Articles

Wills & Estate Planning

by: CHARLES A. MORGAN

There is no substitute for the security and contentment that comes from knowing that your loved ones will be taken care of after your death. How can you be sure that everything that you have worked so hard for will benefit those you care about most? The only way is to plan your estate by taking the time now to make decisions for the future.

I. WHAT IS ESTATE PLANNING?

Estate Planning is providing for the future. It is the process by which you think about and decide how to distribute your property and possessions (your estate) to loved ones, friends or institutions, and the adoption of a plan of action designed to achieve those goals while, at the same time, saving the most in taxes.

A. Periodic Review

Estate Planning is not a once in a lifetime proposition. Family relationships, personal desires, individual finances, and tax laws all change and, as they change, each factor must be considered. It is a good idea to review your Estate Plan every two to three years and whenever there is a significant change in the size of your estate or your personal situation.

B. Professional Assistance

Estate Planning is too important and too complex to be left to chance. Laws governing estates are intricate and vary from state to state. Tax laws are constantly changing. Changes in your Estate Plan should not be attempted without the assistance of competent professionals who can properly prepare Wills, Deeds, Trusts, Powers of Attorney and other instruments necessary to carry out those plans.

II. WHAT IS A WILL?

A Will is typically the legal document which states how you want to dispose of your property and personal belongings after you die. It may also state who you want to carry out your wishes. This is your Personal Representative or Executor.

All Wills must be signed. They are generally dated, witnessed, and notarized to make the probate process easier. Texas and Arkansas both require that a typed Will be properly witnessed. Texas and Arkansas also permit a Will to be "self-proving". A Will is said to be "self-proving" if the witnesses also sign the Will in the presence of a Notary. In this way the witnesses do not have to be located or appear in court to validate their signatures when the Will is submitted for probate. This is very important since witnesses may move, become ill or incompetent or may die before you do.

A. Holographic Will

A Holographic Will is one which is written entirely in the handwriting of the person making the Will. Both Texas and Arkansas will accept Holographic Wills for probate if the handwriting is proven by witnesses, but these Wills can cause many problems and often complicate and make the probate proceedings much more expensive. Perhaps even more important, they often do not accomplish the result wanted by the person making the Will.

B. General Considerations

It is particularly important for residents of this area to consult with an attorney as many residents have lived in both Arkansas and Texas, or have property in both states with different laws governing their ownership and disposition. Your Will should dispose of all of your assets, including real estate, cash, stocks, bonds and other property, both tangible and intangible, as well as special items of sentimental value. The beneficiaries you select may be family, friends, charities, your church or synagogue, or other organizations. In developing your Estate Plan, the powers that your executor and/or trustee will have should be clearly set forth so that they may act without difficulty or delay in administering your estate. The estate and federal tax consequences of your bequests and the effect of taxes on your estate should be carefully considered. If minor children are involved, you should name a guardian or guardians for them, and successor guardians should be named in case the original appointees cannot serve.

C. Beneficiaries

A beneficiary is a person or entity that you designate to receive a share of your estate. You may name as a beneficiary almost any person or entity that you choose. However, federal tax laws and state probate laws may affect your choices. You may want to leave everything outright to your spouse. However, that may not be the best thing to do for tax reasons, or if you have strong feelings about your spouse remarrying and the new spouse receiving a substantial part of your estate. If your combined assets do not exceed the applicable exclusion amount (see VI. below), your estate will not be taxable for Federal or State Estate Tax purposes unless you have made substantial gifts during your lifetime.

In Texas and Arkansas, children do not have the same right to share in an estate as a spouse, but failure to mention a child in a Will (and in some instances, a grandchild) may allow the child to take against the will as a "pretermitted child". In both Texas and Arkansas, illegitimate children also have a right to inherit from their natural parents. In Texas, adopted children inherit from both their natural and adoptive parents, but in Arkansas, they inherit only from their adoptive parents. So long as it is clear that you knowingly and intentionally did not name a child or children as Beneficiaries, including any illegitimate or adopted children, they will not be able to make a successful claim against your estate.

