tax savings” by transferring assets to a revocable trust by a single person.

2. The Creditor Protection Fallacy. It also cannot protect you from creditor claims (another fallacy that trust salespeople trumpet). Transferring the assets to a revocable trust (at least in Texas) means that the Grantor still has the power to get to the assets at any time. Even if there is an independent trustee, the fact that the trust is revocable means that the Grantor can terminate the trust and have the assets returned at any time. Texas law provides if the Grantor has full access to trust assets, then creditors have that same access.


3. The Cost Savings Fallacy. Because living trusts can (in some cases) be more complicated than wills, they typically cost more. There is also the necessity to transfer title to property (which requires deeds and other title transfer documents), which, if the attorney prepares, adds to the costs. Many times property does not wind up getting transferred to the trust, and you have to probate the Decedent’s Will anyway. If the Decedent had a pour-over will -- a will that says that everything owned by the Decedent flows into the living trust, the administration of the estate would be fairly straightforward and possibly reduce the probate costs. However, I have found that I can typically prepare the Will, and then probate and administer an estate where there is no living trust for the same or less cost than to prepare the trust and transfer all the assets to the trust. To me, the cost savings issue is not that great. However, I am speaking as a Texas attorney, and this likely would not hold true in California or New York.

The only times when I have found utilizing a living trust is a good idea is under the following circumstances:

Real estate in another state -- If you are a Texas resident and own real estate in another state, utilizing a living trust would eliminate the necessity of having to go through a probate proceeding in that state.

Incapacity issues – If you are concerned about incapacity (e.g., you have a history of Alzheimer’s Disease in your family), perhaps a living trust could be utilized to provide for the management of your assets in the event of your incapacity, especially if you have no close friends or family members who would act on your behalf. In that case you might need a professional trustee to manage your assets for you. On the other hand, of you have family members that you trust to manage your assets, a simpler method of the continuing management of the assets would not be a living trust, but general power of attorney naming an agent to handle financial matters for you in the event of your incapacity.

Will contest likely -- If your loved ones are likely to fight over your will, then in some cases (with expert advice and attention) a living trust may make it less likely that someone will successfully contest your plan based on undue influence, lack of capacity, etc.

Many (if not all) of the above situations may not be relevant to you. Thus, a living trust likely is not a viable estate planning alternative if you are a Texas resident. Utilizing a Will, a general power of attorney, a medical power of attorney and a directive to physicians is still likely to be the most estate planning you will ever need. However, as always, you should consult with a competent attorney who practices in the estate planning area to help you make that determination.

Alternatives to Probate Administration for Small Estates in Texas

There are times when the full administration of an estate does not make much sense. For example, what if there is only a couple of assets of the estate, such as a house and a bank account, both of which were solely in the name of the Decedent? The bank account only has about $1000 in it. Do you still have to open an administration of the estate for the sole purpose of collecting the bank account and transferring title to the homestead?

In Texas, there are two alternatives to the administration process; one where there was a Will, and one where the Decedent died intestate (i.e., without a Will). The first alternative is known as the collection of small estates upon affidavit, provided for in Texas Probate Code Sections 137 and 138.

If the Decedent had no Will, and the total value of the estate, not counting the value of the house and other exempt property, was less than $50,000, then you can file an affidavit with the probate court of proper jurisdiction (i.e., in the county where the Decedent was a resident), stating who the proper heirs of the estate would be, using the heirship rules of Texas Probate Code Section 38. Two disinterested witnesses have to swear to the heirship information contained in the affidavit. The small estate affidavit rout is very inexpensive (the filing cost in most counties is less than $75) and in many cases can be done without the involvement of an attorney.

Upon approval of the affidavit by the probate court, all persons or entities dealing with distributees of assets from the small estate are released to the same extent as if they dealt with a personal representative of the estate. Distributees can bring action to force delivery of the estate property and the distributees will be liable to any creditors or anyone else having a prior right to the property. You should note that this procedure does not transfer title to real property, except for a homestead. Thus, if the Decedent owned real property other than the homestead, and had no Will, probably your only alternative is to proceed with a determination of heirship proceeding.

A small estate affidavit usually works well with some assets, such as bank accounts, titles to automobiles, savings bonds and the homestead, but it is usually difficult, if not impossible, to use the affidavit to transfer title to publicly traded stocks and bonds, partnership accounts or brokerage accounts in general. Why? Because most publicly traded stocks and bonds are handled by transfer agents who are located in New York or Chicago, and the people working for these transfer agents rarely deal with small estate affidavits for the transfer of title. They are much more comfortable working with letters testamentary and usually will demand letters before they will transfer the title. With all the trouble it takes to get an order from the court ordering the transfer agent to transfer the stock or bond, you might be better off just going through the administration process to begin with.

What if the Decedent had a Will but few assets, or assets that do not require a lot of work in transferring—all the holder of the asset needs is an order from the court and perhaps a copy of the Will? If there is no need for an administration of the estate, then the Will can be probated as a muniment of title only, as provided in Texas Probate Code Sections 89A through 89C.

This procedure will only be allowed by the court when the applicant can show that (1) the estate has no unpaid debts, excluding debts secured by liens on real estate, and (2) there is no necessity for administration. The will must still be proved valid at a hearing before the court; however, no executor will be appointed. In probating a Will as a muniment of title, it is suggested you utilize an attorney because it is more complex than the simple filing of the small estate affidavit.

The effect of an order admitting a will to probate as a muniment of title is strong in that it is legal authority to all persons (1) owing any money to the deceased; (2) having custody of any property of the deceased; (3) acting as registrar or transfer agent of any evidence of interest, indebtedness, property, or right belonging to the estate; or (4) purchasing from or otherwise dealing with the estate, for payment or transfer to the person named in the will as entitled to receive the particular asset, without any administration. In other words, after the will is admitted to probate as a muniment of title, the beneficiaries of the decedent's estate become the owners of the property outright.

Again, if you are dealing with stocks and bonds, and a transfer agent will only accept letters testamentary rather than an order from a court certified that the beneficiaries in the Will are the only distributees of the estate, then you may not be able to utilize the muniment of title process. In addition, if there are numerous debts of the estate, an administration is the only alternative.

In any event, it is not necessary to create an administration in every instance in Texas, and for those estates with simple assets, the small estate affidavit or muniment of title route may be the way to go. Before pursuing those particular avenues, you should obviously consult with a reputable attorney who practices in this area to determine whether either of these options would be suitable for your situation.

Planning for Domestic Partners

It was a nice trip to Colorado this past week, one of the most beautiful states you can travel to during the summertime. I highly recommend a whitewater rafting trip such as the one we took down the Colorado River, which provided us some of the most majestic scenes you will ever see in the U.S.

