Tag Archive for: estate planning

Lifetime Giving: Another Tool in Your Estate Planning Toolkit

Lifetime Giving: Another Tool in Your Estate Planning Toolkit

Lifetime Giving: Another Tool in Your Estate Planning Toolkit

When a client comes in for an “estate plan,” they are usually thinking of a will or trust. These legal documents form the centerpiece of a comprehensive estate plan, but there’s another important tool in the estate planning toolkit that many people overlook: lifetime giving.

Lifetime Giving

Do you know you can give money up to a certain amount, called the annual gift tax exclusion amount, every year, to as many people as you’d like? For 2021, this exclusion amount is $15,000, so you can give up to $15,000/person to an unlimited number of people in 2021 without owing any federal gift tax or having to file a gift tax return. If you’re married, your spouse can do the same, so combined, the two of you can give up to $30,000 per person each year.

For example, Jose and Sarah have an adult child, Chris, who is married to Bob. If Jose and Sarah want to maximize their gifts to Chris’ family, they can give a combined total of $60,000: $15,000 each to both Chris and Bob. If Chris and Bob have children, Jose and Sarah can each make gifts to the grandkids as well.

The Benefits

Lifetime giving has several benefits. First, lifetime giving can be as simple as writing a check. An attorney can help you plan out a lifetime giving strategy and incorporate it into your overall goals, but legal assistance is not required to make lifetime gifts. Second, lifetime giving allows you as the giver to decide exactly who gets what and to apply any preconditions you may wish. Also, you have the satisfaction of seeing the recipients enjoy your generosity and they have an opportunity to express their appreciation. In addition, lifetime gifting enables you to act when it is most needed, for example, to help a grandchild go to college, buy a house, or start a business.

Finally, gifts that do not exceed the annual gift tax exclusion amount don’t count toward your lifetime combined estate/gift tax exemption, which is another benefit. That said, the estate/gift tax exemption amounts are so high (currently $11.7 million/individual and $23.4 million/couple) that estate tax avoidance is not a relevant consideration for most of us.

The Risks

On the flip side, lifetime gifting does come with a few risks. The biggest risk is that the money you give away today may be money you later need for yourself. Second, while you can revise a will or trust to change distribution plans as your circumstances or wishes change, lifetime gifting can’t be undone in the same way. Once the toothpaste is out of the tube, so to speak, it can’t easily be put back. For some people, these considerations may limit the practical value of the gift tax exclusion.

And for clients who may need long-term care in the foreseeable future, it’s important to know that Medicaid has a five-year lookback rule. If you make gifts today and apply for Medicaid within the next five years, your eligibility will be affected.

Conclusion

Many people may already be doing lifetime gifting in an informal way, such as small checks on birthdays. For some clients, greater lifetime gifting isn’t appropriate at this stage of life. For others, however, planned lifetime giving using the gift tax exclusion can be an easy, efficient, and satisfying way to distribute a significant amount of property.


Ellen Daniel Williamson | Farrow-Gillespie Heath Witter LLP

Ellen Williamson is of counsel at Farrow-Gillespie Heath Witter LLP. She has more than fifteen years of experience as an attorney, and practices probate, estate planning, and guardianship law. She was selected as one of “DVAP’s Finest” for her pro bono volunteer efforts through the Dallas Volunteer Attorney Program; she is a member of the Dallas Bar Association Probate, Trusts, & Estates section; a member of the estates manual committee; and a former co-chair of DAYL Elder Law Committee. Ms. Williamson assists with the creation and delivery of many continuing legal education programs for attorneys and enjoys speaking about estate planning and probate topics for senior groups and others. She earned her J.D. from SMU Dedman School of Law.

What is a Revocable Trust?

Revocable trusts have long been a mainstay of American estate planning. A trust is relationship between three parties: (i) the settlor who creates and funds the trust, (ii) the trustee who manages the assets held in trust, and (iii) the beneficiary who enjoys the assets. Each of these parties can be a single person or a group of people. Similarly, one individual can hold more than one of these titles at the same time, but a single person cannot hold all titles at once. 

What is a Trust?

Clients often ask what the difference is between a trust and a Will. The simple answer is, because a trust is a relationship, it is an intangible thing. It can neither be touched nor measured in objective, real-world units. In contrast, a Will is a document. It is a physical thing that can be felt, carried, and (usually) torn up. While most trusts are described and governed by a physical thing—a document we call a trust instrument—the trust itself remains abstract. Note that most trust instruments can create an unlimited number of separate trusts.

Trusts can be categorized in variety of ways. Here are just a handful of ways that trusts can be classified:

  • Revocable or irrevocable;
  • Grantor or non-grantor (also called a “true” trust);
  • Simple or complex;
  • Express or implied;
  • Self-settled or third party-settled; and
  • Testamentary or inter vivos (established during the grantor’s lifetime).

Revocable Trusts

Revocable trusts are self-settled, revocable, grantor trusts that are express and established during the settlor’s lifetime. (Note that grantor trusts can be neither simple nor complex.) This means they are easier to change than irrevocable trusts. They are taxed to the settlor directly, and they are governed by a written trust instrument that is drafted to be effective during the settlor’s life.

Characteristics

Nearly all revocable trusts have a few standard characteristics. Typically, the settlors will also be a trust’s primary beneficiaries. As such, they typically have expansive rights to demand distributions of trust assets, hire and fire trustees, amend and restate the trust instrument, etc. Revocable trust settlors also typically serve as trustees of their trust. Sometimes, they take on this role exclusively, and other times, they bring additional parties to serve as co-trustees. Finally, when the settlors of a revocable trust die, the trust assets are generally distributed to their descendants or other remainder beneficiaries they might select. In this regard, a revocable trust instrument will be very similar to a Will, and the settlors can choose whether the remaining property will be distributed to the remainder beneficiaries outright or in trust.

Uses

Revocable trusts may be deployed for several reasons, but the most common uses are:

  • Assisting elderly clients with asset management;
  • Holding out-of-state property;
  • Probate avoidance;
  • Assets management;
  • Contest avoidance; and
  • Privacy.

While revocable trusts have a number of very important uses, some misinformation exists regarding what can and cannot be achieved with a revocable trust. For example, a revocable trust cannot be used for creditor protection in Texas. Additionally, a revocable trust will not offer any tax savings over other estate planning tools.

Funding

A trust is only effective over property which has been transferred to it. Thus, to make assets subject to the terms of a trust, the settlor must take the affirmative steps to transfer those assets to the trust. For example, financial accounts must be “replated” to reflect trust ownership. Similarly, interests in closely-held businesses are typically transferred using assignments of interest, and real property is transferred by deed. Settlors often fail to transfer all their assets to their trusts during life. Because of this, “pourover Wills” are often prepared in conjunction with a revocable trust instrument. A pourover Will is a Will, just like any other, except that it distributes estate property to a revocable trust rather than to the heirs directly. As such, a pourover Will pours assets over from the settlor’s estate to the trust. From there, the assets are distributed to the ultimate beneficiaries. 

Conclusion

Revocable trusts are a fantastic tool for achieving many goals. They solve an array of real-world problems and make life better for many people. But they can also be overwhelming. To avoid confusion, prospective settlors should seek out quality assistance from competent advisors.


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

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.

Wills v Trusts

Wills v. Trusts: What’s the Difference?

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.

Beware Fill in the Banks Will Chris Wilmoth

Beware Fill-in-the-Blank Wills!

Beware Fill in the Banks Will Chris Wilmoth

In 2015, the Texas Legislature passed a law requiring the Supreme Court of Texas to make available to the public simple forms for preparing wills. In the six years since, however, the Supreme Court has not published these model wills online. If and when these free model wills are published, it will become easier and more affordable for Texans to prepare a will by simply filling in the blanks.

Of course, fill-in-the-blank form wills are much older than the internet and can be found in form books available at your local bookstore. When blanks in a draft or form will are completed in handwriting, the question sometimes arises whether the handwriting was inserted before or after the will was signed.

In 1837, in the absence of evidence as to when blanks were filled in, the Supreme Court of Missouri presumed that the blanks were filled in before the will was signed.[1] Other state courts have followed this presumption, including South Carolina (1921), Illinois (1929), Wisconsin (1939) and Montana (1960).[2] A legal treatise published in 1954 described this presumption as “well settled.” However, no reported Texas case has adopted or rejected this presumption.

There are many published cases from Texas courts addressing “interlineations” in wills – that is, handwritten (or even typewritten) insertions to the text of a will (as opposed to merely filling in blanks). When such a will is challenged, courts require testimony that the insertions were made before or at the time the will was signed because insertions made after signing are considered void. Even in uncontested cases, probate courts typically admit wills with interlineations “as originally written,” leaving questions about insertions to be resolved by agreement or subsequent litigation.

People making a will should not count on a Texas probate court accepting handwritten insertions, even if they are merely filling in the blanks. This could lead to ineffective provisions in the will or, worse, the complete failure of the document to be admitted to probate, resulting in an intestacy.

Attorneys experienced in the drafting and execution of wills take steps to avoid the issue entirely. With word processing programs, it is easy to make corrections and minimize handwritten insertions during signing ceremonies held at the attorney’s office.

