Hispanic Issues Section CLE & MABA-TX Legislative Day

Transcription

1 Hispanic Issues Section CLE & MABA-TX Legislative Day Chapter 3 ESTATE PLANNING 101: WILLS VS. TRUSTS Ivan Ramirez LAW OFFICE OF RAMIREZ & PARENT San Antonio, Texas State Bar of Texas Texas Law Center February 24, 2015 Austin, Texas

2 LAW OFFICE OF RAMIREZ & PARENTI, PLLC Office Address: Phone(210) Mailing Address: 9901 IH-10 West, Suite 800 Fax (210) PO Box San Antonio, Texas San Antonio, Texas Peter J. Parenti, Attorney and Counselor at Law Master of Laws (in Taxation) Board Certified in Tax Law & Estate Planning and Probate, State Bar of Texas-Board of Legal Specialization Ivan Ramirez, Attorney and Counselor at Law IVAN RAMIREZ, Esq. BIO-2015 Ivan Ramirez is a Laredo, Texas native who has been licensed by the State Bar of Texas since After graduating with honors from St. Mary s University School of Law, he has operated his own law firm in the San Antonio area, currently as the managing partner of the Law Office of Ramirez & Parenti, PLLC. Ivan s primary practice areas include business planning (entity formation, contracts, and other agreements), estate planning (trusts, federal estate and gift tax planning, asset protection, family limited liability companies, nonresident planning), related estate administration (probate and trusts). Ivan is also a member of WeathCounsel (a national organization of estate planning attorneys), Karnes County Bar Association (Director), and the Mexican American Bar Association. Since 2008, Ivan has spoken at numerous seminars for business owners in San Antonio, Eagle Pass, Laredo, and Monterrey, Mexico in both English and Spanish. The seminar topics included business entity planning, bankruptcy, and estate planning. In addition, Ivan has been a guest speaker with local San Antonio chambers such as AEM (Asociacion de Empresarios Mexicanos), Greater San Antonio Chamber of Commerce, San Antonio Women s Council of Realtors, Rotary Clubs, and other organizations. As an active member in the local legal community, Ivan has presented at numerous continuing legal education (CLE) conferences for attorneys in Laredo, Austin, and San Antonio, including the San Antonio Black Lawyers Association, Mexican American Bar Association (San Antonio Chapter), Texas Forum of WeathCounsel members, Karnes County Bar Association, and the Laredo-Webb County Bar Association. CLE topics were focused on TEXAS BUSINESS ENTITY LEGISLATIVE UPDATE, TRUST BASED ESTATE PLANNING, FEDERAL ESTATE, GENERATION SKIPPING, AND GIFT TAX STRATEGIES with a 2013 tax law update, and FEDERAL GIFT AND ESTATE TAX PLANNING FOR NON-RESIDENTS.

3 LAW OFFICE OF RAMIREZ & PARENTI, PLLC Office Address: Phone(210) Mailing Address: 9901 IH-10 West, Suite 800 Fax (210) PO Box San Antonio, Texas San Antonio, Texas Peter J. Parenti, Attorney and Counselor at Law Master of Laws (in Taxation) Board Certified in Tax Law & Estate Planning and Probate, State Bar of Texas-Board of Legal Specialization Ivan Ramirez, Attorney and Counselor at Law February 23, 2015 Hispanic Issues Section of the State Bar of Texas and MABA Texas ESTATE PLANNING 101: WILLS vs. TRUSTS CLE Presented by: Ivan Ramirez, Esq. Objective: Provide non-estate planning attorneys a basic overview of estate planning using wills vs. trusts as the primary planning tool. Outline: I. Basics of will based planning II. III. IV. Probate process Pitfalls of will based planning Basics of trust based planning V. Overview of different types of trusts VI. Benefits of trust based planning VII. Sample trust chart explained VIII. Q&A

4 Hispanic Issues Section CLE & MABA-TX Legislative Day ESTATE PLANNING 101: Wills vs. Trusts PRESENTED BY: IVAN RAMIREZ, Esq. Law Office Ramirez & Parenti, PLLC 9901 IH 10 W. Ste 800 San Antonio, Texas Tel Legal Disclaimer - The information provided is designed for general information only and is not intended to be legal advice, nor does it create an attorney client relationship. Consult an attorney before making any legal decisions based on your individual circumstances. Will vs. Trust ESTATE PLANNING: What s the difference? 2 3 Wills and Estate Planning Wills are only effective on Death. 1. A mentally debilitating disability is much more likely for most people in the short term than is a death. 2. America is getting older, and as technology is improving, we are living longer, but not necessarily better. 3. The living probate process, called a guardianship or conservatorship, is very similar to the death probate process, but can be much more expensive and time-consuming. a. Appointment of a guardian of the person. b. Appointment of a conservator or guardian of the estate. c. Gathering and re-titling all assets. 1

