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    FAQs


  INTRODUCTION TO ESTATE PLANNING

  BASIC ESTATE PLANNING

  PROBATE

  COMPARISON OF WILLS AND REVOCABLE LIVING TRUSTS

  THE PEOPLE WHO EXECUTE MY ESTATE PLAN

  INCAPACITY PLANNING - FINANCIAL MATTERS & MEDICAL DECISIONS

  RETIREMENT BENEFITS

  ESTATE TAX AND OTHER ADVANCED ESTATE PLANNING

  ASSET PROTECTION WITH LIMITED PARTNERSHIPS & LIMITED LIABILITY COMPANIES


INTRODUCTION TO ESTATE PLANNING

What is estate planning?
What are the objectives of an estate plan?
What are the best excuses for not doing an estate plan?

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BASIC ESTATE PLANNING

What does a will do?
What does a will not do?
What happens to my property if I die without a will?
Is ownership as joint tenancy considered estate planning?
What if I create a joint tenancy with my child?
What is the difference between community property and separate property?

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PROBATE

What is probate?
Who is responsible for handling probate?

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COMPARISON OF WILLS AND REVOCABLE LIVING TRUSTS

What is a revocable living trust?
What are some similarities between wills and revocable living trusts?
What are some advantages of revocable living trusts?
What are some disadvantages of revocable living trusts?
Why is a revocable living trust sometimes better than a power of attorney?
Would I have control over my property if I establish a revocable living trust?
Does a couple’s revocable living trust provide asset protection?

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THE PEOPLE WHO EXECUTE MY ESTATE PLAN

Who will carry out my estate plan?
What is an executor?
What is a trustee?
What is an agent named in a power of attorney?
What is a guardian? 

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INCAPACITY PLANNING - FINANCIAL MATTERS & MEDICAL DECISIONS

What is a power of attorney?
Who may act as an agent under a power of attorney?
When does a power of attorney become effective?
Is there a specific form for a Texas financial power of attorney and should I have one?
What are some disadvantages of a financial power of attorney?
Can a financial power of attorney be revoked?
What are alternatives for managing an incapacitated person’s property?
What is a Texas medical power of attorney and should I have one?
What is a HIPAA Authorization and should I have one?
What is a guardianship?
What are the disadvantages and advantages of a guardianship?
Can powers of attorney eliminate the need for a guardianship?
What is a living will (or directive to physician)? 

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RETIREMENT BENEFITS

Are retirement plan assets transferred according to the terms of my will?
If I have a retirement plan, will my death trigger estate tax or income tax?
What is the negative effect of my retirement plan assets passing to my estate?
What happens if my estate is the designated beneficiary of my retirement plan?
For income tax purposes, is the spouse always the best choice as designated beneficiary?
Are there complications with designating a trust as beneficiary of my retirement plan?

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ESTATE TAX AND OTHER ADVANCED ESTATE PLANNING

What are gift, estate, and generation-skipping transfer taxes?
How can I avoid gift tax?
How can I avoid estate tax?
Does my death affect the income tax basis of my assets?
What is an irrevocable life insurance trust?
What is a charitable remainder trust?
What is a grantor retained annuity trust?
What information is needed to make a business succession plan?

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ASSET PROTECTION WITH LIMITED PARTNERSHIPS & LIMITED LIABILITY COMPANIES

Can I be sued for something that was not my fault?
Under Texas law, do some entities protect assets better than other entities?
How can a Texas limited partnership protect my assets?
Can creditors of a limited partner reach assets owned by a limited partnership?
What is a charging order?
How can a Texas limited liability company protect my assets?

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INTRODUCTION TO ESTATE PLANNING

Q. What is estate planning? 

A. Estate planning is the preservation and distribution of your assets, both during your life and upon your death. It involves accomplishing your personal and family goals, managing your financial and legal affairs, and minimizing taxes.  Estate planning can be accomplished through a variety of methods, including:

  • Last Will and Testament / Probate
  • Beneficiary Designations
  • Lifetime Gifting
  • Revocable Living Trusts
  • Joint Ownership
  • Entities (for example, limited partnerships and limited liability companies)
  • Powers of Attorney and other documents relating to incapacity

Problems often arise when people don’t coordinate all of these methods of transferring their assets. To take an example, a father’s will may say that everything should be equally divided among his children, while at the same time the father creates a joint account with only one of the children “for the sake of convenience.”  There could be a disagreement about whether that account should be included with the rest of the property and transferred according to the terms of the will.  The legal resolution may be clear, but damage between the children could occur. 

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Q. What are the objectives of an estate plan? 

A. Lifetime Objectives - An estate plan should provide for the best use of the owner's assets during his or her lifetime. The estate plan should anticipate and provide for such lifetime needs as a child's education, income for retirement, replacement of income in the event of disability, and management of the estate in the event of incapacity. These and similar objectives may be accomplished by utilizing a variety of techniques discussed in other FAQs. 

