This video on Succession and Estate Planning in Texas was recorded at a meeting of the Rotary Club of Brazos River, meeting at the Weston Lakes Country Club. In the video, Attorney Ray Kerlick talks about a variety of estate planning topics including wills and trusts, the transfer of property, probate and the Texas Transfer on Death Deed. For an appointment with Mr. Kerlick, please call or text our offices at 800-929-1725. Our estate planning attorneys can help you at our offices in Fort Bend County, Wharton County and Matagorda County.
Summary of Succession and Estate Planning
So the theme for today is Succession: The Real Life Instructions. So, let me ask this question. How many folks have seen the HBO show called “Succession”? Anyone? There you go.
It’s an important and good drama. But, the key to it is a little bit about what I’m going to talk about today. This is Logan Roy. Logan Roy is kind of a self-made man. He’s a poor Scottish immigrant. He comes over to the United States and he builds an empire in the media world, news, entertainment, and all sorts of things.
And he’s got four children, some from different marriages, and he’s constantly manipulating them to see who’s going to take over the empire. Who’s going to take over the business? The show begins with him having some health problems, and these health problems raise concerns about his longevity, his power, and his control over the business.
Lots of people, investors, and board members, and so on, become concerned about his ability to continue this.The immediate thing that comes to mind is what’s the succession plan? And, of course, making it complicated is there’re four children with different mothers, an ex-wife who controls a trust with the children’s interest in the company, and a current wife who wants to carve out her own independent interest in the company and in the fortune. These are all issues frankly that spring really out of real life.
And I don’t think it’s a coincidence that it echoes back to another real life titan of industry, who was a poor Scottish immigrant who created an empire and played his children and family off each other to succeed him in his business. Ultimately, it was cutthroat enough that the family split into several different factions. And while they remained wealthy, the empire that he built eventually crumbled. Anybody know who this guy is? A guess? Cornelius Vanderbilt, right? There you go.
The Commodore, as they called him. Probably best known as Anderson Cooper’s great, great grandfather. So these are real life issues about what happens at the close of my life? Certainly at the close of my productive life?
This is an issue that has continued throughout the ages, and we’ve had a number of different solutions throughout the ages. The most familiar of which is primogeniture. Most of you’ll remember that from history. My wife’s a history teacher, so I have to throw in a little bit of history.
Primogeniture means the firstborn son inherits everything. That was the law for hundreds of years if not a millennium. That generally changed a little bit over time. So then it became a church-state declaration. If I live in England, the king has the ability to trump primogeniture anytime he wants, because I rule by his grace. And therefore, if he tells me my heir is such and such, my heir is such and such. Likewise, the church had certain dictates that help define what primogeniture means and what things like legitimacy means. Things like that.
That gradually developed into what we call heirship laws. And those heirship laws are really just an order of succession. Succession meaning who has the first right to the goods, to the stuff, when I die.
Those laws transformed over time to what we call intestacy laws, intestacy is a fancy word for I don’t have a will. So the state said, “We’re going to determine what happens if somebody dies without a will.” But the concept of a will develops in that same timeframe, and people are familiar with wills as far back as the Roman time.
You’ll remember that Julius Caesar had no heir, and so he designated his nephew Augustus as his heir. Augustus eventually became the emperor of Rome because he was the most wealthy person in Rome because he inherited everything through a will that Julius Caesar had left him. So that’s the funny part we hear about Augustus. We don’t realize really his power came from a will.
So in the English system we developed the probate court. The probate court is literally a court that handles things relating to people who are deceased. Anything touching on that is part of probate. And the purpose of probate is twofold — most people don’t know about this. One is to establish an heirship and succession, whether that be through intestacy or through a will. But the second is to provide a place for creditors to come and say, “That guy owes me money.” So that’s an important distinction that most people don’t think about is the probate court handles both of those issues.
There have been a variety of ways to try and loophole around this issue. In early English times, the concept of a trust came up. The concept of a trust is that I want things to pass outside of the probate court and intestacy laws, and I want to have control over this for multiple generations.