One of the things that I encountered in Colorado during my stay at the Broadmoor in Colorado Springs was a gay couple who overheard me speaking to someone about estate planning. One of the ladies asked what would happen to her assets if she died without a Will. After asking a few questions about children (none), potential marriage in a state that allowed for gay marriage or civil unions (no intent) and assets (mostly cash and real estate in her name), I had to inform her that without a Will, most of her assets would pass according to the intestacy laws of her home state, which meant that her partner would wind up with none of the probate assets.

If you have a domestic partner, gay or straight, you are more of a candidate for a Will and basic estate planning than even married couples or a single person with children. Why? Because most (if not all) states’ intestacy laws do not account for domestic partners. You are treated as if you died single regardless of what you consider yourself in your relationship. A married person in Texas who dies without a Will usually winds having all his property (assuming it is community property) passing to his surviving spouse, so the danger of not having a Will is less extreme for that person.

Another tricky scenario—what if the person who died had a child, and the natural surviving parent of the child was unknown (e.g., the child was adopted or the child was the product of in vitro fertilization? Who would be named as the guardian of the child? The law in Texas provides a laundry list of persons entitled to be named, starting with the surviving parent, then grandparents, then siblings, and so on, but there is no mention of a domestic partner. If a sibling of the decedent asserts a claim to be guardian, it could result in a very costly court battle. A Will and/or a Designation of Guardian in Advance of Need could eliminate this problem.

Two other situations also present themselves: Incapacity in general and incapacity for medical purposes. If a domestic partner becomes incapacitated, the law in Texas does not provide for the incapacitated’s partner to be appointed Guardian of the person or estate. Nor does it provide for a partner to be able to make medical decisions on behalf of the incapacitated person. These could be resolved easily through a general power of attorney and medical power of attorney in favor of the partner.

Finally, don’t forget about non-probate assets when planning for a domestic partner. Any beneficiary designations on an IRA, life insurance policy, annuity, or employee benefit plans should be updated to reflect the partner as the primary beneficiary (if that is desired). Other miscellaneous items to also remember are things such as putting the partner as a signor on the safety deposit box or providing for a joint bank account, and providing for a partner to have the right to dispose of the body either by cremation or burial on their partner’s death.

Some Time Off and Some Problems Revisited

I am taking a much needed vacation beginning July 30th and heading to what I hope are the much cooler climates of Colorado for a week. I will not be posting anything in the meantime; however, before I took off, I wanted to share a couple of problems which came across my desk this past week which serve as warning signs to people who are doing their Wills. Both of these were prepared and executed by people on their own without legal counsel.

The first was a Will that by and large was correct in the body of the Will. However, when it came to the signatures, I found a problem. In Texas, a typewritten Will (which this was), has to signed by the Testator and witnessed by two individuals above the age of 14. Texas also has a provision where the Testator and the witnesses can sign what is known as a "self-proving affidavit," which allows the Will to be probated without the necessity of the witnesses having to come to court and give testimony that they were present when the Testator signed the Will, that the Testator was above the age of 18 and of sound mind, etc.

Unfortunately in this situation, the Testator signed the Will and the self-proving affidavit, but the witnesses only signed the affidavit--there were not even any signature lines for the witnesses on the Will (I will add here that the Testator who prepared the Will was a patent attorney, which only goes to prove that lawyers are there own worst clients). Prior to 1991, this would have rendered the Will completely invalid. Fortunately, Section 59 of the Texas Probate Code was changed in 1991 to provide that in this type of situation, the witnesses' signature to the affidavit will be considered a signature to the Will if necessary to prove that the Will was signed by the Testator, but the Will can no longer be considered self-proven, meaning that either one or both of the witnesses to the affidavit will have to give testimony in court as to the execution of the Will, or two witnesses will be needed to prove up the Testator's handwriting. Moral: Make sure that you have the Testator and the witnesses sign not only the Will, but also the self-proving affidavit. Added notes: make sure the witnesses are over the age of 14, and not related to the Testator or a beneficiary under the Will.

Second problem I encountered:

A gentlemen died with an estate of approximately $2 million. His son brought me the Will, which had been prepared by his father, using forms he had cobbled together from form books and other people's Wills, apparently. Dad's first wife had died and he subsequently remarried, so he wanted to make some provisions for the second wife, who did not get along at all with Dad's children. Dad started out by making some specific bequests worth about $250,000 to his children. In the following Article, he leaves "all my remaining property in trust for my wife for her lifetime." The rest of the Article provides the terms of the trust, which on termination was to be paid to her estate (note: doing this would certainly cut his children off from this share of his estate, since it is very unlikely she would leave any of this property to Dad's children).

The next Article is where things get unusual. He provides that he leaves "all the rest and remainder of my property to my children in equal shares." He now has created, in effect, two residuary clauses leaving all his property in very different ways. It is painfully obvious that he had no idea what he had written and the amount of conflict and confusion that would cause. It is now unclear who receives the residuary estate, so we are going to have to file what is known in Texas as a Petition for Declaratory Judgment with the probate court to have the court determine who the proper recipient of the residuary estate will be. Sometimes, in a case like this, you could go back to the attorney who drafted it and ask: What happened here? What did you mean? What do your notes say? Such extrinsic evidence would normally be admissable if the intent cannot be gleaned from the plain reading of the Will. However, in this case, the drafter of the Will was the Testator, and his intent died with him, so we will have to resort to other means to determine the ultimate beneficiaries. Moral: Don't be penny wise and pound foolish when it comes to drafting such an important document such as your Will. Get competent legal counsel to help in drafting your documents--and don't forget to read what they have drafted! Ask questions--what does this mean? Show me where the Articles where the property gets distributed. What happens is this person does not survive me? You've worked hard to acquire your assets. Don't inhibit your plans for these assets with second-rate software where you can draft your own Wills or with attorneys whose speciality is not in the estate planning area.

Executor and Trustee Compensation in Texas

I have often been asked: Do I have to pay my executor? If I create a trust for my children, does the trustee have to be paid?

In Texas, the answer is both simple and complicated, as most things usually are. In Texas, there is no requirement that an executor or trustee has to be paid a commission or be compensated for their work, but if you are not going to pay them, you have to say so in the instrument that appoints them (i.e., the Will or the trust agreement). If you do not make any reference to compensation, the Texas Probate Code (for executors) or Texas Property Code (for trustees) provides for compensation.

Section 241 of the Texas Probate Code provides that Executors are entitled to a commission of five per cent (5%) on all sums that actually receive in cash, and five per cent (5%) on all sums they pay out in cash. This seems simple enough, but on further examination of Section 241, you will find that “sums received” does not include cash received that was on deposit in a financial institution, life insurance proceeds, certificates of deposit and similar items. In addition, “sums paid out” does not include distributions to beneficiaries of the estate.