Asset Succession - An estate plan should provide for the transfer of assets on death in such a way that the value of the estate that is passing to the survivors is maximized and is distributed in accordance with the wishes of the deceased person and the needs of his or her family. This goal cannot be accomplished unless the estate owner's objectives are carefully determined. Only then can a plan be individually tailored to carry out these objectives.

Role of Tax Planning - Tax saving methods are employed to achieve many planning objectives. By minimizing taxes, the owner will have a larger estate to enjoy during his or her lifetime and to satisfy the needs of the family after death.

The fact that a good estate plan will frequently save taxes helps to show the need for planning.  However, many people are reluctant to engage in estate planning because it forces them to think about matters that make them feel uncomfortable.  How do you provide for yourself in the event of retirement or illness? Who will receive the estate after death? How will the children be cared for?

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Q. What are the best excuses for not doing an estate plan?

A. Many people know they need estate planning; but because of certain conflicts, uncertainties, or concerns, they cannot get the estate planning process started.  Below are eight excuses clients give for not doing their estate planning followed by our answers to those excuses.

Excuse: I've just been too busy, but as soon as I have more time, I will get something done.

Reply: We all put things off from time to time.  However, because of the uncertain timing of death or incapacity, estate planning should not be put off indefinitely. 

Excuse: I don't really know what I would want to do for an estate plan.

Reply: You already have an "estate plan."  Even if you don't know what you want to do, state statutes determine the disposition of your assets if you die without a will or other estate planning documents.

Excuse: It will cost too much.

Reply: Not doing anything can cost you even more. For example, you may be able to avoid or reduce estate taxes which can be as high as 45 cents on the dollar. Basic estate tax planning can reduce or eliminate estate taxes.  Furthermore, your first conference with us is free if you choose not to hire us.

Excuse: I don't like having to think about my death.

Reply: One of the primary reasons for estate planning is to make appropriate provisions for your family in the event of your death. The focus is on protecting the interests of your family members who survive you. Having completed your estate planning does not mean you are going to die any sooner, but it does give you the peace of mind to know you have taken care of your family's needs that arise after you die.

Excuse: I'm not comfortable having to talk about my personal financial situation and family matters with a lawyer.

Reply: Your lawyer is bound by disciplinary and other rules to treat anything he or she learns about you as confidential and to act only in your best interest (whether or not you hire the lawyer).

Excuse: I don't own enough assets to make estate planning important.

Reply: No matter how small an estate you may have, usually there are reasons why having a will, trust, or beneficiary designation in place for the disposition of your property is better than having none of these documents at all. For example, if you have minor children, you need to think about nominating a guardian to take care of those children if there isn't a surviving parent. There are numerous other issues like this that should be addressed, even for someone with a small estate.

Excuse: My spouse and I do not agree on what we should do.

Reply: If you do not agree and do nothing, then your spouse may be able to control everything if you die first. With a will or trust, you can at least make decisions to control your one-half of the community property and all of your separate property.

Excuse: I cannot decide who to name as trustee, executor, or guardian of my children. 

Reply: If you do not name them, then state law will name them for you; and they may be just the people you want to avoid receiving those powers. 

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BASIC ESTATE PLANNING 

Q. What does a will do?

A. A will lays out your distribution plan for the property that you own at the time of your death subject to the payment of debts, expenses, and taxes.  Your will cannot, however, determine the disposition of your property that is not part of your probate estate unless these assets are payable to your estate.   Some examples of these “non-probate” assets are life insurance, retirement plans, certain jointly held property, and assets held in certain trusts.

Other objectives that may be accomplished in your will include: designation of a guardian for your minor children; designation of an independent executor of your estate (which minimizes court supervision of your estate administration); designation of the trustee of any trust created in your will; elimination of the need for a bond for your guardian and executor; and support of charitable causes.

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Q. What does a will not do?

A. Your will cannot determine the disposition of “non-probate” assets (such as life insurance, retirement plans, certain jointly held property, and assets held in certain trusts), unless your estate is the designated beneficiary or trust beneficiary of these assets.

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Q. What happens to my property if I die without a will? 

A. If you die without a will, state law determines who will receive your property.  The applicable state can be either the location of your domicile (for property that is not real estate) or the state in which your real estate is located.  Texas Probate Code sections 38 and 45 determine who will receive your property.  You can view these statutes by clicking the following link: http://www.mystatewill.com/statutes/tx_law.htm

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Q. Is ownership as joint tenancy considered estate planning? 

