Articles Posted in Estate Planning

Many individuals – especially those with children – do not want to think about what would happen to their family if they passed away. Although many people have life insurance to cover the cost of raising a child in the event of their untimely death, they do not think about establishing a trust to hold the money for them. Despite the common misconception, trusts are not just for the rich. Rather, they are critical tools for young families and an important part of a comprehensive Houston estate plan. Below are some of the common questions that individuals have about life insurance trusts.

How Does a Life Insurance Trust Work?

Individuals will set up a trust as part of their overall estate plan, typically, when they are creating a will and naming guardians if they have minor children. A trust holds assets – including property and money – for the listed beneficiaries, and the individual creating the trust details how the assets should be utilized. Additionally, the person appoints a trustee to oversee the process and ensure the assets are handled as written.

In Houston and throughout Texas, living trusts allow property owners to use their assets during their lifetime while ensuring that their assets are securely transferred to their beneficiaries. The legal document is similar to a will in that it allows financial assets and personal property to be passed on to named beneficiaries. However, the terms of a will become effective after they die, whereas a revocable living trust becomes effective immediately. These trusts allow property owners to keep control of their assets while living even if they become incapacitated.

Establishing a legally binding living trust is crucial to ensuring that a person’s wishes are appropriately documented and carried out. The trust documents should list the property, the trustee, and the beneficiaries. The relevant property is transferred to the trust, giving the trust control over the assets. Trustees should designate a successor who will be responsible for effectuating the trustee’s wishes. These trusts are useful for controlling and transferring various types of assets, but it is incredibly helpful for property owners. Regardless of age, marital status, or wealth, living trusts are an inexpensive and effective way to reduce and eliminate the stress of distributing assets while maintaining control and privacy.

Not only do living trusts help individuals avoid probate and court control, but it also allows trustees to control the assets during their lifetime. The trustee maintains the ability to buy, sell, modify, or even cancel the trust. Further, revocable living trusts allow the trustee to efficiently transfer assets such as jewelry, furniture, clothes, and art into the trust.

On November 7, 2020, major news networks declared former Vice President Joe Biden the winner of the 2020 Presidential Election. With Biden’s election, there is likely to be a shift in many policies, from foreign diplomacy to tax incentives. One area that may soon be altered is an increase in the capital gains tax rate. What is this potential increase? Will it impact your Houston estate plan? And should you take action now before any new policy is put in place? Below are some common questions that Texans are asking in light of Biden’s election, specifically regarding capital gains tax considerations.

What is a Capital Gains Tax, and What Has Biden Proposed?

A capital gains tax is a tax on the growth of investments that an individual or corporation must pay when selling those investments. This means that the tax does not apply until an investment or stock shares are sold; however, capital gains taxes will incur every year until the investment is sold. The capital gains tax rate only applies to “long term capital gains,” which are assets held for more than a year.

With the recent election of Past Vice-President, Joe Biden, individuals are curious about how policies will differ after President-Elect Biden’s inauguration. As Biden has mentioned raising estate taxes and changing the taxation of capital assets upon death, many wonder if they should change their Houston estate plan now. While it is unclear what changes – if any – President-Elect Biden will make to estate tax exemptions and taxes, the issue is worth looking into for many families. Below are some of the most common questions individuals have about estate tax exemptions and what they should do.

What is an Estate Tax, and What Is the Current Estate Tax Exemption?

The federal estate tax applies to individuals who receive an inheritance from estates above a certain exclusion limit. In 2020, the estate tax exemption is $11.58 million per person and $23.16 million per married couple. This means if an individual receives less than $11.58 from an estate – or $23.16 if they are part of a married couple – they are not required to pay an estate tax. Currently, this exemption – which was doubled by the 2017 Tax Cuts and Jobs Act – is set to return to $5 million at the end of 2025, in what is called a sunset provision. It is important to note that surviving spouses are normally exempt from estate taxes.

