Texas Estate Planning

Don't Let Your House Haunt You!

The family home can be a place to hold the heart and soul of generations, and just like any good ghost story, if you don’t treat it right, it will come back to haunt you

 

The family home is often the most precious asset–its walls hold sentimental value as well as some real market value. It’s really important to make sure you make the right decision about your home for you and your family. 

 

How could my house haunt me? 

 

Don’t listen to the ghouls and fools who tell you that you can just gift your home away, or sell it for big bucks just before making some major changes in planning. They don’t know about the five year curse (5 year look back period for Medicaid) or the peril of probate!

 

And it’s not just some kitschy catchphrase–probate is no joke. Probate is the legal process of changing ownership of a deceased person’s assets. It can be a lengthy and often stressful process. If a home has to go through probate, maintaining the property and paying the bills can get complicated–and fast. Your house might not be haunting you, but it sure is haunting your loved ones. 

 

Many folks think you can’t own a home if you’re trying to get on Medicaid, but that’s simply not true. In reality, gifts made within the last 5 years will be scrutinized in Medicaid’s crystal ball (mountains of paperwork).  A homestead is an exempt asset that, under most circumstances cannot count against you; however, Medicaid will try to recoup some expenses through the Medicaid Estate Recovery Program (MERP) at the time of your passing. Thankfully, there are things you can do to keep your home safe from the 5-year lookback period, the Medicaid Estate Recovery Program, AND probate.  

 

Stop the Haunting, take Legal Action!

 

Texas allows for Transfer on Death Deeds, or Lady Bird Deeds, which keep the house in your name throughout your life and grant title to a beneficiary at the time of your passing. These two deed options are slightly different and speaking with a licensed attorney can help guide you to the deed that’s right for you, your loved ones, and your goals. 

 

Now, you might’ve heard about a trust to keep your house safe; however, trusts can be more complicated than they need to be. Depending on the amount of property you own and your other estate planning goals, a trust might not be the best option for you and your family. After your passing, a trust must be administered which is a lengthy process distributing all of the assets in the trust. 

 

The most haunting thing you can do is sell or gift the house before speaking with a licensed attorney in your area who is not only familiar with MedicaId but also your assets and goals. 

Blunders in Estate Planning May Lead to Breach of Family Harmony

The Financial Post’s recent article entitled “Avoid these five mistakes when estate planning to preserve family peace” provides us with some of the biggest mistakes:

1. Treating family members differently. People do this frequently. They may have valid reasons for doing so. However, it’s still not a great idea. Instead, comfortably tell your children in advance why you’re doing this. This will avoid anger and jealousy between the children when they discover this. Try to leave assets equally, even if you don’t think it is fair.
2. Pass the family vacation home to multiple children. It's best to either sell the home in your later years or, if you keep it, make sure it is openly discussed. You might set up life insurance to specifically pay taxes and perhaps one or two children, so the remaining children can afford to keep the cottage. Even so, a sale is the cleanest approach.
3. Don’t tell the children anything about your money. Not a good idea. This approach often eliminates any ability to understand what might be most meaningful to your children or beneficiaries. Maybe less so in terms of cash, but in terms of family heirlooms or property. Perhaps a favorite piece of furniture was really important to two children, but there was never any discussion about it. As a result, it’s now completely left to them to fight over. This may sound like a small issue. However, many families have split up forever over just this type of scenario.
4. Purposely or inadvertently leaving most or all assets to a new spouse. It can occur by accident due to poor planning around ownership titles, lack of pre-nuptial agreements or the unintended naming of beneficiaries on investment accounts or life insurance. However, sometimes, it’s meant to hurt the children. The hurt can certainly go both ways and is frequently a major issue when a spouse isn’t treated fairly. Ask an experienced estate planning attorney to walk through this with you.
5. Significant charitable giving. If your gifts to charity aren’t discussed with your so-called traditional beneficiaries, there can be conflicts with the charity that can be drawn out.

Communicate what you’re doing and why to your family.

Reference: Financial Post (Nov. 9, 2022) “Avoid these five mistakes when estate planning to preserve family peace”

 

Exactly Why Do I Need a Will?

Some people mistakenly think not having a will allows their assets to bypass the time and expense of probate. That’s not true–if you die without a will, your property still must go through probate, says Fed Week’s recent article entitled “The Importance of Having a Will.”

If probate avoidance is an issue, you can create a revocable trust to keep control over the trust assets while you’re alive.