A. When property is owned by more than one person as a joint tenancy with right of survivorship, upon the death of one of the owners, all of the deceased owner’s interest in the property is transferred immediately to the surviving owner(s), thereby avoiding probate.  Joint tenancy with right of survivorship is not a substitute for estate planning, it is one type of estate planning.  Generally, it is not a good way to plan an estate. For married couples, joint tenancy with right of survivorship causes a transfer of specified property upon the death of the first spouse to die.  However, it does not help to transfer the estate upon the death of the surviving spouse.  And there are numerous problems with putting a child's name on the title to your property as a joint tenant (see the FAQ below).  

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Q. What if I create a joint tenancy with my child?

A. This is simply not a good way to plan an estate. One problem with putting your child's name on the title to your property as a joint tenant is that while it will avoid probate, creditors of the child will be able to reach the joint tenancy property.  Adding your child’s name to your account may also not be consistent with your ultimately desired distribution.   

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Q. What is the difference between community property and separate property?

A. Texas is a “community property” state.  Under Texas community property law, all property which is owned by either spouse is presumed to be community property unless it is separate property.  Generally, separate property is property either (1) owned or acquired by a spouse before marriage, or (2) acquired by a spouse during marriage by gift, bequest, or inheritance.  Generally, income from all property owned by either spouse is community property (although a marital or premarital agreement can dictate otherwise).  

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PROBATE 

Q. What is probate?

A. Probate is a legal process that takes place after someone dies. It includes:

  • proving in court that a deceased person's will is valid (often a routine matter)
  • identifying the person to be legally responsible for administration of the estate
  • identifying and preparing an inventory of the deceased person's property
  • paying debts and taxes, and
  • distributing the remaining property as the will (or state law if no will) directs.

Probate often works like this: After your death, the probate court appoints the person named in your will as executor of your estate and declares your will to be valid.  The executor then: (1) notifies estate beneficiaries and creditors of your death, and (2) prepares and files with the probate court an inventory of your estate’s assets.

Your executor must find, secure and manage your assets during the probate process, which commonly takes a few months to a year. Depending on the contents of your will, and on the amount of your debts, the executor may have to decide whether or not to sell your real estate, securities or other property. For example, if your will makes a number of cash bequests but your estate consists mostly of “hard to value” assets, those assets might have to be appraised and sold to produce cash. Or, if you have many outstanding debts, your executor might have to sell some of your property to pay the debts.

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Q. Who is responsible for handling probate? 

A. In most circumstances, the executor named in the will takes this job. If there isn't any will, or the will fails to name an executor, the probate court names someone (called an administrator) to handle the process.  

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COMPARISON OF WILLS AND REVOCABLE LIVING TRUSTS 

Q. What is a revocable living trust? 

A. A revocable living trust can be created if you transfer some or all of your property to a revocable trust during your lifetime.  Typically, you control the trust property in your capacity as trustee of the revocable living trust. 

A revocable living trust is created during the trust creator’s life and generally provides for the trust creator (and, if applicable, the trust creator’s spouse) to receive the trust income and use of the trust assets for life. On the death of the trust creators, the assets may be distributed to other named trust beneficiaries, such as the trust creator’s children. 

There are many other practical considerations when using a revocable living trust. A revocable living trust does not eliminate the need for a will because a will identifies who gets the assets that were not transferred to the trust during your lifetime.  The will directs any assets not already in the trust to be transferred into the trust at your death.  The trustee of the trust will manage and distribute these assets according to the terms of your revocable living trust. 

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Q. What are some similarities between wills and revocable living trusts?

A. As a general proposition, both wills and revocable living trusts are prepared as estate planning documents and, for that purpose, the two vehicles are virtually identical in the variety of estate plans which they can implement. For example, both wills and revocable living trusts can provide for distribution by outright gift or by trust, and both can take advantage of the various estate tax saving techniques.  Since the disposition provisions of wills and revocable living trusts can be identical, neither affords estate tax advantages over the other.

Wills and revocable living trusts also share certain similarities during the creator's lifetime. For example, both documents can be amended or revoked by the creator and thus neither limits the creator's control of his or her property. Since the creator of a revocable living trust is taxed on the trust income, the trust (like the will) does not afford any income tax advantages to its creator.

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Q. What are some advantages of revocable living trusts? 

A. The most publicized advantage of revocable living trusts is their ability to avoid probate and thus to reduce the difficulty, delay and expense of transferring one's estate.  However, Texas probate is often less burdensome and expensive than probate in many other states.  This is primarily due to limited supervision by Texas probate courts if your will is properly drafted.  In addition to avoiding probate, other advantages of a revocable living trust include: 

(1)   Privacy.  If your estate is probated in Texas, assets held in your revocable living trust (as of your date of death) are not included in the statutorily required probate inventory of your assets that is a permanent public record; 

(2)   Ancillary Probate Avoidance If non-Texas real estate is transferred to a revocable living trust before your death, the property will avoid probate in the other state. 