If the will is being signed in someone’s home and blanks need to be filled or corrections need to be made, it is best to initial and date those insertions and refer to them in the self-proving affidavit. Even then, the witnesses might be called upon to testify in court that the handwriting was part of the will when it was signed.

If the Supreme Court someday makes form wills available to the public online, or if you use a form from a book, your will stands a better chance of being admitted to probate at less cost and inconvenience if it contains no handwriting except for the signatures of the testator and the witnesses. The experienced estate planning attorneys at FGHW are prepared to help you minimize these risks.


[1] Graham v. O’Fallon, 4 Mo. 601 (1837).

[2] Guerin v. Hunt, 110 S.E. 71 (S.C. 1921); Martin v. Martin, 165 N.E. 644 (Ill. 1929); In re Home’s Will, 284 N.W. 766 (Wisc. 1939); In re French’s Estate, 351 P.2d 548 (Mont. 1960).


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.

Executing Texas Estate Plans in the Era of COVID-19

These are unprecedented times, even for estate planning attorneys. The advent of COVID-19 has “persuaded” many clients to either consider establishing an estate plan for the first time or to re-assess their current estate plans. As a result, estate planning attorneys across Texas are working hard during this period of great uncertainty to develop and protect their clients’ legacies.

Yet a finely crafted estate plan is useless if it is not properly signed and executed. Texas law has strict parameters for the signing of certain estate planning documents. For example, a valid will in Texas must be in writing, signed by the individual making the will (the testator), and attested by two or more witnesses. The witnesses must be within the physical presence of the testator when witnessing the execution of the will. A notary public signs the will as well (though this is technically not a requirement under Texas law). Between the testator, witnesses, notary, and estate planning attorney, a total of five or more people typically attend a will-signing ceremony. In the era of COVID-19, that’s a social faux pas. Government regulations may forbid a gathering of such size, and in the author’s experience, clients are presently uncomfortable with exposure to more than one non-family member at a time. Therein lies the chief problem facing estate planners: how to safely convene with clients to sign and execute their essential documents?

Governor Greg Abbot’s Emergency Order

In recent weeks, Texas Governor Greg Abbot has attempted to provide estate planners with a method for electronically notarizing wills, powers of attorney, and other estate planning documents. Typically, a notary public must also be in the physical presence of a client while he or she is executing a will. Governor Abbot’s emergency order enables a notary to instead observe a will-signing ceremony over Zoom or similar “electronic means.” The notary would then need to receive a faxed or scanned copy of the will (or other estate planning document) and affix his or her signature and stamp to the same. The notarization process is complete upon the notary’s return of the will and other estate planning documents to the client by scan or fax. This temporary fix aims to alleviate the need for large gatherings and can help clients execute their estate plans without undue delay.

Concerns with Electronic Notarization

But as with any temporary amendment to the law, Governor Abbot’s relaxation of notarial standards remains fraught with questions and legal concerns. For one, the required witnesses must still physically attend a will-signing. That fact alone may still dissuade clients from pursuing execution of their estate plan during the pandemic. Questions also remain about the extent of Governor Abbot’s authority to authorize such a suspension of Texas law. Probate litigators may later capitalize on the legal uncertainty surrounding wills notarized by electronic means and initiate a contest in probate court[1]. All this to say, estate planners must proceed with caution when utilizing electronic notarization for estate plans. Certain clients and potentially contentious dispositions of property in an estate plan may not warrant this unproven method of execution.

Trusts and Holographic Wills

However, estate planners have developed another creative approach to this executionary quandary brought on by COVID-19. Trusts can provide a workaround for the more stringent execution requirements of a will. A valid trust in Texas only requires the signature of the client seeking to establish the trust. As a result, clients may print the final version of a trust instrument and sign in the safety of their own home. No public gatherings are necessary.

A trust’s terms provide for the disposition of the client’s property upon death, much like a will. But for a trust’s terms to be effective, a client must transfer his or her assets into the trust. This can be a tedious task involving the drafting of deeds, assignments of interest, and many more documents. A client might also need to personally visit a financial institution to change accounts into the name of the trust: another no-no in the era of COVID-19.

A holographic will might serve as the catchall for assets that have yet to be transferred into a client’s trust. Unlike typewritten wills, a holographic will is entirely in a client’s handwriting. Texas law does not require witnesses or a notary to sign holographic wills. A client could then print and sign the trust while also drafting his or her own holographic will (with an attorney’s instruction) to sign as well.

These homemade, holographic wills are only intended as an interim solution. But they ensure that the assets in a deceased client’s estate will “pour over” into the trust that he or she established, thereby making the estate assets subject to the trust’s dispositive terms. In short, a properly drafted trust and holographic will can provide clients with a temporary fix to the dangers of gathering in larger groups for signing a will and other estate planning documents. Together with the electronic notarization of wills and estate planning documents, these methods give estate planners a chance to achieve their clients’ goals in the midst of the current pandemic.


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] Few things excite probate litigators more than a video of an elderly testator executing his or will. An astute attorney can use a recorded Zoom session to sow doubt and concern among members of the jury regarding the elderly testator’s mental capacity.

The Secure Act | Retirement | Estate Plan

The SECURE Act: Will it Affect Your Retirement Plan?

 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

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.

Legal Documents for Your College Checklist

While shopping for extra-long twin sheets and plush mattress pads for your soon-to-be college freshman, consider adding these items to your checklist:

  1. Financial Power of Attorney (POA)
  2. Medical Power of Attorney (MPOA)
  3. Health Insurance Portability & Accountability Act (HIPAA) Authorization

You are probably wondering why your barely-an-adult child needs these documents. Most high school grads have already turned or are about to turn eighteen. When a child turns eighteen, he or she becomes a legal adult. The law considers adult children capable of making their own decisions and permits them full legal privacy. Your rights as legal guardian have ended.

This new legal independence can create hurdles for you and your ability to provide assistance to your adult child. For example, imagine if your child needs medical attention but the doctor refuses to speak to you about your child’s condition because of HIPAA concerns. With a HIPAA authorization, the doctor is allowed to inform you of your child’s condition. Furthermore, what if there are immediate medical decisions that need to be made, but your child is unconscious? If you are the appointed agent under a Medical Power of Attorney, you are able to make those critical and important medical decisions. These documents can be a part of the ultimate care package for your newly-minted young adult.      

Financial Power of Attorney

The first document to add to your college student’s shopping cart is the financial power of attorney (“POA”). In a POA, the principal (your child) appoints an agent (you) to make financial and related decisions or actions on behalf of him or her in the event of need. For example, the POA gives you the authority to continue signing for your child for banking and tax purposes.

Medical Power of Attorney

An MPOA appoints an agent to make medical related decisions on behalf of or for the principal.

HIPAA Authorization

A HIPAA authorization permits doctors and healthcare providers to share health information with a list of individuals authorized by the principal. Otherwise, HIPAA law generally prohibits medical personnel from discussing your adult child’s health information with you.  

Customization Options

Each document can be customized to fit your child’s needs. The powers and decisions given to an agent under the POA and MPOA can be as broad or as limited as the principal specifies. For example, the power to handle tax matters can be granted under the POA while the power to handle digital assets and the content of electronic communications can be withheld. Under the HIPAA authorization, the information authorized to be provided to individuals can be as limited as the principal prefers. Each one of these documents can be drafted to be effective only for a certain period of time, such as for the four years of your child’s college career.

There are countless scenarios in which these documents can be of great help during your child’s journey through adulthood. Without these documents, you may be denied the ability to help your child and be forced to get court approval when time is of the essence. The estate planning attorneys at Farrow-Gillespie Heath Witter LLP can help you check these important documents off your to-do list at an affordable fixed fee. Please contact us for further information.


Amanda Brenner | Farrow-Gillespie & Heath LLP | Estate Planning

Attorney Amanda Brenner’s primary practice areas are estate planning, business formations, and nonprofit organizations. Ms. Brenner graduated from University of Pittsburgh School of Law in 2015.

Spencer Turner | Farrow-Gillespie Heath Witter

Those Pesky Trusts! A Brief Primer on Terminating Unwanted Trusts

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.  

Adoption | Farrow-Gillespie Heath Witter

Where Adoption and Inheritance Cross Paths

Adoption | Farrow-Gillespie Heath Witter

When a Texan dies without a will, the decedent’s property passes to his or her heirs in accordance with the laws of intestate succession. Adoption may affect inheritance if either the decedent or an heir is a part of what is known as the adoption triad. The adoption triad consists of the biological parents, the adoptive parents, and the adopted child. This article explains the effects of adoption on inheritance for each member of the adoption triad. Additionally, this article suggests best practices for attorneys who find themselves responsible for, as well as individuals who want to avoid, the legal effects of an intestate estate.

The Adopted Child

An adopted child is the son or daughter of their adoptive parents for all purposes, including inheritance. An adopted child and the adopted child’s descendants inherit from and through the adoptive parents and their kindred as if the adopted child were the biological child of the adoptive parents. An adopted child also may inherit through his or her biological parents, if the right to inherit was not terminated in the adoption court’s order terminating parental rights.

The Adoptive Parents

The adoptive parents and their kindred inherit from and through the adopted child as if the adopted child were the biological child of the adoptive parents.

Biological Parents

Biological parents may not inherit from or through the child they placed for adoption.

