Top 10 Estate Planning Mistakes

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Top 10 Estate Planning Mistakes

  1. 1. TOP TEN ESTATE PLANNING MISTAKES Norma Montalvo Petrosewicz, J.D., C.P.A. 121 FM 359 Rd. Richmond, Texas 77406-2401 State Bar of Texas Soaking Up Some CLE: South Padre Litigation Seminar May 15-16, 2008 South Padre Island CHAPTER 17
  2. 2. Top Ten Estate Planning Mistakes Chapter 17 TABLE OF CONTENTS i
  3. 3. Top Ten Estate Planning Mistakes Chapter 17 Top Ten Mistakes Attorneys Make Power of Attorney, HIPAA Authorization, and a Directive to Physicians, formally known as a Living I. INTRODUCTION Will. Many attorneys are asked to draft a simple Will, and most attorneys will do so because all it takes is Statutory Power of Attorney. This is one of the most filling out a “form”, right? This article is presented to important documents of an estate plan and can avoid give non-estate planning attorneys the traps to be wary guardianship proceedings should a person become of in preparing an estate plan. disabled. In the Texas Statutory Form, there is an opportunity to expand powers. I recommend adding II. FOUNDATIONAL CONCEPTS the following powers (see Appendix A for recommended language): A. Rule #1: Applicable Exemption Amount To begin, let’s start with some basic rules. The • Power to qualify individual for Medicaid first is the amount of property a decedent can transfer benefits. In certain instances, an individual to non-charitable beneficiaries before an estate tax is can become qualified to receive Medicaid if imposed. The following is the current law regarding assets are structured a certain way and / or if the amount of property that one may transfer: the income of an individual is placed in a qualifying trust. YEAR EXEMPTION 2008 $ 2,000,000 • Power to take legal action to compel a third 2009 $ 3,500,000 party to honor the power of attorney. 2010 Repealed 2011 $1,000,000 • Power to Create a Living Trust. This is useful when facing a long term disability. Third Every US citizen and resident alien may transfer parties are more comfortable dealing with the foregoing exemption amounts without incurring an Trustees of a trust as opposed to an agent estate tax. Of course, if an estate is transferred to a under a power of attorney, mostly because of charity, the estate would be entitled to an unlimited the strong case law regarding fiduciary duty charitable deduction. under trusts. B. Rule #2: Marital Deduction • Power Related to Oil and Gas. This was Similar to the charitable deduction is the omitted from the statutory form powers listed unlimited marital deduction, whereby an estate can under the probate code and should be included deduct any amount of property passing to a US Citizen to address this type of asset. surviving spouse. Even amounts exceeding the exemption can be transferred to a US citizen surviving Finally, in addition to expanding the powers, I spouse with no resulting tax. Note that there are recommend that you add a Disclosure Statement and certain limitations for amounts passing to a surviving Probate Code (see Appendix B) to the Statutory Power spouse that is not a US citizen. of Attorney. This sample Disclosure Statement was originally offered by professor Stanley Johanson who C. Rule #3: Gift Tax Exemption reasoned that even though the state statute simplifies The annual gift that can be made per year, per the instrument from the client’s standpoint (i.e., all of donee, is $12,000. Also note that gifts in excess of the the legalese is left in the probate code), it is equally $12,000 can be made, however, the amount is limited important that the client be aware of the broad and to a maximum lifetime amount of $1,000,000. comprehensive powers granted under this instrument, and thus the power for misuse. III. THE TOP TEN ESTATE PLANNING MISTAKES B. Mistake #2: Failure to Review Beneficiary Designations and Titling of Assets A. Mistake #1: Failure to Plan for Disability Despite the well drafted estate plan, note that In this day and age with advances in medicine, beneficiary designations “trump” any bequests in a there is a high likelihood that a person will be disabled Will, thus, it is important to review how assets will before they die. Therefore, when preparing a Will for flow upon death. Examples of typical beneficiary a client, every attorney needs to go ahead and prepare designations include those made under life insurance the ancillary documents. These include the Durable policies, retirement plans, and investment accounts that Power of Attorney for financial matters, Medical are jointly held “with rights of survivorship”. 1
  4. 4. Top Ten Estate Planning Mistakes Chapter 17 Gift Tax Consequences. In addition to the estate tax Example. Decedent’s Will left a specific bequest of consequences, there are potential gift tax consequences $10,000 to his “significant other”, and the balance of of life insurance. Often, a parent in a second marriage his estate to his two children. Decedent’s estate will want to provide for children of a prior marriage. consisted of CD’s that listed significant other as the Life insurance can be an ideal solution because beneficiary, thus disinheriting his two children. children can receive some assets upon the parent’s death. The problem is that the life insurance is Living Trusts. Living Trusts are a popular method of typically paid with community property funds; thus, avoiding probate. They are also excellent vehicles for the policy is technically a community property asset. probates in multiple states, keeping family affairs By designating a beneficiary other than the spouse, i.e., private, and are a good tool for managing assets during a child from a prior marriage, the surviving spouse a client’s disability; however, if the trust is not the could be deemed to have made a gift equal to 50% of designated beneficiary of assets, or if assets are not the life insurance death benefit. titled in the living trust’s name, the living trust will not work. An unfunded living trust is like having a car, but Again, a common solution to the estate and gift no gas. Without the gas, the car will not operate. tax consequences is to form an ILIT that owns the life insurance and partitioning the assets used to purchase Therefore, to avoid Mistake #2, keep in mind that the insurance. Alternatively, if an ILIT is not a well drafted plan does not stop with drafting a Will or economically feasible, prepare a Partition Agreement trust and ancillary documents. A client’s beneficiary so that the assets used to pay the premiums for the life designations should also be reviewed to ensure the insurance are the separate property of the insured. estate plan meets the goals of the client. D. Mistake #4: Failure to Take Advantage of the C. Mistake #3: Failure to Consider the Estate and Estate Tax Exemption Gift Tax Consequences of Life Insurance As described in Rule #1 above, each US resident This mistake could probably be included in #2 has a $2.0 million dollar exemption. When you have a above regarding beneficiary designations, however, married couple worth $3.0 million dollars worth of there are enough issues surrounding life insurance that community property, a simple Will (in most cases) is it warrants its own attention. not appropriate. Even though leaving the estate to a surviving spouse results in no tax because of the Estate Tax