D. Updating your Will

It is important to keep in mind that a Will is a transitory document. It can be changed at any time. Your latest Will is the one that counts, no matter how many you have previously executed. Minor changes can be accomplished by a properly executed Codicil, but major changes normally should be made by a redraft of your Will. Other good reasons for updating your Will occur when you move to or from another state, have additional children or grandchildren, have a spouse or child with mental or medical problems, if you inherit substantial property, or if you become divorced.

III. WHAT HAPPENS IF YOU DIE WITH NO WILL?

If you die without a Will, your estate is distributed as determined under the laws of descent and distribution of Texas or Arkansas, depending upon the state of your residence, and the physical location of the property at the time of your death. A second consequence of dying without a Will is that the cost of administering your estate will likely be higher, and the people responsible for administration will be appointed by the Probate Court rather than the appointment of individuals or institutions you would have preferred to be entrusted with the responsibility.

IV. WHAT IS PROBATE?

Probate is the legal process by which your estate is administered under the jurisdiction and supervision of the Court. In Arkansas this is the responsibility of the Probate Court and in Texas this is the responsibility of the County Court. The administration of an estate is the process by which all the decedent's accounts are settled, estate and/or inheritance taxes are paid, and the assets are distributed to a person's beneficiaries or heirs.

V. AVOIDING PROBATE

Many people go to great lengths to avoid probate because they often think they will "beat the system" and save money. It often happens that money is not saved, wishes are not fulfilled, and costs are nevertheless incurred, especially if there are assets which are forgotten in the process or if estate taxes are owed. Remember that probate costs saved may be insignificant when compared to the costs of your independence, flexibility and ability to exert control over what you have taken a lifetime to accumulate. Your attorney can assist you in determining whether there are methods, such as the creation of a Revocable Trust, which will avoid probate and still offer you the flexibility and control that you desire.

VI. GIFTS

In 1981, Congress further revised, "simplified", and integrated the estate and gift tax laws. It increased the Unified Credit, thereby increasing the dollar amounts of gifts which can pass free of tax. This Unified Credit is a lifetime advantage. All or part of your credit can be used by your estate for gifts during your lifetime. Under current laws, someone who dies with lifetime gifts and a net estate that does not exceed the applicable exclusion amount below, will pay no Federal Estate Tax, Arkansas Death Taxes, or Texas Inheritance Taxes.

An individual can make gifts of money or property having a fair market value of $10,000 each calendar year to any number of individuals. If your spouse joins in these gifts, the amount can be doubled to $20,000 per recipient, per calendar year. (Beginning in 1999, these amounts will be indexed for inflation.) Lifetime gifts can be utilized as an important estate planning tool, whether or not your estate is subject to Federal Estate Tax.

VII. TRUSTS

A Trust is an entity which if established during your lifetime or in your Will, is capable of owning, managing and distributing assets and income. Trusts are used for many reasons and not only for estate planning. They are often used to provide for people who may need help during their lifetime, for example, a child or elderly relative. The Trust may take the place of outright gifts to people who cannot handle their money or property responsibly. Trusts sometimes can be used to save taxes.

VIII. RETIREMENT PLANS

Any proper Estate Plan should consider your interest in a Retirement Plan, including pension, profit sharing, "Keogh", 401 K-Plans, SEP'S, SIMPLE Plans and IRA'S, and how they will be treated at the time of your death. If you signed a Beneficiary Designation when you enrolled in the Plan, make sure it still reflects your wishes. The Beneficiary Designation, and not your Will, will determine who is to receive your interest in such Plan unless your estate is the beneficiary. An attorney experienced in estate planning can review these Retirement Plans with you to assist you in determining their effect on your overall Plan, or can assist you in adopting a Retirement Plan to help provide for you during your lifetime or to provide assistance and benefits to your family upon your death.

IX. LIFE INSURANCE

In order to ensure that your Estate Plan will carry out your wishes, you should review with your attorney your life insurance policies, including those provided by your employer, credit association, and professional or other groups. If you have any "incidents of ownership", including the right to control the Beneficiary Designation, have borrowing power and/or the right to receive cash value, the total death benefit will become part of your taxable estate for Federal Estate Tax purposes upon your death even if your estate is not the named beneficiary.

