Author Archives: David B. Willis

Estate Planning Tips for Individuals and Families Building Wealth for the First Time

With new wealth comes new priorities, new problems and a new importance to estate planning issues.  Below are eleven estate planning tips for individuals and families building wealth for the first time.

1. Estate Planning Is Not All About Tax Planning.

A common misbelief is that estate planning is only for the very wealthy and that an estate plan is only created to reduce estate taxes.  This is not true.  Tax planning is merely one piece of the estate planning process and the estate tax exemption is so high that it is not a concern for many estates.

The goals of the estate planning process are the preservation of wealth, providing for the care of yourself, providing for the care of your family, ensuring your assets are distributed as you instruct, and ensuring that decisions made when you are incapacitated or near the end of your life are made according to your wishes.

These goals are true regardless of the size of the estate but certain goals (such as preserving wealth) increase in importance as the value of the estate increases.

2. Take Care of Your Kids First.

Every parent, regardless of the size of their estate, should have a will for one simple reason: to appoint a guardian for their children should both parents pass away.   The birth of a child alone should cause new parents to create an estate plan.

When your family begins accumulating wealth, your planning for the care of your children should expand as well.  This might include the use of contingent trusts to provide for the management of any assets that might pass to your children when they are minors or young adults.

You should also make sure that you provide a mechanism to finance the care of your minor children.  Many people appoint a guardian but fail to recognize that raising your child will impose a significant financial burden on that guardian.  Providing a method of easing that financial burden is important to ensuring that your children live a life full of opportunity should you pass before they are grown.

As your children grow you should make sure that you include them in your estate planning.  I’ll discuss that more below in tip #8.

3. Evaluate Whom You Choose As Executor Carefully.

As your wealth increases, so will the complexity of your estate.  No longer just a bank account and a house, your assets may include various investment accounts, retirement accounts, and businesses.  This means that you must honestly evaluate whether the individual you selected to serve as executor under your will is truly capable of performing that task competently.  This means the common default appointment of your spouse as executor may be inappropriate.

Be honest about the complexity of your estate.  Be honest about the abilities of anyone you are considering for the role of executor.  Make sure you understand the duties, responsibilities, and potential liabilities of anyone you appoint as executor to oversee the administration of your estate.  You created this wealth to provide for the safety and security of your family, not to add to their stress or expose them to liability trying to administer an estate they are not capable of managing.

For many estates or estates with unique income producing property, it may be appropriate to consider a corporate executor with relevant expertise.

4. Consider Incorporating an Asset Protection Strategy Based On Your Risk.

Wealth = Risk.  Its a simple fact of life that those who have wealth are often targets for those who do not.  When an accident happens, the victims will look to those with the deepest pockets to make them whole.  Insurance companies will look for reasons to avoid paying on a policy.

This means that you too must look at asset protection strategies to protect your new wealth in a worst case scenario.  There is nothing morally, ethically, or legally wrong with asset protection planning – but it must be done in advance.  This is especially important for business owners active in the management and operation of their business.

You worked hard to grow your wealth and you have every right to protect it.  You do not want years or decades of hard work to disappear in an instant because of one simple mistake.  The use of trusts or various combinations of business entities can help make sure that you and your family do not lose everything in an instant.

5. Consider Splitting Your Savings Between Pre and Post-Tax Accounts.

It is important to distinguish between wealth and income.  Wealth is money or assets you already own.  Income is new assets or money you acquire.  You can be quite wealthy yet not be in the top income tax bracket or at the top of your current income tax bracket.

In these situations, you might consider converting pre-tax retirement accounts (such as a traditional IRA) into a post-tax account (such as a Roth IRA).  These conversions can be staged over time to avoid pushing you into higher income tax brackets as you will increase your tax bill for the years you make any conversion.  The idea is to pay less tax now then you would pay in the future.