Adopted Adult

In the case of adult adoption, which is generally defined in Texas as the adoption of a person age 18 or older, an adopted adult may not inherit from or through the adult’s biological parents, and the biological parents may not inherit from or through the adopted adult.

Determination of Heirs Through Court Proceeding

When a decedent dies without a will, the decedent’s heirs, as well as the heirs’ respective shares and interests in the decedent’s estate, may be determined through a proceeding to declare heirship. In a proceeding to declare heirship, the court is required to appoint an attorney to represent the interests of any unknown heirs. The court-appointed attorney will perform an investigation into the identity and location of the decedent’s heirs, including any heirs who were adopted or placed for adoption.

Practical Considerations for Attorneys

An adoption placement may be difficult for an attorney to ascertain for various reasons. Sometimes women do not share that they placed a child for adoption, even with close family members or friends. Sometimes men are not aware of the existence of a biological child that was placed for adoption by the biological mother. Moreover, it is difficult to unseal parental termination orders, especially from years past, to determine if the child’s right to inherit from their biological parents was terminated. Despite these potential roadblocks, attorneys representing the applicant or the unknown heirs in a proceeding to declare heirship should make reasonable inquiries into whether the decedent ever: (1) placed a child for adoption, (2) adopted a child, (3) had a biological child that was adopted as an adult, or (4) adopted an adult. Such inquiries are required for due diligence, and if discovered, these actions can significantly impact inheritance under the laws of intestacy.

Avoid Surprises by Executing a Will

Texas inheritance laws do not prevent biological or adoptive parents from disposing of their property in any manner of their choosing through a valid will. Thus, if a decedent has a valid will, the scenario discussed above should never become an issue. Regardless of whether adoption is part of your story, all individuals are advised to obtain a comprehensive estate plan to devise their estate as they wish. The attorneys at Farrow-Gillespie Heath Witter LLP are here to help.


Jessica Dunne | Farrow-Gillespie & Heath LLP

Jessica Dunne is an associate attorney at Farrow-Gillespie Heath Witter. Jessica has substantial experience in probate, guardianship, and trust litigation, with a special interest in adoptions. Jessica graduated cum laude from Baylor Law School in 2011 where she was the recipient of the Presidential Scholarship. Jessica is uniquely equipped to represent individuals who are pursuing adoption because she is an adoptive parent herself.

The Effects of Divorce on Wills and Estate Plans in Texas

Here is a guide to the legal effects of divorce on Wills, Trust instruments, and financial accounts in Texas.

Wills and Divorce in Texas. When a person’s marriage is dissolved by divorce, the former spouse cannot receive any payments, benefits or inherit property from that person’s will unless it expressly states otherwise. Not only is the former spouse not allowed to take any benefits or serve in a fiduciary role with regard to the estate, but neither can a relative of the former spouse do so, unless the relative is also a relative of the testator.

Trust Instruments and Divorce in Texas. A person can create a trust through provisions in a will. However, if that person’s marriage is dissolved by divorce, Texas law will operate as if the former spouse has disclaimed his or her interest in the trust. The divorce cancels the former spouse’s right to receive any property from the trust, to act as trustee, or to be appointed in any other fiduciary capacity. However, this rule applies only to trusts created in a will, and not to trusts created during one’s lifetime.

Divorce on P.O.D. and Multiple-party accounts. If a deceased individual has established a “pay on death”, multiple-party account, or any other beneficiary designation during a marriage that ends in divorce, the beneficiary designation of the former spouse, as well as of relatives of the former spouse who are not a relative of the decedent, are no longer effective.

Exceptions to the Rule. Some exceptions to the general rules occur under the following circumstances:

  1. The Court’s divorce decree so orders.
  2. Express terms in a trust instrument grant rights regardless of divorce.
  3. An express provision of a pre-nup or post-nup relates to the division of the marriage estate.
  4. The decedent reaffirms the survivorship agreement in writing.
  5. There are express provisions in joint trust documents.
  6. The former spouse is re-designated as the P.O.D. payee or beneficiary after a divorce.

This article brushes the surface of the many estate planning issues that can occur after a divorce in Texas. Be sure to review your estate planning documents yearly and seek the counsel of an attorney when there has been a major life event, such as marriage, birth, death, changes in investment accounts, property changes, or divorce.


Elaine Price | Farrow-Gillespie & Heath LLP | Probate Proceedings

Elaine Price practices in the areas of probate, heirship, and guardianship proceedings. Ms. Price is a graduate of the Thurgood Marshall School of Law and holds a Bachelor of Arts in political science from Prarie View A&M. Elaine was formerly with the law office of Rhonda Hunter.

Investment | Farrow-Gillespie & Heath

Uncertainty Continues Around “Fiduciary Rule” Protections for Retirement Investors

The last 40 years have seen a marked change in retirement benefits, with fewer employer-sponsored defined benefit plans, more defined contribution plans (including 401(k) plans and Simplified Employee Pension (SEP) plans), and a proliferation of individual retirement accounts (IRA). These changes have raised questions among regulators about the protections available to employees who are now increasingly responsible for managing their own retirement funds.

The US Department of Labor’s Fiduciary Rule

The US Department of Labor (DOL) wrote rules in the 1970s to regulate trustees of pension funds and those providing investment advice to the funds as fiduciaries. DOL began working on updated regulations under President George W. Bush and again under President Barack Obama to address a perceived gap between the standards applied to pension fund investments and to newer forms of retirement accounts. The resulting “Fiduciary Rule” became final in April 2016 and was scheduled to phase in by January 1, 2018.  President Trump asked for a review of the rule shortly after taking office, and implementation has been delayed.

A key feature of the Fiduciary Rule imposes a fiduciary standard not only on investment advisers (who provide ongoing advice for a fee) but also broker-dealers and insurance agents who may recommend a single security or transaction to a retirement investor. The Fiduciary Rule requires all of these professionals to recommend only transactions that are in the best interest of the retirement investor. Under the Fiduciary Rule, unless an exemption applies, professionals cannot receive commissions for those transactions, because commissions create a conflict of interest between the professional and the investor. Finally, the Fiduciary Rule exempts commissions on the sale of fixed rate annuities under more lenient provisions than fixed indexed and variable annuities.

The Fiduciary Rule in Court

Because brokers and insurance agents are traditionally paid on a commission basis per transaction, rather than receiving fees for ongoing advice, the DOL’s Fiduciary Rule raises concerns among those professionals about costs of compliance and potential lost revenue. Several lawsuits have challenged provisions of the Fiduciary Rule and DOL’s authority to write the rule.  In a decision issued March 13, 2018, the United States Court of Appeals for the Tenth Circuit upheld the Fiduciary Rule against a challenge to its provisions differentiating fixed indexed annuities from fixed rate annuities.  Two United States District Courts, one in Texas and one in the District of Columbia, also upheld the Fiduciary Rule in decisions issued February 8, 2017, and November 4, 2016, respectively. Unlike the Tenth Circuit case, the Texas and DC cases challenged the entirety of the Fiduciary Rule as beyond DOL’s authority.

The Texas case was appealed to the United States Court of Appeals for the Fifth Circuit, which issued an opinion on March 15, 2018 that vacated the Fiduciary Rule. Two members of a three-judge panel found that the statutes relied on by DOL do not authorize it to write the Fiduciary Rule. DOL has until April 30 to move for rehearing before the full Fifth Circuit, and it has until June 13 to ask the United States Supreme Court to review the decision.

Regardless whether DOL challenges the Fifth Circuit ruling, other regulators are poised to write protections for self-directed retirement accounts. The United States Securities and Exchange Commission has already said that it is looking at regulating in this area and may announce a rule in the second quarter of 2018. State regulators may become more active, as well, if they feel that federal protections are not forthcoming or not robust. For now, investors and financial services professionals should watch for DOL’s decision on whether to challenge the Fifth Circuit decision as a sign of how DOL views its future role in protecting retirement investors.

UPDATE:

On April 18, 2018, the United States Securities and Exchange Commission proposed rules that would require all broker-dealers and associated persons to act in the best interest of retail customers when recommending a securities transaction or investment strategy, in addition to requiring enhanced disclosures from both broker-dealers and registered investment advisers of the nature of their services, the fees and costs for those services, and conflicts of interest. The SEC’s rules are broader than the DOL’s Fiduciary Rule in that they are not limited to retirement accounts. They also lack the specific restrictions on commissions and certain annuities that have made the Fiduciary Rule so controversial.

DOL failed to seek rehearing by the full Fifth Circuit by the April 30 deadline. While it is still possible that DOL will ask the U.S. Supreme Court to review the decision, it appears likely that any effort to revive the Fiduciary Rule will require intervention by investors or others representing their interests.


Mary L. O'Connor | Farrow-Gillespie & Heath LLP | Dallas, TXMary L. O’Connor’s practice focuses on representing companies and their officers and directors in commercial litigation and arbitration, securities litigation, internal investigations, and regulatory investigations and enforcement proceedings.

During the course of her career, Mary has been named to the list of Best Lawyers in Dallas by D Magazine, and to the list of Texas Super Lawyers (a Thomson Reuters service) by Texas Monthly Magazine.

Bethany Kelso | Preston Kelso | Christian Kelso

Upjohn Clause: A Trap for the Unwary Trustee

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.