If the executor conducts a sale of property of the estate, the five per cent (5%) will apply unless a broker was used who is also being paid a commission. Thus, on the sale of a home where a broker was used and was paid a commission, the executor is not entitled to a commission as well. Where publicly-traded stock is sold in a brokerage account, and the broker receives a commission on the transaction, the executor receives no compensation.

The general rule of thumb is that the compensation will equal 5% of the income and 5% of the expenses of the estate. Sometimes this is adequate compensation, and sometimes it is not. If the executor feels the compensation is too low, he can always petition the probate court to consider additional compensation to be paid under Section 241.

For trustees, compensation is provided under Section 114.061 of the Texas Property Code (also known as the Texas Trust Code); however, the compensation provided there is very nebulous. It provides that the trustee is entitled to “reasonable compensation” from the trust for acting as a trustee. “Reasonable” can have all sorts of meanings, depending on the circumstances surrounding the trust and its assets, but typically it is taken to mean the amount that would normally be charged for like services by a corporate trustee in the area where the trust is administered. This can be anywhere from 1 to 1 ½ per cent (1% to 1.5%) of the market value of the assets on an annualized basis. Depending on the size of the trust, this could be a significant (or insignificant amount).

Of course, you can state very clearly that you want the executor or trustee to be paid and the terms of compensation, whether it is a percentage of the overall estate (for estate administration), a lump sum, or an annualized percentage of the market value of the assets (for trustees), or a set amount each year. Consider the size of your assets, the amount of income and expenses you might be expecting for your estate, and whether there are any unusual assets that the executor might be dealing with. Then consider whether the resulting compensation would be adequately compensating the person handling these matters.

In some cases, it is not necessary to compensate the executor or trustee. For example, it does not make much sense to compensate a spouse or child who is serving as the executor and who is receiving all the assets of the estate. Where there are multiple beneficiaries, however, and a difficult administration of the estate or trust is faced, it is perfectly fine to pay the compensation.

Finally, those persons serving as executors or trustees should remember that any compensation actually received is income that is taxable to them. Accordingly, the person serving may consider declining compensation. However, they should not do so without first consulting with their accountant or attorney to determine the resulting tax ramifications of accepting or declining the compensation.

Understanding the Distinction Between Community and Separate Property

Texas is one of nine states that are considered “community property” states, meaning generally that property acquired during the marriage is considered owned equally by both spouses. The other states that are considered community property states are:

--Arizona
--California
--Idaho
--Louisiana
--Nevada
--New Mexico
--Washington
--Wisconsin

In Texas, all property (including cash) is classified as community or separate based on when and how it was acquired. Texas (as does some other states) has what is known as the “Inception of Title” rule, which basically states that the characterization of the property is determined at the time the property is acquired. Further, all property acquired during a marriage in Texas is presumed to be community property unless it can proven otherwise.

Converting an asset into cash and back again does not affect the classification. For example, if a separate property asset, such as real estate, is sold during the marriage, the proceeds of that sale and anything purchased with the proceeds will remain separate property. However, you must be able to "trace" the proceeds from each sale to each purchase to prove that the property is separate property. Unless you keep excellent records, this can be difficult.

Under the Texas Family Code, community property is actually negatively defined. That is, Section 3.001 of the Family Code defines what separate property is, and then Section 3.002 states that community property is any property acquired by either spouse during the marriage that isn't separate property.

Separate property (under the Family Code) is defined as follows:

1. Property owned or claimed by the spouse before marriage;
2. Property acquired during the marriage by gift, devise or inheritance; and
3. The recovery for personal injuries sustained by a spouse during the marriage (but not any recovery for loss of earning capacity, which is considered community)

Thus, some examples of separate property might be:

1. Earned income from the work of either spouse before the marriage.
2. Capital gains on separate property (e.g., Joe buys 100 shares of ExxonMobil stock before he marries Sue at $50/share, and after his marriage, the stock goes up to $75/share. The increase in the value of the stock is still considered separate property);
3. Gifts and inheritances received by either spouse during the marriage, including joint gifts (e.g., if Dad gives Son and Son’s wife a piece of real property worth $100,000, Son and Son’s wife each have a 50% separate property interest in the property). Likewise, if Dad dies and leaves that same property to Son and Son’s Wife, the same is true—Son and Son’s wife each have a 50% separate property ownership in the property).

Since, by definition, everything else acquired during the marriage is community property, that means that anything other than the above ought to be classified as such. As you can probably guess, it usually is never quite that simple. However, some examples of community property are as follows:

1. Earned income from the work of either spouse during the marriage.
2. Dividends, interest, and capital gain earned on community property.
3. Dividends and interest earned on either spouse's separate property during the marriage.

Notice that last one? The rule in Texas is that income from separate property is considered community property, and the only way to get around that is to have an agreement in writing. Texas Family Code Section 4.103 allows a couple to agree that the income from separate property will remain separate. The agreement must be in writing and signed by both parties.

A couple can turn community property into separate property by executing a partition or exchange agreement. It must be in writing and signed by both parties. The one thing to note if you execute this type of agreement is that the income and earnings from the separate property will now remain separate unless you actually agree in the partition that the income will continue to be community property.

It used to be the law that you could not create community property out of separate property, but ever since January 1, 2000, a couple can now agree in writing that separate property of one spouse can be converted into community. The writing has to be very specific about what is being converted, and that it is being converted to community property. Further, there can be no consideration for entering into the agreement. That is, it has to be totally voluntary on the part of both spouses, and it is considered a gift by the one spouse who owned the separate property to the spouse who is receiving the new community property interest. Section 4.205 of the Family Code provides disclosure language that must be contained within the agreement to provide for a rebuttable presumption that the agreement was fair and reasonable.

The distinction between separate and community property is a very important one, especially when a couple divorce, because the Texas Constitution and codified law provides that no separate property of one spouse can be awarded by a judge to the other spouse in the division of assets. The identification of an asset as separate or community is also important on a person’s death, especially if the person did not have a Will. Separate and community property pass by intestacy differently, as I discussed in a previous post.

It would be helpful, as part of your estate planning, to make sure you can easily identify which of your assets are separate and which are community. If you have difficulty in doing so, you should confer with your accountant or attorney about how to trace those assets back to their origin. Doing so may be of some benefit to you in the future.

STATE BAR DISCIPLINED FORMER DISTRICT ATTORNEY

Terry McEachern, the man responsible for the numerous bogus prosecutions stemming from the testimony of then Detective Tom Coleman in Tulia was recently disciplined by the State Bar of Texas. Mr. McEachern agreed to the probated suspension of his law license. According to the Texas Bar, then District Attorney McEachern failed to turn over exculpatory and impeachment evidence to defense counsel when his witness Tom Coleman "testi-lied" that he had never before been arrested or charged with a crime. In fact, Mr. Coleman had been previously charged with abuse of official capacity and theft when he worked in law enforcement in Cochran County.

