Tag Archive for: beneficiaries

Wills v Trusts

Wills v. Trusts: What’s the Difference?

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Wills v Trusts
What is a Will?

Often, the first 10 minutes of an estate planning consultation involve explaining the differences between a Last Will and Testament (or, simply a “Will”) and a trust. Each may have a critical role to play in a client’s estate plan. A Will is a testamentary instrument, which is a lawyerly way of describing a document that does not become effective until an individual’s death. In other words, a Will is merely a stack of paper with words and a few signatures until the individual executing it (called the “testator”) has passed away. Texas law provides stringent requirements for the proper execution of a legal, valid Will.[1] After the testator’s death, his or her Will must be “admitted to probate” by a court of appropriate jurisdiction. This requires someone (usually the executor) going before a judge and proving up all the various requirements of the Will. Only then can a personal representative take control of the deceased testator’s property, wind up his or her affairs, and distribute the estate in accordance with the Will’s provisions.

What is a Trust?

By contrast, a trust describes a relationship between three parties: (i) the settlor, (ii) trustee, and (iii) the beneficiaries. Thus, a trust is an abstract intangible thing, so it is not a document at all. Also, unlike a Will, a trust may become effective during the grantor’s life, or at death, and there is no requirement that a trust be proved up, authorized, or otherwise sanctioned by a court. To establish a trust, a settlor simply entrusts property to a trustee, who accepts a legal obligation to manage, administer, and distribute that property for the benefit of the beneficiaries. Each of these parties may be a single individual or a group of people. Even though the trust itself is amorphous, the terms, conditions, standards of distributions and other guidelines for this trust relationship are often memorialized in a written document called a “trust instrument.” A trust instrument may be a stand-alone document, or it may constitute a section in a testator’s Will. Either way, a single trust instrument will often govern many different trusts.

Trusts can take an endless variety of forms and serve myriad purposes. Many trusts are created to achieve special tax, asset protection, or wealth transfer goals. But when clients are weighing their options between a Will and a trust for estate planning purposes, they are generally thinking of a “revocable living trust.” This is commonly structured to have an individual or couple simultaneously serve as the settlor, trustee, and initial beneficiary. Revocable living trusts are similar to Wills in that they dictate what will happen with a person’s property when he or she dies. Thus, they remain a standard tool of estate planning attorneys.[2] 

Deciding whether a Will or a (revocable living) trust best matches a given situation will depend on the particular client’s needs, goals, outlook and other circumstances. Often, a Will is all that is needed in Texas to plan a person’s estate. In some circumstances, however, a revocable living trust will better address the situation. Understanding the fundamental distinctions between a Will and a trust is an important starting point to both a client’s decision about the overall structure of his or her estate plan, as well as the client’s ability to maintain that estate planning structure in the years to come.

Spencer Turner

Spencer Turner is an associate attorney at Farrow-Gillespie Heath Witter LLP. Since obtaining his license to practice law in 2016, Mr. Turner has focused his legal efforts primarily in the trust and estates arena. He has been featured as a speaker on various aspects of the probate process at several seminars hosted by the National Business Institute. Spencer is a graduate of from Baylor University School of Law.

[1] See Ch. 251 of the Texas Estates Code.

[2] Mr. Turner and Christian S. Kelso, Esq., a partner at Farrow-Gillespie Heath Witter LLP, recently co-authored an article for the State Bar of Texas’ Continuing Legal Education program. The article is entitled The Alchemy of Revocable Trusts: Creating the Perfect Solution for Each Client’s Problem, and may be found among the written materials for the “Handling Your First (or Next) Trust 2021” webcast.

Is it too late to probate the will_crop

Is it Too Late to Probate the Will?

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Is it too late to probate the will

You’re going through a loved one’s papers and come across a will. The person who wrote the will (a Texas resident) died years ago. What do you do?

First Things First

First, you should surrender the will to the county probate court where the deceased person lived. Texas law requires you to file with the court the original version of the will of anyone whom you are aware is deceased.[1] Surrendering a will to the county makes it available for any beneficiaries who might want to probate the will.

To Probate or Not to Probate

Texas imposes no legal obligation to probate a will. If a will is never offered for probate, the property of the testator, the person who made the will, passes according to the Texas laws of intestacy as if they died without a will. However, you might want to offer the will for probate if it has favorable terms, or to transfer title of any real property that belonged to the testator.   

You don’t have to go to court for title to pass by intestacy. But if you try to sell real property you inherited, the title company might require you to take steps to clear title. That might include asking the probate court to determine the heirs of the person who died and how his or her property passed under Texas law. If you must go to court anyway, you might consider probating the will you found.