That was eventually tamped down with a law that still exists from the late 1600s called the rule against perpetuities. What that says is that a trust can only last 21 years after someone who is living at the time that I create that trust dies. So rather odd rule, but it is still the law. It’s the law in Texas. It’s law in every state in the Union, because we generally follow English law.
That resulted in something that I’m going to call infinite, fictional beings. And infinite, fictional beings are important for lots of ways. A corporation is an infinite, fictional being. Family limited partnerships are something also that we can talk a little bit about in a little while, and then LLCs are limited liability companies. Most people think of those things as a way to develop capital and to establish ownership in the industry, but recognize they also serve a very important purpose in terms of succession.
Because once something is in the name of an infinite, fictional being, there is no probate for that asset. So, another important tool. Now, why are we concerned with intestacy? Because it sometimes creates results that we don’t like. And so I put the chart here about Texas intestacy rules that deal with persons who are married at the time of their death, but have children from a prior marriage. Recognize that this is a very random way to determine how things are going to get divided.
So community real property, meaning things that I purchased with my new wife, my second wife. My children, both my prior children and my children from that marriage, if there are any, will take half of the land. And which half is it? It’s the half that I owned. So community property means I own half of stuff purchased during marriage. My wife owns the other half. She keeps her half, but all of my half goes to the children in equals shares.
With a regard to separate real property, meaning for example, the most common thing would be I had a house with my first wife. I was awarded that house in the divorce, or God forbid she passed, whatever, the house is mine. The house is mine at the time that I get remarried. Therefore it is my separate real property.
At the time of my death, if I don’t have a will, the children of my prior marriage, take all of it. That house is theirs, period, full stop. However, the surviving spouse has what’s called a life interest right, so for the rest of her life, she would have an interest to live there. It is defined as a one third interest, a one third life interest, which no one can tell you what that really means. There are fancy ways to do tables, to tell you how much that percentage is. At the end of the day, that means she hasn’t the right to sell, she does have to keep up the property, she has no right to mortgage it.
So estate planning is a fancy way of saying, how do I deal with things toward the end of my life?
Here are concerns and goals that I see in my practice.
- Control of your assets after your death, important.
- Avoiding conflict between loved ones, a very important one in my experience.
- Reducing costs faced by loved ones either before you’re gone or after you’re gone.
- Honoring family legacies. A lot of times this is property, a lot of times this is other things.
- Prepare for incapacity and poor health. Most of us will go through a period of incapacity, or poor health before we die. This is a reality, we’re very good at medicine now.
- Providing for a spouse or a challenged loved one. I’ll talk a little bit more about that.
- And then finally avoiding taxes and creditors is something that most people, even though I put it at the bottom, most people come in my office, this is the one they’re worried about.
What I tell them is, think about something else. Think about control, cost, and conflict. Recognize that this is a balancing act at all times. So the more control I maintain of my assets after my death, in my experience, the more it is likely to cost your heirs to manage and access your assets. Why is that?
Because anytime I put restrictions on how assets can be used, how they can be sold, what can be invested in the types of things that often end up in trusts and things like that, there’s going to be a cost. There’s an accountant, there’s a financial manager, there’s an attorney. Each of whom is going to take a little piece of that every year that this continues. So the more control you’ve got, recognize there’s more cost for whoever is inheriting.
Now, if I have a huge empire, no problem, that probably still makes sense. Restrictions on heir’s control of their inherited assets, almost always means more conflict between them, especially where one heir has to administer this control. So this is another thing.
We can put things into trust, we can put things into family limited partnerships. They may all get along fine now, but if one person is controlled, four or five years after you’re gone I promise that situation’s going to be different. Especially if one poor sibling has to divvy up and manage all of the assets for the other siblings.
So we’re talking about increasing conflict when we increase after death control. And finally, restrictions on the sale of these assets usually result in a loss of control for your heirs. Typically I’m thinking of your spouse, but also to your kids, after you’re gone.
