Estate Planning

The Language of Estate Planning

Important terms you should understand before completing your documents

Kerri D. Condie, MBA, JD, Vial, Hamilton, Koch, & Knox, LLP

Estate planning is an essential part of any comprehensive financial plan. This month we have asked Kerri D. Condie, the newest member of our team of estate planning attorneys, to explain the roles of the individuals named in your documents and some of the documents that are necessary for most people.

Selecting your fiduciaries

Executors. An executor is the person appointed in your will to be the primary representative of your estate. Because of a provision somewhat unique to Texas law, if you have a properly drafted Texas will you can make your executor "independent." That is, the executor can act free of control by a court, except for only a few essential matters. Without this independence, virtually all of the executor's actions will be subject to prior approval by the court – an obviously cumbersome and expensive procedure. (This intrusion by the court is the reason people living in other states often feel it necessary to have a "living" trust to avoid probate).

Your executor will be responsible for administering your estate. This includes ascertaining your assets and your liabilities. The executor must prepare a list of your assets and submit them to the court. After debts have been paid (including estate and inheritance taxes) the executor makes distributions to the beneficiaries in your will, and may be required to give an accounting for the estate.

Guardians for minor children. The other parent of your child will be the guardian of your child. But if the other parent is not living, this becomes a selection you can make in your will. If you fail to do so, the court will make the choice for you. Needless to say, you should assume the responsibility of this important decision and not leave it up to a judge.

Clients frequently tell us that they have chosen one of their parents as the "guardian" in the even of both clients' deaths. A quick mathematical computation may shed light on the advisability of this choice. For example, assume that the youngest child of the client is three years old and the client's parent is 58. When that child is fifteen (i.e., during a time when parent-child communication can be difficult under the best of conditions), the grandparent will be 70.

Under these circumstances another choice may be better for your child. You should look first to your contemporaries your families (such as brothers, sisters, or cousins), both both a first choice and an alternate guardian if your first choice is not available at the needed time. If none are appropriate, then consider friends with children in the same age range as yours. You should carefully discuss this aspect of your will with the chosen guardian and alternate guardian.

If you have planned your estate properly, the guardian should not experience financial strain in raising your children. We usually suggest that upon the death of you and your spouse, a trust be established for your minor children. The trustee should be encouraged to make generous distributions to assist the guardian and even provide the funds to pay for any necessary expansion of the guardian's home.

Is a trust necessary?

Many circumstances dictate the necessity of creating a testamentary trust within your will. Some of these situations where a trust is necessary are:

• if you have minor children;
• if you have a disabled child or a special needs child;
• if you have children from a prior marriage; or
• if you have a taxable estate.

Taxable estate. Your estate will be subject to two types of federal tax at the time of your death: the federal estate tax and a federal generation skipping tax. (Note: state inheritance tax will be due only if federal estate taxes are due).

Federal estate tax. The federal estate tax is based on the fair market value of your "gross estate" at the time of your death. Your gross estate will include all of your separate property as well as your one-half of all community property. Your estate may also be taxed on property which you do not own, but over which you retained or received certain rights. A "marital deduction" allows your estate to deduct bequests to your spouse or to a specially designed trust for your spouse. Deductions are also allowed for debts, for administrative expenses, and for bequests to charities.

The federal estate tax and the federal gift tax are now combined into one progressive set of rates. The rates increase with each gift and with the value of the estate. There is however a unified credit against the estate and gift tax, which can be used either through gifts or through the value of the estate or both. The current unified credit for the year 20002 allows each person to gift or bequeath up to $1,000,000 of property to someone other than the surviving spouse before gift or estate tax is required to be paid. Following utilization of the unified credit, the transfer tax rates begin at 41% and increase, based upon the value of your estate, up to 50%.

Generation skipping transfer tax. In addition to estate tax, if you make lifetime taxable gifts to a person more than one generation removed from you (usually grandchildren, great-grandchildren, etc.), or if any portion of your estate passes to a person more than one generation removed from you, then the amount so transferred is subject to the federal "generation skipping transfer" (or GST) tax. There is, however, a credit against the GST tax, which can be used either against gifts or against the value of the estate or both. This credit allows each person to gift or bequeath up to $1,060,000 of property to someone more than one generation removed before a GST tax is required to be paid. The generation skipping transfer tax rate is 55%.