Four-Year Deadline

As a rule, courts are not supposed to admit a will into probate more than four years after the testator has died.[2] If it has been more than four years, an exception permits wills to be probated if the applicant offering the will for probate provides an equitable explanation for the delay.[3]

Unfortunately, the reported cases in this area of law do not provide a predictable basis for determining whether the applicant is “in default” for the delay. This is because these cases are so fact specific.

For example, in one case an impoverished widow was permitted to probate her husband’s will, even though he died more than five years before she learned he owned royalty interests.[4]

In another case, a successful attorney with an oil and gas practice, who learned about mineral interests 14 years after his father died, was told he could not probate his father’s will. The applicant was found to be in default because the son “should have known that unexpected events [like discovering mineral interests] often happen in life.”[5]

A recent case from the Supreme Court of Texas provides another example of how courts focus on the particulars of the applicant’s situation.[6] In this case, the independent executor tried to probate the will of a deceased man’s wife because the husband failed to probate his wife’s will during his lifetime. The courts held that the executor could not probate the will on behalf of the husband because the husband had failed to do so within four years of the wife’s death. However, the supreme court also found that, in this particular case, the executor had standing to offer the will in the executor’s personal capacity and was not at fault for the delay.

Even if the person who made the will died more than four years ago, it might be worthwhile to try and probate the will anyway, particularly if the applicant did not personally delay in offering the will for probate.

If you have found a loved one’s will long after their passing, and need help surrendering it to the court or would like to probate the will, seek the counsel of an experienced probate attorney.

[1] Tex. Estates Code § 252.201.

[2] Tex. Estates Code § 256.003(a).

[3] St. Mary’s Orphan Asylum of Tex. v. Masterson, 122 S.W. 587, 592 (Tex. Civ. App. 1909, writ ref’d). The Estates Code provides that the applicant not be “in default” in offering a will for probate more than four year after the death of the person who made the will.

[4] Kamoos v. Woodward, 570 S.W.2d 6 (Tex. Civ. App.—San Antonio 1978, writ ref’d n.r.e.).

[5] In the Estate of Rothrock, 3112 S.W.3d 271 (Tex. App.—Tyler 2010, no pet.).

[6] Ferreira v. Butler, 575 S.W.3d 331 (Tex. 2019).

Chris Wilmoth

Hon. Chris Wilmoth is a seasoned probate, guardianship, and trust litigator. He also conducts mediations and accepts appointments as a special judge. Mr. Wilmoth served as Judge of Dallas County Probate Court No. 2 from 2011 through 2014. He has been named one of the best lawyers in Dallas by D Magazine each year since 2018.

The Secure Act | Retirement | Estate Plan

The SECURE Act: Will it Affect Your Retirement Plan?

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 A Late 2019 tax change will have a major impact on retirement planning!

The Secure Act | Retirement | Estate Plan

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the “SECURE Act.” Although it passed the House in July, the SECURE Act only recently passed through the Senate on December 19, as part of an end-of-year appropriations act. The SECURE Act implements quite a few technical changes which will affect retirement planning in general.  However, some of the most significant changes will have a direct and very substantial impact on estate planning.

In previous years, a plan participant (i.e. the individual who initially established and funded the IRA) could pass unused IRA assets to a so-called “stretch-IRA” for the benefit of a designated beneficiary (i.e. a person inheriting IRA funds on the participant’s death). The purpose of a stretch IRA was to extend the tax-deferral of the IRA. This would allow the minimum required distributions to be stretched out over many years, thereby increasing the overall tax benefit of the account. Often, participants would establish stretch-IRAs for their young grandchildren, hoping that the minimum required distributions would be based on each grandchild’s age. This would allow more assets to retain tax-deferred status longer and thereby decrease the overall tax burden.  For large IRAs, this decreased tax burden could be very significant.

The SECURE Act rescinds major tax benefits that had been available before 2020. Under the new rules, IRA assets inherited by a designated beneficiary must be distributed within 10 years of the participant’s death. A few exceptions to this rule apply, including surviving spouses, minor children (but not grandchildren), and disabled beneficiaries. The new 10-year distributions rule will apply in most other circumstances. 

Obviously, the loss of the stretch-IRA is important for tax planning purposes, but its significance goes even deeper. For example, when planning for a stretch-IRA, a participant is likely to have established one or more trusts in his or her estate plan. This type of planning would be particularly important where minors (like grandchildren) were expected to be the designated beneficiaries of the IRA.  Often, these trusts directed that no distributions were to be made from the trusts except for the required minimum distributions which would have been required under then-applicable law.  The expectation was that the IRA would be depleted incrementally over years. This would give the beneficiary limited access to the IRA assets with marginal tax impact triggered by each distribution.  Under the new law, however, the (only) required distribution comes at the end of the 10-year period.  Not only does this prevent the beneficiary from enjoying the extended use of the IRA assets, but the lump-sum distribution can have a seriously detrimental tax impact on the beneficiary.