(3)   Contest Deterrent Revocable living trusts may be less susceptible to a successful contest after your death than your will; and, 

(4)   Asset ManagementA revocable living trust offers advantages in responding to the financial management problems arising from your injury, illness, emergency, or incompetency. Under these circumstances, the trustee (who is not the trust creator) can continue to manage the trust property for your benefit during the period of your incapacity (or, if you were serving as trustee, the named successor trustee can manage the property). 

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Q. What are some disadvantages of revocable living trusts?

A. First, a revocable living trust is more expensive than a will. The additional expense of the trust is primarily due to additional drafting; for example, trust provisions for the management of property during the trust creator's lifetime and the transfer of the trust creator's assets into the trust.

Second, a revocable living trust also requires attention to certain formalities during the trust creator's lifetime. For example, sales and purchases of trust property must be transacted in the name of the trust (as the legal owner of the property). Consequently, individuals and companies dealing with the trust (such as banks, title insurance companies, and escrow companies) will frequently want to review the administrative provisions of the trust document. These formalities are only slightly more complicated than if the transactions were completed without a trust, but they do require additional attention to detail which may be inconvenient.

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Q. Why is a revocable living trust sometimes better than a power of attorney? 

A. The trustee of a trust has legal title to the trust’s assets and therefore third parties must deal with the trustee as the owner, even if the trustee is not the trust creator. An agent under a power of attorney does not have title and hence third parties may refuse to deal with the agent.  However, if the third party is willing to deal with your agent under a power of attorney, the power of attorney is less expensive to create. 

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Q. Would I have control over my property if I establish a revocable living trust? 

A. Absolutely. While you are alive and mentally competent, you have total control over your property. You can buy, sell, improve, spend, change investments, or give away property just as you would without a trust. The trust can be modified in any way you desire or it can be completely revoked. Upon your death, the trust becomes irrevocable so that no one can change your testamentary wishes. Upon your incapacity, your successor trustee simply steps into your shoes and manages your trust until you either recover from your disability, or until your death. 

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Q. Does a couple’s revocable living trust provide asset protection? 

A. There is no asset protection provided by a Texas revocable living trust while both trust creators are alive. However, there may be some asset protection for the survivor after the first trust creator dies. The trust can also be created to provide asset protection for other trust beneficiaries.  Other types of trusts can be created to provide asset protection for both spouses if desired.   

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THE PEOPLE WHO EXECUTE MY ESTATE PLAN 

Q. Who will carry out my estate plan? 

A. When an individual prepares or updates an estate plan, he or she is faced with selecting the people who will implement the plan. These people are the executor, trustee, guardian, and agent acting under a power of attorney. The following FAQs describe the duties and characteristics of these representatives. 

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Q. What is an executor?

A. The executor's job is to act as the legal representative of a deceased person’s probate estate. The executor is nominated in the decedent's will and is appointed by the probate court upon admission of the will to probate. Once appointed, the executor's main functions are to gather information about estate assets and liabilities, act as caretaker of the assets during the probate administration, and to keep accurate records of all estate transactions. These responsibilities specifically include the preparation of the estate inventory, the filing of various petitions to the probate court, and possibly the preparation of the federal estate tax return and estate income tax returns.  During administration of the estate, the executor collects the estate’s assets and pays taxes and expenses on its behalf. The executor is responsible for approving and paying, or rejecting, creditors' claims against the estate. The executor also has the authority, subject at times to court approval, to execute legal documents and to sell estate assets. The final duty of the executor is to distribute the assets in accordance with the terms of the will. When that is finished, the executor is discharged.

Frequently the executor is the surviving spouse, a child, or another close relative of the deceased person.  Alternatively, the initial executor (or co-executor) may be a bank or trust company.

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Q. What is a trustee?

A. For tax planning and other family purposes, many wills establish trusts for the benefit of the deceased person’s family members.

Revocable living trusts are also commonly used in estate planning. While the creators of living trusts often serve as the trustees while they are alive, the role of the successor trustees is similar to that of the initial trustee of a trust established under a will.

Trustees should have many of the same attributes as the executor: sensitivity toward the named beneficiaries, an organized and efficient approach to discharging his or her duties, and the financial, business and investment knowledge to invest and manage the trust assets. Accurate record keeping is essential to the performance of the investment responsibilities.

Since a trust is often drafted to last for long periods of time, the ultimate successor trustee should be a well established bank or trust company because of their “unlimited” life.

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Q. What is an agent named in a power of attorney?