So if I give my spouse a life estate interest in my house, what does that mean? That means they’re tied to this house. They’re going to be responsible for the taxes, the maintenance, upkeep with an inability to sell without the approval of what we call the remainder men. That is to say the siblings who will eventually inherit this.
We also have a problem where we potentially create for them an inability to use those assets for their own needs like medical or long term care. So if all my assets are tied up in a house that can’t be sold by my spouse, guess what? They’ve got an issue. They’ve got an issue in being able to access those assets for what probably you want them to using for which is their long term healthcare and their medical issues.
There’s ways around this. But these are just things to think about when we’re starting the process.
So, let’s talk about the other thing that most people are concerned about — estate or the death tax as we call it and gift tax. The good news is almost never do I actually have to worry about this in my normal practice. I deal with people out here and there are very wealthy people, but there are seldom situations in which people have a real concern about hitting the estate tax.
The estate tax for an individual is $12.06 million in assets, this is for 2022 or $24.12 million for a couple. Typically, if we’re hitting up against that number, it’s because of holdings in real estate, that’s usually the issue.
So we’ll talk a little bit about ways that you can reduce asset value, not through a will, but through some other planning tools, a family limited partnership comes to mind. With the trust there’s lots of other things to do to basically get those assets down below that number.
There’s an annual gift tax exclusion available of $16,000 per person. That’s something that people don’t use enough. At the end of the day, your kids are getting your money, probably anyway. Keep in mind that it is always worthwhile to consider, should we start that process earlier?
There’s lots of reasons for that. We’re going to reduce the total estate, which is good. We’re also going to potentially allow us to qualify for some types of governmental benefits that we may want. But just generally speaking, you’re going to get those assets for your kids in a timeframe where they can actually enjoy them instead of getting them much later in life.
That said, you always want to have this concept of do I have enough money to actually cover what I need? So, as a friend of my father used to famously say, “I want to make sure that the last round of check I got bounces.” So, that’s one of those things to keep in mind. But once we get into this type of scenario, we’re no longer talking about simple estate planning. And so what I want to focus on is the simple estate planning.
The reason for that is we’re not all the Vanderbilts, we’re not all HBO billionaires, at the end of the day, most of us are working people with a simple set of assets. It is simple and easy to do what I would call the safety net of taking care of the very limited number of documents that we need to sign.
So this is the basics. Everyone should have these documents and they should have them handy. We’ll talk about a little bit more about the original and all of the above.
- So a last will and testament with a contingent trust.
- A statutory durable, what I call a financial power of attorney.
- A medical power of attorney
- An advance directive to physicians
- and a HIPAA release for my family members.
So those are the basics.
There is what I would consider a new basic, and that’s called a transfer on death deed. This is literally a new innovation under Texas law. For many, many years, Texas did not have a deed that they officially recognized that did what this deed does.
In most states other than ours, there is something called Joint Tenants with Right of Survivorship, JTWROS. And what that means is if we are jointly buying a piece of property, if one of us dies, the other automatically inherits. That is not the law in Texas, and it’s still not the law in Texas. It creates, frankly, a boondoggle for lawyers.
We got one thing, it’s a house, and if somebody dies, we’ve got to go probate that will even if that’s the only asset we care about because without probating the will, we cannot clear title of the house.
This allows us to avoid it. So we avoid probating a will by keeping your house property out of probate. There’s a really cool little feature to that, is it preserves it from creditors. What do I mean when I talk about that? Most of us have heard the concept of Medicaid coming after your house after you’re gone. That is why Texas would not do this.
Texas is incredibly aggressive with regard to chasing down Medicaid dollars after the fact. So owning a house subject to certain valuation limits, unfortunately many of which might be reached out here, but owning my house does not disqualify for Medicaid. Medicaid allows me to get long term care, nursing home care from the government. So many people are interested in that.
I can talk you through any of those concepts if they didn’t want to discuss it. I generally think it’s not the world’s best idea, but we can talk about it. But in this case, because the house never goes into the estate, Medicaid can’t come get it. And so, that’s why for many, many years, this was pushed down, pushed, pushed down. About three years ago, they passed it, now we can do it. Now I can basically sign something that says, I want everything to go to my spouse if she survives me, and if not, then my kids in equal shares. It’s what some people call a mini-will, so it’s effectively avoiding the need for a will.