Consequences. Most attorneys understand unlimited marital deduction (see Rule #2 above), the that life insurance passes income tax free, however, it problem is that upon the survivor’s death, he or she does not pass estate tax free. Thus, a young couple then has an estate that is taxable. with minor children may have a $3.0 million life insurance policy on the wage earner, and $2.0 million Instead of having all assets pass to a surviving on the other spouse. For estate tax purposes, this spouse, consider having the decedent’s share go into a young couple’s estate is worth $5.0 million, not even “Credit Shelter” or “Bypass” Trust whereby the considering their other assets. decedent’s share of the estate ($1.5 million in our example) property) is placed for the benefit of the To solve this estate tax issue, consider forming a surviving spouse. This can be done without depriving separate irrevocable life insurance trust (“ILIT”) to the surviving spouse of the cash flow from the assets own the insurance policy, and also be the beneficiary passing to the trust, and the trust can even benefit of the proceeds. The trust itself can then benefit the children and grandchildren, yet be excluded from the same beneficiaries – surviving spouse and children. survivor’s estate. Note that part of the solution would also be to sign a Partition Agreement so that the donor/parent’s The foregoing assumes a $2.0 million dollar payment of insurance premiums is deemed to be his or exemption. What if the exemption amount increases to her separate property (see below). $3.0 million? I still think the use of a trust can be useful, if not for estate tax savings purposes, for other Three Year Rule: If an existing insurance policy is reasons, such as assuring that assets pass to the transferred to an ILIT, the insured must survive three couple’s children at the surviving spouse’s death. (See years after the transfer in order to effectively remove Mistake #5 below). the death benefit from the estate. To avoid the three year rule, it would be best to make an application for E. Mistake #5: Leaving assets outright to a an insurance after the ILIT is formed surviving spouse 2
  5. 5. Top Ten Estate Planning Mistakes Chapter 17 This mistake may not be so obvious on its face. happens under life insurance policies and retirement Most clients DO want to leave their estate to their plans. I don’t know of any insurance company or spouse; however, there are different scenarios as to financial institution that will knowingly pay $100,000 why this may not be such a good idea. to a twelve year old. More likely, these institutions will require costly guardianship proceedings whereby a Scenario #1: Second (or Third) Marriages: In court-appointed guardian (who may not be the person this day and age, it is quite common for married your client wants) is in charge of your child’s spouses to have had prior marriages. This can inheritance. To make matters worse, the child is entail children from a prior marriage, joint entitled to the entire proceeds at age 18. children, and in many cases, one spouse having substantially assets more assets than the other. Again, when reviewing beneficiary designations, When assets are left to a surviving spouse, it is it may be acceptable to name a spouse as a beneficiary, often a gamble as to whether these assets actually however, look out for minor children named as end up with the decedent’s children. More often, contingent beneficiaries. Instead, the contingent the decedent’s children are left out of the legacy, beneficiary should be “the Trustee appointed under the and the surviving spouse’s children (not the Last Will & Testament” of the client. Such Will would decedent’s children) end up with the assets. then provide the proper trust distributions to children at appropriate ages. A better plan would be to pass assets in trust for the benefit of a spouse, then upon death, direct that G. Mistake #7: Leaving assets outright to Adult estate assets ultimately pass to the decedent’s intended Children heirs. Again, this mistake may not be so obvious on its face, but the following are a few factors to consider if Scenario #2: Medicaid Issues: Another you draft an estate plan that leaves assets outright to common scenario is that Dad dies, and Mom is in children. a nursing home. If assets are left outright to Mom, then the assets could cause Mom to become Scenario #1: Children Involved in Unstable ineligible for Medicaid. The assets would have to Marriages: Even though assets received through be spent down before mom is eligible again for inheritance (or gift) are the separate property of Medicaid. the recipient, many times these assets are comingled during a marriage. Ultimately these Consider instead leaving assets in a Special Needs gifts or inheritances lose their separate property Trust where the assets of the trust could be utilized to character, and are subject to partition upon a benefit the surviving spouse, yet keep him or her child’s divorce. qualified to receive Medicaid benefits. Scenario #2: Wealthy Child: Suppose a client F. Mistake #6: Leaving Assets to Children at a has a child that is a very successful doctor or Young Age lawyer. Every dollar left to such child becomes A very common provision in Wills that I review part of such child’s estate, and thus subject to name children as beneficiaries, and if a child is not 21, estate tax upon his or her death. his or her share will be held in trust until they are at least age 21. I personally think that age 21 is still too For both Scenario #1 and #2, instead leave assets young for a child to handle any one lump sum. A in a lifetime trust for the benefit of a child. Under much better plan would be make distributions in Scenario #1, keeping assets in trust preserves the stages, such as 1/3 at ages 25, 30 and 35. This gives separate character of the inheritance. Under Scenario the beneficiary at least three chances to “blow it”. #2, assets received in a lifetime trust instead of outright Hopefully, after blowing their money once, a child will can be kept out of a child’s estate up to the Generation learn his lesson Skipping Tax Exemption amount, which is currently and be more careful about spending the balance of his $2.0 million dollars. A further benefit of leaving assets inheritance. in trust is that the trust provides creditor protection for the beneficiary, which is useful even if a child is not Naming Minor Beneficiaries. Another related issue wealthy. is somewhat related to Mistake #2 – Failure to Review Beneficiary Designations. A very common mistake is Scenario #3: Disabled Child: If your client has for clients to designate their surviving spouses, then a disabled child, you should not leave assets their minor children, as beneficiaries. This particularly outright. An additional planning technique many 3