Unlimited martial deduction. Although an unlimited marital deduction is available for property transferred to the surviving spouse, this type of transfer will "waste" the first-to-die spouse's tax credits and will unnecessarily increase the amounts that will be included in the second-to-die spouse's estate, resulting in greater tax due at the death of the second-to-die spouse.

Selecting your trustees

Trustee. A trustee is one to whom property is transferred for the benefit of someone else (the beneficiary).

We find that our new estate planning clients frequently misunderstand trusts. Seemingly everyone has heard a trust horror story – usually involving the struggling widow-beneficiary who cannot extract enough money from the trust to maintain herself.

Present law, well drafted trustee's powers, and professional trustees now make this concept of trusts obsolete. A trust can be designed to produce almost any result desired by the client, if the client gives the trustee sufficient funds with which to work. We usually recommend that trustees be given very broad and adaptable powers. The trustee should be able to do what is best for the beneficiary, without being curbed by inappropriate restrictions.

If a trust appears suitable for your estate plan, you will want to be careful in your selection of a trustee. The family member who comes to mind as a logical first choice may not really want to deal with the management of your properties. If a corporate trustee appears appropriate, we will suggest that you have a conference with the representative of your bank's trust department. Further, you should consider giving someone, such as your spouse and your professional advisors, as part of a Trust Committee, the power to change trustees.

Trustee committee members. It is frequently advisable to give a small group of people the authority to remove a trustee, add co-trustees, and appoint successor trustees. This perpetuates the trusteeship in the event of the death or illness of the proposed trustees during the term of the trust. We generally recommend that at least one Trust Committee member be an independent third party. This will enable the Independent Trust Committee member to make tax sensistive decisions regarding distributions and early trust termination without causing adverse tax consequences to the beneficiaries, and can help protect the beneficiaries, especially one who is also trustee, from creditors' claims.

Planning for incapacity

Power of attorney. A Power of Attorney is an instrument in writing by which one person, as principal, appoints another as his or her agent and gives him or her the authority to perform certain specified acts or kinds of acts on behalf of the principal. The person holding a Power of Attorney is known as an "attorney in fact" or "agent."

In Texas, there are two commonly used types of Power of Attorney: A General Durable Power of Attorney (either the statutory form or a custom drafted form is acceptable) and a Medical Power of Attorney.

Statutory Durable Power of Attorney. A Durable Power of Attorney is a document which grants your agent the ability to act on your behalf with respect to various matters. The power can be limited to a single matter, certain types of matters, specified transactions , or can be virtually unlimited in the matters covered (a "General Power of Attorney"). Regardless of the scope of decisions or the term of the agency a Durable Power of Attorney may not be used to make healthcare decisions for you.

Who should be the agent? In view of the authority and discretion conferred by a General Power of Attorney, the agent must be someone in whom the principal has complete trust and confidence. Under Texas law, the power is generally effective when a copy is delivered to the person given the Power of Attorney. However, the agent should not be the same person who determines the principal's incapacity if incapacity is the mechanism that triggers the effectiveness of the Power of Attorney.

Medical Power of Attorney. Texas law permits a Medical Power of Attorney for healthcare decisions. The purpose of this special Power of Attorney is to permit persons to create a Power of Attorney only for purposes of medical care, and it permits the appoited person to make healthcare decisions for an incapacitated principal. The Power of Attorney becomes effective only after the attending physician certifies in writing that the princiapl lacks capacity to make healthcare decisions, but no treatment is permitted if the principal objects. In addition, the Medical Power of attorney cannot, under any circumstances, authorize any of the following:

1. voluntary inpatient mental health services,
2. convulsive therapy,
3. psycho-surgery,
4. abortion, or
5. neglect of the principal through omission of care intended primarily for the principal's comfort.

Declaration of guardian of the estate and of the person. A Declaration of Guardian is a document in which a competent adult designates a person to serve as guardian of their estate or person of the declarant in the event the declarant becomes incapacitated. A declarant may, in the declaration, also disqualify named persons from serving as guardian of the declarant's estate or person. Once a named person is so disqualified, he or she may not be appointed guardian under any circumstances.