Estate planning around retirement assets has always been complicated. The SECURE Act compounds this complexity. For clients whose planning was carefully tailored to the old regime, significant changes may be needed to avoid a major tax trap.

If you’d like to discuss how your estate plan might be impacted by the SECURE Act, please contact our office to set up a consultation.

Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Trust Accountings and the Duty to Inform in Texas

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Spoiled Trust Fund Kids

Trustees have a duty to share trust information with beneficiaries. The nature and extent of the duty to inform is not well defined in the Texas Trust Code, however, and there is little case law on point. There is slightly more guidance with regard to the duty to account, which is a subpart of the duty to inform, although many questions remain and can pose significant problems for trustees.

When considering a trustee’s fiduciary duty, most practitioners turn to the Texas Trust Code first. However, the thoughtful practitioner will notice that the common law duty to inform predates the Trust Code and is broader than the statutory duty to account. Also, the Trust Code directs trustees to “perform all of the duties imposed on [them] by the common law,” so an examination that is limited to the Trust Code may be incomplete.

A broad array of people are generally entitled to trust information and may include “a trustee, beneficiary, or any other person having an interest in or a claim against the trust or any person who is affected by the administration of the trust.”

Trust beneficiaries need information to protect their interests. For a beneficiary to hold a trustee accountable, the beneficiary must know of the trust’s existence, the beneficiary’s interest in the trust, the trust property, and how that property is being managed. Trustees have a duty to provide this information to beneficiaries. This duty to inform is independent of the trustee’s duty of care. Although a trustee holds legal title to trust property, that property is held for the benefit of the beneficiary. Similarly, the books and records of the trust belong to the trust estate. As such, it stands to reason that the beneficiaries should have access to them as well. 

On the other hand, settlors may not want their children to know about assets in their trusts for fear that they might become “trust fund babies,” and information sharing may be a security concern in the modern world. Formal accountings, in particular, are burdensome on both trustees and trust assets. A typical accounting takes many hours to prepare. A trustee may be able to do much of the initial work to prepare the accounting, but significant time spent by attorneys, accountants, and other professionals will likely also be required, and the related fees will usually be borne by the trust.

Additionally, the duties to inform and account cannot be waived in a trust instrument. If this were possible, no trustee would serve unless such a waiver were present. However, the duties may be limited in Texas to so-called “first-tier beneficiaries” who are generally entitled to distributions, either presently under the trust’s terms, or hypothetically, if the trust were to terminate. By restricting the non-waivable provisions to first-tier beneficiaries, settlors can minimize frivolous pestering by contingent remainder beneficiaries.

Even where beneficiaries are entitled to information, caution is advised to those seeking it. If a trust is revocable by, or grants a power of appointment to, someone who might be perturbed by such request, the requesting party might find herself written out of the trust! 

The common law duty to inform and the statutory duty to account are complicated elements of Texas law. Farrow-Gillespie Heath Witter, LLP has helped many beneficiaries gain the information they need about their trusts. We have also advised many trustees through the accounting process. If you are in either position, we would be glad to talk with you about your rights or responsibilities and the potential risks you face.

Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Spencer Turner | Farrow-Gillespie Heath Witter

Those Pesky Trusts! A Brief Primer on Terminating Unwanted Trusts

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Spencer Turner | Farrow-Gillespie Heath Witter

Estate planning attorneys often wax poetic about the multitude of advantages found in a simple trust instrument. They’re not wrong. A well-crafted trust is an excellent vehicle for addressing a client’s concerns under a variety of different circumstances. Clients may place assets in a trust for tax benefits, creditor and divorce protection, planning for incapacity, family dynamics and a host of other reasons.

Yet no trust exists without a level of complexity and sophistication. Every trust has a trustee who must fulfill strict fiduciary duties and carefully manage the trust assets for the beneficiaries. The terms for distributing property from the trust may involve difficult calculations or restrictive standards that are not easily met. In some cases, a trust instrument’s vague provisions may leave both the trustee and beneficiaries confused as to how to proceed with the trust administration. Eventually, these complexities may become overly burdensome. Life circumstances may also render the trust’s intended benefits and purpose unnecessary.