  6. 6. Top Ten Estate Planning Mistakes Chapter 17 clients use is to leave assets to another child with A better plan would be to name an individual, or the “understanding” that that child will use the if there are issues regarding that (see Scenario #2 and money to take care of his or her sibling. The #3), then designate a trust that is a qualified designated problem with this arrangement is that the non- beneficiary. disabled child may die, get a divorce, or be sued, and that intended inheritance may not be available Scenario #2: IRA’s Payable to a Surviving to for the disabled child. Instead, consider leaving Spouse: If a client leaves his estate to a surviving them their inheritance in a special needs trust to spouse, then the spouse has a choice. If the protect the handicapped child and keep them surviving spouse is younger than 59 ½, it may be eligible for public assistance. better to leave the IRA as an “Inherited IRA” so that access to the IRA funds do not have to be H. Mistake #8: Incorrect Beneficiary Designations postponed until 59 ½. In this instance, the IRA’s for IRA’s would be taken out over the beneficiary’s life Oftentimes, a typical client’s estate consists of a expectancy (see Pension Protection Act under house, bank and savings account, and a large IRA. Scenario #3 below). Otherwise, the surviving Because an IRA is a deferred income asset, one has to spouse has the option of rolling over the IRA into navigate carefully to preserve the maximum income his or her own IRA, and deferring the MRD’s tax deferral possible. until age 70 ½. Minimum Required Distributions: To begin, there The disadvantage of leaving a major asset to a are some basic rules to review. Upon reaching age 70 surviving spouse is loss of control as to where the ½, a client must start taking minimum required asset ends up after the survivor’s death. What if distributions (“MRD”). The MRD is calculated based the surviving spouse remarries or leaves the IRA on the amount of the IRA, divided by a divisor to the surviving spouse’s children from a prior provided by an IRS table. The IRS table divisor marriage? depends on the marital status of the client, and if married, whether the client’s spouse is younger by Scenario #3: IRA’s payable to a Child. Thanks more than or less than 10 years. to the recently enacted Pension Plan Act, IRA beneficiaries can calculate the MRD over their For Example: An unmarried client that is 70 ½ life expectancy, as opposed to the life expectancy must divide his $274,000 IRA balance by 27.4 in of the IRA owner. However, from my interviews year one, and must take out a MRD of $10,000. with financial planners, the child doesn’t take In year two, the IRA balance as of the prior year is advantage of the deferred withdrawals. divided by 26.5. This MRD calculation continues Remember, these are minimum required until the IRA owner’s death. withdrawals from the IRA. This doesn’t prevent the child from making a large withdrawal from the In estate planning for IRAs, there are three main IRA, and oftentimes, a child will take the whole scenarios to watch out for: distribution and pay tax at one time rather than deferring it over his or life expectancy. Scenario #1: IRA’s payable to an Estate. In general, this is the least favorable way to Trusts as Qualified IRA Designated Beneficiaries. designate an IRA. If the client dies when he or Trusts can be solutions to the foregoing scenarios, she is older than 70 ½, then the beneficiaries must however, can an IRA be payable to a trust and still continue taking out the MRD over the IRA stretch out the minimum required distributions? The owner’s “ghost” life expectancy, calculated as of answer is absolutely yes under Treasury Regulation the IRA owner’s date of death. Thus a seventy 1.401(a)(9)-4, Q&A 5(b)(3). In order for trusts to five year old decedent’s ghost life expectancy at qualify for the maximum stretch out of distributions that age is 22.9 years, and the heirs must take the from an IRA, they must meet four tests: MRD by calculating the balance of the IRA by the 22.9 divisor. • The trust must be valid under state law. • The trust must be irrevocable upon the IRA If the client dies when he or she is younger than owner’s death 70 ½, then the beneficiaries must take the MRD • A copy of the trust must be provided to the over 5 years. IRA plan custodian by October 31st of the year following death; and 4
  7. 7. Top Ten Estate Planning Mistakes Chapter 17 • The trust beneficiaries must be clearly her death, she sold the home and put the proceeds in identifiable from the terms of the trust. the savings account, and let the life insurance policy lapse. By planning around specific assets, Mary There are two types of trusts that are described in disinherited two of her children. the regulations - an Accumulation Trust and a Conduit Trust. The problem with these types of plans is that they quickly become obsolete and unfortunately, updating Accumulation Trust. An Accumulation Trust allows an estate plan is usually not the top priority of many the MRD withdrawn from the IRA to be kept clients. (accumulated) in the trust. The disadvantage of this trust is that if there is a residuary beneficiary that is The problem of estate planning around specific older than the primary beneficiary, the life expectancy assets can occur in the Will as well. If an asset is no of the residuary beneficiary would be utilized to longer owned, the bequest lapses. calculate the MRD. Example. If the Will leaves rental home #1 to son, Example. “Trust for my child who is 10, and upon his rental home #2 to daughter, and the balance equally to death, the trust goes to my 65 year old mother.” In an both children, the sale of rental #1 results in daughter accumulation trust, the life expectancy of the 65 year getting rental home #2 plus 50% of the other assets. old mother (residuary beneficiary) would be utilized to calculate the MRD as opposed to the 10 year old life The solution is to word the estate plan so that the expectancy. estate is shared equally, with son having the right to take rental house #1, at fair market value, as part of his A worse result is reached if the residuary equal share. Beneficiary designations should also be beneficiary is a charity, in which case the MRD must reviewed so that the testator’s wishes are carried out. be withdrawn over five years. J. Mistake #10: Gifting Asset to Avoid Probate Conduit Trust. As the name implies, a Conduit Trust Ironically, probate avoidance is often a goal; requires that all MRD withdrawn from the IRA must therefore, the client will gift assets away as a way of be distributed to the trust beneficiary. The advantage avoiding probate. The problem, particularly with to this trust is that the IRA remains creditor proof giving away real estate, is that the donee also inherits while in trust, and there is some control as to what the donor’s basis. Thus, a house that was purchased distributions are taken for the beneficiaries. The for $100,000 is the basis of the beneficiary when he or disadvantage of the Conduit Trust is that if the trust she later sells it for $250,000. beneficiary has alcohol or drugs issues, or is handicapped (Medicaid eligible), the mandatory If instead the real property is left to a beneficiary distributions would defeat the purpose of holding the upon death, the beneficiary would get a “step up in IRA asset in trust. basis” equal to the fair market value of the asset as of the date of death. In the example above, if the Trusts as beneficiaries of IRA can be a solution, beneficiary chooses to sell the property, his or her basis but careful drafting must be employed to avoid the would be $250,000, thus there would be little or no foregoing traps. capital gains tax payable on the sale of the property. Similarly, if the beneficiary decides to rent out the I. Mistake #9: Planning an Estate Distribution house, the depreciable basis would $250,000. Around Specific Assets Unless there is a compelling reason for IV. CONCLUSION distributing a specific asset to a specific beneficiary, The foregoing list is by no means an exhaustive this type of plan should be strongly discouraged. list of the estate planning mistakes that occur; however, I hope the issues identified will help you recognize Example: Mary has three children and wanted to treat when changes need to be made to an estate plan to them equally. Mary’s Will even confirmed this. She avoid these problems – hopefully before disability or made a specific bequest of her house to her daughter death. under her Will, added her son as a signer on her bank and savings account, and designated a younger son as the beneficiary of her life insurance policy. When she did this, all three assets were about equal in value. But between the time she established this estate plan and 5