A. Also to be considered are: (1) a durable power of attorney for financial matters, and (2) a medical power of attorney. The durable power of attorney for financial matters allows a property owner to name an agent to act on his or her behalf, with respect to property transactions, during the property owner’s incapacity. Typically the agent has the power to buy and sell property for the person who signed the power of attorney (the “principal”), to bring or defend against lawsuits, and to make many other decisions regarding the property of the principal. The agent will often have the power to manage the principal's businesses. The durable power of attorney for financial matters can be designed to be effective upon the principal’s signature or spring into effect in the event of the principal’s incapacity, whereupon the agent can exercise any legal rights that have been granted under the document.  Accordingly, the agent should possess sufficient business, financial and legal knowledge to properly manage the principal's business and property affairs.

A medical power of attorney allows the principal to designate an agent to make medical decisions if the principal is unable to make these decisions. The agent is authorized to make decisions about the type of treatment the principal should receive.  All medical decisions requiring the informed consent of the patient would be made by the agent if the principal were incapacitated.  The agent under a medical power of attorney is usually a person very close to the principal who is selected without regard to business or financial knowledge.

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Q. What is a guardian?

A. A will is typically the document in which parents nominate a guardian for their minor or incapacitated children.  The selection of a guardian of minor or incapacitated children can be the most difficult decision parents must make in preparing their wills.  During early married life, if the estate is not large enough to require tax planning, the nomination of the guardian may be the primary purpose of a will.

If the parents of a minor or incapacitated child are unable to manage the affairs of or care for their child, a guardian can be nominated to serve in two capacities: (1) he or she may act as guardian of the person of the child (acting as a substitute for the child's parents other than for financial matters); or, (2) act as the guardian of the minor's estate (in which case the guardian will administer and oversee the child’s property).  In many cases, the same individual is named as the guardian of both the person and the estate of a child.

While the child's trust or the guardian of the child's estate may be legally empowered to reimburse the guardians of the person for costs of raising the children, there are indirect costs for raising children which may not be covered.  A couple of examples are adding a room to a home or purchasing additional furniture. Thus, parents may want to make special financial arrangements in their wills and trusts so that the guardians will not suffer an economic burden in caring for the children.

As with other legal representatives, it is important that successor guardians be named in the will. It is also important to consider whether one person or a married couple should be named as guardian.  If a married couple is named, consideration should be given to the preferred sole guardian in the event of a divorce.

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INCAPACITY PLANNING - FINANCIAL MATTERS & MEDICAL DECISIONS 

Q. What is a power of attorney? 

A. A power of attorney is a document authorizing someone else (your agent) to act on your behalf.  Typically, the purpose of giving someone such a power is to enable the agent to act on your behalf when you cannot act for yourself. 

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Q. Who may act as an agent under a power of attorney? 

A. In general, an agent may be anyone who is legally competent and over the age of 18 years. Often, it is a family member. More than one person can be named as an agent. However, sometimes naming two or more individuals to act together can prove inconvenient or ill-advised, particularly if a power of attorney must be exercised promptly. It may be prudent to name one individual as agent and then another as an alternate. 

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Q. When does a power of attorney become effective? 

A. This is your choice.  It can be made effective at the time of signing or it can become effective at the time of your incapacity. 

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Q. Is there a specific form for a Texas financial power of attorney and should I have one? 

A. In Texas, there are several types of financial powers of attorney.  The statutory durable power of attorney is widely accepted.  Executing a statutory durable power of attorney for financial, property, and legal affairs is advisable. It can be effective immediately upon being signed or can become effective at the time of your incapacity. 

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Q. What are some disadvantages of a financial power of attorney? 

A. First, third parties may not recognize or honor your power of attorney. Second, it can be difficult to revoke a power of attorney, especially if your agent has given copies to third parties that have honored it. Third, the agent can reach your assets without court approval or supervision. Therefore, it is imperative that you select an agent with great care and have tremendous confidence in that individual. 

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Q. Can a financial power of attorney be revoked? 

A. Death terminates a financial power of attorney (“FPOA”). Incapacity terminates a FPOA unless the FPOA states that it is “durable.”  The best way to revoke a FPOA is to destroy all original versions and copies. You may also execute a written revocation of a FPOA.   

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Q. What are alternatives for managing an incapacitated person’s property? 

A. One alternative is a court-supervised proceeding referred to as a guardianship (see FAQs regarding guardianship). This is not an appealing option to most people. The better alternative may be the use of a revocable living trust into which you transfer your assets (see FAQs regarding revocable living trusts).  However, some people believe that the hassle and expense of a revocable living trust outweigh its benefits. 

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Q. What is a Texas medical power of attorney and should I have one? 

A. It is very important to have a medical power of attorney, which allows your agent to make decisions with respect to your medical care in the event that you are physically or mentally unable to do so.  Texas statutory law provides the medical power of attorney form.  This statute also provides that if you do not execute a directive to physician (also known as a “living will” – see FAQ regarding living will), your agent under a medical power of attorney has life sustaining treatment authority.  