Whatever the reason, trustees and beneficiaries often find themselves stuck with a trust that no longer meets their needs. But many of these trusts are or have become irrevocable and cannot be unilaterally terminated. Trustees and beneficiaries should not despair, however. Texas law has recognized several different ways to modify or ultimately terminate those pesky trusts.

A. Uneconomical Trusts

The Texas Trust Code enables a trustee to terminate a trust whose assets are valued less than $50,000. The trustee must consider the purpose of the trust and the nature of the assets, and ultimately determine that the value of the assets is insufficient to match the costs of continued administration. A common example of this occurs when a trust established under the provisions of a deceased person’s will receives only minimal funding from the deceased’s estate. The amount held in trust often does not justify the time, effort, and cost in administering the trust.

B. Combining Separate Trusts

Typically, the Texas Trust Code does not allow the outright termination of a trust without petitioning a court of proper jurisdiction for approval. But its provisions do allow for combining two or more separate trusts into a single trust without a judicial proceeding. This is only permissible where the combination would not impair the rights of any beneficiary or prevent the trustee from carrying out the purposes of either trust. Again, this is a great tool for consolidating trusts established under a deceased person’s will.“

C. “Decanting”

Another alternative to judicial termination of a trust, “decanting,” is the distribution of trust assets from one trust to a new trust that may have slightly different terms. The helpfulness of this provision of the Texas Trust Code largely depends on how much discretion the original trust grants the trustee. An attorney will need to carefully evaluate the level of variance the new trust may have under the circumstances.

D. Judicial Termination

A trustee or beneficiary may petition a court of proper jurisdiction to order the termination or modification of a trust. However, the grounds to do so are limited and specifically outlined in the Texas Trust Code. Petitioners should not expect a quick and easy process; terminating a trust in a court of law requires careful preparation, evidence, and a willing judge.

E. Termination by Agreement

Texas case law has recognized that in certain instances the settlor, trustee, and beneficiaries of an irrevocable trust may collectively agree to terminate the trust. This is a great tool if all parties are agreeable. But it does have its drawbacks. If the settlor is dead, then no agreement may be reached. Furthermore, an incapacitated beneficiary may not enter the agreement, further halting any opportunity to proceed under this method.

Trusts are excellent vehicles to achieve any number of tax, asset protection, or family dynamics-related objectives. At some point, these irrevocable trusts may become burdensome and unnecessary. An attorney may use the methods mentioned above to terminate or modify those pesky trusts.

Spencer Turner | Farrow-Gillespie Heath Witter
Spencer Turner

Spencer Turner is an associate attorney at Farrow-Gillespie Heath Witter LLP. Since obtaining his license to practice law in 2016, Mr. Turner primarily has focused his legal efforts in the trust and estates arena. He has been featured as a speaker on various aspects of the probate process at several seminars hosted by the National Business Institute. Spencer graduated from Baylor University School of Law.  

Bethany Kelso | Preston Kelso | Christian Kelso

Upjohn Clause: A Trap for the Unwary Trustee

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Bethany Kelso | Preston Kelso | Christian Kelso

Featured image: Bethany and Preston Kelso. Photo used with subjects’ permission.

Many trust instruments prohibit trustees from relieving themselves of a legal duty under applicable law. Such language, which is sometimes referred to as an “Upjohn” clause after the case of Upjohn v. U.S. (30 A.F.T.R. 2d. 72-5918 (W.D. Mich 1972)), is most often, intended to prohibit a trustee from using trust assets to pay for anything which he or she is obligated to provide to his or her child as a matter of law and regardless of the trust.

Section 151.001 of the Texas Family Code imposes a legal obligation on parents to support their minor children. This includes the duty to provide a child with clothing, food, shelter, education, and medical and dental care.

The prohibitive language of an Upjohn clause typically comes into play in one of two scenarios: Either a grandparent has established a trust for the benefit of a minor grandchild and named the intervening child as trustee, or a spouse has established a trust for the benefit of a minor child and named the other spouse as trustee.  In either case, the trustee is the parent of the beneficiary and owes the beneficiary a legal duty of support because the beneficiary is a minor. Although there are other circumstances where an Upjohn clause might apply (for example in the context of a marriage or guardianship), corporate and unrelated trustees generally do not need to concern themselves with this particular legal landmine.

The legal obligations prohibition is primarily meant to prevent inclusion of the entire trust corpus in a trustee’s estate under Treas. Reg. § 20.2041-1(c)(1), which treats the power to relieve a support obligation as a general power of appointment. Importantly, the trustee does not have to actually discharge an obligation. The mere power to do so is enough to cause inclusion. This is why some affirmative mechanism is needed to deny the trustee such power in the first place.