Converting your accounts to post-tax accounts allows you to hedge against two risks.  The first is the risk that your income will continue to increase as you age, pushing your retirement distributions into a higher tax bracket than you would pay now.  The second risk is that Congress will increase income taxes in the future.  Remember, current income taxes are much lower than they were historically and the Federal government’s debt is increasing at rapid rates.  Higher income taxes in the future are a near certainty.

6. Consider A Philanthropic Trust.

For those who have a charitable inclination, you should consider forming an irrevocable charitable trust.  The trust allows an instant deduction for your contributions while allowing you to grow and distribute the trust funds to various charitable endeavors over time.  This provides a short-term financial benefit and a long-term philanthropic benefit.  A charitable trust could also be created in such a way as to allow its management to pass on to your children allowing your giving to have a positive impact on society and your family for generations.

7. Consider Transferring Ownership of Your Life Insurance Policy(ies).

This is something that is easy to overlook.  Life insurance proceeds are not considered taxable income so most people do not consider them in their estate plan.  However, they are considered part of the estate for estate tax purposes which means an estate that is below the estate tax exemption amount could find itself subject to the estate tax because of life insurance proceeds.

Worse yet, those life insurance proceeds may be a sizeable amount that passes outside of probate leaving only the other estate assets to satisfy the estate tax.  This can create unfair and unintended consequences for your asset distribution plan by burdening some beneficiaries with the estate tax while others are not.

Life insurance trusts are available to avoid this issue by transferring ownership of the policy prior to your death to avoid its inclusion in your estate.

8. Make Sure to Involve Your Children and Beneficiaries in the Planning Process.

As your children and beneficiaries get older, it is important that you include them in your estate planning process for a number of reasons.  They need to understand your plan and your intentions.  This goes a long way in avoiding any misunderstandings or disputes after your passing.

There are also certain benefits that you can take advantage of by involving them early.  For example, if you setup a trust for their benefit and your children are in a lower income tax bracket, then those trust funds could be used to help them during your life and obtain some tax savings.  Also, it may be to your advantage to take advantage of the annual gift tax exclusions to begin transferring some of your wealth to them prior to your passing.

For business owners, it is important to bring your children into the business to familiarize them with your succession plan as well as your advisors and employees if you intend to have them take control of the business.

9. Make a Plan For Your Business.

Many people grow through wealth through business ownership.  If that is the case with you, then you must prepare a business succession plan as part of your estate plan.  The details of a business succession plan are beyond the scope of this article but it should address a number of issues including transferring ownership on your death, management if you become incapacitated, as well as the distribution of proceeds if you intend for the business to be sold.

10. Don’t Forget to Take a Holistic View.

It is important to make sure that someone takes  a bird’s eye view of your estate plan.  It is not uncommon for many professionals to handle various parts of your estate planning, such as an investment advisor handling beneficiary designations on your investment accounts, a banker handling designations on your bank accounts, an attorney drafting your estate planning documents, or a CPA or employer representative handling other matters.

Your estate plan should be comprehensive and integrated.  This means you must make sure that each part of your estate plan complements the others and designates beneficiaries in such a way that your estate plan as a whole is implemented according to your wishes.

11. And Don’t Forget the Other Documents.

Your will is just your starting point as there are important ancillary documents you should execute.  These include a Power of Attorney, to appoint someone to act on your behalf in business, financial, real estate, and money management.  A Medical Power of Attorney, to appoint someone to make decisions regarding your medical care should you be unable to do so.  An Advance Directive, to make your wishes regarding end of life care known.  And a Declaration of Guardian, to designate whom you would or would not want appointed to see to your physical well being in the event you become incapacitated.

Key Probate Terms to Understand When talking to Your Attorney

Law Dictionary

I put together this list of terms with easy to understand definitions (I hope) and examples for my probate clients so that they could familiarize themselves with many of the probate terms they will hear during the probate process.  Then I thought, why not share it with other folks trying to understand how the probate process works?

Note: It is possible that some terms, such as “child” could actually have a different definition if the deceased defined the term in his or her will.