Tax Cuts and Jobs Act | New Tax Law 2017

The Tax Cuts and Jobs Act: What It Means for You

Tax Cuts and Jobs Act | New Tax Law 2017This information is current as of December 27, 2017.

At the request of our clients, we have summarized some of the more important provisions of the sweeping new tax law (“TCJA”), which was signed into effect on December 22, 2017.  Please note that all of these provisions are subject to interpretation by the Internal Revenue Service.  We will not know the true effect of the law until the IRS publishes regulations in the coming years.

These changes do not affect the tax return that you will file next year for 2017.  The changes will take effect with the tax return you file in 2019 for tax year 2018.

We cannot emphasize enough that this new tax law marks the biggest change to our tax system since the 1980s.  Your individual tax situation and your company’s tax situation may have changed dramatically.

To understand fully how the new tax law will affect your particular circumstances, you should consult your tax professionals.  In particular, everyone who owns or operates a business should make an appointment with the company’s tax professionals early in 2018 to consult on the effect of the new tax law.  To the extent those recommendations affect the company’s structure, corporate legal advice should also be sought before any changes are made.

However, here is an executive summary of a few things that you should think about doing now, meaning before December 31, 2017; or that you should think about doing very early next year.

Income Tax For Individuals

Tax Rates

The new law keeps a seven-bracket structure, but cuts tax rates in five of those brackets, and generally raises the threshold for each higher bracket. The top bracket — for individuals earning more than $500,000 per year, and married couples earning more than $600,000 per year – will be 37% in 2018, down from 39.6% in 2017.

Suggestion: To the extent possible, defer acceptance or recognition of income to 2018.

Standard Deduction

For single filers, the standard deduction has increased from $6,350 to $12,000.  For married couples filing jointly, it’s increased from $12,700 to $24,000. The net effect of that change is that fewer taxpayers will itemize their deductions, because many more taxpayers will be better off taking the standard deduction instead.

Suggestion: If you think you may not itemize next year on your personal tax return, consider making this year’s and next year’s contributions to charity by December 31, 2017, to get the itemized deduction benefit now.

Suggestion:  If you have been thinking about donating an old car or other property to charity, consider doing it by December 31, 2017 to get the itemized deduction benefit now.

Personal Exemption

Gone.  Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents.  The new law eliminates the tax savings from those personal exemptions.

Property Tax and Sales Tax

Beginning in 2018, the deduction you can claim for property taxes and sales taxes will be limited to a total of $10,000.

Suggestion: Make sure you pay 2017 and prior property taxes by December 31, 2017.  These are the property taxes for which you already have a bill from the county tax assessor-collector.

Suggestion: Consider prepaying your 2018 home property taxes by December 31, 2017, if your county allows you to do so.  These are property taxes for which you do not yet have a bill, so you would have to estimate the correct amount.  We have confirmed that Dallas County allows prepayment of an estimated amount.  The county clerk requests that taxpayers clearly indicate 2018 prepayments on the check’s memo line, along with the property account number.

NOTE on Prepaying 2018 Property Taxes:   The IRS has now come out saying it will disallow deductions for property tax 2018 pre-payments on the theory that the tax has not yet been levied.  Many  advisers are saying that the IRS’s position does not comply with the language of the new law.  The TCJA expressly disallows prepaid income tax (which of course does not apply to Texas, because Texas does not have state income tax), but does not disallow prepaid property tax.  The argument is that if Congress had intended to disallow prepaid property tax, it could have done so with the same few words it used to disallow prepaid state income tax — ergo, Congress did not intend to disallow prepaid property tax.  The short answer is that nobody knows at this time whether prepaying your 2018 property tax will save you money, or will cause you more trouble than it’s worth.

For more information, please consult the IRS advisory opinion.  Most news sources are carrying articles on this issue, including the Dallas Morning News.

Suggestion: If you are contemplating a large purchase that is subject to sales tax (such as a car, RV, boat, aircraft, etc.), consider making that purchase by December 31, 2017, to maximize the deductibility of the sales tax.

Charitable Deductions

For those who itemize, the new law allows taxpayers to deduct contributions to public charities of up to 60% of their income, rather than limiting deductions to 50% of income.

Child Tax Credit

The new law doubles the child care credit to $2,000 per child under 17, and is available at higher income levels.

Mortgage Interest Deduction

Beginning in 2018, you may deduct the interest paid on new home mortgage loans of only $750,000 or less.  If you bought your home before December 15, 2017, you will still be able to deduct the interest on up to $1M of mortgage loan.  Experts are currently in disagreement whether a taxpayer may allocate some or all of the $750,000 to a vacation home, or whether vacation home mortgage interest is no longer deductible.

HELOC Interest Deduction

Gone.  Interest paid on a home equity loan is no longer deductible.

Alternative Minimum Tax

The alternative minimum tax (AMT) remains in effect.

Student Loans

If you have student loans, you may continue to deduct up to $2,500 per year in interest.

Medical Expenses

For 2018, you may deduct medical expenses to the extent they exceed 7.5% of your income.  For 2017, that threshold was 10% for most people.  This tax break for medical expenses will expire in 2019, and the threshold will return to the current level.

Suggestion:  If you are planning to have an expensive, uninsured medical procedure, 2018 is a good year financially to do so.

Health Insurance Mandate/Penalty

The tax bill repeals the “individual mandate” to purchase health insurance, effective for the 2019 tax year.  The mandate remains for 2018, so the economic effect of the repeal will not be known for several years.  However, the Congressional Budget Office estimates that, by 2027, 13 million fewer Americans will have health insurance, and that, because fewer healthy people will apply for insurance, health insurance premiums will increase as the pool of applicants consists of sicker people.  The brunt of premium increases will be felt primarily by families of four who make more than $98,000 per year.

Electric Car Credit

Drivers of plug-in electric vehicles can still claim a credit of up to $7,500.  Just as before, the full amount is good only on the first 200,000 electric cars sold by each automaker. GM, Nissan and Tesla are expected to reach that number some time next year.

529 Savings Accounts

If you have been making contributions to a tax-free 529 savings account for the next generations, you may use that money, beginning in 2018, for elementary and secondary school costs, as well as for higher education costs.

Alimony

If you pay alimony pursuant to a divorce that is final after December 31, 2018, the amount will no longer be deductible.

Moving Expenses

Moving expenses for job relocation will no longer be deductible.

Estate Tax for Individuals

The new tax law doubles the amount of money exempt from the gift and estate tax, which in 2017 was $5.49M per person.  Each individual can now give away, during lifetime and/or at death, $11.2M without incurring the estate tax.  Amounts in excess of $11.2M that an individual gives away during lifetime or at death will be taxed at the current rate of 40%.  This increase in the exemption will expire in 8 years, at which time the exemption amounts will return to $5.6M per person.

Income Tax for Businesses

Corporate Tax Reduction

The new law cuts the tax rate for C-Corporations from 25% to 21%, starting in 2018, and eliminates the Alternative Minimum Tax for corporations.

Suggestion: To the extent possible, defer recognition of income to 2018.

Suggestion:  If you are currently an S-Corp or LLC with relatively high revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect C-Corp taxation status.

Suggestion:  Look to see where you can save money on tax, as it is important your business is making the highest profit possible. Click here for advice on where you can save tax within your business, ensuring your business is meeting the relevant tax charges and codes.

Pass-Through Entity Tax Reduction

The new law provides a 20% deduction to owners of certain S-Corporations, LLCs, partnerships, and sole proprietorships.

Suggestion: To the extent possible, defer recognition of income to 2018.

Suggestion:  If you are currently a C-Corp with relatively low revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect S-Corp taxation status or to convert to an LLC.

Multi-National Company Tax Breaks

The U.S. is switching to a territorial system of taxation, which means companies will not owe federal taxes on income they make offshore. To take advantage of this long-term benefit, companies will be required to pay a one-time tax on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets.

Sexual Harassment Payments

Beginning in 2018, companies can no longer deduct any settlements, payouts, or attorney’s fees related to sexual harassment claims if the payments are subject to non-disclosure agreements.

Suggestion:  If you are contemplating settlement of such a claim, consider closing the deal by December 31, 2017.

1031 “Like Kind” Exchanges

Nontaxable exchanges of appreciated property for similar property will now be limited to real estate only.  Trades of other types of property will be treated as sales and will trigger capital gains tax.

Suggestion: If you are contemplating a 1031 exchange of art or other personal or business property that has appreciated in value, consider completing that exchange by December 31, 2017 to avoid a capital gains tax in 2018.

Income Tax for Nonprofit Organizations

Standard Deduction Effect on Charitable Donations

For single filers, the standard deduction has increased from $6,350 to $12,000.  For married couples filing jointly, the standard deduction has increased from $12,700 to $24,000. The net effect of that change is that more taxpayers will take the standard deduction rather than itemize their deductions. Because a taxpayer must itemize deductions to be able to deduct charitable contributions, fewer taxpayers will be able to deduct charitable contributions from their taxes.  To the extent that a donor is motivated in whole or in part by the deductibility of his or her contribution, the donor is arguably less likely to give to nonprofit organizations.  Generally speaking, 501(c)(3) organizations may see a decrease in donations by middle-income individuals.

