FAQ

Why do I need a will?

Who gets my property if I die without a will?

Is probate the best option?

Should I have a Living Trust?

What is a Bypass Trust?

1. Minor children.

In the absence of a will, a judge may appoint a guardian for your minor children whom you would never have approved of. By preparing a will, you will be able to specify exactly who you want taking care of your children if something were to happen to you.

Drafting a will also prevents minor children from inheriting real estate outright. Although minor children have the legal capacity to own property, they do not have legal capacity to manage it. If your children inherit any share of your house, your spouse will not be able to sell the house, rent it to tenants, or refinance the mortgage without getting a court order. Getting court orders can be very time consuming and expensive. Although minor children generally will not inherit community property if you do not have a will, they will inherit a share of your separate property.

2. No children.

Do you know what would happen to your property if you died without a will? If you are married with no children, unfortunately your spouse might not inherit everything. If you and your spouse have no children, your parents or siblings may inherit part of your home and become co-owners with your spouse. Your spouse will not be able to sell the house without receiving their permission. If you want to leave property to your parents or siblings in your will, it is a good practice to leave specific pieces of property that your parents or siblings will not be required to share with your spouse. Drafting a will can accomplish this goal and avoid potential feuding among family members.

3. Large family.

All of your heirs will be co-owners of each and every asset you own, requiring them to manage all the property together. These heirs may not live in the same state, and they may not be able to agree on what to do with the property. The more heirs you have, the more money, time and effort will be spent trying to become organized. By preparing a will, you can leave specific assets to specific heirs, or put a single heir in charge as the trustee for the other heirs. Making specific bequests in a will can save your heirs significant effort and expense, in addition to preventing fights amongst family members from breaking out.

4. Real Estate.

In the absence of a will, real estate may be inherited by minor children or multiple co-owner family members, and either result can be costly. Making the important decisions now can save your family members significant time, expense and trouble down the road.

5. Health Care and Financial Decisions.

If you become incapacitated due to an unforeseen illness or injury, having powers of attorney in place will be necessary to allow a friend or family member to make important health care decisions for you. These documents will give you peace of mind, knowing that things will be taken care of in your absence.

1. If you are married:

If all of your children are also the children of your current spouse, then your spouse will inherit all of your community property. Your children will inherit a two-thirds interest in every item of your separate property. The remaining one-third of each item of separate property will go to your spouse, but if the item is real estate, it returns to your children upon the death of your spouse.

If you have children from a previous marriage, your children will inherit all of your half of the community property. Your spouse will keep her half of the community property. Your separate property will be distributed the same way as in the previous paragraph.

If you have no children, your spouse will inherit all of your community property. Separate property that is not real estate will also go to your spouse. Separate real estate will go half to your spouse, one fourth to your mother, and one fourth to your father. If either parent is deceased, that parent's share will be inherited by your siblings if they survive you. If none of your parents or siblings (or their descendants) survive you, your spouse will inherit all of your separate real estate.

2. If you are not married (this includes being widowed or divorced):

Your children will inherit all of your property equally. If any child has died before you, his share will go to his children. If he has no children, it will go to your surviving children. If a child of a deceased child is also deceased but has left a child of his own (your great-grandchild), that great-grandchild will get its parent's share of your estate, and so on.

If you have no children, your father will inherit half of your property, and your mother will inherit the other half. If either parent is deceased, your siblings will inherit that parent's share. If a sibling is deceased but has left a child (your niece or nephew), that child will inherit its parent's share, and so on. If a sibling is deceased and has left no children, the surviving siblings will take that sibling's share. If neither of your parents nor any of their descendants survive you, your grandparents will inherit your estate equally. If either grandparent has died before you, their descendants (your aunts, uncles, and cousins) will inherit your estate.

Probate laws differ from state to state. The following discussion applies to residents of Texas.

First of all, you should remember that the horror stories are just that -- horror stories. They are the most grievous examples from among many different experiences. If you leave no will and your heirs all hate each other, the probate of your estate will very likely be a nightmare. But in Texas, probate can be very simple if you leave a properly drafted will.

You may have heard that a living trust can avoid probate. A living trust works because none of your assets are in your name at death. If you have vigilantly transferred everything you own to the trust, the distribution of your assets at death will be handled under trust law, instead of under probate law. In some states, such as California and Ohio, trust law is much simpler than probate law for this purpose. But in many states, including Texas, the differences are minor. The state of Texas is not interested in tying up your assets. Indeed, probate isn't even mandatory in Texas. It should be thought of more as a service that the state offers to help the heirs clear title to assets. Most banks and other institutions will not release assets or funds to the heirs of the account owner, because they are afraid of being sued if someone lies to them about being an heir. An order from a probate court will protect them from this liability. The Texas probate system is designed to help the rightful heirs obtain such an order as easily as possible, while still preventing fraud by impostors.

