Thinking about estate planning can be very uncomfortable. In my practice, I speak with many people who just “put it off” because it was too unpleasant to think about leaving their loved ones. Those same clients always tell me about an overwhelming sense of relief they feel as soon as they sign their estate planning documents.
For those who are curious about estate planning but aren’t quite ready to speak to an attorney, I decided to make this estate planning guide.
What is an estate plan?
Estate plans are a set of documents that guide someone you trust to make financial and medical decisions for you, or, once you pass, distribute your personal property and real estate (and transfer assets) to your beneficiaries. At a minimum, an effective estate plan should have the following documents:
- Durable Power of Attorney
- Medical Power of Attorney
- Living Will (or Directive to Physicians/Health Care Directive)
- A Last Will and Testament or Revocable Living Trust
More on those documents later. For now, let’s go through a few questions that get the ball rolling on the estate planning process:
- Who will be in charge?
- Who will get your stuff?
- How much time and effort are you willing to take on yourself so your loved ones don’t have to?
- Should you hire a lawyer for your estate planning?
Who will be in charge?
The answer to this question is usually “my spouse”. While that may be a good option most of the time, I always recommend my clients pick at least one alternative (preferably two or more) in case something happens to you and your spouse in the same incident. Of course, you should only pick people you trust with your finances to be in charge, so personal responsibility is key.
I always recommend picking someone local to oversee your estate, but that’s not a requirement – practically speaking, having someone local will make things go smoother and faster for all your beneficiaries. Some laws require the person in charge to physically attend a court hearing to testify in front of a judge. After that person gives their testimony, they must appoint a resident of your county to receive all correspondence from the court and possibly adverse parties.
If you can’t think of a good fit, you can choose to have a corporation (often a bank’s trust department) serve you and your estate. The main benefit to hiring a corporate representative is always having someone available and motivated to be in charge. However, corporate representatives come at a price, often a percentage of your estate’s overall value. You’ll have to decide for yourself whether the price of a corporate representative is worth the risk of having nobody, or worse, unintentionally harming a beneficiary suffering from addiction.
Who will get your stuff?
Most people want their property to transfer to their surviving spouse upon their death, or if their spouse is also deceased, equally among their children (or their descendants). However, this “simple” distribution can easily lead to consequences you didn’t intend.
For example, even if you love and respect your son- or daughter-in-law, the reality is you never know what’s going to happen in the future. Do you want your legacy to be split with someone who’s divorcing your child? Texas law is clear that anything you inherit is your “separate property” – property that isn’t subject to division in a divorce suit. However, the harsh reality of divorce means anything your child owns or controls is on the bargaining table.
Another sadly common obstacle is when a beneficiary suffers from drug, alcohol, gambling, or other addiction that increases the likelihood that your estate will be squandered. The reality is that a beneficiary with these vices is probably going to hurt themselves if they come into a large sum of money or property from your estate.
One final consideration is what you want to happen in case your surviving spouse remarries after you pass. Statistics show that women remarry within 3 years and men remarry within 1 year of their spouse’s death. Practically speaking, your estate could end up with your spouse’s new husband or wife if your estate plan is not drafted carefully.
How much time and effort are you willing to take on yourself?
This is always an interesting question to ask new clients. The two main estate planning strategies in Texas (which I’ll discuss in detail later) are wills and trusts. Simply put, a will is easier and cheaper for you while a trust is easier and cheaper for your beneficiaries.
All last will and testaments must be probated before they are effective. In other words, unless your beneficiaries pay for a lawyer and go through the entire probate process (ranging from about 2 months to several years), your last will and testament does nothing and cannot transfer your property. Probate takes so long because a lawyer must secure a court date, conduct a hearing, send notices to beneficiaries and creditors, prepare and file a list of every item of property that you own, etc. However, a last will and testament is relatively inexpensive and once you sign a will, you don’t have to do anything at all other than make sure the original document is preserved.