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Q. What is a HIPAA Authorization and should I have one? 

A. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) requires health care providers to have an authorization for disclosure of confidential information about a patient.  Therefore, it is important for you to provide the health care provider with a HIPAA Authorization.  If you are unable to make medical decisions, this document authorizes the health care provider to give confidential information to the agents under your medical power of attorney and directive to physician. 

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Q. What is a guardianship? 

A. This is a court supervised proceeding which typically names an individual to manage the affairs of an incapacitated person. A guardianship may also include the duty to care for the incapacitated person. 

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Q. What are the disadvantages and advantages of a guardianship? 

A. A primary disadvantage of a guardianship is that it is a public proceeding, thereby exposing the incapacitated individual to embarrassment as the details of their incapacity are discussed at length.  It is also expensive.  In addition, there is no guarantee that the end result will be in accordance with the incapacitated person's wishes, and someone unacceptable to the incapacitated person could be placed in charge of his or her affairs. In some instances, it can be a major advantage that the courts closely watch the guardian in relation to the incapacitated person’s assets. Some feel this provides increased protection.  

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Q. Can powers of attorney eliminate the need for a guardianship? 

A. Yes.  In many instances, powers of attorney are a much better way to deal with incapacity than a guardianship. If you become disabled, financial and medical powers of attorney authorize your agent to act on your behalf. This will generally avoid the need to go through the time consuming, expensive, and possibly embarrassing process during which someone goes to court to have you declared mentally or physically incompetent and seeks appointment to serve as your legal guardian subject to ongoing court supervision. 

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Q. What is a living will (or directive to physician)? 

A. Every competent adult has the right to make a written declaration commonly known as a "Living Will" (and legally known in Texas as a Directive to Physicians or Family and Surrogates).  A Directive to Physician expressly states your directions regarding the withholding of life prolonging procedures in the event one should have a terminal or irreversible condition. The Texas form, which was created by statute, is very detailed and should be studied carefully before you sign it.  See the FAQ regarding medical powers of attorney for an alternative. 

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RETIREMENT BENEFITS

Q. Are retirement plan assets transferred according to the terms of my will?

A. No. Upon your death, your retirement plan assets are transferred according to the beneficiary designation form that you signed.   A will or trust does not override your beneficiary designation form. However, spouses may have special rights under federal or state law.

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Q. If I have a retirement plan, will my death trigger estate tax or income tax?

A. Possibly.  All assets that you own as of your date of death, including retirement plan assets, are subject to federal estate tax (see FAQs below regarding estate tax).  Also, the identity and age of those whom you designate as beneficiaries of the retirement plans will determine if, how much, and when federal income tax would be triggered as a result of your death.

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Q. What is the negative effect of my retirement plan assets passing to my estate?

A. Your retirement benefits could end up in your estate if: (1) your estate is the designated beneficiary, or (2) none of the designated beneficiaries named by you survives you.  Designating your probate estate as the designated beneficiary of your retirement plans is often ill advised because your estate beneficiaries lose the opportunity to maximize income tax deferral relating to your retirement plan assets. 

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Q. For income tax purposes, is the spouse always the best choice as designated beneficiary?

A. If you are married, your spouse is usually the best choice as the primary beneficiary for maximizing income tax deferral.  However, this could cause an increased estate tax liability on the death of your surviving spouse.  Special tax planning and analysis may be appropriate in this situation.  Also, non-tax factors and priorities may override optimal tax planning.

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Q. Are there complications with designating a trust as beneficiary of my retirement plan? 

A. Complicated tax rules apply to trusts designated as a beneficiary of a retirement plan. Seek tax or legal advice before designating a trust as a beneficiary of a retirement plan. 

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ESTATE TAX AND OTHER ADVANCED ESTATE PLANNING 

Q. What are gift, estate, and generation-skipping transfer taxes? 

A. Under Construction.

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Q. How can I avoid gift tax? 

A. Under Construction.

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Q. How can I avoid estate tax? 

A. Under Construction.

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Q. Does my death affect the income tax basis of my assets? 

A. The income tax basis of each of a deceased person’s assets is “stepped up” to the fair market value of each asset as of that person’s date of death.  This may eliminate or reduce the capital gain that would otherwise be incurred by the person who received the property from the deceased person (by will or otherwise).  If the property is community property, then the income tax basis of all of the community property is “stepped up,” including the surviving spouse’s half of the community property.  These “step up” in basis rules will change dramatically starting in 2010 unless new legislation is passed before January 1, 2010. 

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Q. What is an irrevocable life insurance trust? 