  8. 8. Top Ten Estate Planning Mistakes Chapter 17 APPENDIX A Recommended language to be added to the Statutory Power of Attorney In addition to the powers granted above, I grant to my agent all of the following powers: (A) If I have initialed the line above granting my agent the power to apply my property to make gifts, then in addition to such power, I further grant to my agent the power to make gifts of any of my property to or to pay amounts on behalf of (including transfers which are made outright, in trust or otherwise) any one or more of my descendants (including my agent, if my agent is a descendant of mine) or to any charitable organization to which deductible gifts may be made under the income and gift tax provisions of the Internal Revenue Code of 1986, as amended, (the "Code") if, in the opinion of my agent, such gifts would reduce income, estate, generation skipping transfer or state inheritance taxes. Such gifts or amounts paid to my descendants shall include those which are excludible under Section 2503(b) or Section 2503(e) of the Code or those to which the split gift provisions of Section 2513 of the Code are expected to apply. Nothing herein shall be construed to require any court action whatsoever prior to making such gifts, nor to restrict such gifts to a situation in which it must be determined that I will remain incompetent for the remainder of my lifetime. (B) If my agent in my agent's sole discretion has determined that I need nursing home or other long-term medical care and that I will receive proper medical care whether I privately pay for such care or if I am a recipient of Title XIX (Medicaid) or other public benefits, then my agent shall have the power: (i) to take any and all steps necessary, in my agent's judgment, to obtain and maintain my eligibility for any and all public benefits and entitlement programs, including, if necessary, creating and funding a qualified income trust or special needs trust for me, my wife or a disabled child, if any; (ii) to transfer with or without consideration my assets to my wife and/or my descendants (if any), or to my natural heirs at law or to the persons named as beneficiaries under my Last Will and Testament or a revocable living trust which I or my agent may have established, including my agent; and (iii) to enter into a personal services contract for my benefit, including entering into such contract with my agent, and even if doing so may be considered self-dealing. Such public benefits and entitlement programs shall include, but are not limited to, Social Security, Supplemental Security Income, Medicare, Medicaid and Veterans benefits. (C) The power to take legal action to compel third parties to recognize the validity of this instrument, and the power to sue for damages, both punitive and actual, in the case of a refusal by a third party to honor this power. (D) To create for me (and with my wife as to any property owned by my wife or in which my wife has any interest which may be transferred) one or more revocable trusts (referred to as a "grantor trust") of which I am an income beneficiary and with such person or persons as my agents shall select as the Trustee or Co-Trustees (including my agents or any corporate trustee having capital and surplus at the time of its appointment in excess of $10,000,000.00), without bond or other security, and with such other terms and provisions as my agent shall deem appropriate, including, but not limited to, provisions to minimize or eliminate any death or transfer taxes which may be imposed on my estate, any grantor trust, any beneficiary of my estate or any beneficiary of any grantor trust, and to grant to the Trustee or Co-Trustees of any grantor trust any one or more of the powers granted to a trustee under the Texas Trust Code, as amended, provided that I retain the power to revoke any grantor trust, in whole or in part at any time or I have a general power of appointment over the assets of such trust; and further provided that at my death the assets of any grantor trust which would have constituted my community property if such assets had not been transferred to such grantor trust, together with all of such assets which would have constituted any separate property if such assets had not been transferred to such grantor trust shall pass to the beneficiary or beneficiaries or Trustee or Trustees named in such grantor trust, or if there is no person named in such grantor trust to whom such assets shall pass, then such assets shall be delivered to the personal representative of my estate. (E) The power to exercise my rights to manage the community estate of my wife and myself if I am married at such time (which power shall be presumptively exercised to its fullest extent unless otherwise provided), and the power to enter into partition or other marital agreements between my wife and me. (F) The power to make, execute and deliver oil, gas and mineral leases upon all lands and mineral interests owned or claimed by me, wheresoever located, to such persons and upon such terms and conditions as my agent may deem advisable. Such oil, gas and mineral leases may be for such duration and contain such warranties of title, pooling 6
  9. 9. Top Ten Estate Planning Mistakes Chapter 17 and unitization provisions, and other special clauses as my agent may agree to upon my behalf. This power shall include the right to negotiate and contract for the sale of any such oil, gas and mineral lease or leases. I also give my agent the power and authority to execute pooling or unitization agreements affecting any oil, gas or other mineral rights or interests owned or claimed by me, whether mineral fee interests, royalty interests or leasehold interests, so as to pool and combine any such interest or interests with the interests of others in the same or other lands, such agreements to be upon such terms and conditions and to contain such authorizations as my agent may deem advisable. (G) The power to appoint or substitute one or more agents to serve as my agent under this power of attorney; provided, however, such power shall be exercisable only by the then-serving agent (or if more than one agent is serving, by all such agents acting unanimously), and any such appointment or substitution shall override other provisions contained herein which may attempt to name one or more successor agents. Any such appointment or substitution may be revoked by me or my agent at any time and for any reason, and such appointment or substitution shall not terminate upon the death, disability, incapacity or resignation of my agent. Any such appointment or substitution shall be evidenced by acknowledged written instrument. (H) The power to represent me, and to appoint an agent or agents to represent me, before the Internal Revenue Service or any State or other taxing authority by completing, signing, and submitting IRS Form 2848 or any other governmental form. (I) In addition to the powers enumerated above, I hereby give and grant unto my said agent full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done, as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming whatsoever my said agent shall and may do by virtue hereof. 7