On the other hand, a trust allows your beneficiaries to skip the probate process entirely. If your trust is properly funded, your beneficiaries will have access to your assets immediately upon your death without having to ask permission from a court. The major drawback of trusts is their relatively higher cost and the burden placed on you to transfer your assets into the trust.
Trusts are rising sharply in popularity because of their flexibility and because they enable several advanced asset protection strategies. However, trust-based estate planning remains a niche area of focus that requires a great deal of research and training for even seasoned estate planning attorneys.
Do you need to hire a lawyer for your estate plan?
Well, no. You also don’t need a doctor to fix a broken bone. Would you tell your doctor that you can fix a fractured arm because you Googled it? Would you risk making an unfixable mistake that burdens your family or leaves your property to the wrong person?
The worst – and most common – mistake I see happens when people get a will or a trust from a non-attorney, like a website, their financial advisor, CPA, or realtor. These people are not lawyers, and they are not authorized to practice law unless they’ve gone to law school and passed the Texas bar exam. In fact, practicing law without a license is a crime in Texas. Using a will or a trust from a non-attorney is like trusting your gardener to perform your heart surgery.
If your homemade will fails, it’ll be because you didn’t follow the strict requirements of Texas law. The Texas Estates Code is free to the public and easily accessible online, but take a look and you’ll see why it’s so easy to make a mistake.
If the probate court determines your homemade will is invalid, your property will be distributed as though you had no will at all. This is called dying “intestate” and the law requires your property to go to your “heirs at law”.
Choosing an estate planning lawyer is a huge source of stress and delay for most people. Sometimes they’ve had to hire a lawyer for something else – divorce, business, breach of contract, etc. Sometimes they have a family member lawyer or friend-of-a-friend-of-a-friend connection to a lawyer. Or maybe they don’t know any lawyers at all.
If you’re confident in your own research or you just don’t have the resources to hire an attorney, trust me – I get it. Many attorneys will meet with you for free to review your estate plan and discuss your options.
But how do you choose the right lawyer to protect your legacy? How do you know if the lawyer has the full picture and expertise to accomplish your estate planning goals? After all, your estate plan will be much easier to fix while you’re still around.
Insider tip: Look at the lawyer’s website. How far down the list are estate planning services? That will tell you where their priorities are.
An effective estate planning lawyer should have a firm grasp on these goals:
- Choose the right person to oversee your estate.
- Provide for your loved ones based on their needs.
- Minimize estate taxes and navigate complex tax laws.
- Mitigate or avoid probate.
- Protect your assets.
- Plan for your incapacity.
- Plan for your business.
If the lawyer can’t give you 2 or more solutions to each of these goals, they may not be the right lawyer for you. Texas ethics rules say that a lawyer must have the skill and knowledge to represent the client in all foreseeable issues related to the work. Are you sure your lawyer passes that test?
Insider tip: Just because a lawyer doesn’t focus on estate planning doesn’t mean they’re a bad lawyer. After all, you wouldn’t hire an estate planning lawyer to represent you in a criminal trial!
Your Durable Power of Attorney
A durable power of attorney (or “POA”) designates someone to be in charge of your finances. This type of power of attorney is extremely useful if you are incapacitated or simply unable to be reached. Your power of attorney can be used to keep bills paid, taxes up to date, and even keep your stock portfolio current.
Your financial power of attorney can become effective immediately or only upon your incapacity. It ultimately comes down to personal preference, but I generally recommend they become effective immediately because “incapacity” doesn’t always look the same – there’s a big difference between slipping into a coma and slowly succumbing to dementia and a lot of financial damage can be done before a doctor (or court) is willing to declare you incapacitated.
Your Medical Power of Attorney
A medical power of attorney designates someone to make healthcare decisions for you. Unlike the durable power of attorney, Texas law says that a power of attorney for health care can only become effective upon your incapacity.
Your power of attorney for health care will be an invaluable tool in case of a medical emergency when life or death decisions must be made in a matter of minutes. I always recommend my clients pick someone local who is familiar with your desires to serve under their health care power of attorney.