Legal support prohibitions are often contained in the boilerplate of a trust instrument which individual trustees are unlikely to bother reading and less likely to understand. Litigators who specialize in trust administration issues know to look for these clauses and point out violations. If a trustee makes even a small distribution in violation of an Upjohn clause, he or she has violated his or her fiduciary duty and may be subject to severe reprimand. This underscores the point that trustees, and in particular individual trustees, should maintain a close relationship with their attorneys and other professional advisors.

Although the distributions prohibited by an Upjohn clause are narrow in scope, there is very little legal precedent for determining exactly what is prohibited and what is not, so the best course of action is to proceed conservatively and with an abundance of caution.

In the absence of legal precedent to the contrary, more conservative guidelines are advisable. Thus, where an Upjohn clause applies, the following expenditures are best avoided:

  • Rent or any similar payments
  • Home improvements or decor
  • Homeowners or renters’ insurance
  • Basic utilities for the home
  • Property taxes
  • Clothing
  • Health insurance
  • Non-elective healthcare
  • General dentistry
  • Dentures
  • Optometry
  • Prescription glasses
  • Food

On the other hand, there are a number of expenses which do not fall within support obligation, so trust assets may be properly expendable on the following:

  • Cell phones
  • Pets
  • TV, cable, or satellite service
  • Internet service
  • Personal accessories
  • Automobiles
  • Auto insurance
  • Private school education
  • Extracurricular activities
  • Trips and vacations
  • Elective health care
  • Orthodontics

If you would like to discuss the particular language in your trust instrument, or the circumstances in which it operates, please contact one of our trust attorneys for guidance.

Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP. He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Christian Kelso | Estate Planning | 663(b) distributions

It’s Time to Make Your 663(b) Trust and Estate Distributions!

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Trusts and estates often pay more tax than individuals in like circumstances.  This is not because they are taxed at higher rates, but rather because the same rates applicable to individuals are “compressed,” meaning that each marginal rate increase happens at a lower level of income than it does for individuals.  For example, the highest rate of income tax for both trusts and individuals for 2016 was 39.6%, but whereas this rate only applies to income over $415,050 for single individual filers, for trusts and estates, this rate applies to all income over $12,400.  Other tax burdens, such as the 3.8% Net Investment Income Tax (a/k/a the “Obamacare Tax”) and higher rates of capital gains tax follow suit along similar lines.  Obviously, these add up to a significant potential tax burden.

Fortunately, there is a way to mitigate this tax burden.  Trusts and estates may take a deduction for “distributable net income,” which is generally the amount of income that is distributed from the trust to a beneficiary.  When this happens, the income is effectively shifted from the trust to the beneficiary, who simply adds it to their personal return and pays at whatever rate is applicable to them (including the distributed trust income, of course).

Since large amounts of unnecessary tax can be avoided by shifting income to beneficiaries in this manner, it is common practice for trustees to make distributions for this purpose, assuming, of course, that such distributions are permissible and proper under the terms of the trust.  But there is a problem:  How does the trustee know how much income to distribute from a given trust before the close of a given tax year?  Unfortunately, it is impossible, to know exactly how much income a trust has until after the tax year has closed, at which point, it’s too late to distribute all the income.

Enter IRC §663(b).  Under this special provision, a trust or estate may elect to treat any distribution made within the first 65 days of a given tax year as having been made on December 31 of the previous year.  In other words, the trustee gets 65 days after the actual close of the year to calculate how much income should have been distributed and then actually make that distribution.  The trustee then makes an election on the trust or estate’s income tax return (Form 1041) and voila, the problem is solved!

Although §663(b) distributions may provide a significant benefit, the can also represent a significant danger to trustees.  On the one hand, any distribution from a trust should only be made if and to the extent it is proper under the terms of the trust.  Even if such a distribution is permissible, it may not be in the best interests of a given beneficiary, as taxes are only one of many considerations.  On the other hand, a §663(b) distributions can save a significant amount of tax, so failing to make such a distribution, if permitted, could subject a trustee to liability for waste.

Making the right decision requires careful analysis.  The fiduciary attorneys at Farrow-Gillespie & Heath, LLP are well-versed with the applicable law and have the practical experience to understand the nuanced process that is involved with make the right decision.  If we can help you with this, please don’t hesitate to call.

The trust and estate planning attorneys at Farrow-Gillespie Heath Witter LLP, located in downtown Dallas, serve all of your trust and estate planning needs, including:

  • Estate planning for small estates
  • Estate planning for large, taxable estates
  • Trust review and modification
  • Trust and estate administration
  • Trust litigation
  • Will contests
  • Probate
  • Heirship proceedings
  • Guardianships