I would still always say you got to have a will because it’s a safety net to other issues that might come up, but this is a big, big step. The great news is it’s revocable. I mean, I can revoke it anytime I want to. Unlike a regular deed, it has no effects on taxes or mortgage, and it doesn’t prevent my ability to sell the property. It’s just a designation of beneficiaries, similar to what you would do with life insurance or a 401k.
In that regard, the goal should always be avoid costs by avoiding probate. So one of the things we talked about is how to reduce cost. Well, the easy way is avoid probate, altogether if you can. That’s always the best thing. A will never has to be probated, just because one exists.
If you came to me and said we’ve already done the transfer on death deed, we’ve got beneficiary designations on all of our accounts, we’ve done the gifting in a way that there’s not much cash left over, and we don’t have any outside business interests or anything that needs to be managed, you don’t need to file a will. There’s no reason to file a will for probate. Everything is handled.
So, every time we can do that, we’re money ahead. It takes money out of my pocket, so I’m idiot for telling you all this, but this is the truth. My goal is to try and help my clients the best way I can.
So anything with a beneficiary designation does not go through probate, and the will has no effect on it. So everywhere you can put a beneficiary designation, you should. Bank accounts have something called a POD designation. You absolutely must have that. All of your investment accounts are typically required to have a beneficiary designation. You must do that. On the 401k, remember that your spouse, the current spouse is always the beneficiary, unless a very special form gets filed with the administrator of your 401k.
Just had a litigation about this, where we had a premarital agreement, not that I drafted, but there was a premarital agreement. Current wife had signed away all rights to the retirement accounts. But that form wasn’t filed, and guess what? She got all the retirement accounts, even though she had forsworn them, even though it was a written document signed and sworn and notarized by her, it doesn’t matter. It cannot trump the 401k designation.
Vehicle titles, those of you that have come see me know, I always say, go look at your vehicle title. There’s a place on the blue title where you can actually both sign and say, I want my spouse to be my beneficiary on this title. You can also file a special form that they have down at the County Tax Office that says here’s who I want to designate as my beneficiaries for this vehicle. Easy, cheap, why not do it? It’s one less thing anybody has to hassle with.
We talked about the transfer on death deeds. Something that for any piece of property you’ve got, you can do that.
Now for certain pieces of property, we would do something a little bit different and that’s either a trust or an FLP. So if it’s a property that generates income, if it’s a property that is part of the family heritage, we probably would do something like a trust or an FLP, which is a family limited partnership. But there are costs associated with that so we just don’t do them willy nilly.
Okay, the wills, if you take away anything from today, recognize it’s way easier than you think to do this. Most people, fret, worry and concern themselves. How are we going to do this and how am I going to fix this? And who’s going to get this, and who’s going to get that?
The answer is it doesn’t have to be that difficult. At the end of the day, the easy solution is always, I’m going to leave everything to my spouse and then to kids in equal shares.
So if that’s your situation, we’re talking about it two-week process. You come in, give me some info, I send you a link, you fill it in, you send it back, we generate the documents, and within two weeks, you’re back in my office signing all of these wills and the documents we’re talking about. We’re done. It’s because we don’t have to worry about, for most people, estate taxes or any of those kinds of things. We just need to make sure that the headaches are as short as possible.
It’s a little bit harder when we got children from different marriages, because we have to figure out how to treat them. In my experience, most people have thought about this, even if they haven’t voiced it to each other. So that’s typically the issue.
I’m going to step out of the room, because I’m not going to tell you what to do, but we need to figure it out. So you talk about it and I’ll walk back and you tell me, what are you thinking? You don’t have to decide today, what are you thinking? What are your concerns? All those kinds of things. And we can usually wire around all of that with just a few words and clauses in the will.