In January, Mr. Coleman was convicted of perjury and given probation. Former District Attorney, was defeated in the Republican primary as he tried to run for re-election for DA of Swisher and Hale Counties in 2004. Mr. McEachern is currently in private practice defending criminal matters and touting his 23 years of prosecutorial experience.

Providing for the Disposition of Your Body at Death

In my last post, I discussed making organ donations at your death. Hopefully you will take advantage of making such organ donations to give others an opportunity for a longer lifespan.

But prior to your death, another matter to consider is whether you will be buried or cremated, and what happens if you do not make that election. Who has the right, and who does not, to decide what happens with your body upon your death?

There are basically three scenarios:

1. The decedent during his or her lifetime.

The Texas Health and Safety Code provides, Section 711.002(g) that a person may leave written instructions for the disposition of his or her remains in a Last Will and Testament, a prepaid funeral contract, or a written instrument signed and acknowledged by the person. As noted in my post about organ donations, it is generally not wise to leave such instructions in a Will, as the Will may not be examined prior to the disposition of the body.

The written instructions can impose various requirements, such as the disposition of the body, where the body is to be disposed, how much to spend on the funeral or memorial service, and even where the ashes are to be scattered following cremation (as well as who has the right to scatter the ashes). You will be surprised as to how often these issues are debated among family members. In fact, one of the first battles following the death of J. Howard Marshall was not over the money, but whether his son or Anna Nicole Smith would have the right to bury or cremate the body and who could dispose of the ashes.

2. A person appointed by the decedent.

The Health and Safety Code also provides in Section 711.002(a)(1) that a person may appoint an agent to control the disposition of his or her remains. This designation must be in writing and signed and acknowledged by the decedent before a notary. The designation must be in substantially the same form as the form provided in Section 711.002(b). That statutory form can be found at this link. You should note that a funeral home or cemetery has a right to rely on the document without liability unless it has received actual notice of any modification or revocation of the form.

3. Persons in a Priority List Provided in State Law.

Finally, the Health and Safety Code provides in Section 711.002(a) that if the decedent did not leave written instructions for the burial or disposition, nor named an agent to make such an arrangement, then there is a priority list of the persons who have a right to control the disposition of the body, in this order:

(1) The decedent’s surviving spouse;

(2) Any one of the decedent’s surviving children;

(3) Either one of the decedent’s surviving parents;

(4) Any one of the decedent’s surviving adult siblings; or

(5) Any adult person in the next degree of kinship in the order named by law to inherit the estate of the decedent.

Now you should note that there is nothing in the above list that allows for an unmarried partner (straight or gay) of the decedent any right to control burial or cremation. Persons who want an unmarried partner to have this right will need to execute the statutory appointment.

In addition, there is nothing that distinguishes which of the surviving children or parents have the right to make this decision. What if divorced parents disagree about the burial of a child, or siblings disagree over the burial of a parent? A funeral home in such an instance can require a court order before accepting a decedent’s remains. Section 711.002(k) of the Health and Safety Code provides that the funeral home or cemetery has no liability for refusing to accept remains without a court order in the event of a dispute.

One final note of interest—if a spouse is found criminally responsible for the death of the decedent, then their right to control the disposition of the body can be removed under Texas Probate Code Section 115. The interesting aspect of this is that only the surviving spouse’s right is addressed and no other person. Theoretically, the way the law is currently written, a child could be criminally involved in the death of a parent, and then have the parent’s body cremated. I would argue that this law needs to be broadened to provide a restriction on any person responsible for the decedent’s death.

Because the disposition of your body at death can lead to disagreements (and even legal action) during a very emotional and trying time, it is best that you set out in writing exactly how you want this handled. While difficult to face, doing so now will make everything flow much more smoothly after your death.

Becoming an Organ Donor--Things You Should Know

Every 18 minutes another name is added to the national organ transplant waiting list in the United States. During the past seven years, the transplant waiting list has more than doubled from about 30,000 patients in 1993 to more than 78,000 men, women and children now awaiting heart, kidney, liver, lung, pancreas or small bowel transplants. Thousands more need donated corneas to restore sight; skin to heal burns; heart valves to replace diseased hearts; and bone to repair injured or diseased bones and joints.

Unfortunately, donations have not kept pace with the need. Although it is estimated that about 15,000 people die every year who can be organ donors, there have never been more than 6,000 donors in a year in the United States. As a result of this critical shortage, sixteen people die every day while waiting for a life-saving organ transplant.

Ironically, surveys show that support for organ donation is very high. The problem is that few people ever tell their families about their wish to become a donor. Sharing your decision to be an organ and tissue donor with your family is as important as making the decision itself.

At the time of your death, your family will likely be asked about organ donation. If your family has never discussed donation before, this becomes a very difficult decision that they must make at a very bad time in their lives. Sharing your decision with your family now will help them carry out your wishes later. It will also prevent confusion or uncertainty about your wishes. In fact, many donor family members have said that carrying out their loved one's wishes to save other lives has provided them with great comfort in their time of grief.

If you have already signed a donor card, share this information with your family now. Many people gain comfort in knowing that they have relieved their family of the burden of making that decision. The problem with executing a donor card, but not telling anyone about executing the form, is that someone may not find the form until it is too late. Organ must be done shortly after death to preserve the tissue or organ for transplant. Without oxygen or blood, the tissue or organ will likely deteriorate quickly.

Other things to note:

• Of the 2.3 million people who die in the U.S. every year, fewer than one percent are eligible to be organ donors. Almost everyone, however, can be a tissue donor.

• Donation does not disfigure the body or prevent an open casket funeral.

• Donated organs are removed in a sterile, surgical procedure, similar to open heart surgery, in a hospital operating room by skilled surgeons.

• Few people are too old or too young to donate. Currently there are no age limits for donors. At the time of your death, medical professionals will determine whether your organs are transplantable.

• Organs that can be transplanted are the heart, lungs, kidneys, pancreas, liver and intestines. Tissues that can be recovered for transplantation include: corneas, heart valves, bone, skin, veins and tendons.

• The organ allocation system is blind to wealth, celebrity and social status. Donated organs are placed in recipients based on best medical match and most critical need.

• No costs directly related to organ or tissue donation are passed on to the donor's family or estate.

If you have not yet made a decision about donation -- please consider it. It is a chance for one final, heroic act to turn a loss into a life-giving opportunity.

Finally, make sure you know the wishes of your loved ones because you may be called on to help make the decision for others in your family.

