Life insurance can be an important component in a well rounded estate plan, but owners of life insurance should consider revisiting their life insurance policies to coordinate beneficiary designation forms with their estate planning documents, such as a last will and testament. In doing so, you may be able to give more to your beneficiaries than just the value of the policy’s death benefits.
Life insurance can be intended for different purposes. For instance, life insurance can be used to leave behind or supplement an inheritance. It can also provide a mechanism for the payment of expenses upon the death of the insured and can be used to leverage wealth and assist in mitigating estate taxes. During the life of the owner, some life insurance policies provide protection against disability or long-term care by earning a cash surrender value that may be used to fund long-term care expenses. Many people purchase pre-need funeral contracts funded with life insurance policies which allow for the immediate payment of funeral expenses and relieve the family of the burden of covering the costs of burial.
While many people have life insurance through their employer or have purchased a policy from an insurance broker, most people are unaware that the persons designated as beneficiaries of the policy may be missing out on other indirect benefits. Your estate’s assets can be divided into two broad categories: probate assets and non-probate assets. Probate assets include real estate and personal property – as well as bank accounts – that do not have a beneficiary designation. Non-probate assets are those that pass pursuant to a right of survivorship agreement, pay on death designation or beneficiary designation, such as life insurance for which beneficiaries have been named. Probate assets will pass according to the terms of your will; however, nonprobate assets will pass according to the beneficiary designation. In other words, the beneficiary designation form for your life insurance policy trumps the terms of your will.
In some instances, it is advisable to have your life insurance pass outside of your will to avoid probate or mitigate estate taxes. However, there may be very good and well-intentioned reasons why you would want your life insurance to be governed by your will. For example, you may have created a trust minor children or a family member with special needs and to properly fund these trusts. In order to avoid a costly guardianship or the potential ineligibility for public benefits, the life insurance death benefits must pass through your will and not directly to these individuals through a beneficiary designation.
In order to ensure that your will-based estate plan is followed, it is necessary to coordinate life insurance policies that you currently own – or may own in the future – with your estate plan. Each financial institution has a different procedure for changing beneficiary designations, and you may have to contact financial institutions to obtain a specific form to change beneficiary designations. You will need to make sure you properly word the beneficiary designation. It may be more complicated than simply inserting the name of an individual. Consider visiting with your estate planning attorney before making any changes to your beneficiary designations to make sure your wishes will be accomplished through your life insurance and your estate planning documents.
In the aftermath of Hurricane Harvey and its devastation of the Texas Gulf Coast, there has been an outpouring of giving and support to aid in recovery efforts. Indeed, there are endless opportunities to make a difference in our ravaged – yet resolutely strong – communities. One way to advocate for your cause is to make a charitable gift. However, not all gifts are equal. While your motivation to give may be entirely altruistic, here are five ways you can make charitable gifts and gain tax-saving benefits:
- Make Gifts to Nonprofit Tax-Exempt Organizations. You may be entitled to an income tax deduction for donations made to an organization that is exempt from taxation under Internal Revenue Code § 501(c)(3). While you can freely make gifts to any organization or cause, you cannot take a charitable deduction for a donation to an organization that is not tax-exempt. Additionally, if you receive something of value in return for your donation, such as a meal at a gala or an auction item, you can deduct only the amount that exceeds the fair market value of the benefit you received.
- Consider Gifting Appreciated Assets. Instead of selling an asset to make a cash donation, consider making an in-kind donation, especially if the property has increased in value since you acquired it. By giving an appreciated asset to a tax-exempt organization, not only will the charitable deduction help to reduce your taxable income, you may also avoid paying capital gains on the appreciation.
- Consider How You Gift Real Estate. If you would like to donate your property but are not ready to stop using it, consider giving an irrevocable remainder interest. By giving a remainder interest, the charity is assured that it will someday receive the benefit of the gift, but allows you to continue to enjoy the property for now. A gift of a remainder interest may qualify for a charitable income tax deduction and may reduce estate taxes.
- IRA Charitable Rollover. If you are 70 ½ or older, you are required to make annual distributions – referred to as required minimum distributions – from your individual retirement account (IRA). These distributions are subject to income taxation. However, certain donors can donate up to $100,000 from his or her IRA in any one year directly to eligible charities and shield the donation from being counted as taxable income. This is an effective way to make a difference and lower your income tax bill.
- Make a Gift of Life Insurance. While you can name a charitable organization as a beneficiary on a life insurance policy, there are several other methods for leveraging the gift of life insurance to reduce estate taxes upon your death and result in a charitable income tax deduction in the year you make the gift.