501(c)(3) Deduction AGI Limit Increase

For those donors who do itemize, the new law allows taxpayers to deduct contributions to public charities totaling up to 60% of their income, rather than limiting those deductions to 50% of income.

Highly Paid Executives

The new law imposes a 21% tax on certain nonprofits that pay a salary above $1M to an executive.

Unrelated Business Income (UBI)

Unrelated Business Income, or UBI, refers to certain types of income for which a nonprofit must pay taxes, even though the organization is tax-exempt.  The new law prevents nonprofits from setting off losses in one stream of UBI against gains from another stream of UBI.  To know how the various “streams” of UBI will be defined, nonprofits must wait for the IRS to issue its regulations.  Suffice to say, though, that the IRS will be looking closely at UBI in the coming years.

Suggestion:  Nonprofits should consider an organizational audit in 2018 to ensure that they are accounting for UBI correctly.

Employee Benefits

The value of certain previously nontaxable employee benefits, including parking, transportation, and on-site athletic facilities, will be subject to Unrelated Business Income Tax beginning with the first pay period of 2018.

Donations Tied to Collegiate Season Tickets

Donations to a college or university to obtain the right to buy season tickets to sporting events are no longer deductible.

Private Foundations

The new law does not significantly affect taxation of private foundations.

Luxury Property | Yacht | SPE | Special Purpose Entities

Luxury Property Special Purpose Entities

Portions of this article were originally printed in Dallas Bar Association Headnotes, December 2017.

Luxury Property | Yacht | SPE | Special Purpose Entities

When it comes to luxury property, such as beach houses, lake houses, ski condos, hunting leases, aircraft, watercraft, limousines, and the like, two rules almost always apply: First, they are expensive to own and operate. Second, they tend to sit dormant much of the time. In order to spread out costs, decrease waste, and mitigate damage, it often makes sense for multiple owners to combine resources and share ownership of this type of property.

Whether friends or family, parties wishing to maximize these advantages often hold the property in special purpose entities or “SPE”. But ownership of luxury property involves legal and practical problems that differ from those of the standard, for-profit world. The tips below will help practitioners recognize and address the problems.

Entity Choice

LLCs are generally the entity of choice for luxury property SPEs in Texas. General partnerships lack appropriate liability protection, while limited partnerships are more expensive and complicated.  Although double taxation may not be an issue, corporations nonetheless raise tax concerns, such as increased potential for violating the nonrecognition provisions of IRC §351. Also, LLCs provide a level of privacy which can be valuable.

Usage Rules

Parties to a luxury property SPE must determine how, when, and by whom the property can be used. Options include reservation systems, drawing lots, or simply a first come, first served rule.  Similarly, guests, family members, pets, and smoking should be addressed. Parties should also expressly permit or forbid outside rental of the property.

Contributions

Rules for sharing costs and expenses are also very important. Who will determine what expenses are proper? How and when will contributions be required? Should costs be shared pro rata, per capita, or otherwise? Many usage charges are difficult to track, which leads to infighting.  Requiring users to pay for fuel may be appropriate, but allocating a hangar fee may not. Also, budgeting for expenses well in advance and providing limitations on increases can provide comfort.

Penalties are another important concern. Unlike for-profit entities, luxury property SPEs require regular cash contributions for upkeep, taxes, and other expenses, so mechanisms are required to hold owners to their obligations. Thus, interest charges, as well as forfeiture of usage, voting rights, or even the ownership interest itself may be appropriate.

Contributions must be carefully defined. If Uncle Bob takes his favorite recliner to the ski condo for a few years, is it contributed or can he take it back? Answers to such questions will depend on the circumstances and may change over time.

Management

Especially where many owners are involved, appointing and empowering capable managers is important. Expecting family factions to agree on a cable package for the old family homestead is unrealistic.

Managers’ powers should provide flexibility because they may need to make quick decisions. A company agreement can provide broad direction and allow managers to set specific policies and procedures internally, allowing for simpler, quicker amendments.

Ownership and Voting

Permissible owners of luxury property SPEs should be well defined. Transfers within this class should be easily made, while transfers outside the class should be difficult, but not impossible. Similarly, assignees’ rights should be clearly defined, particularly in the context of unintended transfers. For example, should assignees hold usage rights? Also, it may be helpful to limit ownership by disallowing fractionization of interests. For example, transferees receiving less than a whole unit might can be made assignees until the entire unit is held by one person.

Voting rights present other problems. Small luxury property SPEs will likely function better with a per capita voting whereas larger ones work best where votes are cast pro rata. Also, the threshold for supermajority voting should typically be lower with a luxury property SPE than with a for-profit enterprise because the entity represents a liability to its owners and they should have a more available exit strategy.

To summarize, many of the above considerations either play out differently or simply do not apply in the context of for-profit companies. Further guidance can be found in the rules applicable to social clubs and fraternal organizations. Unlike those organizations, however, additional flexibility is required with a luxury property SPE. If the parties are willing to exercise good planning, show a little patience, and adapt their systems, they will reap great benefits.


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.

Estate Planning | Farrow-Gillespie & Heath | Dallas, TX

Capacity to Sign

Estate Planning | Farrow-Gillespie & Heath | Dallas, TXDifferent legal actions require different levels of mental capacity to be valid. For example, the level of mental capacity required to sign a will, referred to as “testamentary capacity,” is lower than the level of capacity required to sign a contract, called “contractual capacity.” The various standards are discussed below.

Capacity to Sign a Will – Testamentary Capacity

To have testamentary capacity, the will signer must satisfy five requirements. First, the signer must understand the business in which they are engaged.  Second, the signer must understand the effects of making a will. Third, the signer must understand the general nature and extent of their own property. Fourth, the signer must know to whom their property should pass or is likely to pass. And fifth, the signer must be able to collect all of this information in their mind at once and understand the how it all connects. They also must not suffer from an “insane delusion” that affects the will, nor be under undue influence from an outside party.

A person signing a will may do so during a lucid interval (sometimes also known as a “moment of clarity”), which is a time of mental capacity that is both preceded and followed by periods of mental incapacity. As long as the signing occurs during this lucid interval, the person has capacity to execute the document at issue.

Testamentary capacity must be proven only if the will is challenged by someone during the probate process. The party seeking to uphold the will (the will proponent) is the party who must prove that the testator did, in fact, have capacity at the time of the will signing. To guard against claims to the contrary, the estate planning attorney should be certain that the testator has capacity at signing, and should not allow someone with questionable capacity to execute a will.

Capacity for Other Legal Arrangements

In contrast to testamentary capacity, the standard for legally signing other documents is generally higher.

Contractual Capacity

Contractual capacity is the mental capacity required to validly execute a contract. Contractual capacity requires that the contracting person appreciates the effects of the act of signing the contract, and understands the nature and consequences of signing the contract as well as the business that they are conducting.

Power of Attorney

Although not entirely clear under Texas law, proper execution of a power of attorney probably requires contractual capacity. The reason is that the POA is valid during the signer’s lifetime and can have a profound effect on business and financial transactions.

Donative Capacity

Donative capacity, or the capacity to make a gift, is an elusive concept in Texas, but other states require something that appears to be higher than contractual capacity. Common requirements are that the donor of the gift must understand the nature and purpose of the gift, the kind and amount of property given, who is a reasonable recipient of the gift, and the effect the gift will have on the donor. Some states go so far as to require that the donor understand that the gift is irrevocable and that it will reduce the donor’s own assets.

Health Care Decisions

The capacity required to make health care decisions is more than mere mental capacity. Patients must give “informed consent” to all health care procedures, which requires that the patient be competent and that the consent be given voluntarily. The consent is informed when the health care provider gives the patient the information the patient needs to make the right choice.

The Effect of a Lack of Capacity

If a person does not meet the requisite mental capacity requirements when he or she enters into a legal arrangement, the arrangement and its supporting documents are generally void and unenforceable. Third parties can challenge these documents if they believed the person lacked capacity when the documents were signed. For a will, that means bringing a contest during the probate process.

Read More:
  • Michael H. Wald, The Ethics of Capacity, 77 Tex. B.J. 975 (2014).
  • Rudersdorf v. Bowers, 112 SW2d 784, 789 (Tex. Civ. App.—Galveston, 1938).
  • Tieken v. Midwestern State Univ., 912 SW2d 878, 882 (Tex. App.—Fort Worth, 1995).

Catherine Parsley was an intern at Farrow-Gillespie Heath Witter, LLP in 2017. Catherine served as a judicial extern for Chief Justice Nathan L. Hecht, of the Supreme Court of Texas.  She holds a B.S. in communications studies, cum laude, from the University of Texas at Austin.


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.

Digital Assets in Estate Planning

Digital Asset Planning

As technology advances over time, the average person owns more and more digital assets. The same applies to businesses too, where the rise of technology also plays a large part in its development. If companies like Salesforce know it’s importance, then it is definintely something worth considering. We doubt technology is going to disappear anytime soon, so using it to our advantage can be very beneficial.