Because of the widespread use of Powers of Attorney, we do not see many guardianships for adult persons. However, the need for guardianship could arise, and our clients often prefer to choose whom the court will appoint as guardian.

Directive to physicians and family or surrogates (living will). A Directive to Physicians and Family or Surrogates (also known as a living will) is a document which provides instructions to an attending physician regarding your wishes related to life sustaining procedures. In a Directive to Physicians, you can instruct your attending physician to provide you with life sustaining treatment or to withhold or withdraw life sustaining treatment in the event you have been diagnosed with a terminal or irreversible condition which will result in your death if untreated. You can also list any special wishes you may have regarding life sustaining treatment. A copy of this document is filed with your physicians and hospital.

Under current Texas law, "life-sustaining treatment", "terminal condition", and "irreversible condition" are defined as follows:

"Life-sustaining treatment" means treatment that, based on reasonable medical judgment, sustains the life of a patient and without which the patient will die. The term includes both life-sustaining medications and artificial life support such as mechanical breathing machines, kidney dialysis treatment, and artificial hydration and/or nutrition. The term does not include the administration of pain management medication, the performance of a medical procedure necessary to provide comfort care, or any other medical care provided to alleviate a patient's pain.

"Terminal condition" means an incurable condition caused by injury, disease, or illness that according to reasonable medical judgment will produce death within six months, even with available life-sustaining treatment provided in accordance with the prevailing standard of medical care.

Many serious illnesses may be considered irreversible early in the course of the illness, but they may not be considered terminal until the disease is fairly advanced. In thinking about terminal illness and its treatment, you again may wish to consider the relative benefits and burdens of treatment and discuss your wishes with your physician, family, or other important persons in your life.

"Irreversible condition" means a condition, injury, or illness:

1. that may be treated, but is never cured or eliminated;
2. that leaves a person unable to care for or make decisions for the person's own self; and
3. that, without life-sustaining treatment provided in accordance with the prevailing standard of medical care, is fatal.

Many serious illnesses such as cancer, failure of major organs (kidney, heart, liver, or lung), and serious brain disease such as Alzheimer's dementia may be considered irreversible early on. There is no cure, but the patient may be kept alive for prolonged periods of time if the patient receives life-sustaining treatments. Late in the course of the same illness, the disease may be considered terminal when, even with treatment, the patient is expected to die. You may wish to consider which burdens of treatment you would be willing to accept in an effort to achieve a particular outcome. This is a very personal decision that you may wish to discuss with your physician, family, or other important persons in your life.

Statement of anatomical gifts. To avoid having your family be forced to make this decision at the time of your death, you may wish to elect to become an organ donor. You may specify which organs or parts you wish to donate. You may also specify any limitations or special wishes you may have.

In conclusion

Having comprehensive estate planning documents is essential for almost everyone, whether you are single, married, or in a domestic partnership arrangement. For those individuals who may have already drafted a will when you were younger, it is very important you review your documents with your professional advisors to make sure that they are still current. If you do not currently have estate planning documents, you should make obtaining documents a priority.

About Ms. Condie: Kerri D. Condie is an attorney with Vial, Hamilton, Koch, & Knox, L.L.P. in Dallas, Texas. Ms. Condie received her undergraduate degree from the University of Wyoming where she was an Honors and Scholars student. Her undergraduate degree was followed by a Masters of Business Administration at the University of Texas at Austin. She completed her legal education at Southern Methodist University where she was Vice-Justice of the Tanney Chapter of Phi Alpha Delta, listed in Who's Who Among American Law Students, named a member of The Order of Barristers, was twice a member of the ABA Client Counseling Competition Regional Team and was a member of the National Championship Finalist Client Counseling Competition Team. Ms. Condie is also a member of the Southern Methodist University Board of Advocates. She is admitted to practice in The United States District Court of the Northern District of Texas and The United States Tax Court, is a member of The State Bar of Texas, and is a member of The College of the State Bar of Texas. Ms. Condie is a frequent speaker on estate planning and probate issues and effective client counseling. She is the Co-Chair of the Planned Giving Committee for Messiah Lutheran Church and serves as the Coach for the Regional, National, and International Southern Methodist University ABA Client Counseling Competition Team. This month she joins D&A's team of estate planning attorneys, offering our estate planning services in the Dallas/Ft. Worth Metroplex.

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