Even if you have a fully-funded living trust, the distribution of your assets can still be delayed if your estate is large enough to owe estate taxes. Federal law holds your successor trustee and executor personally liable for any unpaid estate tax. Therefore it would be foolish for the successor trustee of your living trust to distribute the trust assets before making sure the IRS is satisfied with the amount of estate taxes paid. The IRS will, upon request, issue a "closing letter" which provides some protection to the trustee or executor, but the process of requesting and obtaining the closing letter can easily take over a year. If you have ever been told that an estate is tied up in probate, it is entirely possible that the probate court is not to blame at all; it's really the fault of the estate tax system. And avoiding estate tax, while a worthy goal, is very different from avoiding probate. A living trust does nothing to avoid estate tax that a properly drafted will cannot also do.

Probate horror stories are often caused by events outside the probate system. Estate taxes, will contests, poorly drafted wills or trust documents, family members who are unhappily surprised by the contents of a will or trust -- all of these things can and do make the process of distributing your assets long and expensive. Simply setting up a living trust to avoid probate without dealing with these other issues will not prevent your estate from suffering the expense and delay of the worst horror stories you've heard.

A living trust works like this: You execute a document, called a trust agreement, that creates the trust. The trust agreement names you as the trustee and the primary beneficiary of the trust. As beneficiary, you are entitled to distributions of trust assets whenever you want them. You then transfer your assets to the trust, so that when you die, you own nothing that is subject to the probate process.

Some planners assert that everyone should have a living trust, while others believe that a will is all most people need. Before you make a decision to incur the extra cost and hassle of a living trust, you should know two things:

1. In Texas, probate can be fast and inexpensive.

Some states impose procedural requirements that generate large legal fees and take years to complete. But Texas has a vastly simplified procedure called "independent administration" that you can take advantage of merely by using the proper language in your will. An independent administration can often be completed within three months if no estate tax return needs to be filed. My fee to set up a living trust usually comes to about the same amount as my fee to handle an uncontested probate with independent administration. So a living trust in Texas is not likely to save probate costs. It won't even save you the cost of the executor's fee; if you don't have a relative or friend who is available to serve as executor for free, then you probably won't be able to find anyone to serve as successor trustee of a living trust for free, either.

2. Living trusts do not save taxes.

Anyone who tells you that a living trust will save estate or income taxes is mistaken. A living trust can do nothing about income taxes. And while it is true that a living trust may contain the same estate tax-saving provisions as a will, and therefore is better than nothing, the decision to execute a living trust instead of a tax-planned will is going to have no effect on your estate tax bill. (This assumes you live in Texas. If you live in another state, ask an attorney to explain your state's death tax. Most -- but not all -- states follow the same system as Texas.)

So who should have a living trust?

Reasons favoring the creation of a living trust:

1. You are a well-organized, prompt record-keeper.

A living trust must be properly maintained for the rest of your life. It is not a highly technical or difficult process, but it involves detail work that some people are not in the habit of doing. You must always remember that you have a living trust and that all of your assets must be owned by the Trust, not you personally. If you buy property, you must buy it in the name of the Trust. If you inherit property, you must transfer it to the Trust immediately. When you open a new bank account, you must explain the trust to the bank and make the trust the official owner of the bank account. The benefits of a living trust only apply to the assets contained in the trust. For example, if only one bank account is in your name rather than in the name of the trust, then your estate will have to go through probate and incur all the costs of probate, in addition to what you paid to create a living trust.

2. You want to give someone the full authority to manage your assets if you become incapacitated.

A living trust can appoint a successor trustee to take over if you become unable to manage your affairs. It functions much like a power of attorney, but banks and title companies are much more willing to accept a trust and act on it. Some banks are reluctant to recognize powers of attorney, but they usually will handle living trust documents.

3. You hold real estate outside of Texas.

The Texas probate process can be very simple if your will is drafted properly. For most Texans, the cost of probate winds up being about equal to that of a living trust, especially when you consider the fact that a living trust must be paid for now, but probate doesn't have to be paid for until after you die. In some other states, however, probate is a long, expensive process. If a Texan owns property in another state, his heirs will have to probate the property in that state. Many Texas estate planners will set up a living trust just for out-of-state property. This avoids much of the hassle of a living trust, yet also avoids out-of-state probate.