Assets placed in trust during your lifetime can be distributed at your death, under the terms of the trust, without going through probate.

There are many types of trusts, and they all establish a financial arrangement between three parties:

• The Trustor
• The Trustee; and
• The Beneficiaries.

The person creating the trust is known as the trustor or grantor. The trustee manages the trust and disperses income or principal from the trust according to specific terms.

When you draft a will, you shouldn’t forget about it. Any births, deaths, marriages or divorces all may create a need to revisit your so-called “last wishes.”

After each change, make sure your current will is both safe and accessible. You can leave your will with your executor. If you decide to keep your will somewhere else, your executor and other family members should know its location. The estate planning attorney who prepared your will should have a copy, as well as a memo revealing the location of the original.

Regardless of where you put your will, have another document for your funeral and burial instructions. Wills generally aren’t read until days or weeks after death, so that won’t help your family make prompt decisions about a funeral or a memorial service.

As a result, a separate letter should be used to specify your final wishes and your executor should know where these instructions can be found.

Ask an experienced estate planning attorney to help you write your will.

Reference: Fed Week (Nov. 2, 2022) “The Importance of Having a Will”

Do It Yourself Wills Go Wrong–Fast

What happens when a well-meaning person decides to create a will, after reading information from various sources on the internet? There’s no end of problems, as described in the Glen Rose Reporter’s article “Do-it-yourself estate plan goes awry.”

The woman started her plan by deeding her home to her three children, retaining a life estate for herself.

By doing so, she has eliminated the possibility of either selling the house or taking out a reverse mortgage on the home, if she ever needs to tap its equity.

Since she is neither an estate planning attorney nor an accountant, she missed the tax issue completely.

By deeding the house, the transfer has caused a taxable transaction. Therefore, she needs to file a gift tax return because of it. At the same time, her life estate diminishes the value of the gift, and her estate is not large enough to require her to actually pay any tax.

She was puzzled to learn this, since there wasn’t any tax when her husband died and left his share of the house to her. That’s because the transfer of community property between spouses is not a taxable event.

However, that wasn’t the only tax issue to consider. When the house passed to her from her husband, she got a stepped-up basis, meaning that since the house had appreciated in value since she bought it, she only had to pay taxes on the difference in the increased value at the time of her husband’s death and what she sold the property for.

By transferring the house to the children, they don’t get a stepped-up basis. This doesn’t apply to a gift made during one’s lifetime. When the children get ready to sell the home, the basis will be the value that was established at the time of her husband’s death, even if the property increased in value by the time of the mother’s death. The children will have to pay tax on the difference between that value, which is likely to be quite lower, and the sale price of the house.

There are many overlapping issues that go into creating an estate plan. The average person who doesn’t handle estate planning on a regular basis (and even an attorney who does not handle estate planning on a regular basis), doesn’t know how one fact can impact another.

Sitting down with an estate planning attorney, who understands the tax issues surrounding estate planning, gifting, real estate, and inheritances, will protect the value of the assets being passed to the next generation and protect the family. It’s money well spent.

Reference: Glen Rose Reporter (September 17, 2019) “Do-it-yourself estate plan goes awry”

What to Gift

The recently passed tax reform law doubled the lifetime gift tax exemption from previous levels. However, the exemption is scheduled to revert to the previous level in a few years. That means if you want to take advantage of the increased limit, then you need to act quickly. 

It is not always a good idea to gift large amounts of cash that can potentially be wasted and there are many other options. News Max listed some of them in "Gifting Wealth and the Estate Tax Law Under Trump," including:

• You can create an LLC that holds stock or other investments and gift your family members’ interests in the LLC. That allows you to control the investments, while still gifting to your family for their use later.
• If you own a company, you can create a trust and gift stock in the company to that trust for your family's benefit.
• It is a great time to fully fund any special needs trusts your relatives have.
• Now is a great time to create and fund trusts that your family can benefit from later. If you have enough money, you can even create a dynasty trust that will supplement your family for generations to come. An estate attorney can help you determine the best trust for your family.
• You can help younger family members purchase their first homes.
• Consider funding retirement options for younger family members, such as by purchasing annuities for them.

Reference: News Max (June 20, 2018) "Gifting Wealth and the Estate Tax Law Under Trump."

 

Inheritance or Gifting?