Making a decision about organ and tissue donation can be difficult because it requires a person to consider his or her own mortality and to talk about dying. Most people don't talk about dying. They think if they don't talk about it, it won't happen. Actually, that is what happens with organ donation. If you don't talk about it, it won't happen.

For more information on organ donation, and to find a form for becoming an organ donor, go to this web site. You can also find a form for providing information to your family members here.

Making Gifts to Minors

Quite often annual exclusion gifts will be made to minor children or grandchildren as part of someone’s estate plan. In some instances, these gifts may create problems for the donor and donee. First, there are restrictions on a minor’s ability to hold or otherwise deal with property under applicable state law. Second, the donor will naturally be concerned about the safety of the funds if the minor has significant access rights. Third, if you make a gift to anyone where there are restrictions on the ability to get access to the gift, then the gift can be considered a gift of a future interest and does not qualify for the $11,000 annual exclusion amount. However, there are several methods for making annual exclusion gifts to minors with restrictions on the minor’s access to the property that will still allow the gift to be considered a gift of a "present" interest, meaning it does qualify for the $11,000 annual exclusion. These exceptions are as follows:

1. Uniform Transfers to Minors Act (UTMA)

The UTMA statute (formerly the “Uniform Gifts to Minors Act” or UGMA) is a set of model laws that have been adopted in various forms in individual states, Texas included. They permit the transfer of funds to a custodial account for the benefit of a minor. The custodian of the UTMA account manages the property under the rules provided by state law. The custodian is to use the assets during the child’s minority for support, education, and maintenance of the minor. In most states, the custodianship terminates when the child reaches 21; however, in some states, the age at which the minor must receive the property is 18. Under UGMA, investments were generally limited to money, securities, life insurance, and annuity contracts, although some states allowed investments in other assets. Under UTMA, property that can be transferred includes any property, real or personal, tangible or intangible. Transfers may be made during lifetime and from trusts, estates and guardianships, regardless of whether the governing instrument authorizes such transfers.

Income on the assets is taxable to the minor, whether distributed or accumulated. Children under 14 pay tax at parents’ top tax rate on unearned income over $1,000. Donors should note, however, that if a donor appoints himself or herself custodian, the assets will be part of the donor’s estate should he or she die before distribution to the minor occurs. To remove the asset from possibly being included in the donor’s gross taxable estate, a third party should be named as custodian for the account.


2. Section 2503(c) Trust.

A Section 2503(c) trust is another type of irrevocable trust designed to receive annual exclusion gifts for a minor. It derives its name from the Section of the Internal Revenue Code that allows a gift to such a trust to be counted against the $11,000/year annual exclusion amount. The trust is allowed to accumulate current income prior to the termination of the trust.

a. Requirements:

(1) The Trustee may expend principal and income for the minor before he/she reaches age 21.

(2) Any principal and income not expended will pass to the minor when he reaches age 21.

(3) Should the minor beneficiary die prior to age 21, the principal and accumulated income will be paid to his estate or to whomever he appoints.


3. 529 Plans.

One of the great benefits currently available are Section 529 college plans, which allow parents (or grandparents) to set up a college fund for their children or grandchildren without any taxable consequences. While a full detailed discussion of the plan is not feasible for this post, the basic set-up is that a tax-free contribution of up to $55,000 in any one year can be made to an account for the future benefit of a designated person. The only caveat is that it must be used for educational purposes (tuition, books, fees, etc.). It is allowed to grow tax-free and is distributed at the time the student attends college, with no income-tax consequences upon distribution. If that student does not use the entire amount, or dies before the time the funds are used, then an alternative beneficiary (i.e., another student in the family) can be named for those funds. If it winds up that the assets are distributed back to the creator of the account, then it will be taxed to the recipient at ordinary income tax rates along with a 10% penalty. If the creator of the account dies before the assets are distributed, there are no estate-tax consequences, because the assets are not includable in the account creator’s estate.

Donors should also note that beyond the 529 plans anyone can make tuition payments for private schools or for public or private universities and also for medical expense payments on behalf of anyone without the tuition or medical payments being considered gifts. The tuition payments must be made directly to the school or university, and cannot be given to the parent of the student. The exclusion also only covers tuition payments—not room and board or books. Similarly, the medical payments must be made directly to the medical provider or insurer rather than to the person who incurred the medical expense. Grandparents often find these two exclusions as a great way to make gifts without incurring gift tax.

Before you make a gift to or for the benefit of a minor, make sure you are not running afoul of any gift tax rules. Also, make sure that the minor child is not someone who will be able to handle receiving the property at an early age. If not, you should consider other alternatives for the future distribution of the assets, e.g., through an irrevocable trust that lasts beyond the age of 21. You should also get legal advice from someone experienced in the estate planning area to make sure that you are not creating a problem either for the minor recipient of the gift or for yourself. A little planning on your part can help provide substantial benefits in the future for the recipient of your gift.

Proper Beneficiary Designations for Life Insurance

Many people own life insurance policies, either through their employment or as supplements to their employer-funded policies, or have individual retirement plans (IRAs) or employee benefit plans (usually 401(k) plans), but unfortunately, not much thought is given to the beneficiary designations for those policies or retirement plans. The typical designation will go something like this:

Primary Beneficiary: My surviving spouse

Secondary Beneficiary: My children

The problem with simple designations such as the above is that if you have a substantial estate or if you have minor children, you can be creating complicated situations for them in the future. For example, let’s say husband and wife are killed in a car accident. They each have insurance policies naming the other spouse as the primary beneficiary. They have two young children, who are 4 and 2 years old, listed as the secondary beneficiaries. The insurance company will not pay out the proceeds to the minor children because they do not have the legal capacity to accept the money. Because of the way the designation is made, the company’s only alternative is to pay the funds to a guardian of the estate for the minor children. A guardianship is a costly and time-consuming process that severely constricts the use and investment of the funds and requires that all a minor child’s share of the proceeds must be given to that child when they turn 18, when they are typically still financially irresponsible.

In addition, if you have a large enough estate, and you have prepared trusts under your Will to protect your exemption against estate tax (known as a “bypass” trust or “credit shelter” trust) or to provide trusts for your children for their future protection, and you planned on funding these trusts with the proceeds from the life insurance, you should be aware that for the tax and other planning contemplated by your Wills to work effectively, much of your property, other than qualified plans and individual retirement accounts (designations for these plans will be discussed in a future post), should pass under your Wills at your deaths. To the extent that you use “probate avoidance” methods of transferring your property at your deaths, some of your property may pass outside the provisions of your Wills (such property is referred to as non-probate property), and you could be circumventing the tax and other planning accomplished under your Wills. Some common types of non-probate properties are those that pass by beneficiary designation (insurance, annuities, individual retirement accounts, etc.) payable on death accounts (also known as “POD” accounts), joint tenancy with rights of survivorship accounts (also known as “JTWROS” accounts), revocable trusts and community property survivorship agreements. Accounts with payable on death beneficiaries or accounts which are held as joint tenancy with rights of survivorship can be convenient ways to dispose of small bank balances if properly handled, but if large amounts are involved, your estate plan could be seriously disrupted. Unless you have non-tax reasons for establishing survivorship accounts, survivorship agreements or payable on death accounts, as a general rule, you should avoid doing so, and you should change any such accounts that you may have previously established to joint accounts held as tenants in common (sometimes referred to as accounts with “No Survivorship”). This will help to ensure that such property does pass under your Will and to the beneficiaries named in your Will or into trusts created under the Will.