A. A popular type of trust for saving estate tax is the irrevocable life insurance trust. It works this way: you transfer ownership of your life insurance policy to an irrevocable trust for the benefit of your family. When you die, the life insurance proceeds are paid to the life insurance trust. The trustee then manages and distributes the proceeds according to the trust instrument. If you die more than three years after the transfer, the life insurance proceeds will not be included in the calculation of your estate tax. If you die within the three-year period, the proceeds will be included in your taxable estate. This three year look-back rule for life insurance transfers may be avoided by creating the trust first and having the trust purchase the life insurance policy. Careful planning must be undertaken to ensure that all tax law requirements are met. 

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Q. What is a charitable remainder trust? 

A. A charitable remainder trust (CRT) allows you to benefit your favorite charity, receive a stream of income during your life, and receive favorable tax treatment.  The mechanics of a CRT are as follows: execute the irrevocable trust instrument, then transfer assets (preferably stocks, real estate, or other property that has appreciated substantially in value since you acquired it) into the CRT. The CRT will pay you income for life (and a percentage of the principal if desired) and the remaining trust property will then pass to the charity at your death. 

Because the CRT is for the ultimate benefit of a charity, you can take a charitable income tax deduction now on the present value of the assets that will pass at your death, and you do not have to pay any capital gains tax. The CRT can then sell the appreciated asset without having to pay capital gains tax. This leaves the entire value of the assets in trust to generate an income stream for you (hopefully greater than the amount of income produced by the asset contributed to the CRT).  With this income, along with the additional income tax savings from the charitable deduction, you can purchase a life insurance policy for your family that will hopefully replace the value of the assets that you transferred into the CRT (or at least replace a portion of these assets). The result is that you have given away an appreciated asset without having to pay capital gains tax, removed the assets from your taxable estate, benefitted your favorite charity, hopefully increased your current cash flow, and replaced some or all of the value of the asset with life insurance to your family.  Careful planning must be undertaken to ensure that all tax law requirements are met. 

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Q. What is a grantor retained annuity trust? 

A. A grantor retained annuity trust (GRAT) is a trust which transfers tax-free all of the trust’s asset appreciation which exceeds a specified interest rate (prescribed by the      U. S. Treasury Department) to one’s children (or other beneficiaries).  

The person contributing the assets to the trust is called the “grantor.” The grantor transfers property to the GRAT.  Typically, the GRAT periodically pays a set amount (the “annuity”) back to the grantor.  You pick the trust’s duration, you pick the annuity amount, and you pick the property to go into the trust.  At the end of this term, the GRAT property remains in trust for the benefit of, or passes directly to, your children or others named in the trust instrument. 

If the grantor dies during the period when the trust pays an annuity to the grantor, the trust property will likely be included in the grantor’s taxable estate for estate tax purposes.  In other words, this tax planning technique does not work if the grantor dies during the trust’s annuity period. 

The annuity payments from the GRAT are calculated so that their value is equal to the value of the assets transferred to the GRAT, plus interest as prescribed by the IRS. This results in little or no gift tax being owed as a result of the grantor’s transfer of assets to the GRAT.   

Please keep in mind that this is a simplified discussion of a complicated topic. There are certain risk factors, including tax law risks, valuation risks, and the possibility that the grantor might die during the term of the trust, that must be reviewed and analyzed in each individual case. 

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Q. What information is needed to make a business succession plan? 

A. Within your privately owned or family business, planning is essential for the security and continued success of the business as well as for the current and future generations of your family.  Your goals, your family's goals, and your company's goals must all be considered in a successful business succession plan. Answers to the following questions provide critical information for developing such a plan. 

Family Dynamic Issues: Is conflict within the family affecting the business? Are some family members active in the family business and some not? Does this create conflict? Can family members pursue their own goals within the current structure of the family business? Should the structure of the business be changed? 

Owner Planning: As the owner, what is your role now? What do you want it to be in the future? Will you remain involved, or will you totally step aside? What if you become disabled? How will you and your children remain financially secure? What are your sources of income? What are your options? Do you need additional life insurance, disability insurance, or other sources of financial support? 

Succession Planning: Who, if anyone, will take over your business? Should it be a family member? How will the wealth of the company be distributed? How will estate taxes affect the company? How will ownership be transferred? How will leadership be transferred? How will significant wealth affect your children? Should creation of a family foundation be considered? 

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ASSET PROTECTION WITH LIMITED PARTNERSHIPS & LIMITED LIABILITY COMPANIES 

Q. Can I be sued for something that was not my fault? 

A. If an individual or company causes an injury, that individual or company should pay fair compensation to the victim for the victim’s loss.  Unfortunately, this is not the prevailing principle in our legal system today. 