5 4 Wills and Estate Planning d. Reducing assets to cash the sale of a business and all other assets for the ease of management. e. Payment of creditors. f. Court supervision until death or until disability ends. If the disabled person never recovers, living probate can last for the rest of his or her life, which can result in living probate costs and fees continuing for many years. g. It could be malpractice for an estate planner not to properly plan for avoiding living probate. Wills and Estate Planning Wills may not control all property. 1. Joint tenancy property is not controlled by a will. 2. Beneficiary designation property (life insurance, annuities, IRAs and retirement) is not controlled by a will. 3. For a typical married client, most, if not all, of the property passes outside of the will of the first spouse to die. 4. The major pitfall here is that if major portions of an estate do not pass under the will, theses assets will fail to be part of the estate plan for saving estate taxes AND INCOME TAXES. 5. It could be malpractice to fail to design an estate plan that covers the 5 client s entire estate. Wills and Estate Planning Wills involve complex legal rules. 1. As a creature of statute, there are very rigid rules of form and execution that must be followed in order to make a will valid. 2. Because of their complex nature, wills are easily attacked by disgruntled heirs. 3. Wills are public as well as all other aspects of the probate process. This could put the estate in a very poor negotiating position when attempting to sell assets. 6 2

6 Wills and Estate Planning Wills are not viable interstate planning tools. 1. Lawyers always suggest that when you move to a new state, you have a local attorney review your will. 2. A will from one state is interpreted under the law of the state that a deceased person was domiciled in at death. 3. Thus, a will valid where made is only valid where made and will be interpreted according to the laws where probated. 4. A valid will in one state may result in an unexpected interpretation result in another state if the maker dies as the 7 resident of another state. Unintended Heirs Marilyn Monroe: Died at age 36 Will left 75% to Marilyn s acting coach, Lee Strasberg, with wishes to donate to charity. Strasberg later married, and at death in 1982, his estate plus all Monroe s licensing and royalty fees went to his widow a complete stranger to Marilyn and not to charity! Licensing fees generate over $1million annually. 8 Wills and Estate Planning Wills must go through probate 1. Probate is a time-consuming, expensive process designed for those who die with wills and those who die without wills and who own property in their own name. 2. Generally, average probate fees across America are shown to be anywhere from 4 to 8 percent of the gross value of the probate estate. 3. Probate is time consuming. On average, a probate takes about 1½ years in Texas. 9 3

7 10 Wills and Estate Planning Probate Steps: (See generally Texas Estates Code) 1. Name the personal representative (also called the executor, executrix, administrator). 2. Understand the will. 3. Ascertain the heirs and ascertain the beneficiaries under the will. 4. Locate and value all property. 5. Pay the personal representative and the attorney. 6. Ascertain, notify, and pay all other creditors of the estate. 7. Resolve all controversy between all parties. 8. File all tax returns. 9. Distribute property. Will Strategy Falls Short of Estate Planning Goals Won t provide for your client s disability. Won t necessarily give what you have to whom you want, the way you want, when you want. Certainly won t avoid probate, public record, no privacy 11 Doesn t address asset protection against creditors or taxes More Will Issues Typical Problems: 1. Surviving spouse leaves your (client) money to her/his children from another marriage (blended families) 2. Surviving spouse keeps or spends the money, effectively disinheriting your (client s) children 3. Surviving spouse is victimized by gold digger, decimating your (client s) estate 12 4

8 13 An overview of trusts 1. You can do anything with a trust you want as long as it is not illegal or in violation of public policy (Tex. Trust Code section ) 2. A trust is very much like baby sitter instructions. 3. All trusts have the following characteristics. a. A trust is created by a maker who is known as a settlor, trustor, grantor, or creator. We prefer the term Trustmaker. b. The person or institution responsible for following the Trustmaker s instructions is the trustee. The Trustmaker can be his or her own trustee. c. Trusts will not fail if no trustee is named, court then must name a trustee. See Texas Trust Code (Texas Property Code, Title 9) d. Trusts can be created by more than one Trustmaker; these are called joint trusts ( usually spouses). e. Trusts can be created for the benefit of the Trustmaker and for the benefit of other people. f. Trustmakers can be primary or contingent beneficiaries of their own trusts. g. Trusts generally cannot last forever unless the beneficiary is a charity because of the Rule Against Perpetuities. (Tex. Trust Code section ) h. Trusts have primary beneficiaries and contingent beneficiaries. 14 i. Trusts should be in writing. (Tex. Trust Code section ) j. Trusts must be signed by their makers. k. Trusts should be signed by the trustees, but this is not absolutely necessary. l. Trust beneficiaries do not have to sign the trust document. m. Any number of sub-trusts can be created in a single trust document. We refer to these as sub-trusts. n. When a Trustmaker puts trust property into the trust, the Trustmaker funds the trust. 15 5

9 Trusts come in two basic varieties 1. Living (also called inter vivos) trusts. a. Living trusts are created during lifetime. b. They are will substitutes. c. They avoid financial guardianships and probate if they are funded Death (also called testamentary) trusts. a. Testamentary trusts are created by wills. b. They are not effective until death. c. They must go through probate. d. Testamentary trusts can be changed during the life of the maker. e. They become irrevocable at the death of the maker. f. The probate court will have continuing jurisdiction over the testamentary trust. 18 Living trusts can be irrevocable or revocable. a. Irrevocable trusts: 1. Irrevocable trusts can only be changed through court proceedings, unless state law allows for a non-judiciary procedure for reformation. 2. Whenever property is put into an irrevocable trust, a gift will result. The gift is usually a future interest gift that does not qualify for the $14,000 annual exclusion (2015) unless the beneficiaries are given a demand right to withdraw the gift (Crummy Notice). 3. An irrevocable trust is a separate taxpaying entity that files its own income tax return and that has its own federal identification number. 4. Irrevocable trusts are gifts with strings attached. 6