Many people worry about do I have to have a list of all my stuff? Well, no, you don’t. Number one, to the extent we can, I want to make sure you designate beneficiaries on everything you want to the extent you can, any stuff that’s left behind, grandma’s China, my gun collection, it’s Texas, so that’s our thing, whatever it is. We can do specific gifts that don’t have to be in the will.
What we can do is create what’s called a written signed, memorandum, needs to be dated, signed by you in your handwriting. And it’s instructions to your executor that say after I’m gone, make sure and do this. And so we’ll reference in the will, follow my instructions that I wrote on that memorandum. That way I can change it over time.
I got new stuff, I got rid of some old stuff, whatever. As you go, you put in, who wants, who gets this? Who gets the Rolex, who gets the, whatever? We don’t have to decide any of that to get the will signed. We can just reference the fact that we’ll decide that in the future. And if you don’t, your kids will figure it out. They’ll figure it out.
Burial instructions, that’s something, if you have any, we typically put in the will.
So for those of you that have minor children, we can designate the guardian of our minor children, if God forbid something happens to both of us, and then a contingent trust. This is for minors, whether grandchildren or children and in my opinion, it’s always required. I always include it and there’s a reason, it’s because minors cannot inherit anything.
So if there’s the second part of anything you remember from today, one, wills are easy, two, minors cannot inherit anything. That includes beneficiary designations on accounts. So if you’ve got a beneficiary designation that potentially includes as one of the people, a minor, you need to change that, you need change it to the trust that we’re going to create right here. The contingent trust in your will. All that says is, money is available for this child, but it’s administered by an adult. Without that designation, the child cannot touch the money until they turn 18. And at age 18, guess what? It’s all theirs with no restrictions.
Nobody wants to give an 18-year-old a bunch of money, that’s an insane idea. So what do we do? We come up with an age 25, 30, 35, where up until then the money’s available for education, health, welfare, whatever the case may be. The money’s available for the child, but they can’t blow it on a Lamborghini or whatever. Instead, it gets released to them, whatever’s left, at that age. So again, it’s almost a no brainer, there’s almost no situation in which I wouldn’t recommend it.
The other thing about the wills it’s important to know is they must be specially signed and witnessed in a legal ceremony. And again, that’s why we get paid is to do those legal ceremonies. They can’t be changed except through a similar legal ceremony. So when people go in and they scratch something on the will just recognize that’s ineffective, scratching through words on a will that’s already been signed, doesn’t work.
Having the original will is a must, always make sure you know where your original will is and that it is kept in a place where it could not be tinkered with or destroyed. The assumption is that if I can’t find the original will, that means I ripped it up. I revoked it.
I had a trial on that very recently. Unfortunately, it didn’t come out my way, but that’s okay. It does happen. And the reality is it could have been saved if we had simply just kept the original will.
Okay, we also mentioned powers of attorney and directives. Most of you are familiar with all of this stuff. So I won’t belabor this too much. But at the end of the day recognize most persons will pass through a phase of medical incapacity prior to your dying. We’re very good at medicine. That doesn’t mean they can keep us awake all the time. Lot of times we’re out of it.
What happens with the tax return or home refinance or possibly there’s a sale of a home or a loan from our retirement account needed to cover those medical expenses. No one can do that without having a durable power of attorney.
There is an alternative and it’s called guardianship. That guardianship is expensive and it’s time consuming. It’s just unnecessary when you can simply sign a document to say my wife or my husband can handle anything that’s necessary if I’m not there.
We also need an alternate, because again, I’m in the worst-case-scenario business, consider the scenario of a mutual accident with one spouse dying and the other ending up in a coma. At that point, we got no one in control of these assets because the person that’s designated as my executor is in a coma. The person who would be capable of handling my affairs up until the will can be probated, et cetera, is in a coma. We’ve got to have an alternate on that. And that allows us to make sure that everything has some continuity.
The rest of these, just pretty much do what they sound like they would do to the medical power of attorney, the HIPAA release are just documents that allow people to be involved in your medical care.