Administration or Administration of the Estate.  This refers to the probate process as a whole regardless of whether the deceased passed away with or without a will.  It includes both dependent and independent administrations.  In general, administration of the estate involves the following steps:  opening the administration and appointing a personal representative; collecting the assets of the estate; paying any estate taxes; identifying, classifying, and settling claims against the estate; distributing the estate assets to appropriate heirs or devisees; and then closing the estate.

Administrator. An “administrator” is the individual appointed by a probate court to administer the estate of an individual who died without a will.

Child. The term “child” includes natural born children as well as adopted children.  However, it generally does not include a child of a deceased male if that male was not the child’s presumed father.  A presumption of fatherhood is established by law with specific time requirements around the birth of the child and a marriage between the presumed father and mother of the child.

Claims.  The term “claims” includes a number of items that may arise before or after the deceased individual’s death.  For example, liabilities of the deceased, taxes, and estate taxes are claims.  So are the expenses incurred in the administration of the deceased’s estate.

Decedent.  “Decedent” is the legal term for the person who passed away.

Dependent Administration.  A “dependent administration” is an administration conducted under close court supervision.  Dependent administrations are usually more expensive because the personal representative’s authority to take action is limited and usually requires prior approval from the probate court.

Devise.  “Devise” refers to a phrase in a will setting forth the distribution of property.

Devisee. “Devisee” refers to one who receives a devise under a will.

Estate Tax Returns.  “Estate Tax Returns” is often used loosely to refer to a number of tax reports that must or may be filed during the probate process.   There are two types of tax returns – income tax returns and actual estate tax returns.  For example, the last income tax return for the deceased for the year in which he or she died must be filed by the personal representative.   The personal representative will also be required to file an  income tax return for the estate itself.  Certain estates may be required to file an estate tax return because the size of the estate necessitates payment of estate taxes.   In certain cases, the personal representative may choose to file an estate tax return even though the size of the estate does not require payment of estate taxes in order to support the “porting” of the deceased’s estate tax exemption to his or her surviving spouse.   Some states may also require an estate tax return if the deceased owned property in a state that required estate tax returns.

Executor. The “executor” is the person designated by a will to administer the estate of an individual who died with a will.  The executor’s appointment must be made by the probate court.

Exempt Property.  “Exempt Property” is certain property defined by law to automatically vest in specific individuals in priority to any other laws of inheritance or devises set forth in a will.  Examples include a homestead exemption for a surviving spouse, minor children or adult unmarried children residing with the family as well as exempt personal property set forth in the property code.

Exempt Property Allowance.  When the deceased’s estate does not contain a homestead or exempt personal property, the surviving spouse and children may receive an allowance in lieu of the exempt property.

Family Allowance.  If a surviving spouse (with or without children) does not possess sufficient property to provide for their own support, then they are entitled to a “family allowance” from the estate for a period of one year from the date of the deceased’s death to be paid as a priority out of the estate’s assets.

Heir. An “heir” is someone who is entitled to receive a deceased individual’s property when that individual dies without a will.

Holographic Will.  A “holographic will” is a document setting forth the disposition of a deceased individual’s estate that is written entirely in the deceased individual’s handwriting.

Independent Administration.  An “independent administration” is an administration conducted with minimal court supervision of the personal representative.  There are specific requirements for an estate to be administered independent of the court but usually results in a less costly probate process because the personal representative may take most actions without prior approval from the probate court.

Intestate. “Intestate” is often used in the phrase, “died intestate.”  This simply means that the individual passed away without a will.

Legacy.  A “legacy” is a gift or devise of property made in a will.

Legatee.  A “legatee” is a person entitled to receive a legacy under a will.

Letters of Administration.  This is the document issued by the probate court to the administrator that the administrator provides to third parties in order to show his or her authority to act as the court appointed personal representative of the deceased individual’s estate.  These letters serve as proof of the administrator’s authority to take possession of the deceased individual’s property as personal representative of the estate.

Letters Testamentary.  This is the document issued by the probate court to the executor that the executor provides to third parties in order to show his or her authority to act as the court appointed personal representative of the deceased individual’s estate.  These letters serve as proof of the executor’s authority to take possession of the deceased individual’s property as personal representative of the estate.