4. Your will is likely to be challenged in court.

In practice, it is more difficult to challenge a living trust than a will, particularly if the living trust was properly operated by the testator for many years before he or she died. Of course, a living trust can be challenged as soon as it is set up, but since you are still alive you can testify on your own behalf. Many will contests succeed because the testator is no longer available to explain himself. For this reason, living trusts are frequently used to avoid fights in nontraditional family settings like stepfamilies, unmarried companions, etc. If you are concerned about your will being contested, a living trust is a good idea, even if you have to pay a professional trustee to maintain it for you.

5. You want to keep your estate private.

Even under Texas' simplified probate process, your executor will probably have to file an inventory of your assets and their approximate values, and this filing, along with your will, is a public record that anyone can look at. A living trust does not have to do this, although many of your assets are already recorded in public records. The deed to your house is filed with your county, as is the initial amount of your mortgage. Your marriage license, birth certificate, and other records contain information about your age, marital status, etc. The title information for a car is available to many businesses and governmental agencies. Incorporation records, limited partnership filings, and assumed name filings are also public records, so your ownership of a business may also be discovered. Finally, consider your credit report, which technically isn't a public record, but is still available to many people (with few safeguards) and which contains a great deal of information about your assets purchased on credit, employment history, marital status, etc. For many people, probate doesn't reveal any information to the world that a good detective or scam artist can't already figure out. Furthermore, your estate may not even have to file an inventory as part of probate. If all of your unsecured debts can be paid off before your executor files the initial application for probate, then your estate may qualify for a special procedure called Muniment of Title, which does not require the filing of an inventory. Of course, the will must still be filed, so anyone will be able to discover who is inheriting your property, but they will not be able to find out what or how much your beneficiaries are getting.

Nevertheless, some people find that the relative privacy of a living trust is still valuable to them. Your ownership of certain assets (such as stocks and bonds) may not be a matter of public record. You may have enough local celebrity that your probate hearing might degenerate into an undignified media event. You may not want your executor to have to take an afternoon off work to appear in probate court. Only you can assess your own desire for privacy, but you should do so with the knowledge that probate is not usually a significant invasion of that privacy.

6. You wish to avoid probate for non-financial reasons, and you own assets that need to be probated.

Many people have personal reasons for not wanting their estates probated, and a living trust is not the only way to avoid probate. Many Texas estates do not ever have to go through probate, because the heirs can gain ownership of every asset without having to get a court order proving their entitlement. Assets that can be transferred without a court order include:

• Life insurance. (The insurance company simply makes the check out to whomever you listed as your beneficiary.)
• Pension benefits, retirement plans, or IRA accounts. (Once again, the beneficiary you listed gets the check.)
• Cars titled in certain Texas counties. (The local DMV is authorized to retitle the car in the name of whomever shows up with the old title and swears on penalty of perjury that he is your heir.)
• Joint bank accounts that were owned with right of survivorship.
• Clothing, furniture, books, electronics, jewelry, and other similar items, if your spouse and family and friends will be able to divvy them up without significant argument. (Often, simply showing them an unprobated will or even just a letter that directs what is to be done with these items can settle any arguments.)

A bypass trust is a tool used for long-term estate planning. If a person leaves property to another in the form of a bypass trust, the property will avoid being subject to estate taxes when that person dies. (The property will still be taxed in your estate, however, the property will avoid being taxed twice.)

A bypass trust can be beneficial for spouses who plan their estates together. If two spouses leave their property to each other in the form of a bypass trust, they can ensure that the property will be taxed only one time between the two of them.

A bypass trust does come with certain conditions that must be followed to ensure the property is taxed only once:

1. You must limit your spouse's ability to access the trust during his/her lifetime.

Your spouse cannot have an unrestricted ability to withdraw principal, but you can give your spouse the ability to withdraw principal to provide for his/her health, support, education and maintenance, and you can also give your spouse the right to withdraw up to $5,000/year of principal for any purpose, or 5 percent of the total principal, whichever amount is greater.

You can also give your spouse the right to all interest and dividends earned in the trust each year, and appoint your spouse, trustee. As trustee, your spouse would have full discretion to decide whether principal is needed for maintenance or support, making this condition flexible

2. You must limit your spouse's power to distribute trust assets upon his/her death.

Except as provided above, your spouse cannot have the right to give the trust assets to himself/herself, his/her creditors, his/her estate, or his/her estate's creditors. You can, however, give your spouse the right to name in his/her will specific persons who will succeed to the trust upon his/her death. For example, you could authorize your spouse to leave the trust to any of your relatives, or to divide it among your children. In the alternative, you can specify who gets the trust next and leave your spouse no discretion.

Although a bypass trust can be very flexible in practice, it is important that the trust be drafted with absolute precision by an experienced estate planning attorney. The IRS has specified the words that must be used in the bypass trust. If these words are not written perfectly, the trust might fail to be excluded from tax in the second estate.

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