The directive to physicians solves a slightly different problem and that is, I don’t ever want someone to come to my child or my spouse and say are you ready to pull the plug. Those of you who have been through that know there isn’t a right answer. Even if your rational mind says, I know the right answer, your emotional mind, just in your heart, it’s tough. And it’s impossible not to have regrets or concerns about did I do the right thing?
So, don’t put anybody in that position. Just sign something and say, hey, look, if I get to a point where the docs say I’m gone, they’re not giving me any further treatment, it’s basically making me comfortable, let me go. If I’m hooked up in machines with no chance of getting off those machines, please let me go. That way, nobody has to make that decision for you.
The real decision and what I have found to be the most difficult part of everybody’s analysis in this is really who do I trust? And there are some easy answers, but there are some harder answers.
So, if my spouse is alive when I die, my spouse is going to be the executor, that is the person under the will who does things. They’ll be the trustee if a trustee is necessary for any minors, probably not. They’ll be the guardian of any minor children. We don’t really need it, my spouse is alive so he or she is the other parent for the financial and the medical power of attorney. Easy answer, first answer is always my spouse.
This is where it gets more difficult. Whenever both spouses are deceased, who do we want to put the charge? And these answer is if I have adult kids and little kids, and I would tell most people don’t pick the favorite, even though it probably seems like a great idea, consider co-executives. That way, reduce the conflict and any decision essentially has to be agreed.
But sometimes we’ve got a scenario where we’ve got a child or children who frankly, we don’t trust with that capability. That’s okay. Let’s find someone that we do trust. And that’s the thing. Whomever would I trust to be my executor, my trustee, my guardian, my alternate for my financial power of attorney. If I trust somebody to handle my assets, I should trust them essentially in most decision making that would be necessary if I am not available.
However, recognize if that person is managing as the trustee of the contingent trust, where funds go to a different person, especially one to whom they’re related, there’s the possibility of conflict. I’m talking about brother or sister, whatever.
So oftentimes you’re going to look outside the family, when we have that scenario. We’ve got one kid who just, as soon as that money gets in his hands, he’s going to blow it on something. God forbid, drugs, God forbid, whatever, but we know we can’t give him the money. It’s got to be held in trust, divvied out over the course of his life, no problem. Find the person to act as that trustee, that’s the hard question. And that’s almost always what I tell people, is you can leave here and you think about all this, but I’m just telling you only thing of this, this is really the only thing that matters. This is the important thing, who do I trust?
And that leads us to trust. I think this is our last slide. Most people, many people come to me and say I want a trust. I say, okay, great. First, do you have a will? Well, no, I heard a trust is better. No, a trust is just different. So if you are having a trust or thinking about setting up a trust, make sure you’ve also got a will. ‘Because the will is a basic building block of this estate planning structure. A trust is another layer and it’s another layer that allows us to do very special things. But again it comes with an additional cost.
And we talked earlier about it, having control increases cost. This is one of those scenarios. So a simple trust is called a revocable or inter vivos, living trust, is similar to a will but used during life. So it’s going to have very much similar wording to what a will would have. It’s going to designate a trustee, which is the same as the executor, it’s going to designate beneficiaries, which will be the same beneficiaries that would be in your will. And it will basically allow you and your spouse to continue to control these assets, but not hold them in your name. That’s really the purpose of the trust.
At the end of the day, I want to make sure that these assets are not held in my personal name, but held in such a way that I’ve got a little bit of control of what happens to them after I’m gone. So one spouse can’t sell the remainder of the house or the land, because of the trust. So once I’m gone, my wife can’t get remarried and sell my family farm. That’s, it’s in a trust, and that way we protected it. And that’s usually where we’re looking at it.
What I also say is, if you’ve got a large bank account full of cash, it’s probably a foolish idea, just from a liability standpoint, you don’t want to just big puddles of cash laying around there. You know investment accounts, retirement accounts are different. But if I have more than whatever is insured like $200,000, it’s $250,000 now, in an account, I’d say get everything over that into a trust. At the trust, set up a bank account and put that money there. At least it gives that money a little air of protection.