Interestingly, children are not always the best option here. Emotions and misunderstandings can lead to delay or worse, a choice you would not have wanted to make yourself. Doctors can generally communicate the scenario and the best options, but emotions notoriously cloud judgment of even those who have your best interest in mind. Fortunately, there are corporate fiduciaries who will agree to serve as your power of attorney for medical care.
Your Living Will (or Directive to Physicians/Health Care Directive)
A living will (sometimes called a directive to physicians or a health care directive) is a document that contains your end-of-life decisions. It is NOT a “do not resuscitate order” – the living will is only used in scenarios where you are incapacitated and suffering from a terminal or irreversible condition, but only if you will not recover within 6 months. Under this document, your options are generally to be kept as comfortable as possible and allowed to pass gently or remain alive with artificial nutrition and hydration (life support) for the remainder of your biological life.
Special considerations usually come into play for a living will. Social, family, economic, and religious factors may convince you to decide one way or the other. Whichever option you choose, this document is key to every estate plan.
Your Last Will and Testament or Revocable Living Trust
This is the big decision and the most important document for your estate planning.
Dying without a will is called dying “intestate” and the law requires your property to go to your “heirs at law”. If you die intestate, you will not have control over who inherits your legacy and you cannot name beneficiaries.
Instead, Texas law provides a framework for distributing your legacy among your surviving family members. There are many complex rules for inheritance under intestacy laws; the most concise explanation is, “It’s complicated.” The outcome under Texas law may not align with your wishes, which means it’s generally advisable to create a last will and testament.
In most situations, property will pass to spouses, children, or other family members. In worst case scenarios where no family can be identified, your legacy could revert to the State of Texas.
Sometimes out-of-state wills don’t meet the requirements of a Texas will. If you have a California will, you will likely need to get a revised will that satisfies Texas law.
Even without a will, you can sometimes get around probate with beneficiary designations on bank accounts and transfer on death deeds that convey real estate automatically upon your death.
In my opinion, every estate plan should have the primary goal of avoiding probate. And the best way to avoid probate in Texas is with a revocable living trust.
All revocable living trusts are created by “Trustors” who are planning to secure their legacy, usually a married couple or an individual. The Trustor (or “Grantor”) selects an individual or corporation to manage and distribute trust property; this person is called the “Trustee”.
The Trustee must follow the Grantor’s instructions written in the trust while managing and distributing trust property to the “Beneficiaries” – the people who will benefit from the trust property. Once the trust is created, the Grantor transfers their property into the trust and the trust takes care of the rest.
For most revocable living trusts, the Grantor acts as Trustee and Beneficiary while they are alive – in that case, the person who created the trust can use their property just like they did before and not change much during their lifetime. Most trusts even contain provisions for minor children, bequests (such as heirlooms and collectibles), and state law.
However, when that person loses capacity or passes away, the trust names a successor Trustee to step in automatically and continue managing or distributing trust property to the trust beneficiaries. This is the primary value of a trust – without a trust, your loved ones may have to ask a court for guardianship over you or your legacy may have to go through the probate process.
An important note to keep in mind is that a trust is simply a legal document and it may not operate as intended if not properly funded with bank accounts, personal property, real estate, and other financial accounts. Basically, anything that will be part of your estate needs to be transferred to your revocable living trust.
There are many different types of trusts that each serve specific goals. Irrevocable trusts may have several goals that make this kind of structure unusable. They can be particularly useful at maximizing any exemption, gift tax, income tax, digital assets, annuities, life insurance policies, IRAs, retirement accounts, retirement plans, social security, and federal estate tax. Whether the goal of an irrevocable trust is privacy, tax planning, special needs planning, life insurance planning, or any other estate planning objective, you need to speak with an experienced estate planning lawyer (and your planners and tax advisors) before considering whether an irrevocable trust is right for your legacy.