The importance of making sure that the death beneficiary designation on your life insurance and similar products like annuities is properly coordinated with your estate plan cannot be overemphasized. One way for you to designate the beneficiary on life insurance policies and annuities is as follows:

Primary Beneficiary: 100% Insured’s spouse

First Contingent Beneficiary: 100% Testamentary Trustee designated in the Insured’s last will and testament

By having it paid to the surviving spouse, the spouse has the right to either accept the assets outright, or if there is a trust created under the Will to protect against the possibility of estate taxes, the spouse can disclaim any or all of the proceeds, and let the proceeds pass to the bypass trust, of which the spouse is usually the beneficiary. The benefit is that while the spouse still can benefit from the policy proceeds, the proceeds will not be counted as part of his or her estate for estate tax purposes when the surviving spouse dies.

If the husband and wife die simultaneously, then the proceeds would automatically be paid to the contingent beneficiary—the Trustee for any trusts created under the Will for descendants of the husband and wife.

If all the children are adults, you can name them as contingent beneficiaries (or if you are unmarried, as the primary beneficiaries). But what if a child predeceases you? Do you want his share to pass to his children, or to your surviving children only? If you want it to go to your surviving children only, then the following designation (or something similar) should be used:

“In equal shares to my children who survive me”

If you want children of any deceased child to receive that child’s share, then you could use the following designation instead:

“To my descendants then living per stirpes”

Per stirpes is a term that essentially means that a deceased child’s share will pass in equal shares to his children. For example, let’s say you have three children. Each child, if they survived you, would receive a 1/3^rd share of the proceeds. However, if one child predeceased you leaving two children, then those two children would get ½ of the deceased child’s 1/3^rd share (or 1/6^th each). The two surviving children would still receive their 1/3^rd share.

The danger, of course, in using the above designations is that you might wind up with some minor beneficiaries and have the guardianship issue arise again. In such a situation, where you have trusts created under your Will for your descendants, the better choice may be to name your estate as the contingent beneficiary. In that scenario, the minor descendants’ share will be held in trust without the necessity of a guardianship.

The beneficiary designations listed above are by no means exclusive. You may have a list of persons you want to name as beneficiaries of your life insurance other than just your children. Further, you should be aware that naming your estate (as opposed to the Trustee under your Will) as the beneficiary of your life insurance can expose those assets to the creditors of your estate, if any creditors exist upon your death. For most people, this is not a concern, but because the above designations may not always be appropriate in every situation, before executing any new beneficiary designations you should check with your attorney or financial planner about the best way to style the designations. Spend some extra time making sure that the designations you use don’t conflict with the estate plan that you have in mind. You may create problems that you can easily avoid.

Duties of an Executor, Part Two

In my previous post, I covered the basic duties of an independent executor in Texas. The role of an executor is an important one, and requires attention to detail and an ability to deal with complex situations with the assistance of competent legal counsel or a certified public accountant. Not only are there issues involving the collection and distribution of assets or the payment of debts and expenses of the decedent, there may be tax considerations as well. Here are some issues concerning taxes that the executor may have to deal with during the administration process:

What about income tax considerations?
Most estates contain income-producing assets, which may require the independent executor to file income tax returns for the estate. These returns are normally prepared by the estate's accountant after consultation with the attorney. In addition, a final income tax return for the decedent must be filed for the year in which he or she died. If the decedent was married, a joint return may be filed including all of the decedent's income up until the date of death. The independent executor should also be alert for the possibility of an income tax refund due the decedent and should apply for it if one is due. Note that some estates are administered fairly quickly and the income is picked up and reported by the recipient, especially if the recipient is the surviving spouse. However, where there are several beneficiaries, and the estate administration takes several months (or longer), an estate income tax return (known as a Form 1041) will almost always be necessary.

An estate is not required to use a calendar fiscal year but instead may select another fiscal year. Substantial income tax savings and deferrals can usually be accomplished by a careful selection of the estate's fiscal year, so the estate's attorney and accountant should be called upon to make recommendations in this respect. This should be selected (or at least considered) early in the estate administration so that a short fiscal year can be selected if desirable.

The provisions of the 1986 Tax Act now require estates to make estimated income tax payments, although not until after the close of the estate's second taxable year. At the appropriate time, the independent executor will need to work with the estate's accountant in determining the correct estimated income for payment for the estate.

If the decedent owned any interest in any partnership, there are certain tax elections with respect to the basis of the property that should be considered. In some cases, additional tax benefits can be obtained if the partnership agrees to elect to alter the basis of the assets in the partnership with respect to the decedent's share.

Certain administrative expenses, such as executor's fees, attorney's fees, accountant's fees, appraiser's fees, court costs, expenses of preserving and distributing the estate, and expenses of selling property are deductible either on the estate tax return or on the income tax return of the estate. The decision as to how to derive the greatest benefits from these deductions will be determined by the independent executor, the estate's attorney, and the estate's accountant.

What about an estate tax return?
A federal estate tax return is due in many of the larger estates. If a federal return is required to be filed, a state inheritance return must also be filed. The estate tax return and the payment of any tax due is the duty of the independent executor. Normally, of course, the return is prepared by the estate's attorney working with the independent executor and the estate's accountant. Generally, it will be the independent executor's duty to supply the information needed to prepare the return.

The estate tax return is due within nine months from the date of death, unless an extension is obtained. An extension to file the return is generally available, although an extension to pay the estate taxes is rarely available. Thus, all estate taxes must generally be paid nine months from the date of death. There are some circumstances-e.g., where the estate owns a sufficient interest in a farm or family business or where the payment of the tax by the due date constitutes a hardship to the estate-in which the time for the payment of estate taxes may be extended. Relatively few estates will qualify for this, however. The independent executor should obtain approximate valuations of the assets as soon as possible, so a determination can be made as to whether assets should be sold to pay taxes and, if so, when they should be sold.