  10. 10. Top Ten Estate Planning Mistakes Chapter 17 APPENDIX B DISCLOSURE STATEMENT INFORMATION CONCERNING STATUTORY DURABLE POWER OF ATTORNEY FOR PROPERTY TRANSACTIONS FOR CLIENT THE POWERS GRANTED BY THIS DOCUMENT ARE BROAD AND SWEEPING. Except for the powers that you have crossed out, you are authorizing the person named as your agent (attorney-in-fact) full legal power and authority to act on your behalf, without any court approval or supervision, by taking any and all actions relating to the indicated transactions. YOU SHOULD NOT APPOINT A PERSON AS YOUR AGENT UNLESS YOU HAVE COMPLETE AND TOTAL TRUST AND CONFIDENCE IN THE PERSON. If, for example, you give your agent the power to handle real property transactions on your behalf, your agent will be able to bind you on all of the actions set out in § 492 of the Texas Probate Code. A copy of the relevant Texas Probate Code provisions, containing all of the powers that you can incorporate by reference into your power of appointment, is attached hereto. In deciding whether you want your agent to have a particular power, YOU SHOULD READ THE CORRESPONDING STATUTORY PROVISIONS. If you have any questions about this document, or about any of the statutory powers, you should address these questions to your attorney. YOU MAY REVOKE THIS POWER OF ATTORNEY AT ANY TIME IF YOU WISH TO DO SO. You may wish to designate an alternate agent in the event that your agent is unwilling, unable, or ineligible to act as your agent. Any alternate agent you designate will have the same authority to make property decisions for you. Even after you have signed this document, you have the right to make property decisions for yourself as long as you are able to do so. This document does not authorize anyone to make medical or health care decisions for you. Such decisions can be made pursuant to a Medical Power of Attorney, if you have executed one. Sign below to acknowledge your receipt of this disclosure statement prior to your execution of the Statutory Durable Power of Attorney, to affirm that YOU HAVE BEEN GIVEN THE OPPORTUNITY (1) TO READ THE ATTACHED STATUTORY POWERS and (2) TO ASK ABOUT THE SCOPE OF ANY POWERS THAT YOU DO NOT FULLY UNDERSTAND. DATED: JOHN SMITH 8
  11. 11. Texas Probate Code Sections 491 - 505 ' 491. Construction of Powers Generally The principal, by executing a statutory durable power of attorney that confers authority with respect to any class of transactions, empowers the attorney in fact or agent for that class of transactions to: (1) demand, receive, and obtain by litigation, action, or otherwise any money or other thing of value to which the principal is, may become, or may claim to be entitled; (2) conserve, invest, disburse, or use any money or other thing of value received on behalf of the principal for the purposes intended; (3) contract in any manner with any person, on terms agreeable to the attorney in fact or agent, to accomplish a purpose of a transaction and perform, rescind, reform, release, or modify the contract or another contract made by or on behalf of the principal; (4) execute, acknowledge, seal, and deliver a deed, revocation, mortgage, lease, notice, check, release, or other instrument the agent considers desirable to accomplish a purpose of a transaction; (5) prosecute, defend, submit to arbitration, settle, and propose or accept a compromise with respect to a claim existing in favor of or against the principal or intervene in an action or litigation relating to the claim; (6) seek on the principal's behalf the assistance of a court to carry out an act authorized by the power of attorney; (7) engage, compensate, and discharge an attorney, accountant, expert witness, or other assistant; (8) keep appropriate records of each transaction, including an accounting of receipts and disbursements; (9) prepare, execute, and file a record, report, or other document the attorney in fact or agent considers necessary or desirable to safeguard or promote the principal's interest under a statute or governmental regulation; (10) reimburse the attorney in fact or agent for expenditures made in exercising the powers granted by the durable power of attorney; and (11) in general, do any other lawful act that the principal may do with respect to a transaction. ' 492. Construction of Power Relating to Real Property Transactions In a statutory durable power of attorney, the language conferring authority with respect to real property transactions empowers the attorney in fact or agent without further reference to a specific description of the real property to: (1) accept as a gift or as security for a loan or reject, demand, buy, lease, receive, or otherwise acquire an interest in real property or a right incident to real property; (2) sell, exchange, convey with or without covenants, quitclaim, release, surrender, mortgage, encumber, partition, consent to partitioning, subdivide, apply for zoning, rezoning, or other governmental permits, plat or consent to platting, develop, grant options concerning, lease or sublet, or otherwise dispose of an estate or interest in real property or a right incident to real property; (3) release, assign, satisfy, and enforce by litigation, action, or otherwise a mortgage, deed of trust, encumbrance, lien, or other claim to real property that exists or is claimed to exist; (4) do any act of management or of conservation with respect to an interest in real property, or a right incident to real property, owned or claimed to be owned by the principal, including power to: (A) insure against a casualty, liability, or loss; (B) obtain or regain possession or protect the interest or right by litigation, action, or otherwise; (C) pay, compromise, or contest taxes or assessments or apply for and receive refunds in connection with them; and (D) purchase supplies, hire assistance or labor, or make repairs or alterations in the real property; (5) use, develop, alter, replace, remove, erect, or install structures or other improvements on real property in which the principal has or claims to have an estate, interest, or right; (6) participate in a reorganization with respect to real property or a legal entity that owns an interest in or right incident to real property, receive and hold shares of stock or obligations received in a plan or reorganization, and act with respect to the shares or obligations, including: (A) selling or otherwise disposing of the shares or obligations; (B) exercising or selling an option, conversion, or similar right with respect to the shares or obligations; and (C) voting the shares or obligations in person or by proxy;