10 Irrevocable trusts are commonly used for: 1. Irrevocable life insurance trusts (takes away the value of the insurance policy from the trustmaker s taxable estate for Federal Estate Tax purposes, $5.43m in 2015). 2. Children s gifting trusts. 3. Charitable Trusts. 4. Asset protection 19 b. Revocable trusts: 1. Can be changed at any time by the Trustmaker. 2. Allow the Trustmaker to retain absolute and full control of the terms of the trust and the property in it. 3. Are grantor trusts under the Internal Revenue Code, Subtitle A, Ch. 1J, Part IE, 671 through 679 (not a separate income tax paying entity). 4.Create no gift when the Trustmaker puts property into the trust Revocable living trusts offer substantial benefits for planning, especially when compared to wills: 1. They distribute property after the death of the Trustmaker. 2. They create one receptacle for all the Trustmaker s property. 3. They take care of the Trustmaker in case of disability. 4. They offer privacy for the Trustmaker and his or her loved ones. 5. They are easy to create and maintain when professional advisers are used. 6. They are easily changed. Re-drafting a will is more difficult because it requires more formality than a trust. 7

11 7. They have no adverse lifetime income tax consequences. Treas. Reg They are probate-free, to the extent that they are funded. 9. They offer continuity in the Trustmaker s affairs upon disability or death. 10. They are good in every state under Article I, Section 10 and Article IV, Section 1, of the U.S. Constitution. 11. They can be used to measure trustees performance during the Trustmaker s life. 12. They are difficult for disgruntled heirs to attack Assets in the trust avoid guardianship on incapacity. There are many circumstances where powers of attorney cannot do the same thing. 14. A trust imposes a high duty of care on a Trustee and eliminates third party liability. Powers of attorney cannot do the same thing because though they impose a high duty of care on the Agent, they do not eliminate the third party liability and that third party that has the liability must accept the power of attorney. Because they remain liable, they frequently will not allow the power of attorney to be used. 15. A trust provides continuity in the handling of client affairs by efficiently transferring your property to loved ones after death. Probate takes more time, and isn t always smooth A trust can define disability or incapacity in several ways and if property defined, does not require any court involvement. Proving disability or incapacity with a power of attorney may require going to court. 17. A trust provides certainty of result if it is drafted property and completely funded. Other methods of passing assets don t provide the certainty of results. 18. Trusts make the best beneficiaries of life insurance policies because if an individual is named, and they are incapacitated or dead, then the proceeds go through either guardianship or probate, contrary to your client s wishes. 8

12 19. A trust allows life insurance to be paid to the trust so it passes according to your client s distribution and control plan. Life insurance left directly to beneficiaries can be subject to divorces, lawsuits, and creditors, or it may undo your client s overall planning due to lack of coordination with the distribution plan. It will also pass to the beneficiary without any controls, and may bypass your client s tax planning. 20. A trust enables you to measure how your successor Trustees perform when you delegate management duties to them. You will never know how the executor of your will performs A trust enables you to rely on your Trustees should you wish to travel or otherwise delegate the day-to-day management of your financial affairs. Powers of attorney may not work when you are traveling since it might not be possible to prove you are actually alive, and if that is a problem, it will be too late to do anything about it. Again, if you can t be found, there is no guarantee that you are alive and the institution likely won t risk allowing the use of the POA in case you are dead. 22. Upon death, a trust adequately provides for the surviving spouse, children, or other beneficiaries. No other planning device provides enforceable instructions For married couples, a trust achieves at least some of your client s death tax objectives by using both exemption equivalents. This is far more efficiently done in a trust than in a will. That s because of the disadvantages of having life insurance or annuities either paid to an individual or paid to an estate to take advantage of the tax planning. Right of survivorship planning will completely avoid tax planning. 24. A trust can allow a Trust Protector to modify or update the estate plan if there are changes in laws or circumstances that make it beneficial without spending the money to go to court and without having to depend on a judge s approval. Wills cannot be modified except by judicial modification, and judges might not approve the change. 9

13 A trust is more difficult to challenge for incompetence than a will. To prove incompetence, the challenger must prove the Trustmaker was incompetent at the time of signing, and that the Trustmaker remained incompetent while managing the trust, since at any time the Trustmaker regained competence, he could have changed the trust. A will challenger only has to prove there was incompetence at the time of the will signing, which might be as simple as showing the testator wasn t himself that day, though it is usually more complicated than that. 29 ESTATE PLANNING 101: Wills vs. Trusts Office Address: Mailing Address: 9901 IH 10 West, Ste. 800 PO Box San Antonio, TX San Antonio, TX Phone: Fax: ivan@ram-law.com 10