If the total value of all assets in the estate (before any deductions for debts and other expenses) is less than $1,500,000 (assuming the decedent died in 2004 or 2005--see this post for the exemptions in past or future years), an estate tax return is typically not required. It is normally necessary, however, except in estates for which it is clear the assets are well below that figure, to proceed as if preparing an estate tax return so it can be determined that no filing is in fact required. In addition, it is important to have the information available should the IRS ever claim that a return should have been filed. In addition, gathering such information will be helpful to the attorney in preparing the inventory for the estate for filing with the probate court.

Since the estate tax return requires considerable information and documentation (such as appraisals) for its filing, it is necessary to begin gathering the information for the return as soon as possible after the death of the decedent.

When and how are distributions made from the estate?
The timing and nature of the distributions from the estate to beneficiaries will depend upon the financial condition of the estate (including the amount of any debts owed by the estate and potential tax liability) and of the individual beneficiaries, as well as the tax consequences of the distribution. Before any distributions are made, the executor should consult with the estate's attorney or accountant or both.

The IRS has an unrecorded lien on real property owned by the estate if an estate tax return must be filed. Particularly when the executor considers selling real property, the executor should consult the estate's attorney regarding this issue. A procedure is available to the Independent executor should he or she need to obtain a release of the lien either for distribution or a sale of the property. The release will be issued if, in the judgment of the district director, it will not jeopardize the ability of the IRS to collect any outstanding balance or potential deficiency. Because obtaining the release may take a few weeks, it is generally advisable to begin this procedure early if the Independent executor anticipates selling property.

Because a final distribution normally will not be made until after the estate tax return has been audited or the estate has received a letter stating no audit will be made, it is likely the surviving spouse or other beneficiaries will desire some distributions prior to the final distribution. In addition, for tax purposes it is usually desirable to make interim distributions.

Any distribution will have a tax effect, so no distributions should be made until the consequences of those have been discussed with the estate's attorney and accountant and the tax effects have been taken into consideration.

Conclusion:

As can be seen, the tax issues surrounding an estate can be complicated. Make sure if you are acting as an executor that you get proper guidance before making any decision that could have an adverse tax consequence on the estate (and inevitably, on the beneficiaries of the estate).

Duties of an Executor, Part One

In a previous post, I discussed the importance of naming the right person or entity in your Last Will to handle your estate administration. The role of the executor is a demanding one, requiring some common sense and the assumption of some legal responsibilities. The role also requires great sensitivity and objectivity to deal the with the concerns of the beneficiaries of your estate.

This post highlights some of the major activities involved in serving as executor. The purpose is to outline the vast number of tasks that may need to be performed, the range of expertise that could possibly be required, and the size of problems the could arise in the settlement and ongoing administration of an estate. With regard to the duties listed below, (provided by the State Bar of Texas) the executor in all instances should be guided by competent legal counsel to assist in handling complicated and delicate issues. My next post will deal with tax issues that face an executor.

How do I administer an estate?
Each estate is, of course, unique. The information provided in this manual is intended as a mere overview to provide general guidance to an independent executor. It is by no means comprehensive. Both the estate's attorney and accountant should be involved throughout the administration of the estate, so problems can be identified and advantages taken of choices or opportunities that may be available to the decedent's estate.

What is an independent executor?
The independent executor is considered the personal representative of the testator who appointed him or her. In addition to serving as the representative, however, the independent executor also assumes a position of trust for all those who have an interest under the will.

What are the duties of an independent executor?
The primary duties of the executor are to collect and preserve the assets of the estate, to pay all debts and taxes, and finally, to distribute the remainder of the estate as provided by the will. Court supervision of these duties will be minimal in the case of an "independent" executor. Normally, after the initial admission of the will to probate, the only further court action necessary will be obtaining court approval of an inventory of the estate. This inventory is prepared and filed with the court by the independent executor with his or her attorney's assistance. Certain other required documents, such as notices to creditors and closing letters from taxing authorities, will simply be filed with the court.

A bank account (and possibly a money market fund or savings account) should be opened by the independent executor. It should be opened in the independent executor's individual name "as independent executor" of the decedent's estate. The bank will request a taxpayer identification number. The attorney or accountant will file an application for this number (while you can now obtain tax identification numbers online with the Internal Revenue Service website, there are some questions on the application form that may be difficult to answer without the proper legal or accounting expertise). Death certificates will be needed for a number of matters (insurance policies, social security benefits, federal and state estate tax returns). These can be obtained from the funeral home or the Department of Vital Statistics.

When does an independent executor have the right to act?
The independent executor does not become empowered to act until the court has admitted the will to probate and has appointed the independent executor. Therefore, it is normally advisable to begin the probate proceedings as soon as possible after the death. An application to probate the will is filed by the attorney, and a hearing will then be held 10 or more days after the application is filed. Normally, the hearing will be held on a Monday. At that hearing, a personal friend of the decedent or a family member will give certain information to the court. If the independent executor is the person giving the information or is present at the hearing, he or she may take the Executor's Oath at the hearing, after which the court will issue "Letters Testamentary." The Letters Testamentary are evidence of the independent executor's authority and will frequently be requested by parties dealing with the independent executor during the administration of the estate. Additional letters can be obtained from the court at any time during the administration. If the decedent owned real property in another state, it will normally be necessary to take certain actions in the courts of that state as well.

How does an independent executor evaluate the needs of the surviving spouse, children, or other beneficiaries?
The independent executor may need to discuss with the surviving spouse, children, or other beneficiaries, the financial condition and anticipated needs of the beneficiaries during the administration of the estate. After consulting with the estate's attorney and accountant, a schedule of the interim distributions can then be planned by the executor.

What about recordkeeping for the estate?
One of the most important and time-consuming responsibilities of the independent executor is to keep adequate records during the administration of the estate. This should begin almost immediately following death and be continued until the final distribution of the estate is made. It is absolutely necessary to begin the recordkeeping process promptly, since it is very difficult at a later date to reconstruct the financial affairs of the estate. The estate's accountant will be able to assist the independent executor in setting up the books and financial records for the estate. You can assist the accountant or attorney in keeping an up-to-date spreadsheet of all income received and expenses incurred by the estate. All items of income and expense, whether you deem them important or not, should be recorded on the spreadsheet. If a beneficiary ever raises an issue with the manner in which you handled the estate administration, you should be able to pull out the spreadsheet and give them an accounting of all transactions that occurred in the estate.