  12. 12. Top Ten Estate Planning Mistakes Chapter 17 (7) change the form of title of an interest in or right incident to real property; and (8) dedicate easements or other real property in which the principal has or claims to have an interest to public use, with or without consideration. ' 493. Construction of Power Relating to Tangible Personal Property Transactions In a statutory durable power of attorney, the language conferring general authority with respect to tangible personal property transactions empowers the attorney in fact or agent to: (1) accept as a gift or as security for a loan, reject, demand, buy, receive, or otherwise acquire ownership or possession of tangible personal property or an interest in tangible personal property; (2) sell, exchange, convey with or without covenants, release, surrender, mortgage, encumber, pledge, hypothecate, create a security interest in, pawn, grant options concerning, lease or sublet to others, or otherwise dispose of tangible personal property or an interest in tangible personal property; (3) release, assign, satisfy, or enforce by litigation, action, or otherwise a mortgage, security interest, encumbrance, lien, or other claim on behalf of the principal, with respect to tangible personal property or an interest in tangible personal property; and (4) do an act of management or conservation with respect to tangible personal property or an interest in tangible personal property on behalf of the principal, including: (A) insuring against casualty, liability, or loss; (B) obtaining or regaining possession or protecting the property or interest by litigation, action, or otherwise; (C) paying, compromising, or contesting taxes or assessments or applying for and receiving refunds in connection with taxes or assessments; (D) moving from place to place; (E) storing for hire or on a gratuitous bailment; and (F) using, altering, and making repairs or alterations. ' 494. Construction of Power Relating to Stock and Bond Transactions In a statutory durable power of attorney, the language conferring authority with respect to stock and bond transactions empowers the attorney in fact or agent to buy, sell, and exchange stocks, bonds, mutual funds, and all other types of securities and financial instruments other than commodity futures contracts and call and put options on stocks and stock indexes, receive certificates and other evidences of ownership with respect to securities, exercise voting rights with respect to securities in person or by proxy, enter into voting trusts, and consent to limitations on the right to vote. ' 495. Construction of Power Relating to Commodity and Option Transactions In a statutory durable power of attorney, the language conferring authority with respect to commodity and option transactions empowers the attorney in fact or agent to buy, sell, exchange, assign, settle, and exercise commodity futures contracts and call and put options on stocks and stock indexes traded on a regulated options exchange and establish, continue, modify, or terminate option accounts with a broker. ' 496. Construction of Power Relating to Banking and Other Financial Institution Transactions In a statutory durable power of attorney, the language conferring authority with respect to banking and other financial institution transactions empowers the attorney in fact or agent to: (1) continue, modify, or terminate an account or other banking arrangement made by or on behalf of the principal; (2) establish, modify, or terminate an account or other banking arrangement with a bank, trust company, savings and loan association, credit union, thrift company, brokerage firm, or other financial institution selected by the attorney in fact or agent; (3) hire a safe deposit box or space in a vault; (4) contract to procure other services available from a financial institution as the attorney in fact or agent considers desirable; (5) withdraw by check, order, or otherwise money or property of the principal deposited with or left in the custody of a financial institution; 10
  13. 13. Top Ten Estate Planning Mistakes Chapter 17 (6) receive bank statements, vouchers, notices, or similar documents from a financial institution and act with respect to them; (7) enter a safe deposit box or vault and withdraw or add to the contents; (8) borrow money at an interest rate agreeable to the attorney in fact or agent and pledge as security real or personal property of the principal necessary to borrow, pay, renew, or extend the time of payment of a debt of the principal; (9) make, assign, draw, endorse, discount, guarantee, and negotiate promissory notes, bills of exchange, checks, drafts, or other negotiable or nonnegotiable paper of the principal, or payable to the principal or the principal's order, to receive the cash or other proceeds of those transactions, to accept a draft drawn by a person on the principal, and to pay the principal when due; (10) receive for the principal and act on a sight draft, warehouse receipt, or other negotiable or nonnegotiable instrument; (11) apply for and receive letters of credit, credit cards, and traveler's checks from a financial institution and give an indemnity or other agreement in connection with letters of credit; and (12) consent to an extension of the time of payment with respect to commercial paper or a financial transaction with a financial institution. ' 497. Construction of Power Relating to Business Operation Transactions In a statutory durable power of attorney, the language conferring authority with respect to business operating transactions empowers the attorney in fact or agent to: (1) operate, buy, sell, enlarge, reduce, or terminate a business interest; (2) to the extent that an agent is permitted by law to act for a principal and subject to the terms of the partnership agreement: (A) perform a duty or discharge a liability or exercise a right, power, privilege, or option that the principal has, may have, or claims to have under a partnership agreement, whether or not the principal is a general or limited partner; (B) enforce the terms of a partnership agreement by litigation, action, or otherwise; and (C) defend, submit to arbitration, settle, or compromise litigation or an action to which the principal is a party because of membership in the partnership; (3) exercise in person or by proxy or enforce by litigation, action, or otherwise a right, power, privilege, or option the principal has or claims to have as the holder of a bond, share, or other instrument of similar character and defend, submit to arbitration, settle, or compromise a legal proceeding to which the principal is a party because of a bond, share, or similar instrument; (4) with respect to a business owned solely by the principal: (A) continue, modify, renegotiate, extend, and terminate a contract made with an individual or a legal entity, firm, association, or corporation by or on behalf of the principal with respect to the business before execution of the power of attorney; (B) determine: (i) the location of its operation; (ii) the nature and extent of its business; (iii) the methods of manufacturing, selling, merchandising, financing, accounting, and advertising employed in its operation; (iv) the amount and types of insurance carried; and (v) the mode of engaging, compensating, and dealing with its accountants, attorneys, and other agents and employees; (C) change the name or form of organization under which the business is operated and enter into a partnership agreement with other persons or organize a corporation to take over all or part of the operation of the business; and (D) demand and receive money due or claimed by the principal or on the principal's behalf in the operation of the business and control and disburse the money in the operation of the business; 11