The traditional way of passing wealth down to later generations by giving descendants inheritances does not work for everyone. If a child needs money to start a business now, many wealthy parents would rather give the child the money when it is needed and when they can see the results of the gift. The alternative might result in the child missing out on the business opportunity.

Surveys suggest that a majority of older Americans would prefer to give to heirs now rather than wait to give them inheritances. However, before giving to heirs now there are a few things that need to be considered.

This subject was taken up recently by Merrill Lynch in “Why Make Your Heirs Wait?”

These things include:

• If you give to one heir now, other family members might wonder what is going on and might want a gift as well, even if they do not have a pressing need for it. You should talk to your family and make sure everyone knows that a gift now might make their eventual inheritances smaller.
• Do not give to your family for selfish reasons. Consider whether the receiver actually needs and wants the gift. Giving someone a responsibility they do not want or are not ready for could be a burden to them.
• Do not give away so much that you neglect your own needs. Before giving to anyone take stock of how much money you need for your own retirement.

A qualified estate planning attorney can help you think through your options and remove the emotion from the decision.

Reference: Merrill Lynch (Aug. 2016) “Why Make Your Heirs Wait?”

Community Property and Your Estate Plan

Chances are you do not live in a community property state. Only a handful of states have community property marriage laws. However, some of the states that do have them are popular destinations for people to move to. For example, Arizona is a popular retirement destination with community property laws.

The main difference between community property states and other states is in how marital assets are considered to be legally owned. In a community property state everything acquired during a marriage is considered to be equally owned by the husband and wife except for any inheritances solely made to one of them. Property acquired before the marriage is not community property.

This is different from other states where spouses can continue to acquire separate property after marriage.

As Barron's Penta Daily discussed in "How Community Property States Are Different," this has implications for estate plans, such as:

• Capital Gains – Community property states have a benefit for surviving spouses because the spouse receives a step-up basis on an entire home, for example, instead of only half the value of the home in other states.
• Gifts – If one spouse gives a gift of community property without the permission of the other, the spouse who did not make the gift can revoke it later.
• Life Insurance Trusts – Funding a life insurance trust for the benefit of a spouse needs to be done from non-community property or the entire purpose of the trust will be defeated.

If you live in a community property state, or are considering retiring to one, then contact a qualified estate planning attorney to learn the legal implications.

Reference: Barron's Penta Daily (June 28, 2016) "How Community Property States Are Different"

Why Gifting Might Be Better than Leaving an Inheritance

Some people struggle over whether they should give money now to family members so they can see the benefits of that money or whether it is a better idea to leave those family members an inheritance. 

One important aspect to the decision is the potential tax consequences. 

In neither case will the recipient have to pay taxes on the money. Nevertheless, as the Wills, Trusts & Estates Prof Blog explained, in a recent article titled "To Gift or Bequeath? That is the Question," the recipient might receive more money if you give it to them now.

As the article explains, if you are in the 40% tax bracket and give someone $1 million today, you will be required to pay $400,000 in taxes on the gift. However, if you have precisely $1.4 million and leave it all to someone in an inheritance, then the entire amount would be taxed at 40%. 

That would make the actual amount inherited $850,000, not the $1 million that could be gifted with the exact same amount of money.

Of course, it is not quite as simple as that and you should speak with an estate planning attorney before reaching a decision whether to gift now or leave an inheritance.

Reference: Wills, Trusts & Estates Prof Blog (May 4, 2015) "To Gift or Bequeath? That is the Question"

 

Gift Tax Basics

Many parents find themselves in a position where they want to give a large sum of money to an adult child in need. They often wonder if they can do so without having to pay tax on the gifts. 

One such parent recently wrote to Money and asked if he could give $15,000 to a child to pay off the child's debt. 

The answer, given in a Money article titled "When Does a Gift Trigger a Tax Bill?," contains a good explanation of the basics of the gift tax.

As the article explains, you can give up to $14,000 a year to any one individual without triggering the gift tax. You can also give up to $5.43 million in total gifts during your lifetime. 

For married couples those numbers are doubled. 

It is important to note that more can be given to pay tuition or medical expenses. Gifts for those purposes are always tax-free. 

If you need to give more than that to a child, you might be able to if your child is married. You can give $14,000 to your child and up to another $14,000 to your child's spouse.

If you have other questions about the gift tax or want to know how making gifts can be integrated into your estate plan, speak with an estate planning attorney.

Reference: Money (May 5, 2015) "When Does a Gift Trigger a Tax Bill?"