Non-probate Assets.  “Non-probate assets” refers to property that does not pass or transfer title through the probate process.  Most property can, through proper estate planning, be made into a non-probate asset.  Examples of non-probate assets include the following: bank accounts with payable on death designations, retirement accounts with beneficiary designations, and real property if title is held with a right of survivorship.  Beginning in 2016, Texas enacted a law that allows title to automobiles to also be held with a right of survivorship that allows title to the automobile to transfer outside of the probate process.

Personal Property.  “Personal property” refers to every type of tangible or intangible property that is not real estate.  This could include money, clothing, cars, promissory notes, a lease agreement, or anything else that is movable and has value.

Personal Representative.  “Personal Representative” is a term used to refer to both executors and administrators.  In the case of an estate where the deceased had a will, the term refers to the executor.  In the case of an estate where the deceased did not have a will, the term refers to the administrator.

Probate Assets.  “Probate assets” refers to property that must pass through the probate process in order to transfer title from the deceased individual to an heir or devisee.

Real Property.  “Real property” means property that is real estate or land.

Self-Proved Affidavit.  A “self-proved affidavit” is an affidavit executed by the deceased and two witnesses that is used to prove the validity of the will when admitting the deceased individual’s will to probate.

Forming a Texas Corporation – Other Documents You Should Know About

 

Most folks forming a corporation are aware that you file a certificate of formation with the Secretary of State’s office in order to legally form the corporation and then adopt bylaws to govern the corporation’s day to day operations.  There are several other documents important to properly forming a Texas corporation that you should be aware of and I discuss several of them below.

Pre-Incorporation Agreements

Pre-incorporation agreements are those made between future shareholders regarding the formation of the corporation.  These agreements may be formal (preferred) or informal.  Pre-incorporation agreements vary widely but are often used if there is some concern that one or more shareholders may back out of their commitment to form the new corporation.   They are also used to document the future shareholders’ expectations with regard to employment, capitalization, management, and other terms.

In essence, the pre-incorporation establishes a joint venture between the parties for the purpose of forming a corporation and establishing its business.  The pre-incorporation agreement usually terminates upon formation of the corporation.

Subscription Agreement

A subscription agreement is defined as an agreement between a subscriber and a corporation or a written offer by a subscriber to a corporation, before or after its formation, in which the subscriber offers or agrees to purchased a specified ownership interest in the corporation. Pre-incorporation subscription agreements are irrevocable by the subscriber for six months unless otherwise agreed.  The subscription agreement will usually set forth the conditions of the subscription as well as the payment terms and timeline for the subscription.

These agreements are becoming less common because of the ease with which modern corporation can issue new shares in exchange for additional capital but they are still in use today.  One of the reasons they are still in use is to condition the subscriber’s obligation to purchase shares.  For example, the subscription agreement may condition a commitment from the subscriber to purchase shares upon the occurrence of some event, such as, the corporation securing debt financing, a total capital investment amount, a key customer, hiring a key employee, etc.

An important note: it is important for the corporation to be aware of State and Federal securities laws when considering a subscription agreement and issuing stock to an investor.

Buy-Sell Agreement

A buy-sell agreement sets forth the terms under which the corporation or the other shareholders of the corporation must purchase shares from an individual shareholder.  The agreement also sets forth the terms under which a shareholder must sell his or her shares back to the corporation or to the other shareholders.

The buy-sell agreement will usually contain specific trigger events that create the obligation to sell or purchase the shares.  Common examples of these trigger events include death, divorce, and dissociation.  The buy-sell agreement should set forth the manner of determining the price of the shares to be sold as well as terms for payment of the purchase price.  The buy-sell agreement may set forth different prices and payment terms for different trigger events.

The buy-sell agreement may be set forth in a separate written agreement or in another corporate document such as the certificate of formation, bylaws, or a shareholder agreement.