People and companies are sometimes named as defendants in lawsuits because of their ability to pay rather than their degree of fault.  Why?  Because many plaintiffs have no risk of loss when filing a lawsuit against those with “deep pockets.”  The plaintiff hires the lawyer in exchange for a percentage of the lawsuit judgment or settlement (a “contingency fee” arrangement).  Consequently, people and companies with significant financial resources are lawsuit targets.  And often, lawsuits, whether frivolous or not, are settled by defendants to avoid spending the time and money necessary to put on the best legal defense possible.  This provides a clear advantage to a plaintiff who has no financial risk in filing the lawsuit. 

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Q. Under Texas law, do some entities protect assets better than other entities? 

A. Given the litigious environment in the United States (see FAQ above), one important goal of a sound estate plan is to protect your personal and business assets from potential lawsuits and claims.  One method of discouraging lawsuits is by owning your property in a protected manner. 

One important step in structuring a sound asset protection plan is deciding which form of entity should be used to operate your business or hold your investments.  Many Texas physicians use a professional association as the entity through which they operate their medical practices.  Otherwise in Texas, limited partnerships and limited liability companies are favored entities for protecting assets.

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Q. How can a Texas limited partnership protect my assets?

A. A limited partnership (“LP”) consists of one or more general partners and one or more limited partners. The general partner is responsible for managing the LP and has unlimited liability for all of the LP’s debts and obligations.  A limited liability company (“LLC”) or other type of entity may serve as the general partner.  Having an entity as general partner adds a layer of protection for the owners of the entity serving as general partner who would otherwise be individually liable for the LP’s debts and obligations.

Limited partners have no personal liability for the LP’s activity and stand to lose only the amount which they contribute, or obligate themselves to contribute, to the LP.

Example:

Step 1: Alex and Pat each contribute $500 to an LLC.  In exchange, Alex and Pat each receive a 50% ownership interest in the LLC.  

Step 2: Alex and Pat each own a 50% interest in a rental property valued at $99,000.  They transfer the rental property to an LP in exchange for each becoming a limited partner with a 49.5% ownership interest. 

Step 3: The LLC transfers $1,000 to the LP in exchange for becoming a general partner with a 1% ownership interest.  To bolster the asset protection plan, the LP buys an appropriate amount of insurance to cover damages that might arise from the LP’s operation of the rental property. (See next 2 FAQs.)

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Q. Can creditors of a limited partner reach assets owned by a limited partnership?

A. Assume that Pat is a physician and there is a malpractice judgment against him for $1 million. The plaintiff is now a judgment creditor who will try to collect the $1 million from Pat.   As payment of the $1 million award, the judgment creditor wants assets that Pat transferred to a limited partnership (“LP”). Can the judgment creditor take these assets from the LP?

The answer is “no” assuming that Pat’s asset transfers to the LP were not fraudulent transfers. A creditor of a limited partner cannot reach into the LP and take LP assets. Under Texas law, the judgment creditor’s sole remedy with respect to a limited partner is called a charging order (see next FAQ).

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Q. What is a charging order?

A. Under Texas law, a judgment creditor’s sole remedy with respect to a limited partner is called a charging order.  A charging order requires the general partner of a limited partnership (“LP”) to pay over to the judgment creditor any distributions from the LP which would otherwise go the debtor partner (Pat in the immediately preceding FAQ’s example), until the judgment is paid in full.

Importantly, a charging order does not give the creditor the right to: (1) become a partner of the LP, or (2) interfere in the management or control of the LP’s business. The creditor only receives the right to receive any distributions from the LP to Pat.  If the LP arrangement had not been used, and if all of Pat’s assets were titled in Pat’s name, the creditor could have collected against all of Pat’s non-exempt assets.

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Q. How can a Texas limited liability company protect my assets?

A. A big difference between a limited partnership (“LP”) and a limited liability company (“LLC”) is that the LLC does not have a general partner.  In other words, there is no LLC owner who is individually liable for the LLC’s debts and obligations.  All of the LLC owners are treated for liability purposes as if they were a limited partner of an LP.  In other words, limited partners have no personal liability for the LLC’s activity and stand to lose only the amount which they contribute, or obligate themselves to contribute, to the LLC.  Assume that Alex and Pat transfer ownership of an apartment building to an LLC in exchange for each owning a 50% interest in the LLC.  If a tenant of the apartment building is injured on the premises, the assets of Alex and Pat would be protected from any claim by the tenant against the LLC or any judgment rendered against the LLC.

Also, an LLC’s property cannot be reached by a creditor of an LLC owner.  As is the case with the LP, LLC assets are protected from potential claims against an owner. Under Texas law, the creditor is limited to the charging order remedy (see discussion of charging orders in FAQ, above). A creditor of an LLC owner is only permitted to take any distributions from the LLC to the LLC owner.  Importantly, a charging order does not give the creditor the right to: (1) become an owner of the LLC, or (2) interfere in the management or control of the LLC’s business.

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DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.

 
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