People want to get more assets over this transition and therefore may want to dispose of the old ones, which is why exittechnologies.com is brilliant for the disposal or renewal of your old IT equipment. The definition of digital assets is very broad and includes intangible assets ranging from online accounts, such as bank accounts, email accounts, and social media, to digital files stored on a computer or in the cloud. Traditional estate planning tools have been useful in dealing with comparable non-digital assets, such as by allowing a person’s fiduciary to deal with a bank in person. However, the efficacy of traditional estate planning tools on digital assets is still unclear.

Digital Assets Under Federal Law

While most issues of property disposition are handled by state laws, digital assets are usually controlled at the federal level because of their interstate nature. Original guidance was offered by the Electronic Communications Privacy Act of 1986 (ECPA)’s Stored Communications Act (SCA). The SCA allows digital asset providers to deny access to anyone, but includes a now-abused “lawful consent” exception. The exception is not applied uniformly between states and is therefore unclear and unhelpful.

Digital Assets Under Texas State Law

More recently, twenty-three states have passed the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) in some form, which provides specific guidance on how to distribute digital assets upon death. RUFADAA allows a person’s fiduciary, such as an agent or executor, access to online accounts if the person explicitly grants the power in an estate planning document or through a service provider’s own procedures. RUFADAA also allows the fiduciary to determine how to distribute and manage the assets after the person’s death. RUFADAA was filed in the Texas Legislature on February 21, 2017 for consideration during the 85th Regular Session.

In states that have not passed RUFADAA, planning for the disposition of digital assets remains unclear. Most digital assets will be governed by the user’s licensing agreements, which vary over time and between assets. More certainty will likely arise as these assets become more prevalent.

Estate Planning for Digital Assets

Whether or not the Texas legislature adopts RUFADAA, special considerations for digital assets should be included in every estate plan. The attorneys at Farrow-Gillespie & Heath, LLP understand the issues digital assets present and are prepared to help clients address them in a way that is appropriate for each client’s particular situation.

Read More

About the Author

Catherine Parsley was an intern at Farrow-Gillespie Heath Witter, LLP. Ms. Parsley is a law student at SMU Dedman School of Law in Dallas, Texas, where she is a staff editor of the SMU Law Review. Catherine served as a judicial extern for Chief Justice Nathan L. Hecht, of the Supreme Court of Texas. She holds a B.S. in communications studies, cum laude, from the University of Texas at Austin.

Christian Kelso | Estate Planning | 663(b) distributions

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

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

Family Governance Arrangements: Putting the SUCCESS into Succession Planning

It is a little known fact among us mere mortals, but the über-rich have a trick for both keeping the peace in their families and preserving their vast fortunes. They engage in something called family governance planning. Most of us are unfamiliar with this concept although those working in family law like for example Goodman Ray Solicitors should understand what this means, however it’s not difficult to grasp on a fundamental level. Put simply, family governance has two parts: First, it involves identifying and agreeing on specific goals which a family can actively pursue. Second, it involves establishing rules by which those goals will be pursued and what each family member will contribute in the furtherance of that pursuit. In other words, family governance charts a course for the family unit and provides clarity and transparency among and between the individual family members so that they can function more cohesively as a group.

I. The Problem. Most families fail to conduct any family governance planning whatsoever. In fact, most families do exactly the opposite. Rather than discussing openly the nature and extent of their bounties, most family heads in America will actively hide details about their wealth from their children and other family members. And their loved ones often pay for it in the form of costly legal disputes, intra-familial discord and lasting, emotionally-charged feuds.

Why do we do this? Well, there are two major obstacles, one or both of which may impact a given situation. First, discussing wealth is taboo. We all know that it is distasteful to discuss wealth publically, but the problem is that too many of us take the rule too far. Discussing wealth in a private setting with close family is not taboo. Second, discussing wealth is hard. If one is to have a proper discussion about their wealth with family, they need to arrange a meeting, collect all sorts of information and come up with an agenda. One also needs to know what to say, what questions to ask and how to listen to other family member’s input. All of this is labor-intensive and emotionally charged. Fortunately, however, there is quite a bit of help available, from books for those who want to educate themselves to professionals available to provide direct guidance.

Family governance seeks to minimize negativity by addressing some or all of the following:

  1. Expectations regarding wealth;
  2. Caring for elderly family members;
  3. Employment within the family business;
  4. Investment and management of family assets;
  5. Procedures for resolving grievances;
  6. Spousal issues;
  7. Enfranchisement and training of younger generations; and
  8. Charitable giving.

Different families will apply family governance strategies to varying degrees depending on a number of factors, such as size of the family, relative ages of the family members, assets held by the family, status of existing family relationships and quite a few more. Thus, every structure is necessarily bespoke and it is usually quite helpful to have a professional guide who can provide guidance, technical clarity and an unbiased third-party perspective.

II. The Tools. There are many forms that family governance can take. At the highest levels, comprehensive family governance planning may include some or all of the following:

  1. Regular family assemblies;
  2. Family mission statement;
  3. Family constitution;
  4. Formalized narrative of family history and traditions;
  5. Family counsel tasked with dispute resolution;
  6. Various committees (i.e. Investment, Education, Administrative, Charitable, etc…); and
  7. Trustees.

Typically, larger, wealthier families will employ more of these components while families of more modest means will employ less. At a minimum, however, regular (usually annual) family assemblies are necessary to identify the extent to which various components are needed and flesh them out. These assemblies (which in certain circumstances can even be deductible for income tax purposes) often take the form of a family vacation or reunion where participants are encouraged to both work and play.

III. The Program. A typical family assembly agenda might look like this:

A. Set the tone and talk family history. A family assembly will usually begin with an initial session to set the tone for the assembly, as well as the goals and ground rules. Steps should be taken to avoid disillusionment by family members because participation by all relevant players is crucial. Therefore, the patriarch or other organizer should avoid talking down to the other family members and focus instead on listening to the others’ thoughts and opinions. That said, it should be clear from the start that the purpose of a family assembly is not to voice grievances, assign blame or point fingers. Rather the focus should be on moving forward towards a common goal. At the end of the day (or weekend or week), the primary goal should be for everyone in the family to be “on the same page” about family business, relationships and expectations.

After setting the initial tone and ground rules, the family may benefit from some exercise designed to promote what the military calls “unit cohesion.” That is, a discussion designed to get the family pumped up about its own history and traditions. Discussions of family heritage, retelling of family lore and recognition of individual accomplishments (i.e. since the last family assembly), may help motivate the family to proceed with the work ahead. The family should also acknowledge the extent to which it was able to meet its goals as set out in the previous family assembly.

B. Review mission statement. At this point, the family mission statement should be restated and evaluated. Note that this is done before the new goals are set out because the adoption of new goals will be guided by the family mission statement. That is, goals that do not fit within the mission statement probably should not be adopted.

Often times, this discussion is best had over dinner with a little (but not too much) drink. It also provides an opportune time to incorporate and educate spouses. Remember, the directive to have fun at a family assembly is just as important as the conduct of business.

C. Get to business. The next step is to report on the status of family affairs and set expectations. This will often be the point at which the patriarch does the most talking. He or she should describe with appropriate specificity the outlay of the family’s assets and liabilities. An accurate description of his or her estate plan is also germane to this part of the meeting and should be made in front of all relevant family members with complete transparency. The implications, tax and otherwise, of any estate planning techniques should also be explained to each expectant beneficiary so that they can have clear expectations of what is to come and avoid being blind-sided by confusing legal jargon and unintended consequences when the time finally comes.

When discussing his estate plan, a patriarch should make sure to declare his intentions regarding how beneficiaries are to enjoy their inheritance and put them on notice of any restrictions on the use of property. Clarity with regard to the enjoyment of property held in trust can go a long way to reduce friction between beneficiaries and trustees. Thus, the patriarch should state whether he or she intends for future generations to enjoy the estate assets liberally, as a nest egg, or only as a safety cushion. Some mention should also be made regarding the ability of spouses to benefit from the estate. Finally, there will almost always be tax-based restrictions placed on assets held in trust. These along with any others (for example promoting certain behaviors) should be made clear.

Of course, end-of-life planning is ancillary to any discussion of estate planning, and depending on how things play out, may be just as important, if not more so. Modern medicine makes it increasingly likely that each of us will need extensive care, often for a number of years before we die. Not only is this care labor-intensive, it is incredibly expensive and emotionally draining on family. By setting out a plan before incapacity, we can greatly reduce these burdens on our loved ones. To this end, we might want to discuss i) the nature and extent of the care we might need, ii) the expected costs and how they will be covered, as well as iii) how specific family members might participate in assisting with such care and the extent, if any, to which they should be compensated for their efforts. Remember that caring for a loved one can be a full-time job in and of itself. Also, caregivers who are able to maintain regular employment may have to reduce their hours, pass up promotions and otherwise sacrifice in ways that are financially burdensome, so compensation will often be appropriate.

The estate and end-of life planning portion of a family assembly may be the most difficult for the patriarch. As mentioned above, discussing wealth remains extremely taboo in our society and nobody wants to think about a slow decline towards the inevitable. However, in controlled circumstances, these discussions can literally save future generations from ruin, so it may be helpful to view openness as a lesser evil. One way to mitigate apprehension in this regard is to set clear expectations for family members’ keeping the discussion confidential. Also, clear policies for when and how such information may be brought up with younger family members will likewise provide comfort. In any event, a balance must be drawn between the need to promote family unity and the desire to avoid embarrassment (or worse) if details are made public.

