The Foundations of an Effective Estate Plan

The Foundations of an Effective Estate PlanBaylor

Legacies Newsletter
by W. Marc McDonald

The Will

The basic element of an effective estate plan is a Will. However, three out of four Americans die without a Will.

A properly prepared Will ensures that your assets are given to the person or organization you desire. It prevents assets from being needlessly taxed. It specifies a guardian for your children. It designates someone qualified to settle your estate.

A formal Will is in writing, signed by you, and attested by two credible witnesses over the age of fourteen (14) who sign in your presence.

A Will disposes of your probate property, all of your separate property and your one-half interest in the community property owned by you and your spouse. Your non-probate property is transferred outside your Will because of prior agreements that have been made with third parties concerning the distribution of these assets. Examples of non-probate assets are life insurance, retirement plan benefits, IRAs, property held in joint tenancy with right of survivorship and assets held in a living trust.

If you do not have your own Will, the state of Texas has prepared one for you (called an intestate succession). And it may not be to your liking. Basically, with a “State of Texas Will,” your spouse will be assured of inheriting your full probate estate only if none of your children, descendants, parents, brothers or sisters and their descendants survive you.

A Will is very important to you and your family. It should be given proper consideration.

The Living Trust

If a will is the basic element in estate planning but does not become effective until after you die, what can you do now, during your lifetime, with regard to ongoing financial changes and estate planning needs? One proclaimed answer to that question is a living trust. First of all, do not confuse a living trust with a living will. A living will is a document that defines your wishes regarding measures taken by your physician to prolong your life should you become so incapacitated.

A living trust is created by you during your lifetime and is completely revocable or changeable by you as long as you live. It contains provisions for the disposition after your death of the assets you choose to place within the trust during your life. Therefore, the property held within the trust becomes nonprobate assets; that is, the trust property does not, at your death, pass by the instructions of your will, but instead passes according to the terms of the living trust. Some attributes to the living trust are:

  1. property is transferred into the trust upon the creation of the trust and not through the probate process;
  2. management of your property can take place easily during your lifetime if you become disabled and unable to manage your property;
  3. exposure to will contests as to the property contained in the trust is reduced and
  4. your estate information is shielded from public scrutiny because living trusts are not made a matter of public record as are wills.

There are, however, some misconceptions about living trusts that must be examined in light of your goals and the specific needs in your own estate planning. The trust does not, in and of itself, reduce federal estate taxes. Estate taxes, federal or state as to Texas residents apply if your estate is above $60,000 and is distributed to or for the benefit of someone other than your spouse. Because the living trust is revocable by you during your life, the assets held therein remain subject to your control and consequently are not out of your estate for estate tax purposes. Consequently, you will pay the same amount of estate taxes as you would if all of the assets were dealt with under your will.

Also, some financial planners and attorneys warn that living trusts have been oversold as a substitute for a will in the attempt to avoid the probate process. Avoidance of probate is generally not necessary in Texas because Texas is a forerunner of simplified probate and makes available the use of an independent probate administration.

Summary

The first step in ongoing estate planning is to access your goals and desires, then communicate these wishes to your advisors. If you have had estate planning done in the past, periodic updates of your goals and objectives is imperative.