Regardless of your charitable motivations, giving strategically can mean immediate or future benefits for your cause and for yourself or your estate. If you are considering making a charitable gift, you should consult with the charity of your choice and your estate planning attorney prior to giving so that you can develop a plan that maximizes your impact.
In this section, we will look at famous – and sometimes infamous – trust and estate cases coming out of Texas. In our inaugural edition, we profile an individual who definitely embodied A TEXAS ESTATE OF MIND: Emily Austin Perry.
Emily Austin Perry was a daughter, sister, mother – and, in more than one way, a pioneer. Sister of the “Father of Texas,” Stephen F. Austin, Emily and her family moved to Texas in the 1830s. Stephen F. Austin died in 1836 and left his expansive estate to Emily. At that time, Texas had some of the most sweeping laws granting women property rights. Due to these laws, Emily was legally entitled to keep her inherited property separate from her husband’s property and her marital property. This meant that Emily was one of the largest land owners in Texas and considered by many to be the wealthiest woman in Texas. In fact, it has been said that Emily was diligent in keeping her inherited property separate from her marital property in order to maintain its character as her personal property. Emily Austin Perry – a pioneer of navigating Texas probate laws.
Sam Houston’s Last Will & Testament. Image from Texas Land Grant Records, Archives and Records Program, Texas General Land Office, Austin, TX
Probate is a legal process that takes place after a person has died and which governs the process for administering and distributing the deceased person’s estate. Although the probate process has acquired a reputation for being expensive and cumbersome, that is not always the case. Here are five different ways to administer or distribute property of a deceased person in Texas:
- Affidavit of Heirship. An Affidavit of Heirship may be helpful to transfer real property and some personal property without a court proceeding. This affidavit identifies the names of the deceased’s heirs and is recorded in the real property records of the counties where the property is located – much like a deed. This affidavit has limited applicability.
- Small Estate Affidavit. A Small Estate Affidavit may be used if the deceased died without leaving a will, and the estate – excluding the homestead and other exempt property – is valued at $50,000 or less. Generally, there also needs to be more assets than debts. While the affidavit must be submitted to the court for approval, the process is usually shorter and less expensive than other probate proceedings. This affidavit does not transfer title to real property other than the deceased’s homestead.
- Probate Will as a Muniment of Title. A will may be admitted to probate without having an executor appointed to administer the estate. This process is typically reserved for cases when the estate consists primarily of real estate. The recording of a certified copy of the will and the order admitting it to probate in a county’s deed records is the equivalent of a deed from the deceased to the beneficiaries of the will. A will may not be admitted to probate as a muniment of title if there are unsecured debts. Likewise, many non-Texas based third parties are reluctant to honor an order admitting the will to probate as a muniment of title.
- Appointment of an Executor or Administrator with or without a Will. Many times, an estate consists of a mix of assets or has substantial debts requiring the appointment of an executor or administrator. The default rule in Texas is that this appointee is supervised by the court. This adds additional costs and time but affords beneficiaries the comfort of knowing that the appointee is being watched and cannot do anything without the court’s approval. The appointee is also bonded. Fortunately, the appointee can serve independently of the court’s supervision if all of the beneficiaries of the will or all of the heirs of the estate (if there is no will) consent. Likewise, you can specify in your will that the appointee should serve independent of supervision. This can save the estate substantial time and money.
- Heirship Determination. If the deceased dies without a will and there are no other options, a court will have to determine the names of the heirs of the deceased and each heir’s respective share of the estate through a court proceeding. This proceeding is often required before the court will appoint an administrator of an estate of distribute the estate to the heirs.
One of the best things you can do now to save money for your estate is to execute a valid will to ensure that your wishes are carried out in the most appropriate and cost-effective manner.
Howdy! A TEXAS ESTATE OF MIND exists to educate – and sometimes entertain – its readership about estate planning and probate, trust and guardianship laws, cases, and issues affecting Texans and anyone who is involved with trust and estate matters in Texas. This space will be filled with tales of famous – and sometimes infamous – trust and estate cases and disputes, thoughts about laws governing estate planning, probate and trusts, and tips for estate planning and the administration of trusts and estates…from a Texas perspective.
Estate Planning is necessary for the orderly and efficient administration and transfer of your property upon your incapacity or death. An estate plan can be designed to discourage litigation about the distribution of your estate, to protect an inheritance from falling into the wrong hands, such as a beneficiary’s creditors or during a divorce, and to preserve a beneficiary’s governmental benefits.
Having a last will and testament isn’t enough. Your estate plan needs to be a comprehensive plan which takes into consideration the particular types of property that you own, including business interests, your family dynamics, and whether your beneficiaries have special needs.
An estate plan should coordinate assets that may not pass through your will, such as life insurance or other assets naming a beneficiary. Otherwise, the estate could be used for purposes that the individual did not desire.