D. Setting goals for moving forward. Once family members have been apprised of the family’s overall status, they can go about setting goals for the future. This may be a tricky part of the program, because family members may not understand what options are available as family goals or the extent to which their eventual achievement might be realistic. But this part can also be the most fun because it affords the individual family members the opportunity to think creatively and plan with hope in their hearts about the future. The nature and extent of the particular goals will vary widely from family to family. Within a family, the goals will likely change over time as well. To the extent there is a large family business, a stronger focus on business objectives will be needed. These might include some discussion of:

  1. Goals relating to growth;
  2. Acquisition or divestiture of assets;
  3. Development of new products or services;
  4. Employee matters (including hiring family members, spouses or others); and
  5. Tax matters.

Other families, however, might focus more attention on personal goals such as:

  1. Family members’ education (i.e. high school, college and/or professional degrees);
  2. Identifying charitable beneficiaries to support;
  3. Family members’ personal goals (i.e. weight loss, writing a book or promotion at work); and
  4. Setting standards for the care of elderly or disabled family members.

Setting goals necessarily requires the family to assess its own definition of success. Some measures of success can be objective. For example, determining an amount the family intends to give to charity may be straightforward. On the other hand, success may also manifest itself more as a path than a destination. That is, the continuance educational goals developing new familial relationships (i.e. through marriage or the birth of children) are more subjective.

E. The plan of attack. Once the goals have been laid out, the family can map out a path to success. Typically, they will do this by first brainstorming ideas for achieving their goals and then by developing (and memorializing) clear steps each will agree to take in furtherance of each goal.

There are a few keys, however, to doing this effectively. First, larger tasks must be broken down into progressively smaller ones until they become realistically achievable for the individuals responsible for their completion. Thus, the creative gives way to the practical. Also, it is important that all family members are encouraged to avoid creating work for others. Some families have rules effectively stating that the person who mentions some new task should be in charge of seeing to it that the task, if adopted, is completed.

Second, it is very important to avoid disenfranchising any family member. The input of all family members, once they meet certain general criteria, should be valued. Thus, the tasks assigned to younger family members will be very different than those assigned to older family members, but they should not be described in terms that portray relatively less value. For example, a family may choose to enfranchise children at age 16. At that age, however, the child’s primary focus should be finishing high school with the best possible grades and beginning the next phase of life (be that military service, technical school, college or something else). While young family members may work at the family business in the summer, they will not be responsible for the successful deployment of the new marketing push for the coming fall. Similarly, adult family members with diminished capacity or those who simply are not interested in participating in the family business should be provided with some opportunity to contribute, no matter how trivial that contributions might seem. This is because the very essence of family is promoted by each individual’s opportunity to contribute and their ability to “own” some task.

Third, it is absolutely critical that deadlines be placed on each step of the plan. Like it or not, it is a reality of human nature that the road to hell is often paved with good intentions. A family will have done itself no good if it fails to implement the plan, however masterful it may have seemed when laid out. By providing deadlines, individual family members can be motivated to take the necessary steps towards realizing the family’s stated goals. Of course, the deadlines (like the individual steps themselves) must be realistic. This may take several attempts to get right—that is, several years’ worth of family assemblies—so families should not allow themselves to be put off by this. Rather they should adjust their expectations accordingly. And to the extent possible, individual family members should avoid criticism of others who missed their deadlines. Giving a family member less responsibility for the coming year because failed to meet deadlines in the past is criticism enough for most.

F. Review and revise documents. After setting out the path towards achieving its goals, the family may wish to revisit operational documents and procedures and amend or adjust as needed. Are the nepotism rules for the family business sill relevant and just? Does the constitution adequately address methods for resolving conflict? Does the policy for loaning money to family members need adjustment? Likewise, appointments to the family council and any committees should be made at this time. Note that this may not be something that all family members at the assembly participate in. Depending on the particular family’s circumstances, this may be the exclusive purview of the family council.

G. Here’s to us! The final agenda item for most family assemblies is to recognize a job well done by all. It can be hard work to map out the family’s year, so thanks and congratulations all round are in order, particularly if and to the extent that the family has been able to conduct its business peacefully and on schedule.

IV. Tailoring the Plan. Obviously, not every family will follow the exact plan laid out above, but it is illustrative as to how family governance can be implemented. Some families may wish to adopt a paired down version of this plan while others may wish to add to it. For example, workshops can be added to help keep up to date with market trends or other matters relevant to the family business, as well as legal, tax, financial, insurance and other matters.

Regardless of how the family governance is implemented, it is very important that the family continues to meet periodically. Most families will choose to meet annually, but bi-annual or quarterly meetings are also standard. Less frequent meetings, however, may not provide the necessary continuity or guidance. Indeed, a lot can happen in a year!

To the extent that family assemblies are deductible, they can also provide a patriarch with an excellent avenue for shifting wealth. In other words, a family assembly is not much different than a corporate retreat, so they provide an opportunity to give family members something nice (a trip) without any estate or gift tax consequence.

Also, the importance of seeking professional assistance cannot be overstated. A third-party facilitator provides numerous benefits. First, they can make arrangements for the family assemblies by coordinating with family members, booking hotel rooms, securing meeting spaces, preparing agendas and much more. Next, facilitators provide unbiased perspective to aid in the decision-making process. To this end, they can provide guidance with developing family goals, as well as breaking tasks down into achievable parts. Similarly, they can help keep the family on track. Family assemblies can easily devolve into chaos without someone who is willing and able to provide the requisite guidance. Furthermore, a facilitator can assume the role of the “bad guy” and help avoid negativity between family members. Finally, a professional facilitator may have the experience and specialized knowledge to provide clarity and answer questions regarding legal and other matters. Not only will this help promote realistic expectations, but it will also provide the patriarch an opportunity to communicate his or her thoughts and feelings without being the one who is actually talking. In other words, it affords the opportunity to talk without the appearance of talking down.

V. Pairing Down. Successful families of means use family governance to achieve their goals and preserve wealth. This can be a very involved (and therefore expensive) prospect. Fortunately, however, the same principles developed by and for the very rich can also be adapted for families of more modest means. By seeking the guidance of a professional to help develop a family governance plan and facilitating family assemblies, the family can compound the benefit derived.

VI. Fact-based example. While the benefits of goal-setting in the family business context may be easier to grasp, an example will illustrate how family governance can provide great benefits in other areas as well:

Assume Family consists of Dr. Patriarch (a successful physician), Mrs. Matriarch (a homemaker), Junior (an MBA working for a large corporation), Daughter (an art history major working as a docent at a local museum) and Baby (a high-school senior trying to decide on the right college). Assume that Family has a net worth of $7mm. At their annual family assembly in the Texas Hill Country, Junior expresses a desire to strike out on his own doing the same thing he has been doing at his large company. Similarly, Daughter expresses her desire to write a book about art collections of Upper Bavarian monasteries in the mid-1290’s. Baby, on the other hand is debating whether or not to attend an expensive private school or a state school. Finally, Mrs. Matriarch has joined the board of prestigious local charity that raises money for medical research.

At their assembly, the family might determine it will lend Junior the funds he needs to start his business and the specific terms on which that loan will be made (and repaid). The family might also determine to purchase equity in the new company.

Additionally, the family may agree to support Daughter by encouraging her to meet set deadlines for certain portions of her book. In this manner, they can increase Daughter’s motivation to accomplish her goals. She is less likely let herself down if doing so would also mean letting her loved ones down. Finally, the family might agree to hold their next family assembly in the Bavarian Alps, as it would be relevant to Daughter’s work.

Next, since all the family members are together, they will all be able to provide guidance to Baby with regard to his college decision. Also, the financial impact of his final decision will be out in the open for everyone to see. If Baby decides to attend the expensive, private college, it may be appropriate for him to enter into a loan agreement with Patriarch to cover the additional tuition, particularly if the other two children attended significantly less expensive schools.

Regarding charitable activities, the family can determine an appropriate amount that it will give away in the coming year. They might further agree that Mrs. Matriarch’s charity will be the charitable recipient and that they will purchase a table at the charity’s annual gala large enough for all the family members (along with a spouse or date)

VII. Conclusion. Family governance provides clarity of purpose, guidance for achieving specified goals and unity among family members. At the end of the day, this translates into increased family happiness. Of course, both time and money must be invested, but the rewards will generally exceed the costs by a wide margin. After all, what price can a family put on its own happiness?

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.

Read about author Christian S. Kelso

Estate Planning | Farrow-Gillespie & Heath LLP | Dallas, TX

Do I Need a Will?

One of the most common misunderstandings about estate planning is the belief that it is only for the wealthy. Anyone who owns property of any kind has an estate. Basic estate planning is an important component of an organized and responsible life, whether or not your estate is large enough to be subject to federal estate taxes. If you own any property, or have minor children, you should have a Will. Estate planning includes more than just a Will, however. It includes planning for potential disability during your lifetime, designating trusted individuals as medical and/or financial agents with power of attorney, designating a guardian to take care of your minor children in the event both you and your spouse die or become incapacitated, and other critical decisions. For those reasons, we include an entire package of the basic estate planning documents with your Last Will and Testament.

See list of basic estate planning documents.