  14. 14. Top Ten Estate Planning Mistakes Chapter 17 (5) put additional capital into a business in which the principal has an interest; (6) join in a plan of reorganization, consolidation, or merger of the business; (7) sell or liquidate a business or part of it at the time and on the terms that the attorney in fact or agent considers desirable; (8) establish the value of a business under a buy-out agreement to which the principal is a party; (9) prepare, sign, file, and deliver reports, compilations of information, returns, or other papers with respect to a business that are required by a governmental agency, department, or instrumentality or that the attorney in fact or agent considers desirable and make related payments; and (10) pay, compromise, or contest taxes or assessments and do any other act that the attorney in fact or agent considers desirable to protect the principal from illegal or unnecessary taxation, fines, penalties, or assessments with respect to a business, including attempts to recover, in any manner permitted by law, money paid before or after the execution of the power of attorney. ' 498. Construction of Power Relating to Insurance Transactions In a statutory durable power of attorney, the language conferring authority with respect to insurance and annuity transactions empowers the attorney in fact or agent to: (1) continue, pay the premium or assessment on, modify, rescind, release, or terminate a contract procured by or on behalf of the principal that insures or provides an annuity to either the principal or another person, whether or not the principal is a beneficiary under the contract; (2) procure new, different, or additional contracts of insurance and annuities for the principal or the principal's spouse, children, and other dependents and select the amount, type of insurance or annuity, and mode of payment; (3) pay the premium or assessment on or modify, rescind, release, or terminate a contract of insurance or annuity procured by the attorney in fact or agent; (4) designate the beneficiary of the contract, except that an attorney in fact or agent may be named a beneficiary of the contract or an extension, renewal, or substitute for the contract only to the extent the attorney in fact or agent was named as a beneficiary under a contract procured by the principal before executing the power of attorney; (5) apply for and receive a loan on the security of the contract of insurance or annuity; (6) surrender and receive the cash surrender value; (7) exercise an election; (8) change the manner of paying premiums; (9) change or convert the type of insurance contract or annuity with respect to which the principal has or claims to have a power described in this section; (10) change the beneficiary of a contract of insurance or annuity, except that the attorney in fact or agent may be designated a beneficiary only to the extent authorized by Subdivision (4) of this section; (11) apply for and procure government aid to guarantee or pay premiums of a contract of insurance on the life of the principal; (12) collect, sell, assign, hypothecate, borrow on, or pledge the interest of the principal in a contract of insurance or annuity; and (13) pay from proceeds or otherwise, compromise or contest, or apply for refunds in connection with a tax or assessment levied by a taxing authority with respect to a contract of insurance or annuity or its proceeds or liability accruing because of the tax or assessment. ' 499. Construction of Power Relating to Estate, Trust, and Other Beneficiary Transactions In a statutory durable power of attorney, the language conferring authority with respect to estate, trust, and other beneficiary transactions empowers the attorney in fact or agent to act for the principal in all matters that affect a trust, probate estate, guardianship, conservatorship, escrow, custodianship, or other fund from which the principal is, may become, or claims to be entitled, as a beneficiary, to a share or payment, including to: (1) accept, reject, disclaim, receive, receipt for, sell, assign, release, pledge, exchange, or consent to a reduction in or modification of a share in or payment from the fund; (2) demand or obtain by litigation, action, or otherwise money or any other thing of value to which the principal is, may become, or claims to be entitled because of the fund; (3) initiate, participate in, or oppose a legal or judicial proceeding to ascertain the meaning, validity, or effect of a deed, will, declaration of trust, or other instrument or transaction affecting the interest of the principal; 12
  15. 15. Top Ten Estate Planning Mistakes Chapter 17 (4) initiate, participate in, or oppose a legal or judicial proceeding to remove, substitute, or surcharge a fiduciary; (5) conserve, invest, disburse, or use anything received for an authorized purpose; and (6) transfer all or part of an interest of the principal in real property, stocks, bonds, accounts with financial institutions, insurance, and other property to the trustee of a revocable trust created by the principal as settlor. ' 500. Construction of Power Relating to Claims and Litigation In a statutory durable power of attorney, the language conferring general authority with respect to claims and litigation empowers the attorney in fact or agent to: (1) assert and prosecute before a court or administrative agency a claim, a claim for relief, a counterclaim, or an offset or defend against an individual, a legal entity, or a government, including suits to recover property or other thing of value, to recover damages sustained by the principal, to eliminate or modify tax liability, or to seek an injunction, specific performance, or other relief; (2) bring an action to determine adverse claims, intervene in an action or litigation, and act as amicus curiae; (3) in connection with an action or litigation, procure an attachment, garnishment, libel, order of arrest, or other preliminary, provisional, or intermediate relief and use an available procedure to effect or satisfy a judgment, order, or decree; (4) in connection with an action or litigation, perform any lawful act the principal could perform, including acceptance of tender, offer of judgment, admission of facts, submission of a controversy on an agreed statement of facts, consent to examination before trial, and binding of the principal in litigation; (5) submit to arbitration, settle, and propose or accept a compromise with respect to a claim or litigation; (6) waive the issuance and service of process on the principal, accept service of process, appear for the principal, designate persons on whom process directed to the principal may be served, execute and file or deliver stipulations on the principal's behalf, verify pleadings, seek appellate review, procure and give surety and indemnity bonds, contract and pay for the preparation and printing of records and briefs, or receive and execute and file or deliver a consent, waiver, release, confession of judgment, satisfaction of judgment, notice, agreement, or other instrument in connection with the prosecution, settlement, or defense