LEGAL CORNER: A review of common types of estate documents

Sam Moak

Editor's Note: The information in this column is not intended as legal advice but to provide a general understanding of the law. Any readers with a legal problem, including those whose questions are addressed here, should consult an attorney for advice on their particular circumstances.

Have you ever noticed that the names of many estate planning devices sound the same ? There are Wills, Living Wills, Living Trusts, Revocable Trusts, Irrevocable Trusts, Crummey Trusts, Charitable Trusts, Real Estate Investment Trusts, Family Limited Partnerships, Family Trusts, powers of attorney and powers of appointment.

Even though they may sound the same, they are quite different. This week I will provide a simple definition for each of these estate planning devices.

WILLS:

Most people know that a Will is a document that disposes of your property upon your death. Wills are normally typed, witnessed and notarized. Sometimes people sign what are called “Pourover Wills,” which are designed to be used with revocable trusts. In Texas, it is also legal to write a Will by hand. A handwritten Will is called a “holographic” Will. But as I have addressed in other columns, this can be very dangerous. It is also legal to do a Will orally, without writing anything down. An oral Will is called a “nuncupative” Will. Before you start planning your speech, however, be aware that nuncupative Wills are often limited to the first $30 of your estate.

LIVING WILLS:

Unlike a Will, a living will expresses your wishes regarding the use of life-sustaining treatments should you have a terminal or irreversible illness. Living wills are also called “advance directives” or a “directive to physicians.” In Texas, the official name is “ Directive to Physicians and Family or Surrogates.”

LIVING TRUSTS AND REVOCABLE TRUSTS:

Living trusts and revocable trusts are the same thing, and are often called revocable living trusts.

Revocable trusts are designed to own some or all of your property while you are still alive. The trust agreement specifies how much of the trust you are entitled to receive while you are alive. It also makes provisions for what is to happen to the trust assets upon your death. The assets in a revocable trust will still be subject to estate taxes when a person dies.

Many people create a revocable trust to avoid probate because they are afraid of the cost of probate. In the case of owning out of state real estate, a revocable trust may be the best option to avoid probate in two states. However, revocable trusts are complicated, time consuming and in most cases more expensive than the cost of probate. Revocable trusts can be useful to address the issues of out of state property, incapacity and privacy.

IRREVOCABLE TRUSTS:

Irrevocable trusts are similar to revocable trusts, except that you can never change them. People typically create an irrevocable trust because they want to give away property. The objective is to avoid having it in their taxable estate when they die. Since federal estate taxes do not apply to an individual’s estate under $11,000,000.00 ($22,000,000.00 for a couple), irrevocable trusts are normally created by people with a LOTof money, real estate or other assets. It should be noted the exemption amount is subject to change from time to time, so you should consult your attorney if your estate is close to or above this amount.

Common types of irrevocable trust are: Crummey Trust, Charitable Trust, and Family Trust.

CRUMMEY TRUSTS:

Crummey trusts are a common type of irrevocable trusts that got their name from a Colorado taxpayer’s case. Crummey trusts have special language that allow you to make monetary gifts up to specific amount per year to each beneficiary of the trust. As you may have already guessed, since this type of trust got its name from a taxpayer’s case, the IRS does not like this type of trust and from time to time challenges them. In most instances the taxpayers win and so Crummey trusts remain popular in estate planning.

CHARITABLE TRUSTS:

Another type of irrevocable trust is the charitable trust. These are typically used if you have a large estate and need a way to reduce your taxes. There are many different forms of the charitable trust, but the basic idea is that stock, real estate or other property is placed into a trust that in part benefits the person setting it up and partly benefits one or more charities. Charitable trusts are popular because they can eliminate lots of taxes and benefit the donor’s favorite charity. Again, everyone wins except the IRS.

FAMILY TRUSTS:

The name “family trust” does not identify a type of trust. This is just a name that is commonly given to different types of trust. You can call just about any trust a “family trust.” The name “family trust” is most commonly associated with two types of trusts. One is a bypass trust created under a person’s Will or revocable trust. The other is an irrevocable Crummey trust created for someone’s children or grandchildren.

FAMILY LIMITED PARTNERSHIPS:

As the name implies Family Limited Partnerships are a conventional limited partnership that is owned exclusively or primarily by members of a single family.

Limited partnerships are a type of business arrangement you can create in Texas under which some investors have no control of the business (limited partners) and other partners have all the control of the business (general partners). Limited partners invest their money in the business silently in hopes that one day they will reap a huge profit from the business. If the limited partnership fails, then the limited partners lose only what they have invested in the partnership. The limited partners cannot be forced to pay of the partnership’s debts with their personal savings. General partners get to call the shots, but for that control they have unlimited personal liability for debts of the limited partnership.

Limited partnerships are popular in estate planning for estates exceeding $22,000,000.00 for a couple. The reason is that parents can create a limited partnership and give limited partner interests to their children without the children being able to control the property. Additionally, the fair market value of the limited partner interests established as gifts may be reduced to account for at least two factors: (1) the gift owners’ lack of control of their interests; and, (2) the fact that the gift owners’ interests constitute only a minority of the business.

A word of warning... the limited partners (or children) should get along well. This is because at some point, when the general partners (parents) are out of the picture, then the limited partners will have to get along as partners in order to take care of the assets of the partnership. If they do not get along, then this could lead to a messy split of the partnership and fight over the assets.

POWER OF ATTORNEY:

A power of attorney is a document that allows you to designate another person (your agent) to sign your name on your behalf. The powers granted in a power of attorney can be broad and sweeping. Powers of attorney can be general in which case you are authorizing the person named as your agent full legal power and authority to act on your behalf by taking any and all actions relating to the indicated transactions. Accordingly, the person you appoint as agent should be someone you trust completely. However, powers of attorney can be limited to specific tasks you think your agent should be allowed to address. If you have any questions about this document, or about any of the statutory powers, you should address these questions with an attorney familiar with estate planning and probate.

Powers of attorney are popular because they offer an alternative to guardianship which requires that a lawsuit be filed with the court, notices given, and a hearing. If the guardianship is contested then this could mean a full blown trial. Additionally, once a person is named guardian of another, then the court maintains its involvement throughout the guardianship. This is typically a very expensive process.

In closing, if you have questions about the different methods of estate planning I have briefly addressed here, you should consult with an attorney experienced in estate planning and probate. Everyone has their own unique situation and which method is right for you depends on your goals.

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas. www.moakandmoak.com