Many people (as much as half of the population) will experience a period of either physical or mental disability before their death. Lack of planning can make caring for a disabled individual expensive and inconvenient for the caregiver. Good planning preserves a person’s dignity, as well as his or her assets, which can be used for the person’s care and can be preserved to the full extent possible for the next generation. Your loved ones will be grateful to you for having your affairs in order.

Angela Hunt Assists Aldredge House to Keep Doors OPen

Forming a 501c3: The “Texas Three-Step”

Individuals and families may establish a 501c3 tax-exempt charitable organization to accomplish substantive philanthropy while receiving very favorable tax treatment. The degree of maintenance such an organization requires depends whether the organization can be classified as a public charity or is instead a private or family foundation.

Either way, forming a 501c3 is a three-step process.

Step One: Form the Organization

A charitable organization must be formed as a corporation in the state in which it is to be located. Many states, including Texas, have a special corporate form called a “nonprofit corporation,” which the organization is required to use be able to qualify for tax-exempt status. Special provisions must be included in the Articles of Formation.

Formation of a nonprofit corporation in Texas is less expensive than formation of a business corporation. To register the entity with the state, the filing fee is only $25.

Step Two: Obtain Federal Tax-Exempt Status from the IRS

Formation as a nonprofit organization does not automatically make the organization tax-exempt. For the organization’s income to be tax-free, and for donations to be tax-deductible to the donor, another step must occur. The organization must file for tax-exempt status with the IRS.  The application for tax-exempt status (Form 1023) is a comprehensive application for which legal assistance is usually desired. Small organizations may qualify for the new, simpler application (Form 2012-EZ) that was introduced in 2014. Most organizations with anticipated annual gross receipts of $50,000 or less and assets of $250,000 or less are eligible for the shorter application.

Step Three: Obtain State Tax-Exempt Status from the State of Formation

After an organization receives its tax-exemption letter from the IRS, a final step remains. The state in which the organization was incorporated must be notified of the IRS tax-exempt status. Most states, including Texas, have a streamlined process for obtaining state tax-exempt status once the IRS has approved federal tax-exempt status.

For a consultation on forming or administering a nonprofit organization or charitable foundation, contact us at (214) 361-5600 or email info@fghwlaw.com

Jennifer Lewis | Farrow-Gillespie & Heath LLP | Dallas, TX

What do “Basic” Estate Planning Documents Include?

Even if an estate is not large enough to be subject to the Federal Estate Tax — and most are not — estate planning is a component of an organized and responsible life.

Good estate planning enables a person to transfer his or her property at death in the fastest, easiest, least expensive manner possible; and it also enables a person to take advantage of the powers granted by the state of Texas to make healthcare choices and to plan appropriately for disability, whether temporary or permanent.

Your loved ones will be grateful to you for leaving your affairs in order. Completing these estate planning documents can provide peace of mind for you and your family.

We prepare the following basic estate planning documents at an affordable fixed fee for individuals and families with estates valued at less than the federal estate tax threshold.

  1. Last Will and Testament, validly prepared and executed under Texas law
  2. Statutory Durable Power of Attorney
  3. Medical Power of Attorney
  4. HIPAA Authorization
  5. Directive to Physicians (often called a Living Will)
  6. Appointment of Guardian for Minor Children
  7. Designation of Guardian Before Need Arises
  8. Burial Instructions

The Will

Every adult who has legal capacity has the authority to designate how his or her assets and liabilities will be distributed at the time of death. To protect that right, the state requires that a Will be properly executed to be considered valid. A valid Texas will can name an Independent Executor to serve without bond and with minimal court supervision. Probate is the legal process of proving the Will in court, settling the estate, and distributing the assets. In Texas the cost of probating a Will is very reasonable. Probate can be very expensive, however, if an individual has assets and dies without a valid Will. Executing a valid Texas Will can go a long way toward preserving your assets for the intended beneficiaries.

Statutory Durable Power of Attorney

The Texas Statutory Durable Power of Attorney is a document that allows you to designate someone to manage your financial affairs or transact business on your behalf in the event it should become necessary or convenient. The powers granted in the document can become effective immediately, or can be designated to become effective only if you become incapacitated. In either case, the powers will remain effective even after your incapacity – hence the use of the word “durable.” This document can be very powerful. The state of Texas has provided a statutory format to be used to help improve acceptance of the document by third parties. Without a Statutory Durable Power of Attorney, a Guardianship would likely be required to take over an incapacitated person’s financial affairs. Guardianships require continuing oversight by the Court, are very expensive, and open a person’s private business to public scrutiny. Having a Texas Statutory Durable Power of Attorney is the estate planning equivalent of a “stitch in time.”

Medical Power of Attorney

The Medical Power of Attorney allows you to designate the person who will make your healthcare decisions in the event you are unable to do so – and only in that event. This document is always important to have. It is particularly valuable where someone other than a spouse will be making those decisions, or when members of a family have differing views of what should happen. If you remember the case of Terry Schiavo in Florida, you should be aware that if she had only executed a Medical Power of Attorney – whether in favor of her husband or her parents – those parties would not have spent the 15 years and untold amounts of money they ultimately spent fighting in court over control of her healthcare decisions.

Directive to Physicians

The Directive to Physicians is sometimes called a Living Will. It allows an individual to decide in advance if he or she wishes to have artificial measures used to sustain life when the person is near death. Many people do not wish to be kept alive by means of artificial respirators or feeding tubes if they are not able to sustain life on their own. Without a Directive to Physicians the doctors involved may be required to use all measures available to sustain life. Proper execution of this document can help maintain a person’s dignity and preserve assets for loved ones. Most importantly, the document allows you to exert maximum control over what happens to you in the event you are unable to speak for yourself.

Designation of Guardian Before Need Arises

The Designation of Guardian Before Need Arises is a relatively new statutory document in the state of Texas. It allows you to designate in advance who your guardian will be should you ever need one – for example, in the event of a debilitating stroke, or an injury that results in incapacity (in which state individuals sometimes linger for many years). The document also allows you to disqualify certain individuals from ever becoming your guardian. This document can bring peace of mind to the maker, and can assist the court in making a proper guardianship designation if the need ever arises.

Appointment of Guardian for Minor Children

If you have minor children, and both you and their other parent die or become incapacitated, the children will need to be cared for by someone until they reach the age of majority. The Appointment of Guardian for Minor Children allows you to choose who that person should be – whether it is a family member or a friend. In the event you do not designate someone yourself before the need arises, your family members may dispute the matter; and in that case, a court of law would decide who will raise your children. You can avoid that possibility and maintain control over your children’s future by executing a Guardian appointment.

Burial Instructions

It is possible to designate a particular person to be in charge of decisions affecting burial and funeral arrangements; and once designated, that person can enforce the right to do so. Within the same document, you may specify your burial instructions.

Conclusion

The documents discussed above form the basic estate planning package. If the estate is large enough to be taxable, certain complex estate planning documents and techniques can minimize and in some cases eliminate the tax liability. For most of us, however, the bottom line is this: Good advance planning significantly eases the emotional and financial burden of disability and death on our loved ones.

Liza Farrow-GIllespie | Farrow-GIllespie & Heath LLP | Dallas, TX

Power of Attorney Liability

A person (“agent”) holding a power of attorney for another person (the “principal”) must act with the utmost degree of loyalty to the principal. The agent must avoid being involved in any transaction which benefits, or even which potentially benefits, the agent.

That rule of law was enforced once again in 2015 by the Texas courts in Jordan v. Lyles, No. 12-13-0035-CV, 2015 WL 393791 (Tex. App.–Tyler 2015, no pet. h.).

In that case, the agent used her power of attorney to place a significant portion of the principal’s money into pay-on-death accounts naming the agent as the beneficiary. At the principal’s death, the principal’s other heirs sued the agent for breach of fiduciary duty for moving the money and receiving it at the principal’s death. A Tyler jury found in favor of the heirs, and held the agent liable for breach of fiduciary duty and tortious interference with inheritance rights. The appellate court affirmed the jury’s verdict.

The moral to agents is this: If you conduct or participate in a transaction for the principal that benefits you personally, obtain bulletproof evidence that the principal instructed you to do so. If the principal has lost capacity, it is too late; and unless you obtain the advance approval of all beneficiaries under the principal’s will (or all heirs at law if the principal has no will or has a questionable will), you simply may not do anything with the principal’s property during the remainder of the principal’s lifetime that would be to your benefit.

Liza Farrow-GIllespie | Farrow-GIllespie & Heath LLP | Dallas, TX

New Simpler 501c3 Application for Small Charities

In July 2014, the Internal Revenue Service introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.

The new Form 1023-EZ is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

Previously, all groups — regardless of size — went through the same lengthy application process regardless of size. This process created long delays for all organizations seeking to receive tax-exempt status.

According to the IRS: “The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog. Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months. . . . We believe that many small organizations will be able to complete this form without creating major compliance risks.”

A reduced fee accompanies the streamlined application.  Whereas larger groups required to use the standard Form 1023 must pay a filing fee of $850, smaller groups entitled to use Form 1023-EZ must pay only $400. For either application, the fee is due at the time application is made.

For more information on charitable organizations, call us at 214-361-5600 or contact info@fghwlaw.com.