Shareholder Agreement

A shareholder agreement is a critically important document, especially for small or closely held corporations.  A shareholder agreement is a binding contract between the shareholders used to manage their relationship and the governance of the corporation.  The terms of the shareholder agreement may be the only recourse a disgruntled minority shareholder can rely upon to protect his or herself.  Likewise, majority shareholders may benefit from a shareholder agreement setting forth the shareholders’ agreement with regard to management, rights, duties, and standards of care.

The shareholder agreement is often used to modify the standard corporate governance laws in a number of areas by setting forth specific terms to govern issues such as those listed below:

  • placing restrictions on the transfer of shares
  • creating mandatory buy-sell provisions
  • establishing mandatory voting terms or altering voting rights
  • modifying fiduciary duties and standards of care for Directors and Officers
  • mandating dividend payments
  • setting forth restrictions, requirements, or terms for the employment of shareholders or their family members
  • protecting minority interest holder’s rights
  • modifying the reasons when a corporation may be wound up and terminated
  • setting forth methods for resolving management disagreements
  • mandating the election of specific directors
  • placing restrictions on the management authority or discretion of directors and officers
  • expanding the types of actions which require shareholder approval
  • mandating bylaw terms

Initial Organizational Meeting Minutes

As soon as the corporation is formed, the initial Directors must hold an initial organizational meeting although the meeting may be accomplished through a written consent.  Regardless of whether an actual meeting is held or action is taken by written consent, the initial organizational meeting is important to address the following business in addition to other matters:

  • adopting the corporate bylaws
  • electing officers
  • issuing stock and setting forth the consideration to be received by the corporation
  • adopting a minute book to document BOD actions
  • establishing corporate bank accounts
  • authorizing other significant actions such as borrowing money, significant contracts, or leases
  • adopting the corporate share certificate
  • approve the initial stock ledger

Assumed Name Certificate

If the corporation will conduct its business under a trade name or any name other than the one set forth on its certificate of formation, then the corporation must file appropriate assumed name certificates.  These certificates are filed at both the State and County levels.

Stock Ledger

The new corporation will also need to create its stock ledger.  The stock ledger will serve as the corporation’s official record of stock ownership in the event there is any dispute as to what shares the corporation has issued and who owns those shares.

Basic Estate Planning Issues for New Parents

The feeling of being a new parent is exhilarating, a little scary, and often very tiring – I know, I did it twice.  I still remember walking out of the hospital when my son was born thinking, “That’s it? They really just let me walk out the door and go home with him?”  Along with… Continue Reading

Texas AG Issues Opinion Requiring County Clerks to Record Affidavits of Adverse Possession

The Texas Attorney General recently issued opinion KP-0165 addressing whether county clerks in Texas are required to accept and file affidavits of adverse possession.  The Opinion concludes that yes, county clerks are required to accept and file affidavits of adverse possession. The Opinion begins its analysis by noting that county clerks are mandated by law… Continue Reading

Texas AG Issues Opinion on When Tree Ordinances Could Result In A Taking of Private Property Rights

The Texas Attorney General recently issued opinion KP-0155 addressing the issue of whether, under certain circumstances, municipal tree preservation ordinances might violate the Takings Clause of the Texas Constitution. The opinion begins by noting that although there are some differences between the Takings Clause in the Texas Constitution and the Takings Clause in the United… Continue Reading

Comptroller Announces Texas Taxpayer Bill of Rights

Yesterday the Texas Comptroller of Public Accounts, Glenn Hegar, announced the creation of the Texas Taxpayer Bill of Rights.  These were promulgated as part of his goals to address taxpayer concerns in an efficient and respectful manner.  I’ve listed the short version below, but you can access the Taxpayer Bill of Rights here. You have… Continue Reading

NLRB General Counsel Memo Discusses Lawful and Unlawful Employer Handbook Rules

This past week the General Counsel for the National Labor Relations Board published a memo titled “Report of the General Counsel Concerning Employer Rules.”  You can download the PDF by following that link. The report provides an update on the General Counsel’s view of lawful and unlawful employer handbook policies in the areas of confidentiality,… Continue Reading