What must be done to finalize the decedent's personal and financial affairs?
The independent executor should consider what needs to be done to finalize the decedent's personal and financial affairs. The following are examples of the types of activities the independent executor will need to undertake:

1. Arrange to terminate or alter services and deliveries supplied to the decedent, if necessary. The post office should be supplied with a forwarding address for the decedent's mail if appropriate.
2. If there are credit cards in the decedent's name, attention should be given to terminating the credit, after considering any need for the surviving spouse to have access to credit cards.
3. If services are necessary for the maintenance of real property, arrangements should be made for the services to be continued.
4. The decedent's employer or business associates should be contacted. The independent executor may need to take steps to ensure that an active business keeps operating, or that a business be sold. The independent executor should also ascertain whether any death benefits or insurance benefits are available.
5. The independent executor should notify the appropriate family members that they may be eligible for certain social security benefits or veteran administration benefits. A small lump-sum death payment may also be available to persons covered by social security. The social security offices prefer to deal directly with the persons eligible for benefits, and are usually quite helpful in this regard.
6. Insurance policies should be located and delivered to the named beneficiary so the beneficiary can apply for the benefits. The policy and a certified copy of the death certificate should be presented with the claim. If the claim is mailed to the company, it should be sent by certified or registered mail. Before submitting any insurance policies for benefits, the independent executor should make a copy of the entire policy and all attachments, as they are frequently requested during the estate tax audit.
7. The independent executor should determine whether it is advisable to continue various types of liability and loss of insurance coverage and, if so, take any steps necessary to continue such coverage.

If I am the independent executor, how do I prepare a preliminary inventory?
As soon as possible, you should make a general inventory of the assets and liabilities of the estate and present it to the attorney. This will give the attorney the ability to determine the approximate size of the estate and to identify any assets that may need special attention or that may be eligible for certain tax elections. In order to prepare the preliminary inventory, you will probably want to question the decedent's family, business associates, accountants, and attorney. You should also examine checkbooks, tax returns, financial statements, and the decedent's other business records. You should make a detailed inventory of all items in the decedent's safe deposit boxes before anything is removed.

The independent executor is required to file an inventory with the Probate Court. While this is due 90 days after the independent executor's appointment, it is normal for an extension to be requested so any property interest required to be included on both the estate tax return and the inventory is consistently described and valued.

How do I manage the assets?
As independent executor, you should collect the assets of the estate. Bank accounts and savings certificates can be transferred to the independent executor upon presentation of a certified copy of Letters Testamentary. The independent executor may request the assistance of a stock broker to aid in the transfer of the decedent's securities. Transfer agents usually require an Affidavit of Domicile and certified copies of the death certificate, will, and Letters Testamentary. If the decedent was the owner of the stock or assets of a closely held business or professional practice, immediate attention should be given to the decision as to whether the business or practice should or can be maintained by the estate. If the decision is made to sell, potential purchasers should be contacted and negotiations commenced before values decline.

When and how do I give notice to creditors?
Within one month after receiving Letters Testamentary, a notice to all creditors of the estate must be published. The publication can be in any newspaper of general circulation within the county where the decedent was a resident. While the attorney will normally prepare the notice, it must be signed by the independent executor. In addition, within two months after receiving Letters Testamentary, the independent executor must give personal notice to secured creditors of the estate.

This is just a beginning indication of what duties the executor faces. The role of an executor should never be taken lightly or without assistance by competent counsel. In my next post, I will discuss the tax issues that an executor faces.

The New Medicaid Recovery Act for Texas Residents

The federal government now requires each state to implement an estate recovery program, the purpose of which is to attempt to recover part or all of the costs associated with providing long-term care services through Medicaid. To comply with this federal requirement, the Texas Legislature recently directed the Texas Health and Human Services Commission ("HHSC") to establish a Medicaid estate recovery program.

HHSC developed rules after gaining input through a multi-step process that included a state agency workgroup, statewide public hearings, and public comment. The revised rules proposed in December 2004 also reflect input from the Centers for Medicare and Medicaid Services, which is the federal agency that has final approval authority on all Medicaid estate recovery programs.

The Texas Medicaid estate recovery program began operations on March 1, 2005. The Department of Aging and Disability Services ("DADS"), an agency under the oversight of HHSC, administers the program.

Under this program, the state may file a claim against the estate of a deceased Medicaid recipient, age 55 and older, who applied for certain long-term care services on or after March 1, 2005. Claims include the cost of services, hospital care, and prescription drugs supported by Medicaid under the following programs:

• Nursing facility
• Intermediate Care Facility for Persons with Mental Retardation (ICF/MR), which includes state schools
• Medicaid Waiver Programs including
  • Community Living Assistance and Support Services
  • Deaf-Blind with Multiple Disabilities Waiver
  • Home and Community-based Services
  • Texas Home Living Program
  • Consolidated Waiver Programs
  • Community Based Alternatives, which includes Star Plus services
• Community Attendant Services

Exceptions to Filing Claims

Medicaid Estate Recovery Program claims will only be filed when it is cost-effective. Claims that are considered not cost-effective are those where:

• The value of the estate is $10,000 or less.
• The recoverable amount of Medicaid costs is $3,000 or less.
• The cost of the sale of the property would be equal to or greater than the value of the property.

In addition, a claim may not be filed should one or more of the following conditions exist:

• There is a surviving spouse.
• There is a surviving child or children under 21 years of age.
• There is a surviving child or children of any age who are blind or permanently and totally disabled under Social Security requirements.
• There is an unmarried adult child residing continuously in the Medicaid recipient’s homestead for at least one year before the time of the Medicaid recipient’s death.

An undue hardship waiver may be filed when:

• The estate property is: a family business, farm, or ranch; is the primary income producing asset of the heirs; produces at least 50 percent of the livelihood for heirs for at least 12 months prior to the death of the Medicaid recipient; and recovery by the state would affect the property and result in heirs losing their primary source of income.
• Beneficiaries of the estate will be eligible for public or medical assistance if recovery claim is collected.
• Allowing one or more heirs to receive the estate enables them to discontinue eligibility for public or medical assistance.
• The Medicaid recipient received medical assistance as the result of being a crime victim.
• The value assessed by the tax appraisal district is less than $100,000 and the heirs have gross family incomes below 300 percent of the Federal poverty level.
• Other compelling reasons exist.

Additional Information

• Information about the filing process, allowable deductions, and asset transfers can be found in the Texas Medicaid Estate Recovery Program Receipt Acknowledgement Form, which is in PDF format.

• You also may call DADS at 1-800-458-9858. This line is answered by in-office staff from 8 a.m. to 5 p.m. Monday through Friday. Voice mail is available 24 hours a day, seven days a week, with a message that states the call will be returned the next day. Voice mail is monitored by in-office staff from 8 a.m. to 5 p.m. on Saturday, Sunday, and holidays. You can also send e-mail to charline.stowers@dads.state.tx.us.

Rules and Statutes Concerning Medicaid Recovery in Texas

• Texas Probate Code, Section 298, Claims Against Estates of Decedents
• Texas Probate Code, Section 301 Claims for Money Must Be Authenticated
• Texas Probate Code, Section 322, Classification of Claims Against Estates of Decedent
• Texas Administrative Code, Title1, Part 15, Chapter 373