So if I run somebody over one night that trust money is at least protected from the liability standpoint. So having lots of cash is very seldom a great idea.
It’s also useful with real estate, especially real estate that is inherited that we can kind of keep in the family. It’s also useful with closely held investments. So that would be memberships in real estate investments or small companies, things like that. We can put those in trust.
An irrevocable trust is way more powerful but it has a whole lot of wrinkles on it. So, I put something in an irrevocable trust, meaning I can’t change it, to avoid estate tax. It is no longer my money period, nor my income because it’s in this other name.
Think of an irrevocable trust as one of those infinite beings that we talked about earlier. It is often used for Medicaid qualification. So if I have a family farm, it’s where it comes into play most often. Ranchers and family farmers have this way. They are land-rich and income-poor. That’s typically how these folks out here live and where I grew up and so on.
So, a lot of times we can solve that problem by putting the landing into an irrevocable trust. The downside of that is it is no longer my money. When I say it’s no longer my money, I can’t be the trustee. I can’t be the beneficiary. I have no access to that money. Typically you’re not supposed to have your spouse or your son on or anybody like that in your direct lineal descendency to be the trustee. So this trustee had better be somebody you trust, because technically this becomes their money and you’ve got to designate a beneficiary other than yourself. So it’s powerful, but it comes with a lot of catches.
The other one that I’ll mention is a special needs trust. And this is for challenged heirs. So if I’ve got a person who is receiving governmental benefits in some way, whether that be Medicaid, SSI, disability coverage, things like that. And I want to make sure that there’s a provision for them, I probably don’t want to include them in my will individually because that’s going to disqualify them immediately, whenever you die. Now they can disclaim, so anybody can disclaim their inheritance and thereby avoid this issue.
That’s another purpose of some of the trusts we talked. I’ve got a son who’s got a big IRS lien, one I’ve dealt with before, big IRS lien. If he inherits anything, it’s all going to the IRS and the IRS is going to sell and force everybody to sell. We want to fix that issue.
But if they’re just challenged, we want to set up a trust that provides the benefits for which the governmental subsidy is not available. In my opinion, we should create that before you die, so you don’t want that to be part of the will, you want it to be created prior to it. And the reason for that is the third party funding allows a designation other than the government. So, once this person has inherited these funds in some way, once it’s their money, they can put it into a special needs trust, but they must designate Medicaid or Medicare as the beneficiary and allow them to have access to those funds and we don’t want that. So we do it by creating it before you die.
And you should also use in connection with what we call an ABLE account, this is again, a new creation of the federal government that essentially allows a certain amount of income each year to be put into an account and to be used without violating the qualification standard for Medicaid, Medicare. It’s essentially whatever the maximum social security disability that you could receive. Basically, they’re going to say, we agree that that receiving that doesn’t disqualify you from getting Medicaid or other benefits. And so that ABLE account is really an important thing to consider if you find yourself in that situation.
And then the last thing we’ll talk about is family limited partnerships. This is a complicated structure. It’s not that complicated, honestly, but it’s used for multi-generational land holding. So typically what happens is the initial holders of this property, they create this entity. They are what’s called the general partner of that entity and they run the entity and they basically transfer their interests typically first into a trust and then into this partnership.
But that means that the assets are held by a limited partner. A limited partner has no right to do anything to the property. I then begin gifting out interest in that family member partnership within that $16,000 guide we talked about each year until it’s all divvied up among my descendants in the way that I want. And because they have restrictions on what they can do with the property, the IRS acknowledges, in that reduces the value of the inheritance.
And so, let’s say I’ve got a $25 million estate in land. By going through this little process, I can take a 25 to 30% reduction in the actual value as far as the IRS is concerned, and that would potentially take us out of an estate tax issue and back down to no estate tax. So it’s a complicated structure, but at the end of the day, it’s there for a purpose that typically involves, like I said, branches and privately owned businesses.
We got to the end. Obviously there’s lots more stuff to talk about. You guys have this information, my cards back there. So if there’s anything we can do to assist, I promise it’s a quick and easy process and we can get through it quickly. So, thank you.
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