of a claim or litigation; (7) act for the principal with respect to bankruptcy or insolvency proceedings, whether voluntary or involuntary, concerning the principal or some other person, with respect to a reorganization proceeding or a receivership or application for the appointment of a receiver or trustee that affects an interest of the principal in real or personal property or other thing of value; and (8) pay a judgment against the principal or a settlement made in connection with a claim or litigation and receive and conserve money or other thing of value paid in settlement of or as proceeds of a claim or litigation. ' 501. Construction of Power Relating to Personal and Family Maintenance In a statutory durable power of attorney, the language conferring authority with respect to personal and family maintenance empowers the attorney in fact or agent to: (1) perform the acts necessary to maintain the customary standard of living of the principal, the principal's spouse and children, and other individuals customarily or legally entitled to be supported by the principal, including providing living quarters by purchase, lease, or other contract, or paying the operating costs, including interest, amortization payments, repairs, and taxes on premises owned by the principal and occupied by those individuals; (2) provide for the individuals described by Subdivision (1) of this section normal domestic help, usual vacations and travel expenses, and funds for shelter, clothing, food, appropriate education, and other current living costs; (3) pay necessary medical, dental, and surgical care, hospitalization, and custodial care for the individuals described by Subdivision (1) of this section; (4) continue any provision made by the principal, for the individuals described by Subdivision (1) of this section, for automobiles or other means of transportation, including registering, licensing, insuring, and replacing the automobiles or other means of transportation; (5) maintain or open charge accounts for the convenience of the individuals described by Subdivision (1) of this section and open new accounts the attorney in fact or agent considers desirable to accomplish a lawful purpose; and (6) continue payments incidental to the membership or affiliation of the principal in a church, club, society, order, or other organization or to continue contributions to those organizations. 13
  16. 16. Top Ten Estate Planning Mistakes Chapter 17 ' 502. Construction of Power Relating to Benefits From Certain Governmental Programs or Civil or Military Service In a statutory durable power of attorney, the language conferring authority with respect to benefits from social security, Medicare, Medicaid, or other governmental programs or civil or military service empowers the attorney in fact or agent to: (1) execute vouchers in the name of the principal for allowances and reimbursements payable by the United States, a foreign government, or a state or subdivision of a state to the principal, including allowances and reimbursements for transportation of the individuals described by Section 501(1) of this code, and for shipment of their household effects; (2) take possession and order the removal and shipment of property of the principal from a post, warehouse, depot, dock, or other place of storage or safekeeping, either governmental or private, and execute and deliver a release, voucher, receipt, bill of lading, shipping ticket, certificate, or other instrument for that purpose; (3) prepare, file, and prosecute a claim of the principal to a benefit or assistance, financial or otherwise, to which the principal claims to be entitled under a statute or governmental regulation; (4) prosecute, defend, submit to arbitration, settle, and propose or accept a compromise with respect to any benefits the principal may be entitled to receive; and (5) receive the financial proceeds of a claim of the type described in this section and conserve, invest, disburse, or use anything received for a lawful purpose. ' 503. Construction of Power Relating to Retirement Plan Transactions In a statutory durable power of attorney, the language conferring authority with respect to retirement plan transactions empowers the attorney in fact or agent to do any lawful act the principal may do with respect to a transaction relating to a retirement plan, including to: (1) apply for service or disability retirement benefits; (2) select payment options under any retirement plan in which the principal participates, including plans for self-employed individuals; (3) designate or change the designation of a beneficiary or benefits payable by a retirement plan, except that an attorney in fact or agent may be named a beneficiary only to the extent the attorney in fact or agent was a named beneficiary under the retirement plan before the durable power of attorney was executed; (4) make voluntary contributions to retirement plans if authorized by the plan; (5) exercise the investment powers available under any self-directed retirement plan; (6) make "rollovers" of plan benefits into other retirement plans; (7) borrow from, sell assets to, and purchase assets from retirement plans if authorized by the plan; (8) waive the right of the principal to be a beneficiary of a joint or survivor annuity if the principal is a spouse who is not employed; (9) receive, endorse, and cash payments from a retirement plan; (10) waive the right of the principal to receive all or a portion of benefits payable by a retirement plan; and (11) request and receive information relating to the principal from retirement plan records. ' 504. Construction of Power Relating to Tax Matters In a statutory durable power of attorney, the language conferring authority with respect to tax matters empowers the attorney in fact or agent to: (1) prepare, sign, and file federal, state, local, and foreign income, gift, payroll, Federal Insurance Contributions Act, and other tax returns, claims for refunds, requests for extension of time, petitions regarding tax matters, and any other tax-related documents, including receipts, offers, waivers, consents, including consents and agreements under Section 2032A, Internal Revenue Code of 1986 (26 U.S.C. Section 2032A), closing agreements, and any power of attorney form required by the Internal Revenue Service or other taxing authority with respect to a tax year on which the statute of limitations has not run and 25 tax years following that tax year; (2) pay taxes due, collect refunds, post bonds, receive confidential information, and contest deficiencies determined by the Internal Revenue Service or other taxing authority; (3) exercise any election available to the principal under federal, state, local, or foreign tax law; and (4) act for the principal in all tax matters for all periods before the Internal Revenue Service and any other taxing authority. 14
  17. 17. Top Ten Estate Planning Mistakes Chapter 17 ' 505. Existing Interest; Foreign Interests The powers described in Sections 492 through 504 of this code may be exercised equally with respect to an interest the principal has at the time the durable power of attorney is executed or acquires later, whether or not the property is located in this state and whether or not the powers are exercised or the durable power of attorney is executed in this state. 15

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