Creating a Houston estate plan is critical to ensure an individual’s wishes are met after their passing. However, when estate plans include mistakes or are not done properly, they can cause major, costly headaches for loved ones. Below are some common pitfalls that individuals should avoid when drafting or updating their estate plan. Also, check out our eBook on the Top 15 Estate Planning Mistakes.

Not Naming Contingent Beneficiaries

A common estate planning mistake is not naming a contingent beneficiary on retirement accounts, trusts, and insurance policies. A contingent beneficiary is an individual who benefits from an estate plan if the primary, named beneficiary is deceased or unable to be located. If a contingent beneficiary is not named as a part of the estate plan – and the named beneficiary dies before the assets of the estate plan are distributed – the estate may be subject to Texas probate court, additional costs and delays.

Getting to Know the Texas Intestate Laws

As we’ve mentioned in previous blog posts, a will is the cornerstone of any Houston estate plan. In a will, a person can determine what will happen with their property. However, not having a will does not mean that someone’s property will end up with the state. Instead, the Texas intestate laws dictate how the property will be distributed.

Texas intestate laws determine how an individual’s property is passed on. Rather than take a look at subjective factors such as close relationships or the deceased’s intentions, the intestate laws look only to the surviving family members of the deceased. This is not necessarily a problem if the deceased has no children, or family members all can agree on what the deceased’s intentions were. However, that is not often the case.

Under Texas law, the probate process is triggered when a person dies and leaves property without directly transferring ownership to another party. Probate is the process in which a court recognizes a person’s death, resolves debts, and distributes assets according to their will. If the decedent dies with a will, the estate’s representative or executor must file for probate. In situations where a person does not leave a will, the person’s assets and debts will go through intestacy laws.

The probate process requires a court to determine whether a will is valid. After hearing arguments on the will, the court will appoint a person to administer the estate and determine heirs. After determining heirs, the court will notify creditors of the death and allow them to file claims on any debts the estate may owe. After creditors make their claims, the court will distribute assets and resolve any disputes.

Families should understand that there are two main types of probate processes, “independent administration” and “dependent administration.” Independent administration cases tend to be quicker and less expensive. In most cases, however, the will must provide for independent administration. There are ways to get around this requirement if the lawyer or executor makes the appropriate argument to the court. On the other hand, dependent administration of estates occurs when there is any dispute regarding the beneficiaries or asset distribution.

Even among those who have an estate plan in place, many are unaware of the potential taxes their heirs will need to pay. However, depending on the estate’s value, heirs may need to pay a significant amount of estate tax after the owner of the estate passes away. In short, an estate tax is a tax on property that is transferred from the deceased to their heirs. There is no Texas estate tax. However, there is still a federal estate tax to consider. Thus, it is important to work with a qualified Houston estate tax attorney to reduce or eliminate estate taxes. The questions below are those most commonly asked about preparing for an estate tax and the intricacies of the tax itself.

How Does an Estate Tax Work?

A federal estate tax is based on the fair market value of the estate’s “includible property.” Includible property may consist of cash, real estate, trusts, business interests, and other assets. Some assets may be deducted from the taxable estate, such as mortgages and other debts, administrative estate expenses, and qualified charities. Additionally, surviving spouses are normally exempt from these taxes. It is when the surviving spouse dies that any other beneficiaries may be forced to pay estate tax.

Probate is the process in which the court validates a will and distributes the deceased’s property according to the terms of their will. While probate is the default process in many situations, there are ways to avoid this lengthy and potentially costly process. In fact, one of the primary purposes of a Houston estate plan is to avoid probate.

Assets that are mentioned in a will are typically passed on to those named in the will. However, certain classes of assets are referred to as non-probate property. Non-probate property consists of those assets that will automatically pass on to the beneficiary at the time of the owner’s death. There are several types of non-probate property.

Jointly Held Property

Few people look forward to creating an estate plan. However, the importance of creating a Houston estate plan cannot be overstated. By taking action now, individuals can ensure that they have the means to provide for themselves while protecting everything that they have worked so hard to obtain throughout their life.

For many, the concept of estate planning can be overwhelming. Below is a checklist of important steps for those who are thinking about how to start the estate planning process.

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