If your Beneficiary Designation(s) is no longer appropriate you should change it. Some have found that they can avoid paying estate taxes by transferring ownership of an insurance policy to another person, perhaps to the beneficiary. Others have found it beneficial to establish a Trust as the owner and beneficiary of the policy proceeds so as to provide for the welfare and education of their children or grandchildren. These important considerations should be reviewed by you and a competent estate planning lawyer.

X. BUSINESS INTERESTS

What will happen to your business when you die? Is there a Buy-Sell Agreement which requires your partners or the other stockholders to buy your partnership interest or stock? If not, will your estate be able to sell your interest? In the absence of such agreements, your remaining family may have a valuable asset that is not salable and that may produce very little income for them. If you have significant responsibility in managing the business, is there someone to replace you? If you own a business, whether a sole proprietorship, partnership, limited liability company or corporation, you should review that business with your attorney to see that the business will continue to function, or that someone will buy your interest to provide for the needs of your spouse or children upon your death.

If you own a partnership interest with another person or persons, you should ensure that your Partnership Agreement covers the disposition of each partner's interest at death. These provisions should be carefully drafted to meet the needs of both the partnership business and the individual partners.

If your business is a corporation, you should seriously consider the preparation of a Stock Purchase Agreement to dispose of the corporate shares upon your death or retirement. It is prudent and good business to regularly review Partnership and Shareholder agreements because relationships, capacities and businesses can change. The estate planning process can be substantially affected by these agreements since these agreements often cover death, withdrawal, retirement, disability, termination and responsibilities of management.

XI. DURABLE POWERS OF ATTORNEY

One out of every two Americans will suffer a period of prolonged disability in their lifetime. An important legal document in any estate plan is a document called a "Durable Power of Attorney" which permits someone to act on your behalf despite your disability or incompetence. A general power of attorney can give the person or entity you designate, called your "attorney-in-fact", authority to do whatever you can do except change your Will or vote for you. Such a power can only be granted while you are competent, that is, while you have control of your senses, awareness of what you are doing, and are acting free from undue influence and duress when you grant it. Unless you specifically state otherwise in the Power of Attorney itself, the Power of Attorney in Arkansas and Texas will not be effective after you become incompetent. To avoid that result, you should have a "Durable Power of Attorney" which says that your subsequent incompetency does not invalidate the powers granted. This document can assist in your estate planning, your retirement, care, and the care of your spouse, and perhaps most importantly, it can possibly avoid the expense and embarrassment of a guardianship. When properly drafted, it can even authorize your attorney-in-fact to make gifts for you should you become incompetent.

XII. LIVING WILL

A Living Will is something of a misnomer. It is not a Will in the usual sense. It does not dispose of property, establish trusts, deal with taxes, authorize a Fiduciary to represent your estate, or do the other things that a Will typically does. In Texas, the instrument is called a Directive to Physicians and in Arkansas, it is called a Declaration. The instrument usually directs the physician to withdraw life support systems when you are incurably ill, unable to make decisions, and near death, so as to avoid prolonging the process of dying. A substantial estate can be consumed by continued medical expense not to mention the continued anguish to your loved ones. In Arkansas and Texas, the document can authorize your health care proxy to make decisions to terminate artificial prolongation of life and usually provides that doctors, hospitals or others relying on such decisions may do so without fear of legal reprisal.

CONCLUSION

The cost of estate planning is small in comparison to its value. When you think about how hard you have worked to acquire what you have, and when you think about wanting to provide for your loved ones, it makes a lot of sense to go about it in the right way.

To execute a new will, trust or power of attorney, or to review your will, trust or estate plan, call our offices and make an appointment with one of our attorneys. Your delay or failure to act could seriously affect the ones you love.

DUNN, NUTTER, & MORGAN, L.L.P.
-- ATTORNEYS AT LAW--
Practicing in Texas & Arkansas

3601 Richmond Road
Texarkana, TX 75503-0716
Phone (903) 793-5651
Fax (903) 794-5651
http://www.dnmlawfirm.com
lawfirm@dnmlawfirm.com

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